Post-pandemic economy, aging population, spending commitments present long-term challenges for Florida

Amy Baker (File photo by Colin Hackley)

State legislators will have to contend with an increasingly unfavorable demographic climate, the end of federal pandemic funds, and a housing market with cost pressures that discourage transactions.

As a result, they will face increased challenges in meeting obligations in the next three fiscal years.

That’s the grim takeaway from Tuesday’s legislative briefing from the Office of Economic and Demographic Research (EDR) regarding the state’s long-term economic outlook.

While the upcoming budget year presents minimal challenges at current spending levels, projections suggest that tough choices await the Senate, the House, the current Governor and whoever succeeds him.

Expenditures are bound to increase, without a revenue match.

EDR Coordinator Amy Baker described Florida’s gross domestic product as getting back to “normal” after the pandemic, saying the GDP was projected to be around 2% for the next three years. Florida is now 18th in the nation, “slowing as we expected it to slow,” at 3.2%, down from sixth back in September.

The Interstate 4 corridor, which is seeing population growth, is also seeing strengthening in terms of GDP in recent years. Fiscally constrained counties are lagging in relative terms, leading to some “worry” from EDR.

Turning to personal income, COVID dollars created “very strong” growth during the pandemic, but “wage growth” has driven the trend since, with more than 5% growth in the last two fiscal years, with a gradual settling predicted toward the end of the three years of projections.

Florida is 24th in terms of personal income growth, but at 5.2% the annual change is a bit below the 5.3% national average.

“This has a lot to do with your thinking about the budget,” Baker said.

She noted Florida historically was a low-wage state compared to average, but a “significant change” is underway, with Florida wages at 91% of the national average now, representing a high point.

Wages are expected to continue to grow roughly 4% a year, and “it’s almost certain these higher wages are here to stay,” Baker said.

This “service wage issue” will affect state contracts and will increase budgetary obligations.

Job creation, meanwhile, is slowing, expected to be 1.2% in Fiscal Year 2025-26 and to stabilize at that level, which is half of what it was in recent years.

Unemployment is edging up, meanwhile, though at 3.3% the state is below the 4% target.

“Even though it’s coming back up, it’s still at this point of time on the good side,” Baker said, though she expects it to edge up to 4.6% in the coming years.

Population growth continues to be driven by in-migration, Baker noted, though the numbers will moderate in the coming years to 1.2% by the end of the decade. This removes “pressure” seen in previous eras, but Florida’s population growth is expected to triple the nation overall.

Deaths outweigh native births, a trend that turned negative during the pandemic, but which was expected given the aging “demographic profile.” Newcomers are expected to make up the difference created by these negative trends, however.

Population growth is uneven, concentrated in Southeast Florida, the I-4 corridor and Duval. Meanwhile, “fiscally constrained” counties in North Florida are essentially static.

“The numbers statewide are really good, but that doesn’t mean that every single county in the state will show that result,” Baker warned.

Baby Boomers continue to drive trends, with an anticipated “inflection point” in 2030. This group moved to Florida to retire, but Generation X and beyond are not “totally wedded” to Florida, meaning inflow is expected to decline as the demographic expires.

Compounding the problem: a “variety of challenges” as that group ages in place and becomes a “more expensive” population.

The housing market has been a “roller coaster,” per Baker, with the pandemic seeing artificially lower interest rates and a “big surge” in home buying in the state that exceeded the surge back in the middle of the first decade of the century.

The bubble has largely popped, Baker added, due to rate increases and “price inflation” leading to “people being priced out of the market.”

Growth is expected in the forecast years, but “moderated” even though interest rates are expected to be lowered.

The “lock in” effect will depress interest in transactions, given inflationary pressures on rates and prices, Baker said.

“That is going to be an issue,” she added, with a “slight downside” risk.

EDR added $2 billion into the coming year’s revenue forecast. But given uncertainty, Baker doesn’t see that as a “game changing” amount.

Still, with more than $12 billion in projected reserves, the state is in a position to be able to respond to challenges, according to Baker.

However, critical needs exist, and the anticipated cost impact is up compared to earlier this Fall. Core education and Medicaid present more than 70% of the impact anticipated, with “medical inflation” driving the low-income health care cost impact.

These and other drivers, driven by cost commitments that recur, drive a $32 billion expenditure impact over the next three years, based on $21 billion of new commitments in critical areas.

By Fiscal Year 2027-28, the state will be approaching a $7 billion deficit unless changes are made, with pressures building in Fiscal Year 2026-27, forcing legislators to make a “big decision” ahead of the projected fiscal cliff.

“Much more disruptive actions” are likely if legislators lack the will to make changes, Baker warned.

Meanwhile, potential “black swans” such as hurricanes, wildfires and other environmental emergencies present potential wildcards.

Though the state is in “reasonably good shape” to deal with one emergency, multiple risks at the same time present graver doubts.

The forecast also presents a potential recession as a “black swan,” given decreased personal savings by Florida families and personal debt that is “really taking off again,” removing “cushion” for citizens in the event of an economic downturn.

Baker expects inflation to cool, but says that people in legislators’ districts are still experiencing higher costs. Deflation, which would lower costs, is not anticipated.

“People are still going to be largely spending at those higher price levels,” Baker said.

Meanwhile, costs from 2024’s hurricanes are expected to drive more pressures for legislators, Baker said, given prior experience with storm recovery.