Fitch, Moody’s GO Bond Rating Downgrade to Impact Hawaii Taxpayers

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Photo: Emily Metcalf

BY MALIA ZIMMERMAN – Hawaii has been hit with bad news from two credit rating agencies in recent weeks.

On June 15, 2011, Fitch downgraded Hawaii’s outstanding general obligation (GO) bonds to ‘AA’ from ‘AA+’ and outstanding certificates of participation (COPs) to ‘AA-‘ from ‘AA’.


On May 17, 2011, citing Hawaii’s “strained” state financial operations, the depletion of its reserves in fiscal year 2011, and covering budget shortfalls with one-time solutions — Moody’s Investors Services downgraded the general obligation bond rating to Aa2 from Aa1 for an estimated $5.1 billion in debt.

Kalbert Young, Director of the state Department of Budget & Finance, said the action by Fitch places all of the State’s ratings from the major agencies at the mid-tier double-A level for GO credit with Standard & Poor’s at AA, Fitch at AA and Moody’s at Aa2.

What that means for Hawaii taxpayers is it will cost more to borrow money through general obligation bonds. These bonds, which are backed by the state taxpayers, are secured by loan payments subject to legislative appropriation. Hawaii typically uses these bonds to fund infrastructure projects and repairs.

But how much will the downgrades costs the Hawaii taxpayers?

When the state issues between $500 million and $650 million in GO bonds this fall  to fund state projects, Young estimated in a May 23 interview that it will likely cost taxpayers an additional $1 million to $2 million. Now with the Fitch Rating also downgraded, it could cost even more, but predicting how much more is a challenge:

“The concert of the three ratings is difficult to predict how bond buyers would interpret the different ratings.  However, for the current State ratings, with S&P maintaining at “AA” all three rating agencies have the State at the same level – being, two levels below triple-A (AAA) status.  This essentially sets the State’s rating solidly at middle double-A.  In some respects it might be a little easier to predict what a double-A credit is expected to sell for in the market – but, I would be just guessing if I had to tell you what that rate is on any given date. The bottomline is that the overall collective rating for the State is down, so there is to be an expected increase in the overall interest rates for when the State sells bonds,” Young said.

Ratings agencies are largely concerned about Hawaii’s depletion of the reserve funds, unfunded pension ratios, high debt ratio, rising liabilities for health insurance benefits for retirees, and growing expense for unemployment benefits.

Listed as specific reasons for the Fitch rating downgrade were high debt levels, a volatile tourism industry, the depletion of previously large balances, and the state’s growing long-term liabilities. “Pension funding levels are considered weak by Fitch’s standard. Other post employment benefit obligations (OPEB) are also significant,” the report said.

The analysis took note of Hawaii’s budget shortfalls for fy 2011, 2012 and 2013, and the way lawmakers are covering the gaps through special fund raids: “Continuing revenue weakness resulted in a new $220 million shortfall for fiscal 2011, which ends on June 30, and the state plans to balance through spending cuts, fund transfers, and the draw down of remaining balances in the Hurricane Relief and Emergency and Budget Reserve Funds. A general fund ending balance of $73.1 million is currently projected, with no other funded reserves.”

The report concludes Hawaii’s government structure, which if it remains highly centralized, will help kept debt high. “As of July 1, 2010, net tax-supported debt totaled approximately $5.5 billion, which equates to 9.9% of 2010 personal income. Principal is retired at an above-average pace, with 67% of bonds due in 10 years.”

The funding levels for Hawaii’s pension system also “remain a concern”, the report said, “with reported funded ratios having declined from 95% in 2000 to 61.4% as of June 30, 2010 and the unfunded liability exceeding $7.1 billion … Further, the state’s other post employment benefits obligation is large.”

There was some good news for Hawaii, however. Behind the scenes, the state administration lobbied rating agencies not to downgrade the ratings, or at the very least, list the outlook for the future at “stable.”  Hawaii made two presentations to Fitch on this point – and the effort worked.

While Young called the downgrade action “unfortunate”, he said it is positive for Hawaii that the agencies removed ‘negative outlooks’ that were attached to the State’s rating and has assigned “stable outlooks” at the lower rating. Standards and Poors maintained Hawaii’s bond rating and outlook.

Now, the Administration must address the underlying financial problems outlined in the Fitch and Moody’s reports, Young said.

“Problems with growing unfunded liabilities in pensions, health insurance benefits, and rebuilding reserve funds are significant structural issues that the Administration and its financial team are currently working on – and, which the State will have to be pro-active in addressing immediately.  The credit action is symbolic of the huge and significant financial problems still facing the State – even with improvements in the overall economy,” Young said.





  1. One thing that worries bond raters is raiding special funds especially dedicated contingency money. They don’t like it because it shows you have no fiscal discipline and will always look for the easy short term fix. When Neil went after the hurricane relief fund I’m sure that got their attention…and not in a good way.

  2. The tendency to raid special funds to balance the state budget concerned bond raters in all three cases, Moody’s, Standard & Poor’s and Fitch. They each mentioned the emergency fund or rainy day fund raid and the hurricane relief fund raid. They see that as poor management of Hawaii’s finances

  3. Article says “While Young called the downgrade action “unfortunate”, he said it is positive for Hawaii that the agencies removed ‘negative outlooks’ that were attached to the State’s rating and has assigned “stable outlooks” at the lower rating.”

    That sounds really absurd. Suppose a kid got a grade of C minus on his previous report card, indicating a C but a shaky one with a negative outlook. Then on the next report card the kid gets a D. Kid defends himself to angry Dad as follows: Gosh Dad, that D is actually an improvement because it no longer has the minus that was attached to the C.

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