Thursday, October 18, 2012
Fitch Rates Honolulu Bonds AA+
By News Release @ 12:36 AM :: 5603 Views :: Maui County, Education K-12
News Release from Fitch Ratings October 17, 2012
Fitch Ratings assigns an 'AA+' rating to the following City and
County of Honolulu (the city), Hawaii's general obligation (GO) bonds:
--Approximately $890.4 million series 2012A, 2012B, 2012C, 2012D, 2012E, 2012F,
The bonds are expected to be sold via negotiation during the week of Oct. 22,
2012. Approximately $250 million in series 2012A proceeds will fund various
capital projects. The balance of proceeds will refund $50 million in outstanding
commercial paper and all or a portion of several outstanding GO bond issues for
In addition, Fitch affirms the following rating:
--$2.5 billion in outstanding GO bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by the city's full faith and credit, supported by an
unlimited pledge of ad valorem property tax.
KEY RATING DRIVERS
STABLE ECONOMY: Honolulu's economy has proven its stability over the long term,
with ongoing growth in tourism activity despite periodic downturns. The city
also benefits from its position as the state's political and business center, in
addition to substantial defense-related investments.
STRONG FINANCIAL FLEXIBILITY: Ample reserves and demonstrated revenue-raising
ability provide the city with the flexibility to manage both expenditure
pressures and economic cyclicality.
SUBSTANTIAL CARRYING COSTS: Fixed costs for debt service and retiree benefits
comprise a somewhat high and growing share of general fund spending.
MIXED LONG-TERM OBLIGATIONS: Debt levels are low on a per capita basis and as a
proportion of taxable assessed value, due in large part to the absence of
overlapping entities, but funding levels for the state-sponsored pension system
are notably low.
Honolulu's economy benefits from a resilient visitor industry that has
maintained its strength throughout periodic downturns. Tourism levels have
fluctuated in recent decades in response to both natural disasters and financial
crises, but have proven remarkably stable over the longer term. Honolulu's
visitor industry is showing strong growth in 2012, following declines during the
recent recession. Visitor arrivals and days have risen steadily since mid-2009,
and both average daily room rates and hotel occupancy levels continue to grow.
The city's non-tourism economy is also substantial and balances tourism's
inherent volatility. The city is the state's commercial and business center, a
regional transportation hub, and the state capital. In addition, Honolulu
retains a sizable U.S. military presence due to its strategic Pacific location,
and its economy reflects substantial defense-related investments.
More than 70% of Hawaii's population and jobs are in Honolulu, and more than
half of all tourist expenditures statewide are made in the city. Unemployment
rates have consistently remained lower than mainland averages and the July 2012
rate of 5.7% was well below the national average despite recent fluctuations.
Wealth and income levels also compare favorably to national averages, although
this advantage is somewhat offset by the island's high cost of living.
The property tax base in Honolulu remained relatively stable in the recession
until fiscal 2011's 7.6% decline in assessed value, and returned to modest
growth in fiscals 2012 and 2013. Housing starts remain well below peak levels
but residential properties retain much of their pre-recession value, with median
home prices in 2012 just 7% below peak levels. Commercial and residential
investments show strong signs of growth in 2012 with a variety of large projects
underway or in planning stages. These results bode well for the city's finances,
as property taxes provide 82% of discretionary general fund revenues.
STRONG FINANCIAL FLEXIBILITY
Honolulu maintained its strong financial position during the recent downturn
with operating surpluses after transfers in four of the last five audited fiscal
years. Unreserved fund balances increased by 53% in fiscal year 2010, and with
GASB 54 consolidations, unrestricted fund balance rose by a remarkable 134% (to
19.5% of general fund spending) in fiscal 2011. Management expects further
improvements in fund balance for fiscal 2012, which Fitch considers likely based
on the city's record of conservative budgeting.
Honolulu's financial flexibility is aided by its large tax base and flexible
provisions for increasing property tax revenue. The city council has a strong
track record of approving and modifying tax rates, with adjustments made on an
annual basis. Differential rates for residential and non-residential property
allow the council to limit the impact of tax increases upon residents, as do
substantial homeowner exemptions.
Property taxes are reserved for county government under Hawaii's constitution
and competing demands for such revenues are limited by the state's unique
distribution of municipal responsibilities. All local services are provided at
the county level but K-12 education, health, and welfare are overseen and
financed by state government. Hawaii's counties receive 100% of property tax
revenues as a result, reducing their reliance upon more economically sensitive
tourism revenues. The county's most direct exposure to tourism is through the
transient accommodation tax (TAT), a levy upon hotel and rental properties.
Hawaii's legislature has capped county shares of TAT through 2015 in response to
recent operating pressures, but such revenues represent less than 4% of general
fund spending for Honolulu.
SUBSTANTIAL CARRYING COSTS
General fund expenditure requirements include somewhat high shares for debt
service, pension contributions, and other post-employment benefits (OPEB), at
approximately 28% of general fund spending in fiscal 2011. Excluding debt
service payments supported by highway taxes, this ratio declines to a still
substantial 23% of general fund spending. Management has made some progress in
reducing the rate of growth for future debt service, but spending requirements
are expected to continue to increase because of additional GO issuances planned
through 2018. Pension spending is also likely to increase to offset investment
losses in the state-sponsored pension plan. Overall carrying costs will likely
rise over the next several years due to these higher debt service and pension
requirements, and could limit the city's ability to meet other spending demands
if revenues do not keep pace.
MIXED LONG-TERM OBLIGATIONS
Debt ratios for Honolulu are low due in large part to the absence of overlapping
taxing entities. Overall debt is equal to 1.1% of taxable assessed value and
$2,024 per capita. The tax burden upon residents is further reduced by the high
proportion of parcels, up to two-thirds, with offshore ownership. Capital plans
for Honolulu's proposed $5 billion rail line rely on a temporary excise tax
surcharge, and are not anticipated to require general fund support; the fate of
this controversial project likely will become clearer following the November
2012 mayoral election.
Honolulu participates in a state-sponsored cost-sharing multiple-employer
pension plan, which is poorly funded. Actuarially valued assets represented just
59% of reported liabilities at the end of 2011, or 55% under Fitch's alternate
assumption of 7% investment returns. Recent pension reforms have sought to
improve funding levels through a reduction in benefits for new hires and
restrictions on pension spiking, but will also increase the city's pension
contributions over the next several years. OPEBs are funded on a pay-go basis
and the city has begun to address this liability with recent contributions to an
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating
Criteria, this action was additionally informed by information from Creditscope,
University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global
Insight, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria