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REPORT TO THE FLORIDA STATE LEGISLATURE ON CDDs

REPORT ON THE STATUS OF FLORIDA COMMUNITY DEVELOPMENT DISTRICT BONDS
(Submitted by Income Securities Advisor Inc.)

Since 2008, Florida CDD bonds have suffered a dramatic decline in value due to the nationwide collapse of the housing market.  As of March 1, 2010, 122 districts have defaulted on $2.997 billion in bonds.  A further 78 districts representing $2.705 billion are on our watch list of bonds likely to default in 2010.  To put this into perspective, we have been tracking municipal defaults since 1980 and have accumulated histories for over 3,200 defaults since then.  We can say without hesitation that in the last 30 years, Florida CDD defaults is the single biggest default wave in the history of municipal bonds.  California, Texas, Colorado, Arizona and Nevada have had similar events, but their magnitude does not approach what is happening in Florida. 

It would be easy to attribute the problem to Florida’s size and to the nationwide problem in housing, but this would ignore that there may be structural problems with the CDD enabling legislation.  Some of these problems are similar to those faced by the other states cited above and it would be worthwhile for Florida to study those default cycles and see what actions were taken.  This is especially relevant for Texas and California since their default waves took place many years earlier and only a modest recurrence is being experienced in the current housing meltdown.  Clearly, some corrective actions were taken from which Florida could learn.

While the state and its municipalities are not liable on any of these bonds issues, they do have an effect on the perception of the state as a safe place to invest.  Florida does not have a large body of captive investors buying its bonds to avoid high state and local income taxes.  Added to this, dirt bonds are normally considered safer because they have such strong collateral backing, i.e. the tax assessments on the land has a higher priority than even the first mortgages.  This perception will be sorely tested before this crisis is over since a reduction of the bond assessments per lot is one remedy for completion of most CDD projects.  While Florida has had a number of real estate meltdowns over the last 50 years, they have always been remedied by vigorous growth.  That growth cannot be counted on to resolve the current crisis, so some projects will inevitably fail and others will only revive with shared concessions. 

The audience of buyers for CDD bonds have principally been large mutual fund families.  These buyers will look for the state to tighten its standards for CDD bond issuance in the future or demand significantly higher rates of return to offset the perceived higher risk.  They may also look to the state to provide other remedies.  The state has both an interest and an obligation to address these issues, both to reassure the bond market and to help resolve the current crisis. 

This report is submitted by Income Securities Advisor, Inc., a Florida based publisher of various investment advisory newsletters; the Forbes/Lehmann Income Securities Advisor, the Forbes/ISA Closed End Fund & ETF Report and The Distressed Debt Securities Newsletter.  ISA maintains a website on all Florida CDDs at www.floridacddreport.com and maintains the only historical database of all municipal and corporate defaults since 1980.  Richard Lehmann is the publisher of these newsletters, a registered investment advisor and a columnist with Forbes magazine.