BY MALIA ZIMMERMANHONOLULU, HAWAII – State borrowing will cost taxpayers more now that its credit rating dropped.

Hawaii’s “strained” state financial operations, the depletion of its reserves in fiscal year 2011, and covering budget shortfalls with one-time solutions — these are the factors that Moody’s Investors Services cited in downgrading the general obligation bond rating for an estimated $5.1 billion in debt.

Moody’s announced the downgrade Tuesday in a report on Hawaii’s financial condition, legislative action from this past session including tax increases and special fund raids, and the state’s financial obligations and debt.

Hawaii’s unfunded pension ratios, high debt ratio and growing expense for unemployment benefits were also used to justify the downgrade to Aa2 from Aa1. The state’s 2009 certificates of participation also were downgraded to Aa3 from Aa2 (approximately $40 million outstanding) and to A1 from Aa3 (approximately $24 million outstanding) on the state’s 2006 certificates of participation.

A certificate of participation is a method of financing capital improvement projects in which an investor buys a share of the lease revenue generated from an agreement made between the state and a developer. They can include clauses that increase payments when credit ratings drop.

Lawmakers said general obligation bonds are for most infrastructure repairs and upgrades to schools and highways and other state facilities. Taxpayers guarantee the debt. With this downgrade, the interest on state borrowing will increase meaning taxpayers will pay more.

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.”

Moody’s points to Hawaii’s spending and special fund raids as contributing factors for its “large operating deficit” including $539 million (10 percent of operating revenues) in fiscal 2012 and $498 million (8.6 percent) in fiscal 2013 and a 4 percent gap for the current fiscal year.

Some of the special funds nearly depleted by the legislature to balance the budget include the emergency budget reserve and Hurricane Relief Fund.

“The recently adopted budget for the next biennium was balanced mostly with recurring solutions. The shortfalls were resolved with $329 million of revenue enhancements in fiscal 2012 and $323 million in fiscal 2013, while expenditure reductions total $319 million and $458 million in the first and second years of the biennium, respectively,” the report said.

Lawmakers did cut some expenses in the 2012-2013 biennial budget, such as medical services and public welfare, but these will not take effect immediately.

The state’s settlement with the Hawaii Government Employees Union that includes a 5 percent pay cut, but increase in vacation days, and across the board cuts to government agency spending, will help cut some costs.

Moody’s points out that a number of the legislative actions offer only one-time or temporary solutions to covering budget shortfalls created by the spending, including the “suspension of general excise tax exemptions, temporary limitations on itemized deductions and delays in the increase of the standard deduction and personal exemption.”

Plans to increase the rental car surcharge and cap the counties’ share of the transient accommodations taxes are also just temporary solutions, unless they are made permanent, Moody’s said.

The agency said the outlook for Hawaii is “stable at the Aa2 rating level” because of expectations that revenue will grow in fiscal year 2012. In addition, tourism has begun to rebound, helping the economy. Also the state took “proactive measures” to bring the public employee retirement system future debt under control by curbing benefits for new enrollees, Moody’s said.

“The stable outlook also reflects our expectation that the state will manage its budget challenges and make appropriate adjustments as needed to restore budget balance in the event that the economic recovery is more prolonged and/or weaker than currently projected, resulting in revenue shortfalls,” the report said.

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

State Sen. Sam Slom, R-Hawaii Kai to Diamond Head, the only Republican in the Senate, said: “As the minority has consistently cautioned, 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.”

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.

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