Fitch Upgrades Florida Documentary Stamp Revs to 'AA-'; Outlook Stable
--\\$46.495 million DEP Everglades Restoration revenue bonds, series 2015A.
The bonds are expected to sell competitively as soon as Aug. 24, 2015 for bids on 18 hours' notice.
In addition, Fitch upgrades the following ratings:
--\\$216.225 million DEP Everglades Restoration revenue bonds to 'AA-' from 'A';
--\\$1.155 billion DEP Florida Forever revenue bonds to 'AA-' from 'A'.
The Rating Outlook is Stable.
The bonds are secured by collections of the state documentary stamp tax, which is levied primarily on real estate transfers.
KEY RATING DRIVERS
STRENGTHENED LEGAL PROVISIONS: The upgrade reflects state action to strengthen the legal provisions supporting the bonds. Implementing legislation related to voter approval of Amendment 1 to the state constitution increased the pledge to include all documentary tax collections and effectively raised the additional bonds test from 1.5x to 2.58x maximum annual debt service (MADS).
ROBUST DEBT SERVICE COVERAGE: The upgrade also reflects robust debt service coverage by pledged revenues, due to recent strong growth in documentary stamp tax revenues, but also a result of the declining debt service schedule.
VOLATILE REVENUE STREAM: The pledged revenue stream, which is derived from economically sensitive real estate and other transactions, has historically been quite volatile. Coverage declined significantly but remained adequate through the recession. Revenues have resumed growth with recovery in the state housing market.
STATE NON-IMPAIRMENT: The state covenants to not reduce the allocated percentage of excise taxes securing the Florida Forever and Everglades bonds.
STATE CONTROL OF PROGRAM: The state controls future debt issuance and has flexibility regarding offerings under the programs. Legislative action during the recession to increase the revenues available to bondholders and recent legislative changes that strengthened the pledge are indicative of state support of the program.
MAINTENANCE OF AMPLE COVERAGE: The rating is sensitive to maintenance of ample debt service coverage despite revenue volatility. It is Fitch's expectation that Florida will continue to limit the leveraging of this revenue stream beyond what the additional bonds test would permit.
The state's action to strengthen and simplify the legal structure supporting the documentary tax bonds results in a stronger credit profile and a rating upgrade to 'AA-' from 'A'. Following voter approval of Amendment 1 to the state constitution in November 2014 that dedicated 33% of documentary stamp taxes to the Land Acquisition Trust Fund, the state legislature enacted implementing legislation in 2015. The legislation increases the pledge to bondholders to 100% of documentary stamp tax collections from the previous 63.31%. It also effectively increased the additional bonds test from 1.5x MADS to 2.58x MADS by relying only on the previously pledged amounts for the coverage test. The effect of the increased pledge dramatically increases coverage of debt service by pledged revenues while also limiting additional leverage.
INCREASING BUT VOLATILE REVENUES
The documentary stamp tax revenue that secures the bonds is derived primarily from real estate activity, with additional revenues coming from other transactions such as car loans. Documentary stamp tax revenues have historically been quite volatile and rose dramatically during the boom in real estate through the middle of the last decade, from \\$1.2 billion in fiscal 2000 to a high of \\$4.1 billion in fiscal 2006. As the economy entered recession, with the Florida housing market severely affected, these transactions and the associated documentary stamp tax revenues dropped precipitously.
Revenues bottomed out in fiscal 2010 at \\$1.1 billion before beginning to recover. Recent revenue growth has been quite strong, increasing 30.3% in fiscal 2013, 10.3% in fiscal 2014, and 17% in fiscal 2015. With recent strong revenue growth and the final maturity of parity Preservation 2000 bonds in fiscal 2013, debt service coverage has returned to former high levels. Fiscal 2015 pledged revenues provided 7x coverage of annual and peak debt service, which occurs in fiscal 2018. With the change in the revenue pledge to 100% of documentary stamp tax revenues, debt service coverage by fiscal 2015 revenues increases to 12x MADS.
REVENUES SUPPORT VARIETY OF ENVIRONMENTAL PROGRAMS
The state has levied documentary stamp taxes for more than 70 years and has issued land acquisition bonds of several types since 1964. The state began issuing Preservation 2000 bonds in 1991 and Florida Forever bonds in 2001, pursuant to constitutional amendments. The two programs provide for revenue bond issuance to acquire land and water areas for conservation, recreation, water resource development, and preservation. The Preservation 2000 bonds have matured and no further borrowing is permitted under this program. The state has authorized issuance under the Florida Forever program to a maximum of \\$5.3 billion with borrowing authorized annually. No more than \\$300 million of pledged taxes may annually be used for debt service on Florida Forever bonds.
Everglades Restoration revenue bonds, which since 2006 have had a parity lien on the documentary stamp tax revenues, fund the acquisition and improvement of land and water areas, including water supply and flood protection, under a \\$12.5 billion Everglades Restoration program, a joint federal, state, and local endeavor. Everglades Restoration bonds were approved by constitutional amendment in 1998, at that time payable from a junior lien on pledged documentary stamp tax revenues. In 2006, the state legislature elevated the Everglades Restoration bond lien to parity status with the Preservation 2000 and Florida Forever bonds. The amount of Everglades bonds authorized is currently \\$500 million; the current issuance will fund costs associated with constructing sewage treatment facilities.
LIMITS ON ADDITIONAL LEVERAGE
Despite the increase in pledged revenues, the ability to leverage the revenue stream remains limited to what would have been available under the prior structure. The additional bonds test takes into account debt service under both remaining programs and requires 1.5x coverage of MADS by the previous, smaller pool of pledged revenues (58.25% of pledged revenues; former pledge of 63.31% reduced 8% for service fees). Additional bondholder protection is provided by covenants that ensure the revenues are not reduced, the state's degree of control and flexibility in issuing future debt, and the rapid amortization of outstanding debt.