Historically low interest rates, better bonding practices and a debt-reduction program during former Gov. Rick Scott’s eight-year administration helped Florida’s state government reduce its debt by $400 million last year and 27 percent since 2010.
But the state still ended fiscal 2019 carrying $20.6 billion in debt and faces uncertainties – and $22 billion in unfunded liabilities – with its pension plan, Florida Division of Bond Finance Director Ben Watkins told Gov. Ron DeSantis and Cabinet members.
Watkins said while changes in federal tax law adopted under the 2017 Tax Cuts & Jobs Act (TCJA) make it more difficult for states and municipalities to refinance older debt, investor demand for government bonds and low interest rates are helping Florida to trim its debt costs.
“It has kept us in the game on our ability to be able to reduce our long-term costs for re-financings,” he said.
According to an annual Division of Bond Finance report, the state has refinanced $16.2 billion in debt, with $3.2 billion in savings, since 2010. Most of the debt is related to transportation and infrastructure bonds.
Florida re-financed $1.7 billion in debt, saving about $260 million in interest costs in fiscal 2019, trimming its debt from $20.6 billion, down from $21 billion of debt the prior year, as of June 30.
Another reason why the state’s interest costs have declined was Florida earning its first-ever ‘AAA’ bond ratings from Moody’s, Standard and Poor’s and Fitch Ratings in 2018.
Watkins told the Cabinet that to retain its “stellar” bond rating, Florida lawmakers must maintain its budget reserve fund at about 10 percent of its general fund.
As of June 30, the last day of fiscal 2019, the state had $3.4 billion in reserve funds, about 10.4 percent of the state’s revenues.
In his $91.4 billion budget request for fiscal 2021, which begins July 1, DeSantis restricts borrowing to transportation projects and a 600-bed mental-health hospital for the state prison system.
DeSantis fiscal 2021 budget request seeks to retain $3.1 billion in reserve funds, including $1.4 billion in general revenue money and about $1.7 billion in its budget-stabilization fund.
An additional $2.5 billion could also be available for the reserve fund, depending on the amount of unspent money that will accumulate in assorted state trust funds. About $800 million in tobacco-settlement fund proceeds could also be directed into the reserve fund.
“We have the wind at our back,” Watkins told the Cabinet. “We have a strong economy with growing revenues. We have a reduction in the amount of debt that we have outstanding because of our limited use of debt to finance our budget. And we have been able to reduce our cost of the debt we have outstanding by lowering the interest rate through re-financings.”
The report warned that perhaps the biggest threat to the state’s reserve funds and bond ratings – other than hurricanes – is the status of the Florida pension system, which pays benefits to nearly 400,000 retired teachers, state workers, county employees and other public workers.
“The status of pension funding is an important aspect of credit rating analysis,” the report said. “In recent years, there have been more downgrades of state credit ratings [nationally] due to outsized pension liabilities than any other single credit factor.”
Watkins said the Florida Retirement System Actuarial Assumption Conference, comprised of state accountants and analysts, has recommended the Legislature reduce the “assumed rate of return” on the $160 billion-plus pension fund to 7.2 percent a year, down from 7.4 percent during the 2020 legislative session, which begins Jan. 14.
If implemented, Watkins said the fund’s projected rate of return would be a “more realistic” 6.6 percent per year.
“We are moving in the right direction,” he said. “But we will have more work to do in that space.”
“They’re moving in the direction of greater fiscal responsibility,” agreed Truth in Accounting (TIA) Director of Research Bill Bergman.
In September, TIA, a Chicago-based government accounting watchdog, called a pattern of upward adjustments by states in the “assumed rate of return” (ROI) on pension investments a “kick the can down the road” accounting tweak that “hides the true cost of government” from voters and “passes this expense on to future taxpayers.”
“If anything,” Bergman said, reducing the assumed ROI from 7.4 to 7.2 percent “is the opposite of ‘kick the can down the road’ and a move in the right direction.”
Of the $65.1 billion in retirement benefits promised to nearly 400,000 former public workers enrolled in the Florida Retirement System (FRS), TIA maintained in its annual "Financial State of the States 2019" report that the state has not funded $11 billion in pension and $11 billion in retiree health care benefits, equaling $22 billion in unfunded pension liability.
If that debt was included in the state’s “true” financial statement, Florida would have $60.9 billion available to pay $73 billion in bills – a $12.1 billion shortfall that increased by about $500 million since 2018, raising each Florida taxpayers share of that debt to $1,800, according to TIA.