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Growth won't pay the bills in Florida

By Mary Ellen Klas and Steve Bousquet, Times/Herald Tallahassee Bureau
In print: Sunday, November 30, 2008

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TALLAHASSEE — For the dozen state economists huddled around a table this month to fine-tune Florida's annual revenue forecast, something was different and disturbing.

Their projections from just a year ago were way off. Their new math: In the next four years, the state will collect $31.4-billion less in taxes than expected. That's more than six times the Pinellas and Hillsborough county budgets combined, the cost of more than 60 waterfront stadiums for the Tampa Bay Rays, and almost half of this year's state budget.

The free fall in revenues the economists saw Nov. 21 was not as shocking as what caused it: Fewer newcomers were moving to the state for the first time in decades. The state's legendary growth machine had ground to a halt, compounding the troubles brought on by the global recession.

For years, governors and legislators relied on population growth to create jobs, avoid raising taxes and shield the state from recession. They saw Florida's population swell annually by 2 to 3 percent, enough to add a city the size of Miami or Tampa each year. By marketing itself as a low-tax, low-cost retirement haven, Florida literally bet its future on growth.

Every few years, an event would expose weaknesses in Florida's economic system: a recession in 1991, a school overcrowding crisis in 1997, a steep drop in tourism after the terrorist attacks on Sept. 11, 2001. But the growth machine always roared back to life — until now.

With the mortgage crisis, the credit crunch and the flatlining of the population, the twin industries that buffered Florida through two previous recessions, real estate and construction, are weighing down Florida's economy, complicating a recovery and making it likely Florida will be among the last to bounce back.

"This recession is not only going to be bad for us. It's going to be worse than the nation's," said David Denslow, a University of Florida economist. The primary reason: Florida's residential construction boom grew at twice its normal rate and "we got overbuilt."

The backlog of unsold homes nationwide coupled with the credit crisis makes it almost impossible for Florida to lure people from other states when they can't sell their homes, he said. At the same time, cuts in property taxes and a deepening state budget shortfall squeeze basic public services, making the state less appealing to retirees. State economists this month predicted the recession will linger throughout 2009, with a gradual return to very slow growth in employment and population in 2010.

The pessimism of the revenue experts, however, stands in stark contrast to the optimism of Gov. Charlie Crist, who said, after economists completed their latest forecast: ''Florida will probably come out of it first. I mean, the sun always comes up in Florida first."

• • •

How quickly did Florida's once-bright economy turn gloomy? The state led the nation in job growth in 2005 and now leads the nation in job losses. After five years of double-digit increases in housing starts and price increases, it's now second in the nation in foreclosure filings, with 444,000 homeowners in default, according to industry researcher RealtyTrac. Florida had the lowest unemployment rate in June 2006. Now it has the ninth highest. And in the most important indicator of a productive economy, gross domestic product, Florida led the nation in 2005 and now ranks 47th.

"We are in trouble," Chief Financial Officer Alex Sink, who pays the state's bills, said earlier this month. "We're writing checks like crazy and the money isn't coming in."

During a single week in November, she said, the state took in a half-billion dollars in tax revenue and wrote checks totaling $1.3-billion, a recipe for fiscal disaster.

"We can't rely any more on attracting fixed-income retirees from up north and selling them cheap land," Sink said. "Those days are over."

"Hopefully, this is a wakeup call for the state of Florida," said Frank Nero, president of the Beacon Council, Miami-Dade's economic development organization. "We can no longer be dependent on population growth as the base of our economy."

Nero predicted that regions of Florida that have more diversified economies, such as South and Central Florida, will rebound faster than those that don't, like Southwest Florida, where Lee County has the highest housing foreclosure rate in the country.

Just as the state's growth-based economy now seems lopsided, Florida's revenue model also looks wildly out of sync with the times. The state clings to a decades-old dependence on a sales tax applied only to goods like cars, furniture and appliances. Left untaxed are Internet sales and such items as bottled water and charter fishing boat excursions. The idea of a state income tax remains taboo, both in the state Constitution and in the psyche of most Floridians.

"It's obvious that if we don't find new sources of revenue, the existing revenue sources are going to have to go higher," said John Ramil, chief operating officer of TECO Energy Inc. and president of the Greater Tampa Chamber of Commerce Committee of 100.

• • •

Nowhere are the ups and downs in Florida's economic roller coaster more apparent than in Port St. Lucie, a city of 166,000 whose motto is "A City for All Ages."

In January 2002, while most of Florida was still reeling from the recession brought on by the Sept. 11 attacks, Port St. Lucie was bustling. Jobs increased 4 percent. Wages were up 11 percent. Home construction soared.

Then-Mayor Bob Minsky's biggest worry was traffic, and the head of the city's Economic Development Council held a presentation for local developers titled "What recession?" The New York Times called it the "fastest-growing economy'' in the fastest-growing state.

Fueled by low home prices that lured people up the coast from heavily congested, high-cost South Florida, the city's population had soared by 133 percent by 2007.

Fast-forward to 2008: New construction is down 70 percent, unemployment is at 10 percent, and one in every 113 homes is in foreclosure.

• • •

Now, no region of the state has escaped the downturn. By the time the national recession hit this fall, Florida was already a year into it. The construction industry felt it first, with 79,000 jobs lost. By October, unemployment had reached every sector, and 156,200 Floridians had lost their jobs in a year. A once-robust housing market has a record inventory of 300,000 unsold homes, six times the normal average of 50,000.

The credit crisis has spread from home mortgages to delinquencies on car loans and credit cards, said Amy Baker, the state's chief economist and director of the Legislature's Office of Economic and Demographic Research.

Until the excess inventory goes away, Baker said, "we're looking at probably 15 months before things improve."

But they will, she said. "This may be our life for the next 18 months to two years, but after that, things will return. We will have population growth and all the things that made Florida attractive to the baby boomers before are still going to be here."

For some, things will get worse before they get better. About 410,000 homeowners are vulnerable to the worsening economy and are struggling to keep their homes, Baker said. For years, Florida had a home ownership rate of 66 percent, close to the national average, but during the housing boom, that rate increased to 72 percent and those new homeowners are most at risk.

The economic meltdown is only part of the problem. Unemployment in Florida is at a 15-year high. The "brain drain'' of college professors accelerates as state money for universities has evaporated, university officials complain. The state pension fund has lost one-third of its value. And for the third year in a row, the state will take in less tax revenue this year than the year before.

• • •

For the past year, the official response from Crist and the Legislature to the economic crisis has been to cut spending, borrow from cash reserves, hold back 4 percent of state agencies' budgets and take largely cosmetic steps such as accelerating the construction timetable for roads.

Crist said he is open to a special session in January, so that legislators can make deeper budget cuts. But he has said he wants to shield public schools and health care, which make up the bulk of the budget, from more reductions. Crist's agency heads warn that more cuts will mean layoffs of state workers, which would drive the jobless rate higher.

Secretary of Corrections Walt McNeil said he has ordered spending reductions such as an end to travel and training, but fears additional spending cuts.

"The only way we can achieve that is to let people go. We will have to lay people off," McNeil said.

Some short-term budget fixes have emerged, but many of them produce too little money or lack widespread support from the Republican majority that controls both houses of the Legislature.

They include selling or leasing to private investors such assets as the Florida Lottery, Florida's Turnpike or Alligator Alley; hiring more auditors to aggressively chase tax cheats; raising fines and fees for state services, as the Legislature did for the court system last spring; raising the cigarette tax by up to $1 a pack, which would generate about $1-billion a year; expanding gambling and validating the compact with the Seminole Tribe, which would generate more than $100-million a year; and extending the sales tax to Internet sales, which would produce an estimated $3-billion a year.

None of those represents any structural change in the Florida tax system, which some economists say is needed to avoid future cyclical downturns made worse by recessions.

"The weaknesses reveal themselves under stress," said Sean Snaith, an economist with the University of Central Florida's Institute of Economic Competitiveness. "Hopefully that will underscore the need for some real tax reform to find a stable, equitable way to fund the things we agree on."

But in the Republican-led Legislature, little support exists for a review or overhaul of the tax system, which is typically framed by critics as a backdoor way of increasing taxes. A far-reaching proposal last spring to eliminate property taxes for schools and replace the revenue by expanding the sales tax and repealing tax exemptions never reached voters because the Florida Supreme Court ruled that it was misleading.

As the economy worsens, demand for government help goes up. For example, complaints to the state child-abuse hotline are up by 1,000 a month so far this year compared with last year.

Florida State University president T.K. Wetherell, a former House speaker and community college president, sees a state unwilling to face its challenges. He sees his university as the "training ground'' for young professors who leave for better-paying jobs elsewhere.

"You can't be a world-class state and use the tax system that we have," Wetherell said. "This system is not going to produce the resources that we need to run one of the largest states in the nation and provide the services that people want. You can't keep putting Band-Aids on it."

Miami Herald staff writer Marc Caputo contributed to this report.