Fiscal Year 2022: Florida Reduces Debt Ratio

Florida has remained in good financial standing this past fiscal year. This is also true of the state’s debt position. FY 2021-22 marks the ninth consecutive year with a debt ratio below the six percent target established by the Legislature. In addition:

• Outstanding debt, debt service and the debt ratio have decreased;
• General Revenue (GR) collections increased [BN1] by $7.8 billion over FY 2021-22;
• An unprecedented year-end budget surplus of $22 billion was reached;
• Increased funds within the Budget Stabilization Fund (BSF), significant cash reserves, and an increased debt capacity, provide Florida cushion in case unexpected funding is needed;
• All three major rating agencies affirmed the State’s AAA general obligation ratings; and
• Credit agencies determined Florida’s outlook is stable.

Every year, as required by Section 215.98, Florida Statutes, the Division of Bond Finance creates a debt report, an analysis that helps policymakers consider Florida’s fiscal position. The report informs the government’s decision-making but it can also tell the taxpayer how much of their hard earned money is being committed in the future for expenditures being made today.  In this blog, Florida TaxWatch provides taxpayers with a summary and key takeaways drawn from the Division of Bond Finance’s “Debt Report State of Florida 2022.”[1]

Florida prioritizes managing its debt to ensure sustainable use of funds as the state continues to develop. To limit the accumulation of debt, Florida has a targeted debt ratio of six percent and a limit of seven percent.[2] The government seeks to uphold these guidelines by restraining the use of borrowed funds and encouraging a revenue-producing economy. This effort is reflected in the Florida’s FY2021-22 debt ratio of 3.78 percent, a decrease from the 4.3 percent ratio of the preceding year.  

As reserves made up 45 percent of GR by the end of FY 2022, the State is considered strong by rating agencies’ standards.  A record-high General Fund Reserve level of $19.7 billion at the end of FY 2022 also demonstrates Florida’s favorable standing.

DEBT ISSUANCE                                                      

Florida’s legislative and gubernatorial aversion to bonding, consistently high bond ratings, and leverage of bond refinancing opportunities have helped reduce the state’s outstanding debt. As of June 30, 2022, the total outstanding direct debt of Florida was $17.1 billion, with direct debt decreasing by $1.3 billion from the prior fiscal year. This continues a downward trend that began in FY 2011, totaling an $11.1 billion reduction, or 39 percent, of the total outstanding debt.[3]

The debt primarily consists of funding efforts for transportation and education, composing 50 percent and 40 percent of the debt, respectively. Projected debt issuance over the next ten years increased by 21 percent in FY 2022. This equates to about a $380 million increase since the 2021 Debt Report. Contrary to a significant decrease of projected debt issuance in FY 2021, this increase indicates a higher level of borrowing to fund transportation projects. Debt ratios being consistently under the six percent target for nearly a decade also suggests that Florida’s debt capacity is strong, and that the State can afford to issue more debt while adhering to the target ratio.

Limiting debt issuance not only keeps future costs down, but also creates an allowance for future debt. By expanding the divide between the current debt ratio (3.78 percent) and the targeted debt ratio (six percent), Florida produces a debt capacity. The debt capacity allows Florida to withstand a sudden onset of debt—which may be necessary to resolve unpredicted circumstances—while respecting its goal of a six percent debt ratio. Due to the current low debt ratio, the total debt capacity that is expected over the next ten years is approximately $40 billion.[4]

Debt Service Payments

Debt service payments are the principal and interest payments made to retire the debt. For FY 2023, Florida’s projected debt service payment is $1.8 billion, a decrease from the $2.1 [BN2] billion in debt service paid in FY 2022. The decline is due to the last milestone payment made in FY 2022 for transportation Public Private Partnership (PPP) projects.  This trend is expected to continue through the decade due to years of debt issuance restraint.

In 2032, Florida’s debt service payment is expected to be $994 million, marking the second time Florida paid less than $1 billion since the origin of debt service payment tracking in the 1990s. Over the next ten years, the state of Florida is expected to pay $11.8 billion in debt service on outstanding net tax-supported debt, with 33 percent of the money ($3.9 billion) in interest payments.

Refinancing can save taxpayers money by reducing interest rates on bonds. Florida has successfully refinanced multiple times. Since FY 2013, the government refinanced its debts 120 times, creating gross debt service savings of $2.7 billion over the remaining life of bonds.[5] In FY 2022, Florida completed eight refinancing transactions, resulting in gross debt service savings of $115 million.[6] Proactive pursuit of lower interest rates has helped the state’s long-term costs, but since an estimated 90 percent of the state debt has already been refinanced, fewer candidates for refinancing are expected within the next five years. Diminished new money bond issuance is also shrinking the candidate pool for future refinancing, with only $4.2 billion of debt available for refinancing given favorable market conditions.

General Revenue

Florida’s general revenue relies primarily upon sales tax, so during COVID-19, the state experienced a GR drop of $2.0 billion (6.1 percent) in FY 2019-20.[7] FY 2021 reaped significant benefits from the economic rebound, with Florida’s GR continually exceeding forecasted levels. In FY 2022, GR collections continued to grow, increasing by 21.4 percent from FY 2021. GR collections in FY 2023 are projected to decrease, however, by about $2 billion. The Office of Economic and Demographic Research (EDR) cites tight monetary and fiscal policy and global inflation as causes for this projection. Although collections are predicted to decline[BN3]  in FY 2023, collections in FY 2022 surpassed monthly estimates consistently through September of 2022. According to the debt report, the State’s strong economic position and increased tax collections from all sources resulted in GR collections of $44 billion in FY 2022. 

Reserves

Florida’s General Fund Reserves reached $19.7 billion by the end of FY 2022, almost doubling that of FY 2021. This bodes well for the State’s financial flexibility in the wake of unexpected and costly events, such as hurricanes.  The projected fiscal impact of Hurricane Ian, which occurred in September of 2022, is $1.8 billion.  Having adequate reserves is crucial for ensuring these disrupt Florida’s fiscal standing as little as possible.

LET’S NOT FORGET ABOUT LOCAL GOVERNMENT DEBT

While outstanding debt at the state government level in Florida remains relatively low, it is higher at the local level. Florida’s local governments are carrying approximately four times the debt of the state.  While Florida’s total state debt per capita ranks 47^th out of the 50 states, Florida per capita local debt ranks 19^th.[8] As Florida taxpayers vote, they should be aware of their comparatively high local tax level, as Florida TaxWatch discusses in the report, “Florida Voters Continue to Say Yes to Proposed Tax Increases: Voters approve $2.2 billion in tax referenda and $1.4 in bond issues in 2021 and 2022”.

The state of Florida manages its debt in a way that benefits taxpayers, and the state should consider how to ensure the effective practices continue.