Hawaii bond downgrade by Moody's cartoon
The Moody's Blues

Hawaii bond downgrade by Moody's cartoon
The Moody's Blues

BY MALIA ZIMMERMAN – HONOLULU, HAWAII – Moody’s May 17, 2011 downgrade of Hawaii’s General Obligation Bond rating will cost taxpayers more money this fall when the state issues between $500 million and $650 million in GO bonds to fund state projects for which taxpayers guarantee the repayment of debt.

Exactly how much more money, Department of Budget & Finance Director Kalbert Young told Hawaii Reporter “will depend on the date of sale and duration of the specific bonds.”

The difference in rating could cost the state 10 to 20 basis points difference, Young explains.

For example, for $1 million in bonds, with 10 basis point difference (0.1%), taxpayers would see an increase of $1,000/year. On $1 million worth of bonds with 20 basis points difference, taxpayers would see a $2,000 increase for every million dollars worth of GO bonds issued, he said.

The next GO bond that the state plans to issue in August or September 2011 could cost the state between $1 million to $2.5 million more. Historically, over the last 10 years, the State plans to issue GO bonds twice a year for anywhere between $250M to $450M for each issue, Young said. These GO bond issues also will be impacted.

During this economic downturn, the $1 million to $2.5 million in additional interest could pay for several key projects that lawmakers did not fund this legislative session because they needed to cover a $232 million budget shortfall this fiscal year and a $1.3 billion revenue shortfall for fiscal years 2012 and 2013.

That included $2 million for security at the November Asian Pacific Economic Cooperation conference, $4 million for the University of Hawaii medical school and $2.67 million for claims won in court against the state.

The May Moody’s report, which issued Hawaii a “Aa2” rating for for an estimated $5.1 billion in debt, down from its former “Aa1” rating, identified significant areas of concern about Hawaii’s fiscal health including Hawaii’s “strained” state financial operations, the depletion of its reserves in fiscal year 2011, and covering budget shortfalls with one-time solutions. In addition, the report said:

(1) The State does not have adequate reserves to sustain operations when there are down cycles in revenues, e.g. the state needed to raid funds such as the rainy day fund and the hurricane relief fund;

(2) Large unfunded liabilities in Other Post-Employment Benefits (OPEB), which includes medical costs for state retirees; and

(3) Large unfunded liability ratios in its pension fund.

“As a result of the nation’s financial crisis, credit agencies are now more sensitive to considering states’ unfunded liabilities such as pension debt and medical insurance benefit costs for state government retirees – both of which Hawaii has significant liabilities,” Young said. “To get the rating up, or maintain the rating, the State will need to demonstrate pro-active efforts to restructure its finances in these areas and implement changes. These issues are large and did not occur overnight, similarly, they will take time to correct.”

Moody’s also cited the state government for its reporting delays. They point out that audited financial reports have been late since 2007, noting this is “a weak trend that detracts from the state’s other relatively strong governance practices, such as multi-year financial planning and quarterly binding consensus revenue forecasting.” Young has been in the director’s position just this year, so the criticism is directed at the last administration.

The State of Hawaii was also surveilled by two other major bond rating agencies: Standard & Poor’s and Fitch.

Standard & Poor’s maintained its existing rating of “AA” with a “Stable Outlook”. Fitch Ratings has not yet issued its report, and there is no indication on whether its rating will remain the same at this time, Young said.

There is some good news for Hawaii taxpayers. Both Moody’s and Fitch placed “Negative Outlooks” on the ratings of State of Hawaii GO bonds the last two years, but that changed this year.

The “Negative Outlooks” came after rating agencies cited concerns over several economic factors including declining tax revenues and the faltering economy for Hawaii’s two major industries: tourism and construction.

“In presenting its annual review, the State had asked the agencies to consider removing the ‘Negative Outlook,’ considering the economic future for those concerns are showing signs of improvement, and the economic statistics are much more optimistic,” Young said.

In issuing the rating downgrade, Moody’s did remove the “Negative Outlook” at the lower rating – instead, issuing a “Stable Outlook” recognizing the optimistic economic signs of improvement in construction and tourism, Young said.

The House and Senate majority and minority leaders were asked to respond to the Moody’s downgrade.

Rep. Gene Ward, R-17th (Kalama Valley, Queen’s Gate, Hawaii Kai), the House Minority Leader, said, “I was very concerned when in the first 90 minutes of his taking office, Governor Abercrombie spent $90 million.  House Republicans again sounded the alarm from the House Floor that Hawaii’s bond rating would be downgraded if the new Administration raided both the Rainy Day and the Hurricane Relief funds, leaving us with no cushion to weather difficult times. This downgrade will mean higher interest rates when Hawaii borrows money for state projects and demonstrates poor fiscal management when we should be masters of fiscal management in these tough economic times,” Ward said.

State Sen. Sam Slom, R-Hawaii Kai to Diamond Head, the only Republican in the Senate, said the state cannot continue on its reckless path of over taxation and overspending without suffering the consequences of higher debt service costs, a direct burden to the taxpayers of Hawaii. “Our problem remains with our spending and not with a lack of redistributed revenues,” Slom said.

But State Senate Ways and Means Chair David Ige, D-Pearl City, who spoke on behalf of the Senate majority, was more optimistic: “The Senate is disappointed that Moody’s Investors Service downgraded the rating on the State of Hawaii’s general obligation bonds and certificates of participation, although the action was anticipated in light of the fiscal challenges of the past few years. The State’s general obligation bond rating of Aa2 with a stable outlook is still strong and should result in favorable interest rates for bond sales in the near future.  We are also confident that the State budget and key components of the financial plan approved in the 2011 legislative session, especially the significant change in the pension’s of future employees, provide a stable fiscal foundation for Hawaii.”

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