Nov 8 - Fitch Ratings has assigned an 'AA' rating to the following State of
Hawaii general obligation (GO) bonds:
--$374 million GO bonds of 2012, series EE;
--$400 million GO refunding bonds of 2012, series EF;
--$26 million Taxable GO bonds of 2012, series EG.
The bonds are scheduled to price through negotiation the week of Nov. 12, 2012.
In addition, Fitch affirms the 'AA' rating on approximately $5 billion of
outstanding state GO bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: The state employs quarterly revenue forecasting and
long-term planning, and has shown a commitment to restoring budget balance when
ECONOMIC CONCENTRATION IN TOURISM AND DEFENSE: Hawaii's extensive tourist
infrastructure underpins an economy dominated by tourism, and there is also a
large federal military presence. The state's geographic location somewhat
limits economic diversification efforts.
ELEVATED DEBT BURDEN: Hawaii's debt levels are high for a U.S. state government,
and Fitch expects them to remain so. This largely reflects the state's
responsibility for many functions handled by local governments in other states,
particularly K-12 education.
HIGH LONG-TERM LIABILITY LEVELS: Pension funding levels are weak, and the
unfunded liability as a percentage of personal income is at the highest end of
states rated by Fitch. Other post-employment benefit obligations (OPEB) are also
General obligations of the state of Hawaii that carry the full faith and credit
pledge of the state.
The state of Hawaii's 'AA' GO rating reflects the state's sound financial
management practices, its highly developed and resilient tourism-heavy economy,
high debt levels, and a large long-term liability burden. Following significant
revenue declines in the recession, which resulted in the drawdown of previously
large reserves despite extensive budget balancing action, solid economic and
revenue recovery and continued prudent budget management have stabilized
Hawaii's financial position. The state has begun to rebuild its fund balance to
provide a cushion against unforeseen events. Although debt and other long-term
liabilities are likely to remain well above average for a U.S. state, Hawaii has
demonstrated its ability to manage these costs.
Prior to the recession, the combined general fund and Emergency and Budget
Reserve Fund (EBRF) balances peaked at $786 million, or 16% of total general
fund resources, in fiscal 2006, with the EBRF accounting for $54 million of the
total and the rest fund balance. As tax revenue growth slowed in fiscal years
2007 and 2008, and declined by almost 10% in fiscal 2009, balances were drawn
down. The state closed the fiscal year with a negative ending balance of $36.8
million after accounting for an overstatement of certain tax revenues, though
$60.4 million remained in the EBRF.
The fiscal plan for the fiscal 2010-2011 biennium was initially balanced through
a mix of tax increases, spending reductions, modest debt restructuring, the
application of federal stimulus monies, and employee furloughs. Projected
revenues were revised downward several times over the course of the biennium,
and despite delaying the payment of income tax refunds to be paid in fiscal 2010
into fiscal 2011 and a draw from the separate Hurricane Relief Fund (HRF) which
had been funded at approximately $180 million, the state again ended fiscal 2010
in a slightly negative position ($22.2 million), offset by monies in the EBRF
and remaining HRF funds.
Continuing revenue weakness in fiscal 2011 resulted in a projected $220 million
shortfall following an off-cycle meeting of the state's council on revenues in
late March 2011, prompted largely by the Japanese earthquake and tsunami. The
state planned to maintain balance through spending cuts, fund transfers, and the
drawdown of remaining balances in the HRF and EBRF. Ultimately, revenue
performance for fiscal 2011 was above those projections. Combined with the
effects of lapsed spending, full draws on the reserve balances were not
necessary. Fiscal 2011 ended with a general fund balance of $126 million, 2.5%
of fiscal 2011 resources. An additional $30 million in available balances
remained between the HRF and EBRF at the close of the fiscal year.
Hawaii's budget for the current fiscal 2012 - 2013 biennium addressed a
projected gap of more than $1 billion. The gap was closed through a mix of
spending reductions, savings resulting from labor concessions, and temporary
revenue measures. Fiscal 2012 is projected to have ended on June 30 with a
balance of $275 million (almost 5% of resources) and another $46 million in the
combined reserves. Fiscal 2013 is forecast to increase the ending fund balance
to $348 million, with growth of 4.9% in overall general fund tax revenues and
8.1% in the general excise tax that represents about 55% of that total.
Hawaii's economy is dominated by tourism and government, with a significant
federal military presence. The tourist industry relies heavily on California and
Japan, although increased visitation from other countries, most recently Korea
and Australia, has provided diversification. The state is focused on increasing
the diversification of its visitor base.
Following a sharp drop in 2001, the tourism sector saw strong growth that began
in 2004 and continued to a record high in 2007. The industry saw significant
declines in the recession, but has recovered strongly since 2010 to reach
projected new highs in 2012. The state is currently projecting continued
recovery at a slower pace in the next few years.
Although a large military presence makes Hawaii vulnerable to federal deficit
reduction, the state has benefitted from military consolidations and serves a
strategic role that should somewhat limit downside risk. Fitch will closely
monitor federal budget decisions as they develop for the potential impact on
Following several years of strong gains, employment in the recession generally
mirrored the national experience, with a decline of 6.1% between 2007 and 2010.
The state and country added jobs at a similar pace in 2011, and gains in Hawaii
have accelerated in 2012, with year-over-year growth of 2.1% in September
exceeding 1.4% for the nation. Leisure and hospitality employment was up 5.1%
over September 2011 levels. Although tourism as a percentage of total employment
remains well above the national average, Hawaii's employment in the service
sectors is relatively near national levels.
Hawaii's unemployment rate has been consistently below that of the nation since
2001. Unemployment for September 2012 was 5.7%, well below the U.S. rate of 7.8%
for the month.
Personal income growth has outpaced the nation for most of the last decade, and
2011 per capita personal income equals 103% of the U.S. level. Hawaii ranks 18th
among the states by this measure.
DEBT AND OTHER LONG-TERM LIABILITIES
Hawaii's government is highly centralized, and the state is responsible for many
functions, such as K-12 education, normally handled at the local level. Largely
as a result of this structure, debt is high for a U.S. state and expected to
remain so. As of July 1, 2012, net tax-supported debt totaled approximately $5.5
billion, which equates to 9.4% of 2011 personal income. Principal is retired at
a rapid pace, with 66% repaid in 10 years. The vast majority of the state's debt
is in the form of general obligation bonds.
Despite a history of funding an actuarially calculated annual required
contribution, funding levels for Hawaii's pension system remain weak. Using
Fitch's 7% discount rate assumption rather than the 7.75% used by the system,
the statewide employees retirement plan is 55% funded. Fitch notes that the
state has passed legislative changes, including changes to the benefit structure
and increased employee contributions that are designed to limit the growth in
On a combined basis, the burden of net tax-supported debt and adjusted unfunded
pension obligations in Hawaii is almost four times the median for states rated
by Fitch. The state's OPEB obligations are also large, and the state has
indicated its intent to undertake reform efforts in this area in the near term.