Watkins on Florida’s finances, what Reedy Creek bondholders can expect



Chip Barnett: (00:03)
Hi and welcome to another Bond Buyer podcast. I’m Chip Barnett. My guest today is Ben Watkins, he’s the director of the state of Florida’s Bond Division. And we’re gonna be talking about the latest news coming out of the Sunshine State. And we’re gonna take a look at what’s happening in Reedy Creek. Welcome to the Bond Buyer, Ben.

Ben Watkins: (00:21)
Thank you, Chip.

Chip Barnett: (00:22)
Okay. Let’s dive right in. Can you tell our listeners about how Florida’s doing right now? I mean, the state of its finances.

Ben Watkins: (00:31)
So the answer to that is stronger than it’s ever been. I’ve been in this position for a very long time, through various economic cycles and, and I can say that we’re in a better position, both economically as well as financially at the state level, than we’ve ever been over my 25 year tenure. And to just sort of give you a sense of that, on the economy side, our tourism has surpassed pre-pandemic levels. We see unprecedented growth in population with in-migration, people moving to the state, an extraordinarily strong housing market, an unemployment rate at 3%, which is if you want a job, you can find it. So it’s really remarkable how quickly our economy and our finances have really bounced back from the from the pandemic.

Ben Watkins: (01:43)
When I think about our finances and just in terms of, you know, looking at it and thinking about it, probably the easiest metric to look at is our levels of reserves, which are really off the charts relative to historical norms. We’re looking at general fund reserves of some $19 billion. That’s about 43% of, of our total general revenues. And if you look at our total reserves, we’re it $21.8 billion, which is call it 50% of our general revenues. Normally we’re running between 5% and 10%, so that gives you an idea of order of magnitude in terms of how it’s affected our financial performance, how it’s affected our reserve levels.

Chip Barnett: (02:36)
Oh yeah. That’s really impressive.

Ben Watkins: (02:38)
Yeah. Unprecedented is a way that I would characterize it for sure, Chip. And when I think about general revenue, general revenue’s $44 billion at the end of fiscal 22, June 30, 2022, that’s up 21% over the prior year. And the prior year was up 16.5% over the previous year. So really the recovery has really been remarkable. And when I think about, and I think about the reasons why, and I think about the pandemic, and I think about how people have re have responded, it’s largely attributable to in a large part to how the governor responded in managing the pandemic, which was to do everything that he could to keep schools open and keep businesses open. So people could go to work, and people living in the Northeast and in New York and New Jersey and people who were moving to Florida to retire, saw an opportunity and to work remotely could effectively do their job from somewhere else, had a second home in Florida and just decided to stay. And so really our growth business is people moving to the state, in-migration. And it was turbo charged as a consequence of the pandemic coupled with the governor’s response in terms of how he managed the pandemic. So we’ve been beneficiaries of that from an economic and a financial perspective in a big way.

Chip Barnett: (04:25)
Exactly, I mean between the beautiful weather and no state income tax, it’s is really very alluring to be heading down south from a place like New York or heading from out West from California.

Ben Watkins: (04:39)
Well, we’ve seen it, that’s for sure. And we’ve experienced it, not only seen it, but experienced it. So we’re in a really, really good place economically and financially right now, Chip.

Chip Barnett: (04:51)
How’s the state’s current debt situation?

Ben Watkins: (04:54)
Well, our focus really over the last decade has been on refundings, taking advantage of historically low interest rates and we’ve done that in a big way. So over the last 10 years, we’ve executed about 130 transactions, totaling $16 billion for savings in refundings generating $3.4 billion in gross savings for the state in terms of reduced interest on the debt that we have outstanding. So what does that mean portfolio-wise? We’ve refinanced about 95% of the debt that we currently have outstanding. The other thing that’s remarkable and first time that we’ve we’ve ever experienced it historically is actually a reduction in the debt that we have outstanding. The prior governor, Governor Scott, now Senator Scott, every cabinet meeting I would go to, he would ask me, ‘are we paying down debt?’

Ben Watkins: (06:03)
And I’d say, ‘yes, sir, we’re paying down debt.’ He was very much a debt hawk and over his tenure, or I should say over the last 10 years, we’ve reduced that amount of state debt outstanding from $28.2 billion to currently $17.1 billion. So that’s some 40% decline in the amount of debt that we currently have outstanding. And then when I think about the money that we’ve received from the federal government and expect to receive from the federal government has really put us in a position to utilize pay-go to provide for strategically important infrastructure investments. So that’s exactly what we’ve done, used the benefit we’ve derived from the federal government, the windfall, since it’s non-recurring revenues, we’re using it for non-recurring expenditures for strategically important infrastructure investments in a way that’s really remarkable and moves the needle in terms of the amount of money we’re spending on infrastructure in the near term.

Chip Barnett: (07:31)
Yeah, Florida issue bond issuance has been on the decline and has been doing so for quite a while — but looking forward, what do the latest forecasts tell us about the future what’s what’s on tap?

Ben Watkins: (07:46)
So you know we do revenue estimate estimates twice a year, at least, sometimes three times a year, and then we use those revenue estimates to build the budget off of. And they just completed those general revenue estimates yesterday, so this is very fresh information. So what do the forecasts tell us? They added three and a half billion to general revenues. So we adjusted upward to basically our actual number at the end of ’22. We collected $44 billion in general revenues at the end of ’22, significantly beating estimates throughout the year. And they made an adjustment to adjust the current estimate for the upcoming year, up by a similar amount, three and a half billion. And that’s interestingly enough, or coincidentally, about the same amount that we expect a reduction over the collections in the current fiscal year of $44 billion.

Ben Watkins: (09:02)
So we’re embedded in those estimates as a conservative approach to thinking about the possibility of a recession. And what does that mean relative to revenue collections? So as per normal in this state, taking a very conservative approach and planning for the worst and hoping for the best. And when you do it that way, you generally always end up in a position that’s better than where you thought you would, and you don’t have unexpected contingencies that you have to deal with. And that’s typically the way we roll, and that’s why we’re a triple-a rated state. That’s embedded in our DNA in terms of how we approach these things, but so what it really means is continued strength is what I would say, continued economic strength, both in the housing, the employment, but down from the extraordinarily high levels, precipitated by a lot of the federal government programs to stimulate the economy, recognizing that that’s going away, that that’s tapering as tapering off and, and planning for the possibility of a slow down in the economy is consequence.

Chip Barnett: (10:18)
Okay. Let’s take a look at what so many people have been talking about, the controversial Reedy Creek situation. Can you tell us your thoughts on what’s happening and what may happen before this special district is dissolved next year?

Ben Watkins: (10:42)
Yeah, I’m happy to talk about that. We’ve done so with some of the major investors to give them a heads up, keep them informed on what the thinking is behind that. It was an extraordinary legislative action that took place very quickly during a special session, addressing insurance. That was a forward starting date, over a dissolution of the special district. Normally a bill like that would be 60, 80 pages long and would have all of the next steps spelled out in detail about what was expected to happen. This was a two sentence bill, one paragraph with a forward, starting dissolution of Reedy Creek that is a special district serving Disney in the Orlando area. And so, well, what does that mean? What that means is that there will be a subsequent legislative action to spell out exactly what that is and what that looks like before the dissolution date.

Ben Watkins: (11:50)
So it was anticipated at the outset that there would be more to come, but it didn’t spell that out. So there’s been an awful lot of speculation because of the information void about what might happen and what that might look like. The first thing that I would say is that we understand our responsibility to bondholders and investors and take that seriously. And whenever we endeavor to change a governance framework potentially, it’s to do so in a manner that does not have any adverse consequences on the bondholders. And so that’s exactly what we’ve undertaken to do. We have a seat at the table. We’ve been in conversations with decision makers about what does that look like. I would expect there to be a review of the special privileges afforded Disney, granted back in 1967.

Ben Watkins: (12:51)
And those things that are not important to the current Reedy Creek operation, district operations, for both their utilities, as well as their public infrastructure, consideration of removing those special privileges and to bring it better in alignment with the Uniform Special District Act, which is a successor statutory scheme, dealing with the multitude of different special districts around the state, dealing with transparency, with reporting transparency and accountability. So it’s to remove those special privileges, like the ability to build a nuclear power plant or an airport, or the power of eminent domain, a consideration by the legislature of stripping those away that are unnecessary to the current operations to bring it better into alignment with the framework of the Uniform Special District Act. The other thing that I would expect is a reconsideration of how the board of Reedy Creek is appointed and qualified to serve, to be appointed by state leadership with a broader interest across the spectrum of interest across the state.

Ben Watkins: (14:15)
And not just solely based on Disney’s special interest. Currently, you have to be a property owner in the district in order to be on the Reedty Creek board. But the only property owner within Reedy Creek is Disney. So it’s basically a handpicked Disney board and I would expect that board to be appointed by state leadership with a broader interest across all citizens of the state and not just Disney in decision making relative to Reedy Creek. What does does that mean for bondholders? I would also expect, and there’s a recognition of the need to protect bondholders’ interest. So I would expect the successor entity to assume all responsibilities and obligations under the existing bond documents, the existing security structure, the existing pledges, the existing revenue collection and payment mechanisms for bondholders.

Ben Watkins: (15:22)
I would expect that to be identical to the, the current flow of funds, the current pledges and the current collection and payment mechanisms that, that currently exist. So that there’s a transfer and assumption by the successor entity of all of the obligations currently applicable to Reedy Creek and that are important for bondholder security. So I would expect no change in the Reedy Creek the credit structure or the security for the repayment of debt relative to outstanding Reedy Creek bonds. So what does that mean? So what I see is a change in the governance framework with protection of bondholders at the end of the day, which means that bondholders are gonna be in the same place they were after the dissolution of Reedy Creek than they were before. And that’s what I would advocate for and what I would expect to happen.

Chip Barnett: (16:29)
Okay, thanks for that update. Let’s turn to the other ESG issues. How does Florida stack up, um, you know, environmentally?

Ben Watkins: (16:38)
So when I think about ESG, you know it means a lot of different things to a lot of different people and there’s an awful lot of confusion and awful lot of conflating issues involved in that because I think it’s largely been used by the asset, the, the investment management community to gather assets, what it means for us and the way we think about ESG, we think about ESG as a risk disclosure issue. And I think it’s a fair question to ask, especially the environmental side in Florida, you know, what are you doing to anticipate hurricanes, sea level rise and climate change. And I think that’s a fair question for the long term investors and for credit analysts, the S and the G is a little bit lost on me and again it’s because we don’t have any particularly acute social or governance risk.

Ben Watkins: (17:42)
I mean, we’re a government, we have elected bodies, we have Sunshine Laws that are applicable in doing business and decision making, social issues are what they are. There aren’t any particularly acute or that have any impact on credit. So for us, it means, what are you doing about your environmental risk? And the answer is an awful lot. And this doesn’t really get reported, but it’s a great story. And it’s one of the governor’s prior priorities, or one of the central planks to his platform — is protection of the environment. And we’ve done an awful lot in that space to enhance the, our ability to adapt and be resilient. So what does that look like? Governor DeSantis when he came in, he was calling for a two and a half billion dollar investment in Everglades restoration and protection and resources over four years, which was more than a, a billion dollars more, or twice as much, as it had been spent over the previous four year period that, that four year total, well over the last three years, we’ve exceeded that goal, by investing 3 billion, which is double the amount of, of the prior four years.

Ben Watkins: (19:16)
And with the federal revenue sharing particularly as well as the robustness of our economic growth has really put us in a position to make meaningful progress. So far targeted water quality improvements, Resilient Florida, which is resiliency infrastructure of grant program with local governments to provide for resiliency, infrastructure, Everglades restoration, and conservation land acquisition, making up the major components of 4.2 billion to be invested in Florida’s environmental programs in fiscal 2023. So it’s a great story. We’re really proud of the legacy and leadership provided in the environmental space. Importantly, we have the institutional infrastructure created at the state level with a chief science officer and a chief resiliency officer and creating a mandate for consensus estimates on sea level rise for purposes of planning and investing in coastal mapping and vulnerability assessments for every county in the state to be used as infrastructure for planning around changes in climate.

Ben Watkins: (20:44)
So, hose are, that’s how we think about it, that’s what we disclose in our offering documents. We think that’s the appropriate approach in the muni space. But the whole ESG moniker has gotten hijacked in a lot of different ways and used in a lot of different ways that that are not particular. Are they helpful to the the right approach, which is all about risk disclosure? I think more broadly for the industry, the whole ESG moniker is a trap, for either underwriters and dealers selling green bonds with nothing to behind it, or issuer self designating without adequate explanation of what they mean by that — it’s gotten the regulators’ attention on the corporate side and it wouldn’t surprise me if it gets the regulator’s attention on the enforcement side. So it’s something we’ve avoided and stayed away from and, and treated it simply as a risk, which is how we’ve approached it and how we’ve implemented.

Chip Barnett: (22:07)
Exactly. Florida has, been taking a very proactive approach to climate change and, uh, also too, in their disclosure and transparency on their financial documents.

Ben Watkins: (22:19)
Well, it’s a really important question and it’s challenging for everyone. It means different things to different people across the United States, and what we did was to try get ahead of it, to work closely with the GFOA in drafting best practices for disclosure, relative to environmental, social and governance risk. What does that mean? What does that look like? We reached out to chief resiliency officers in Fort Lauderdale and Broward county, Dr. Gasman and Dr. Harrada, I didn’t even know there was such a thing as a resiliency officer and they coached us up on the way they think about it, how they treat it. And a lot of it is around say, for example, statewide building codes, zoning regulations, not allowing structures to be built in environmentally sensitive or flood prone areas.

Ben Watkins: (23:19)
So they’re not things that you would typically think about in terms of resiliency that see people’s day to day business, and that I’m, I’m forever grateful for them, for taking the time to coach us up on what it means and how to think about it so that we could share those best practices with other folks across the country, whether it’s ice in Texas or fires in California or flooding in the Midwest or drought in the Western states — we’re all confronted with something that’s environmental related that needs to be thought about and talked about with our analysts and investors to give them a real picture of how it is that we are thinking about and approaching it. And what kind of strategies we’re developing to mitigate the potential impacts of that.

Chip Barnett: (24:12)
You know, speaking of catastrophes, how’s the Cat Fund doing? I know you had a big sale a few years ago to kind of get it into good financial shape. Is it doing okay now?

Ben Watkins: (24:22)
Oh, yeah, a subject that’s near and dear to my heart. I’m happy to say that the Cat Fund is actually very well positioned coming into this storm season. We’ve got a 16.2 billion liquid claims paying resources on hand relative to a $17 billion maximum statutory cap on liability. So we’re within shouting distance of being fully funded in the highly, highly unlikely event of a major catastrophic storm hitting the state. So we’re very well positioned on the Cat Fund that of course includes three and a half billion of pre-event proceeds that we borrowed and got a great market reception on that. We did an awful lot of investor education and outreach, had a multitude of institutional accounts, multiples the number that we’d had participating in prior transactions.

Ben Watkins: (25:44)
So we’re really, really happy about having them on board — no better way to understand a credit than own it. So we were very pleased with the transaction, very pleased with the investor base and the breadth and depth of that base. And so Cat Fund is very well positioned, I will say. Another action of note was we had a special legislative session to deal with the insurance issue this year. It was all around availability and affordability and what the legislature did, and we are in the financial position to be able to do this cause of the pressure on the primary insurers cause of insurance fraud in, I call it ‘institutionalized insurance fraud,’ around the extraordinary litigation that’s taking place in the state around roof damage.

Ben Watkins: (26:48)
We were able to do tort reform and eliminate a lot of the perverse incentives to litigation. To give you an idea at order of magnitude, we accounted for nationally about 8% of all homeowners claims, resided in the state of Florida, but relative to that, 8% of all claims outstanding nationally, Florida represented 80% of all litigation. So that gives you an idea of order of magnitude just way outta line in terms of what you would expect of national norms. So we were able to do tort reform. The legislature was able to set 2 billion aside as a contingent reserve for reinsurance, underneath the current Cat Fund retention level. So an extraordinary move, of very positive to help support the industry as a whole, both from a solvency standpoint as well as the ability of primary insurers to be able to steer adequate reinsurance for the risk they have on their books. So that has happened, but we’re in a very, very strong position, both Cat Fund and Citizens to deal with catastrophic events in the state.

Chip Barnett: (28:24)
Okay. Do you have any last thoughts you’d like our listeners to know about?

Ben Watkins: (28:29)
No, I really don’t Chip. But I do really very much appreciate the opportunity to have the conversation. The story this year has been easier to tell than any prior year during my tenure. So it is remarkable where we are immediately after a pandemic. So, I really appreciate the opportunity to tell the story and I appreciate the opportunity to talk with you today, Chip.

Chip Barnett: (29:06)
Ben Watkins, head of the Bond Division of the State of Florida, thank you very much for being here with us today.

Ben Watkins: (29:12)
Happy to do it,

Chip Barnett: (29:13)
And thanks to the listeners of this latest Bond Buyer podcast. Special thanks to Kellie Malone, who did the audio production for this episode, and don’t forget to rate us, review us and subscribe at www.bondbuyer.com/subscribe. For the Bond Buyer, I’m Chip Barnett, and thank you for listening.

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