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

The State of Florida is now facing the worst financial crisis in its history. As it struggles with balancing its budget deficit, outrageous Florida property taxes, and ski high Florida homeowners insurance there is one new shocking development - It won't be able to borrow its way out of this crisis. Here's what you need to know about Florida's financial collapse and how to prevent a brand new assault on your wallet!

The State of Florida's financial situation has never been more serious than it is today.

With a projected budget deficit 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. Dramatic reductions in tourism, consumer spending, and corporate income have all led to 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 very high. Voters have not experienced meaningful tax reductions from Amendment 1 which was approved earlier this year. While the collapse of the Florida real estate market has brought down taxable home values, this has been negated by higher tax rates and the introduction of new 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 low cost reinsurance to insurance companies and assumed an additional $12 billion in 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 the state run insurance company in Florida - Citizens Property Insurance Corporation isn't much better. Citizens Property Insurance has some of the highest risk homes in Florida and doesn't collect enough in premiums for the risk that it takes. Its exposure to property damage on its books is $433 billion with only a $4 billion surplus available 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. It was a simple process and no one thought twice about it. That's changed since the failure of the subprime mortgage market.

Despite a very low bond default rateHealth Fitness Articles, 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 caused bonds to be less liquid and not 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 severe revenue shortages and a frozen bond market all Floridians should be demanding that the state keep tightening its belt. That process has already started. But you should anticipate strong opposition to spending cuts from those who think big government is good.

These groups will demand that Florida lawmakers increase taxes rather than making additional cuts in spending. Don't make the mistake of not anticipating where this could lead. Many items presently exempt from Florida sales tax could suddenly be made taxable during the current crisis. 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 our job 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 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.

Article Tags: Real Estate

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR


Michael Letcher is a former Bank of America and W.R. Grace executive and is a CPA. Florida consumers use his on line guide to find other options to Citizens Insurance for their home insurance in Florida. Subscribe to his free monthly newsletter and get all the facts about Citizens Insurance by visiting => http://www.homeinsurancebuyers.org



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