Florida budget would fund defeasance of state bonds

A provision in Florida Gov. Ron DeSantis’ proposed $114.8 billion budget for fiscal 2023-2024 would accelerate the state’s efforts to shrink its debt portfolio.

The proposed budget provides for the early retirement of some state debt as well as creating a state investment fund and a debt reduction program.

The budget package is under consideration by the state legislature.

“It’s basically a continuation of what we’ve being doing for the last decade,” Ben Watkins, the state’s director of bond finance, told The Bond Buyer.

“We’ve been steadily reducing the amount of debt that we have outstanding, but more in a passive way,” he said.

“What I mean by that is because of the way our debt is structured, it’s just like a mortgage payment — paying part principal and part interest — and so if you don’t do any new debt then over time the principal amount of debt you have outstanding is going to go down,” he said.

He noted that this was the type of debt reduction program that was seen during Gov. Rick Scott’s administration because he was a “debt hawk,” Watkins said.

Since 2010, the state has reduced its debt by roughly 40%, from around $28 billion to approximately $17 billion.

Watkins said the new proposal is a more aggressive and proactive approach to lowering outstanding debt.

He noted the two different pieces that fit together to make the plan workable.

“One is a recommendation to give us $400 million in general revenue to defease outstanding taxable debt, which we can do in lieu of tax-exempt advance refundings,” Watkins said.

“We have a couple of series of bonds outstanding that we did on a taxable basis when taxable and tax-exempt rates were equivalent,” he said. “So because we sold them on taxable basis they’re not subject to the same tax law requirements that prohibit tax-exempt advance refundings.”

He said the bond division would be using cash to defease that taxable debt by putting that into an investment escrow and defeasing the outstanding $400 million of taxables.

“The second piece is even more interesting. It takes $1 billion and puts it in a state investment fund to be invested by the pension fund folks, designed to generate income and growth,” Watkins said. “The first 3% of its investment earnings is retained in the fund for the fund to grow over time. The next 2.5% is dedicated to debt reduction, transferred to the Division of Bond Finance to be used to pay off outstanding debt.”

So how does that work for tax-exempts?

“So right now, we’ve refunded everything we can refund — we don’t have any debt that’s callable,” he said. “But we can buy bonds on the secondary market and just retire them and avoid the future interest costs associated with that debt.”

He said that the visibility available through the Municipal Securities Rulemaking Board’s real-time reporting system allows a look at secondary market trading of bonds that can be tracked by CUSIP.

“We can see there are certain low coupon bonds that are trading at a discount, so you can buy them on the secondary market at less than 100 cents on the dollar,” he said, depending upon market conditions.

“So you not only avoid the interest costs associated with that debt, but you also can purchase them at less than 100 cents on the dollar, so you get a double whammy — a benefit in terms of savings for the state,” he said.

The draft legislation of the bill to implement the program creates a state investment fund and provides for administration of the fund by the State Board of Administration.

The bill would also establish the debt reduction program, and provide for administration of the program by the Division of Bond Finance. The debt reduction program would take effect on July 1.

Under the act, $1 billion would be transferred from the general revenue fund in fiscal 2023-24 to the Board of Administration to establish the fund. The principal balance of the fund will include the initial transfer and any other transfers from the general revenue fund to the investment fund.

The primary objective of the fund is the long-term growth of its value and to allow for periodic distributions.

Starting in fiscal 2024-2025, the state’s chief financial officer will transfer the first $100 million of investment earnings attributed to the general revenue fund in each fiscal year to the Board of Administration for deposit into the fund.

The bills also creates the debt reduction program for the purpose of retiring outstanding state debt prior to its maturity and generating savings by avoiding the interest cost on debt being retired.

“The [Bond] Division is authorized to consider innovative techniques to purchase, defease or retire state debt in order to implement the program, including, but not limited to, engaging outside professionals necessary or advisable to carry out and perform the duties and obligations of the division under this section,” the legislation states.

On Wednesday, the Bond Division published the state’s annual comprehensive financial report for the fiscal year that ended June 30, 2022.

“Florida recorded its second year of strong double-digit growth in general revenue fund collections when the state’s fiscal year ended on June 30, 2022, signaling an economy near full recovery from the worst of the pandemic,” the report said.

Watkins said it is very exciting that the state would be in the financial position to put $1 billion aside for the program and have the government leadership to make it a priority.

The state Legislature is currently debating these and other proposals in what DeSantis markets as the “Framework for Freedom Budget” for fiscal 2023-2024, which maintains a record level of $15.7 billion in reserves.

The GOP-dominated legislature is usually a reliable rubber stamp for DeSantis’ proposals.

“This budget elevates our state’s most critical priorities to provide Floridians with needed relief, fund essential services and honor public employees, and maintain record reserves to safeguard our state’s fiscal health and keep our economy roaring,” said House Appropriations Chair Tom Leek, R-Ormond Beach.

In January, Florida’s unemployment rate was 2.6% and remained lower than the nation for the 27th straight month while job growth outperformed the nation for the 22nd month in a row.

Florida’s private sector employment increased 0.3%, or by 29,800 jobs, from December, while on a year-over-year basis the rate increased 5.3%, or by 433,100 jobs.

The Legislature is nearing the end of its budget deliberations and has already approved several pieces of legislation.

A bill that takes the choice of issuing ESG-labeled bonds away from local finance officials has passed the House and been sent to the Senate. The bill would also forbid the state from doing business with financial institutions that invest based on environmental, social or governance scores or criteria.

DeSantis has already signed into law a bill that expands the state’s education universal voucher and education savings account program for Florida students.

The Florida Policy Institute was critical of the new law.

“At a time when our K-12 schools are already severely underfunded, the governor approved a program that will reroute billions in education funding from public education to unaccountable private schools,” FPI CEO Sadaf Knight said in a statement. “The potential impact on the funding for public education in our state — the bedrock for our communities, economy, and children’s futures — is a looming risk to our state.”

DeSantis also signed a tort reform law with the stated aim of protecting business and property owners from frivolous lawsuits and aligning many civil legal procedures with federal standards.

“Florida’s legal system has long been plagued by frivolous lawsuits which benefit lawyers,” said Republican Sen. Debbie Mayfield, who said the law places a significant limitation in multiplier incentives for lawyers to collect higher fees when they sue.