With Florida's (AAA/Stable) general revenues declining nearly 28% for the month of April relative to estimates, the state's positive momentum for much of last year has all but stalled as recessionary headwinds intensify. Additionally, as the unwelcome hurricane season approaches, the state's phased efforts to safely re-open its economy could be further challenged by a natural disaster. While the short-term economic outlook remains murky, S&P Global Ratings believes the state is well positioned to address the mounting challenges over the near term supported by its strong structural budgetary management and reserves.
Coinciding with the beginning of spring break, the final quarter of the fiscal year is typically when general revenues peak. With the onset of the COVID-19 pandemic in early-to-mid March, however, the state's economic activity largely began to idle, reflecting a considerable slide in its sales tax collections. With two months left in collections, the state's general revenues would have to increase at least 11% more than initially estimated to make up the difference. Additionally, while its total net collections for the fiscal year are down 2.6% relative to forecast, April collections largely reflect economic activities that occurred in March just as economic activities were slowing. The Office of Economic and Demographic Research noted, however, that certain declines, including corporate income taxes, highway safety fees, and corporate filing fees, reflect deferments in payment now due in June and beyond. Collectively, these revenue sources represented 35% of the total revenue collection decline for the month. Given our baseline assumption that U.S. economic activities will not meaningfully rebound until later in the third and fourth quarters of the year, we do not anticipate the state's collections quickly returning to near-estimated levels, but rather gradually growing as economic activity improves. (For additional information, please see "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020, on RatingsDirect.)
Florida's favorable weather and attractions, including its 663 miles of beaches, are at the heart of the state's service economy. Additionally, it has an extensive transportation and distribution network that combines freight and passenger service, offers numerous deep-water harbors, and has several international airports which support its trade and tourism sectors. Overall, the state's employment mix is in line with that of the nation, in our view, although leisure and hospitality employment in the state represents a larger share (14%) than that of the nation (11%). According to Visit Florida, the state's official tourism marketing corporation, roughly 90% of visits in 2019 were from domestic travelers. New York, Georgia, and Texas collectively accounted for 25% of visitors to the state. With the hospitality and leisure sector taking a pronounced hit as result of the pandemic, the state's ability to attract wary domestic travelers will remain key to lessening the overall economic effects on the state, particularly in local communities that rely on tourism as their economic engine. For example, Orange County (Orlando), home to Disney World and Universal Studios, among other theme parks, employs nearly 38% of the state's full- and part-time employees in the arts, entertainment, and recreation (25.1%) and accommodation and food services (12.7%) industries, according to the Bureau of Economic Analysis. Miami-Dade County, the state's largest county by population, represents roughly 22% combined of the state's total. For 2020, IHS Markit forecasts Florida's total employment contraction will be 1.4 percentage points greater than the national level of negative 4.5%, then roughly equal in 2021, but subsequently reverting back to its usual trend with growth exceeding 2.2 and 1.4 percentage points in 2022 and 2023, respectively.
In late March, the legislature adopted the state's fiscal 2021 budget. Totaling $93.2 billion ($35.2 billion general fund), the proposed budget is a modest 2.4% larger than in fiscal 2020. To date, the budget has not been approved by the governor, but he is anticipated to approve it prior to the end of the current fiscal year. The governor has indicated that he will continue monitor developments, including further federal resources and support prior to formally reviewing and approving the budget. The largest portion of federal support to date has been provided through its allocable share of relief funds from the CARES Act's Coronavirus Relief Fund, which totaled $5.86 billion, according to the U.S. Dept. of the Treasury. While certain restrictions limit the use of those funds, we believe they will help the state offset the direct and ongoing costs associated with the pandemic. Additionally, other targeted measures provided in the act, including supplemental aid to health care programs and public education, could provide stronger budgetary support in the current and subsequent budget. (For additional information, please see "What The CARES Act Means For Credit In U.S. Public Finance," published April 20, 2020.)
Before the onset of the pandemic, the state had anticipated ending fiscal year 2020 with a combined general fund reserve balance of $3.5 billion, or nearly 10.3% of appropriations. Including various available trust fund balances and tobacco settlement reserves, Florida had planned to close fiscal 2020 with $6.3 billion in reserves, or approximately 18.6% of general fund appropriations.
Florida has a constitutional budget stabilization fund (BSF) equal to 5% of the net general revenue fund collections from the previous fiscal year. If it draws from the reserve, it must start replenishing it in five equal installments, starting in the third year after it draws down from the reserve. Florida has completely replenished its reserves under this process with payments into the BSF made in fiscal years 2012 through 2016 after a $1 billion drawdown in fiscal 2009. Once the budget is adopted, the governor as well as the chief financial officer must ensure that revenues collected during the year will be sufficient to meet appropriations. The Florida constitution requires the state to raise revenues sufficient to defray expenses in each fiscal year and that sufficient money be appropriated to pay debt service as it becomes due.
As the state navigates the reopening and economic recovery process, it must also continue the work of balancing its reliance on natural resources to generate business and sustained in-migration with its inherent vulnerability to environmental risks, such as hurricanes and rising sea levels. So far, Florida has demonstrated fiscal resilience to significant hurricanes andwe viewed favorably its inclusion of measures to address water quality issues and climate change in its fiscal 2020 budget. Additionally, the creation of a chief resiliency officer last summer also moves the state in a positive direction as it works to coalesce state and local resiliency initiatives. While these risk mitigation measures provide for a framework to minimize longer-term climate change-related risks, it remains possible that changes in storm frequency and severity and rising sea levels, or temperature changes could result in a variety of outcomes that individually--or in combination--weaken economic activity and related state revenues over time. Overall, we believe the ongoing focus on the long-term exposures to Florida from climate-related risks, accompanied by demonstrated mitigation and adaptation initiatives, supports our long-term view of the state's credit quality.
This report does not constitute a rating action.
|Primary Credit Analyst:||Oscar Padilla, Farmers Branch (1) 214-871-1405;|
|Secondary Contacts:||Sussan S Corson, New York (1) 212-438-2014;|
|Carol H Spain, Chicago (1) 312-233-7095;|
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