Florida Tax-Credit Plan to Shore Up Cat Fund Raises Questions

By Michael Adams | March 22, 2012

A Florida plan to sell insurers and financial institutions state premium tax credits to help fund the state’s homeowners’ reinsurance facility is raising concerns among some officials.

The Florida Insurance Tax Pre-Payment Program was a late addition to the state’s budget that lawmakers approved earlier this month. Sponsored by Senator J.D. Alexander (R-Lake Wales), the plan is designed to help shore-up the resources of the Florida Hurricane Catastrophe Fund after lawmakers failed to pass his bill to finance a potential shortfall in the fund’s finances.

“Right now we’re short $3 billion in being able to meet the statutory commitments in the Cat Fund,” said Alexander. “So this is another way to try and piece together enough cash to make it through the coming hurricane season.”

The plan, however, is coming under scrutiny from Cat Fund officials who were not involved in creating the plan.

“Anytime you pass something like this it needs a lot of study,” said Cat Fund Executive Director Jack Nicholson. “We would hope it would come up earlier in the session where it could be reviewed. As it is I’m not sure how many legislators even understood the plan.”

The plan envisions insurers and financial institutions purchasing tax credits whereby they would receive a discount on the dollar for paying their state premium taxes early. The plan calls for insurers and banks to receive up to $1.5 billion in tax credits over 10 years.

That money would then be lent to the Cat Fund, which would then be responsible for paying that money back to the state.

It would mark the first time the Cat Fund has ever borrowed money from the state’s general revenue fund. That means if the Cat Fund is unable to pay its debt due to overwhelming hurricane losses it could have an impact on the state’s credit rating.

“For a lot of people that is a game changer,” said Nicholson.

Nicholson said there are other financial concerns.

For example, since there is no way to calculate just how much money would be raised by the program or the costs, it would be nearly impossible to determine how and where the money would be used.

That is opposite from the Cat Fund’s current financial structure that relies on bonds where the fund knows upfront how much money is raised and what the interest rates and administrative costs will be.

Then there is the question of which investor groups are inline to be paid first. Since the tax credits are tied to general revenue the state might want its money first, which could conflict with the Cat Fund’s current bondholder agreements.

“We have no way to evaluate the costs or benefits of the program,” said Nicholson. “That is why we prefer to go the pre-event bonding route. It gives us certainty.”

Nicholson said fund officials are in contact with the governor’s office to make them aware of both the financial concerns and the administrative problems it could create in the Cat Fund.

Governor Rick Scott does have the authority to use his line item veto power to strike the measure from the budget.

“If we have to do the program, then we have to do it,” said Nicholson. “But we would prefer that it just go away for now.”

 

 

 

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