Florida’s Office of Economic and Demographic Research is warning of new fiscal challenges for the state government in coming years.
Without changes to revenue and expenditure policies, the office, a part of Florida’s government, projects a general revenue fund deficit of $9.8 billion by June 30, 2028, the official
The state expects to have $48.5 billion in general fund revenues this fiscal year.
Fitch Ratings
The Florida Joint Legislature Budget Commission unanimously approved the outlook earlier this month.
Making matters worse, the proportion of the state’s residents 65 or over is likely to reach 25% in 2030, the year the first Baby Boomers will reach 85.
That is up from 21.2% in 2020 and 17.3% in 2010.
Residents age 85 or older tend to make heavy demands on state government services, Amy Baker, coordinator for the EDR office, told the joint commission.
“The party is going to slow down, if not stop,” said Dominic Calabro, president and CEO of Florida Tax Watch. Florida’s general obligation bond ratings are Aaa from Moody’s Ratings and AAA from S&P Global Ratings and Fitch Ratings.
Calabro said the state is still in a strong position but “we will have to control costs better.”
Calabro said his group will recommend spending cuts and, if history is a guide, Florida’s government will accept 2/3 to ¾ of them.
Baker told the joint commission that without changes she projects general revenue balances going from $7.754 billion when the current fiscal year ends on June 30 to $2.092 billion at the end of fiscal 2025-2026, negative $2.825 billion at the end of fiscal 2026-2027, and negative $6.941 billion at the end of fiscal 2027-2028.
The fiscal 2027-2028 projected deficit does not include the shortfall from the previous year, which in practice it would include, so she is saying the deficit for June 30, 2028, would be $9.766 billion.
Baker’s projections were based primarily on looking at what she said were critical and high priority needs spending and how they are likely to play out over the next few years.
The budget drivers are higher because of the legislature’s “decisions to make significant recurring and nonrecurring investments in several policy areas.” The projections assume the state will continue existing spending commitments and revenue practices.
Baker and her office present the outlooks annually to Florida’s government and in the last one the EDR office projected a $5.36 billion surplus at the end of fiscal year 2025-2026. So, the new projection of $2.09 billion is a $3 billion step backward.
Baker projects the state’s general revenues to rise from $48.5 billion in the current fiscal year to $53 billion in fiscal 2028. She projects expenditures to grow faster.
The state’s population continues to grow because of in-migration.
Baker said she expects an annual average increase of 1.24% per year from now through 2030. The state’s natural population increase —births subtracted by deaths — has been negative for a few years and is expected to remain so.
Florida’s population increase is due to immigration into the state, including many retired senior citizens.
The biggest drivers of increased costs over the fiscal years 2025-2026, 2026-2027, and 2027-2028, are the state’s education aid program, with projections of $2.87 billion in additional aid needed, and Medicaid, with an additional $2.56 billion needed. The state’s aid includes school voucher subsidies to parents to send their kids to private schools, without any needs-based restriction.
In addition to the general revenue fund reserve, Florida also has other reserve accounts supporting the general fund. Baker projected on top of the $7.75 billion reserve already mentioned, Florida would have an additional $4.94 billion on June 31, 2024.
Florida has a constitutional requirement for budgets to be balanced and so the state government will be working to avoid the projected deficits.
“My takeaways are that the expense side is going to be harder to control,” said Joseph Krist, publisher of Muni Credit News.
“Education and Medicaid going up is no surprise. The situation might be worse but Florida remains one of the ten states not to expand Medicaid under the Affordable Care Act,” he said.
“The thing that stood out for me was the commentary on the sources of increased revenues — corporate income taxes and taxes on investment income,” Krist said. “The fact that sales tax revenue has barely grown tells you more about what’s going on in the economy. … It’s a sign of weakness in disposable income for the middle class. It’s the first time the state has had to deal with tighter times in a while so that makes the outlook more negative.”
Evercore Director of Municipal Bond Research Howard Cure is less concerned by Baker’s report.
“For the most part, the projected deficits are not driven by negative trends in revenues,” he said. The major tax categories are going up though some minor categories are going down. Some Florida tax cuts have reduced revenue, he said.
“An aging population (as Florida is still attractive for many retirees), will put budgetary pressure on the state in areas such as housing and healthcare,” Cure said.
“In addition, on the expenditure side, there are some recurring programs that have caused additional budgetary pressure,” Cure said, citing Florida’s universal school voucher system for schools with no financial eligibility restrictions, Medicaid continuing to be a further burden even without Affordable Care Act expansion, the addition of 19,000 college employees and staff added to the state employee health insurance rolls, and state employee raises, particularly for teachers, which are still well below nationwide averages.
“I don’t think there is currently concern about the state losing its gilt-edged Aaa/AAA ratings, particularly since the state on many measures, continues to grow and there are sizable budget reserves,” Cure said. He was concerned about the state’s dependence on sales, tourist, and business taxes because they are prone to fluctuations during an economic downturn.
“The state does have a history of raising revenue and reducing expenditures to balance budgets so, for now, I think the investment community will wait and see how the state plans to balance its operations going forward before there is a severe negative reaction in ratings and how the bonds trade,” Cure said.
Fitch Ratings Director Tammy Gamerman believes Florida can handle what is coming.
“Like many states, Florida will have to contend with the long-term challenge of returning to more normal revenue growth after a period of elevated tax revenues and one-time federal aid,” she said. “Florida’s transition will be eased by the state’s prudent use of surplus revenue to build up reserves, pay down debt, and invest in infrastructure. Fitch expects that the state will closely monitor future revenue growth and adjust spending and revenues if necessary.”
When it affirmed Florida’s AAA rating in December, S&P cited strong revenue growth, robust reserves, and
About 80% of the state’s economic output is in its coastal counties. The state’s coast is increasingly exposed to climate change and environmental stress from rising sea levels, hurricanes, and rising temperatures, S&P said.
However, the
The state’s low debt and liabilities are also credit positive, the rating agency said.
The government is taking steps to deal with rapidly increasing property insurance rates and it remains to be seen how this plays out, S&P said.
Fitch in a July report said the low debt and liabilities and strong reserves contributed to its AAA rating. It said the state mainly drew revenues from sales taxes, which the ratings agency expects to grow at or better than the U.S. gross domestic product.
The state does not levy a personal income tax.
The Bond Buyer sought comment from the state’s governor and leaders of the state Senate and House of Representatives committees on appropriations on Baker’s report but none of them responded.