BY MALIA ZIMMERMAN – HONOLULU – Last year, Hawaii spent more than $175 per person — $244 million in all — just to fund its interest payments, the third highest rate per person in the country.
Truth in Accounting, a Chicago-based financial watchdog group, found that among the 50 states, only Connecticut and Massachusetts paid more per person to manage their debt than Hawaii.
“From 2005 to 2012, interest expense for the state government in Hawaii rose from $170 million to $244 million,” said Jeff Wysong, a research analyst for Truth in Accounting. “The $244 million represents almost 4 percent of Hawaii’s total revenues.”
“Rising interest expense amidst falling interest rates is not a good sign for state government financial health. If interest rates rise, they might place a great strain on state’s budget,” Wysong added.
Wysong said interest expense has risen significantly among state governments since 2007, despite a substantial fall in market interest rates.
State records show Hawaii’s state government had $4.2 billion of outstanding general obligation bonds in fiscal year 2005, according to Kalbert Young, director of the state’s Department of Public Finance. At the conclusion of fiscal year 2012, Hawaii had $5.4 billion in outstanding general obligation bonds.
Young disagrees this is an “excessive” rate of growth for debt compared to other states, and said Hawaii has sold a good portion of its bonds realizing a premium.
“When interest rates are low, as they have been over the last 4 to 5 years, good-credit bonds with 4 percent to 5 percent coupons typically sell for a premium, meaning that bond holders will buy the bonds by paying more upfront than the face value of the bond,” Young said. “In Hawaii’s case, when bonds sell at a premium, the premium is used to pay future debt service, meaning that the general fund (the Legislature a la tax-payers) do not have to pay more towards appropriating for debt service.”
This nuance is not visible to Truth In Accounting analysts by looking exclusively at appropriated debt service in the annual budget, Young said.
“The last GO bond transaction in November 2012 netted more than $65 million in premiums. The 2011 GO transaction netted more than $105 million in premiums. All of the premium was received as ‘unanticipated revenue’ and subsequently appropriated by the Legislature towards future debt service,” Young said.
There are other factors to consider, he said. The state capital finances a greater portion of facilities such as schools and prisons, and the state has been on an aggressive capital investment campaign for the last few years. During the economic recession in Hawaii between 2005 and 2010, the state restructured existing debt by postponing principal repayments.
“This definitely did not help the interest expense duration levels, but was probably necessary considering the fiscal revenue declines the state was experiencing,” Young said. “This was a textbook strategy of a good number of municipals and states back then.”
Since Young became the finance director for Hawaii in 2010, he directed the addition of about $1.2 billion of new-issued general obligation debt while the state has retired between $400 to $600 million in outstanding debt.
The state will spend $24 billion over the next biennium budget for its operating funds.
In the City & County of Honolulu, where the majority of Hawaii’s 1.2 million residents live, the city spends 19 percent of its $2 billion operational budget on debt service.
Honolulu City Council Budget Chair Ann Kobayashi said if the city builds its proposed $5.2 billion elevated steel rail project, that number could rise as high as 24 percent compared to 13 percent in good years.
Hawaii already has the highest overall cost of living and cost of doing business designation in the country. The state is among the overall highest taxed in the nation. Funding the local government falls on 78 percent of the working population not employed by government in Hawaii.