Florida could be on the verge of losing a key financial tool that helped the state reduce the amount of money it owes by $1.4 billion last fiscal year.
Through June 30, Florida had cut the debt it accumulated to build schools, roads and other infrastructure over the last seven years by some $5.5 billion, Ben Watkins, director of state Division of Bond Finance, told Gov. Rick Scott and the Cabinet on Wednesday.
A major portion of that savings, $2.8 billion, came through the state’s ability to use a financing technique known as “advance refunding,” which allows the state to take advantage of lower interest rates to pay off tax-exempt bonds that have higher rates.
Last week, Watkins warned aides to Scott and Cabinet members that the pending federal tax overhaul contained a provision that would eliminate the use of advance refunding by state and local governments.
In delivering his annual state debt report Wednesday, Watkins said that prohibition is “highly likely” to remain in the final tax bill since it was contained in the original House and Senate versions. Republican congressional leaders said Wednesday they had reached agreement on a final bill, though the measure would still need approval from the House and Senate.
“Unfortunately, Congress in the tax act is going to make it more difficult for us to save money through refinancing at lower interest rates,” Watkins told the governor and Cabinet members.
Over the last 7 ½ years, Florida has used the financial technique to carry out 98 debt refinancings, totaling more than $14 billion and resulting in more than $2.8 billion in savings, according to the new debt report.
In the 2016-17 budget year, the state had 14 refinancings, resulting in $304 million in savings, the report showed. Florida’s total state debt has dropped from a high of $28.2 billion in June 2010 to $22.7 billion last June 30.
“That’s a meaningful savings to the state. Those are real dollars. Those are not phantom dollars,” Watkins said.
Eliminating the advance refunding of the bonds is “going to cost every citizen and taxpayer in the state by disallowing states, cities, counties and school districts to reduce the cost of their debt,” he said.
Anticipating the end of the advance refunding with an effective date of the tax legislation on Dec. 31, Scott and the Cabinet on Wednesday approved plans to refinance $325 million in education construction bonds and another $100 million in debt related to the Florida Turnpike.
“I appreciate you moving so nimbly after that announcement to get some of those deals in the pipeline and save us a lot of money,” Agriculture Commissioner Adam Putnam told Watkins.
Watkins said those will be last advance refundings for the state unless federal lawmakers alter the ban in final negotiations on the tax bill. One possibility, Watkins said, would be providing state and local governments with a six-month or one-year “transition period” before the ban is enacted.
If the new tax law prohibits advance refunding, it means Florida will not be able to realize similar debt savings in the future, although the scope of the savings will depend on whether interest rates rise or not. The new report also showed Florida has already refinanced 62 percent of its outstanding debt, further limiting future savings.
At least the initial versions of the federal tax legislation would prevent advance refundings during the “no-call” period of the bonds, which typically is the first 10 years of a 30-year bond issue. However, Florida and other government agencies that issue tax-exempt bonds would be able to refinance bonds after that period, although Watkins said it would limit the refinancings.
“It doesn’t take us out of the game entirely, it just makes the job more difficult,” Watkins said. “It makes us dependent upon the interest rates that exist at the time the bonds are called.”
Some federal officials have long sought to curb the use of tax-exempt bonds by states and local governments, arguing that they represent a “subsidy” since federal income taxes cannot be collected on the bond investors’ earnings.
The potential change in the tax bill would save the federal government about $17 billion over the next decade.