Fitch Ratings assigns an ''AA'' rating to the following City and County of Honolulu (city), Hawaii''s general obligation (GO) bonds:

--$150 million series 2009D;

--$50 million series 2009E Build America Bonds (taxable);

--Up to $150 million series 2009F.

The bonds are expected to price on Nov. 3, 2009. In addition, Fitch affirms the ''AA'' rating on the city''s $2.1 billion in outstanding GO bonds. The Rating Outlook on all bonds is Stable.

The ''AA'' rating reflects the city''s sound financial position and low debt burden, highly developed tourism economy supplemented with a stable non-tourism economic base, which is balanced by rising labor costs, the volatility inherent in the tourism sector, and the potential for tax base declines as home prices soften and new construction slows. Economic stability is enhanced by the area''s role as the commercial center and state capital with a sizable military presence. With a revenue base highly reliant on property taxes, the immediate financial exposure to tourism''s fluctuations is limited. Nonetheless, revenue growth has softened and the city''s ability to maintain fiscal balance by cutting spending and raising revenues throughout the economic downturn is key to maintaining its high credit quality.

The city''s non-tourism economy is substantial and adds balance as the state''s commercial and business center, state capital, and home of the University of Hawaii. The U.S. military also is a major economic element. The city makes up 72% of Hawaii''s population, about 60% of visitors, and about one-half of the hotel rooms statewide. Nonetheless, the city saw a decline of about 3.7% of its job base from August 2008 to August 2009, resulting in an unemployment rate of 6% in August 2009 compared to 3.8% for August 2008. While this is markedly above its historical unemployment rates, it is well below the national unemployment rate of 9.6% for August 2009. Income levels are well above the national average and market value per capita is a high $183,000.

The city is coterminous with the island of Oahu, and the island''s tourism draw is based on sustainable elements such as natural beauty, diverse accommodations and activities, and proximity to sizable North American markets. Tourism activity exhibits volatility typical of the sector and recently dropped significantly following a strong surge which came after a long decline. Total visitors peaked in 2005, declined modestly in 2006 and 2007 and then dropped 9% in 2008. Annualized data through August 2009 points to further loss in the number of visitors by about 2.3%. Average daily room rates and hotel occupancy softened modestly but still remained strong through 2008 before falling about 12% through the fist half of 2009.

The real estate market has remained relatively steady, with an estimated 11% decline in home prices offset by new construction or appreciation and resulting in assessed valuation for fiscal 2010 of $165.8 billion, roughly flat compared to fiscal years 2008 and 2009. Median home prices are still high relative to income levels but the level of non-standard mortgages is about one-half that of the U.S. average as are home foreclosure rates. Nonetheless, Fitch believes the city''s vulnerability lies in the home price run-up prior to 2006 and the presence of second homes and vacation properties. Property taxes make up about 80% of the city''s discretionary general fund revenues. Offsetting this concern somewhat is the city''s ability to raise the property tax rate as was done in fiscal 2010.

Financial operations are still sound as the city continued to raise revenues and cut spending in fiscals 2009 and 2010. Audited results for fiscal 2008 show an unreserved fund balance of about 8.6% of spending. For fiscal 2009, the city estimates ending the year with an unreserved balance of about 4.6% of spending. In addition to the general fund the city maintains a fiscal stability reserve, which, in addition to the internal other post-employment benefits (OPEB) reserve, provide an added layer of financial flexibility, bringing the estimated unreserved balance up to 13.9% of fiscal 2009 spending. For fiscal 2010, the city is expecting roughly balanced operations and is exploring additional revenue raising options for fiscal 2011. Fitch expects that the city''s continued willingness to raise recurring revenues as well as implement prudent spending decisions will enable the city to retain its solid fund balance levels.

Debt levels are moderate at $2,759 per capita and 1.5% of market value. Amortization is about average with 48% of principal retired in 10 years. The city''s liability to OPEB - on a pre-funded basis - is high at $1.2 billion. The city maintains an OPEB reserve equal to half of the annual required contribution and has transferred about $40 million to a state run OPEB trust.

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or
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