Go to: /articles/2009/01/15/ for other articles.

State of Florida - Can it Avoid Financial Collapse without a Credit Card?

State of Florida - Can it Avoid Financial Collapse without a Credit Card? The financial situation in the State of Florida has never been worse than it is today.

With an estimated budget shortfall of $2.3 billion, the State of Florida is one of eight states where a deficit of over $1 billion is expected. The budget shortfall is being blamed on everything from lower collections on documentary stamp taxes from a slumping real estate market to reduced sales taxes on the sale of automobiles. Massive declines in tourism, consumer spending, and corporate earnings have all resulted in lower sales and corporate taxes. And in particular, for the first time in decades there are fewer newcomers entering the state.

Florida property taxes are still extremely high. Voters have seen little relief from Amendment 1 passed earlier this year. While taxable home values have come down due to the collapse of the Florida real estate market, this has been more than offset by higher tax rates and an increase in taxes that are not based on the value of the home. The net result is that Floridians still face staggering Florida Property tax bills - even in a depressed real estate market.

Florida homeowners insurance is still expensive and hard to find. Legislation passed in 2007 put much of the risk of a major Florida hurricane on the backs of Florida taxpayers. The Florida Hurricane Catastrophe Fund offered cheap reinsurance to insurance companies in exchange for taking on $12 billion in additional risk. Now the Cat fund says that it doesn't have the borrowing capacity to meet its obligations - estimating a possible shortfall of up to $15 billion.

The State of Florida was so concerned about the inability of the Cat fund to raise money to cover a major hurricane earlier this year that it paid Warren Buffett's Berkshire Hathaway Company $224 million. In return, Buffett's company guaranteed that the state would be able to raise $4 billion in bond debt if a major hurricane produced enough damage to trigger the Cat fund.

The situation at Florida's state run insurance company - Citizens Property Insurance Corporation isn't much better. Citizens Insurance covers some of the riskiest homes in the State of Florida and doesn't charge enough to Florida homeowners for the risk that it takes. It has $433 billion of property exposure on its books with a $4 billion surplus on hand to pay claims.

Policyholders of Citizens face two issues. First there is the risk that Citizens can't meet its primary claim obligations for lower level storms because of its own trouble raising cash in the bond market. Second, once losses reach a certain level, Citizens will look to the Cat fund for reimbursement after a series of major Florida storms - a fund that just might not have the cash needed by Citizens.

While all of these developments in Florida are serious, there is really nothing new about a government that doesn't live within its means and takes on obligations that it doesn't have the cash on hand to meet.

What is new and should send shockwaves across Florida is the fact that the state cannot borrow in today's bond markets the way it has been able to in the past. In effect, the State of Florida has maxed out its credit card.

Why is it so hard for states like Florida to borrow in the current bond markets?

Quite frankly, it used to be easy for state and local governments to issue bonds. The process was straight forward, and very few people paid any attention to it. That's all changed since the collapse of the subprime mortgage market.

Despite a very low bond default rate, it is very difficult to attract bond investors these days. Companies that used to insure new bond issues have had their ratings downgraded. That's made the bond market less liquid and less attractive to investors. And it makes states like Florida have to offer higher payments for interest and principal in order to sell out a bond issue.

With a massive shortage of revenue and an unfriendly bond market everyone in Florida should be asking the state government to continue to tighten its belt. That process is already underway. But you should also expect strong resistance to spending cuts from those who believe that there is no such thing as too much government.

These groups will ask Florida Legislators to raise taxes instead of making further spending cuts. Don't underestimate where this could lead. Many items that are currently exempt from Florida sales tax could suddenly be taxable in this crisis environment. Expanding the sales tax could lead to new taxes on everything from Internet sales to various types of consulting services. All of which would dramatically increase our own cost of living and make it that much harder for Florida to emerge from this recession.

And never underestimate the risk of Florida legislators dealing the final death blow to the state - instituting a state income tax.

It is up to all of us to make sure that never happens!

If there is one lesson that all governments need to learn during the current financial crisis it is this - there is absolutely nothing wrong with the "pay as you go" system. It will always stand the test of time no matter how shaky the bond markets are.

About the Author:

Michael Letcher is a former executive with Bank of America and W.R. Grace and is a licensed CPA. Floridians use his on line database to find alternatives to Citizens Insurance Florida for their homeowners insurance in Florida. Subscribe to his free newsletter and get the truth about Citizens Insurance Florida by visiting => www.homeinsurancebuyers.org

---------- This article is distributed on behalf of the author by SubmitYOURArticle.com SubmitYOURArticle.com is a trading name of Takanomi Limited. Takanomi Limited is a limited company registered in England and Wales. Registered number: 5629683. Registered office: 31 St Saviourgate, York YO1 8NQ. Full contact details are at takanomi.com ----------

------------------------------------



Read Financial Markets  |   Home  |   Blog  |   Web Tools  |   News  |   Articles  |   FAQ  |   About  |   Privacy  |   Contact
Donate Bitcoin: 1K9TzBvQ2oaEb4tX9t2vKDtZouMcpfV6QF
paypal.me/rhashemian
© 2001-2019 Robert Hashemian   Powered by Hashemian.com