Fitch Ratings has assigned 'AA' ratings to the State of Hawaii's general obligation (GO) debt as follows:
--$32 million taxable GO bonds of 2009 (Qualified School Construction Bonds), series DS (Tax Credit Bonds);
--$594.6 million GO refunding bonds of 2009, series DT;
--$2.2 million GO refunding bonds of 2009, series DU;
--$8.8 million GO refunding bonds of 2009, series DV;
--$18 million GO refunding bonds of 2009, series DW.
Also, Fitch assigns an 'AA-' rating to Hawaii's certificates of participation (COPs) (State Office Buildings) 2009 series A. All series are expected to be offered through negotiation on Oct. 13, 2009. In addition, Fitch affirms the 'AA' rating on Hawaii's approximately $4.7 billion of outstanding GO bonds. The Rating Outlook is Negative.
The state of Hawaii's 'AA' rating is based on sound financial operations and a demonstrated willingness to maintain budgetary balance under stressful conditions. The Negative Outlook reflects the reduction in previously large balances necessitated by continued revenue undeperformance, limiting the state's financial flexibility should revenues weaken further. A funding gap for the current biennial period has been identified, and the state's ability to implement balancing solutions will influence future rating direction. Fitch notes Hawaii has a highly developed tourist economy which is contracting in the current recession, and the sector's outsized presence adds volatility to the state's revenues and overall financial position. The large military presence continues to be an important stabilizing factor, and notable employment growth in professional, educational, and health services in recent years added a measure of diversification. Debt levels are high though amortization remains well above average. Additionally, the state's pension funding levels have also weakened considerably in recent years.
As security for the COPs rests on the annual appropriations to be made by the State of Hawaii, the 'AA-' rating reflects the state's credit. The certificates offered represent ownership in loan payments to be made by the State of Hawaii, acting by and through the director of its Department of Accounting and General Services as the borrower under loan agreements with the certificate trustee. While loan payments are subject to appropriation by the state legislature, the importance of the leased assets supports the credit.
Hawaii's tourist industry relies heavily on California and Japan, although there has been increased visitation from other countries, most recently Canada. Following a weak period in the early- to mid-1990s caused by recessions in Japan and California and the sharp drop in 2001, the tourism sector saw strong growth that began in 2004 and continued to a record high in 2006, due in part to gains in domestic arrivals. Visitor arrivals experienced only a marginal decline in 2007. The previous loss of two passenger air carriers and limited recovery of that service, combined with previously rising fuel costs and weakening consumer spending, played negatively on Hawaii's tourism industry in 2008 when arrivals dropped 10.8%. Through the first half of 2009, visitor arrivals by air were down a significant 9.9% from levels year-over-year. State projections indicate tourism will return to growth in 2010, though persistence of the global recession may delay that recovery.
Following several years of strong gains, total employment declined by 0.9% in 2008 as compared with a national decline of 0.4%. Employment declines persist through 2009, and August 2009 employment was down by 3.7% over one year ago, comparing favorably to the U.S. contraction of 4.4% over the same period. While tourism remains dominant, the share of total employment in direct leisure and hospitality employment has dropped slightly since a decade ago, due to growth in the service sector, which is approaching U.S. levels. Unemployment rose to 7.2% in August 2009, still well below the U.S. rate of 9.7% for the month, but well above the state's 3.9% rate for 2008. Personal income growth has outpaced the nation for much of this decade, and preliminary 2008 per capita personal income now stands at 101.9% of the U.S., ranking Hawaii 17th among the states by this measure.
Financial operations improved following a difficult period in fiscal years 2001-2003 when revenues fell short and fund balances were reduced. With strong revenue growth, the state finished fiscal 2006 with combined general and reserve fund balances of $785.8 million or 15.9% of total general fund resources. The reserve fund accounted for $53.5 million of the total. More modest revenue growth occurred in fiscal 2007, before revenue performance began to weaken during the course of fiscal 2008. Fiscal 2008 revenues finished just 1.2% over fiscal 2007, although reserves remained significant at just over $400 million. Hawaii ended fiscal 2009 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 reserve fund. The fiscal plan for the current biennium spanning fiscal years 2010 and 2011, which was initially based on the March 2009 revenue forecast, was balanced through a mix of tax increases, reduced spending, modest debt restructuring, the application of federal stimulus monies, and proposed employee furloughs, though some of the furloughs have been challenged in court. Projected revenues have been revised downward on two occasions since March, and the state's current financial plan requires an additional $290 million in solutions to maintain balance through the end of fiscal 2011. Combined general and reserve fund balances of $90.1 million, or 1.8% of estimated revenues, are anticipated at fiscal 2011 close, and balances are projected to remain below 2% of general fund revenues for the balance of the current financial plan period ending fiscal 2013. Revenue performance for the first two months of fiscal 2010 is the lagging most recent estimate and significant revenue growth is projected for fiscal 2010. At present, there are no plans to use a separate hurricane relief fund with approximately $180 million for budget balancing purposes, providing additional flexibility beyond the figures noted above.
Hawaii's government is highly centralized, and the state is responsible for many functions, such as education, normally handled at the local level. As a result of this structure, debt is and will remain high. As of July 1, 2009, net tax-supported debt totaled approximately $5 billion which equates to $3,864 per capita and 9.5% of preliminary 2008 personal income. However, principal is retired at a well above average pace, with 67% of bonds due in 10 years. The 2009DS bonds will finance new money school capital projects. The 2009DT, DU, DV, and DW bonds and series 2009 COPs refinance outstanding issues for debt service savings which are primarily taken upfront. Funding levels for Hawaii's pension system remain a concern having declined from 95% in 2000 to 68.8% as of June 30, 2008, with the unfunded liability exceeding $5 billion. The system's funding level is a bit improved from one year prior, reflecting improved investment returns as well as state funding efforts and reforms.
Additional information is available at 'www.fitchratings.com'.
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or
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