Fitch Rates Honolulu, HI's $353MM 2020 GOs 'AA+'; Affirms IDR at 'AA+'; Outlook Stable

Ratings Action Commentary, Fitch Ratings, July 10, 2020 (excerpts)

ANALYTICAL CONCLUSION

The 'AA+' IDR and Stable Outlook reflects the city and county's solid revenue framework, which is dominated by stable property taxes, low long-term liabilities, and robust operating performance. The rating is constrained by the city and county's elevated fixed carrying costs for debt service and retiree benefits, limiting expenditure flexibility.

Economic Resource Base

The city and county includes the entire island of Oahu. While a significant portion of the city and county's economy is driven by tourism, it is also the state's center for business services, trade, transportation, healthcare, defense and government. Additionally, Honolulu is home to a large military presence that adds a degree of diversification to the economy. The city and county's population of around 975,000 is approximately two-thirds of the statewide total. Median household income is strong at 138% of the national level and unemployment rates have typically been below the U.S. average. Proportionately less of the city and county's non-agricultural workforce is in the leisure and hospitality sector (16%) than is the case for the state as a whole (20%).

Fitch recently revised the state's Outlook to Negative due to the potential for coronavirus-related economic pressures to adversely affect the state's financial resilience in the medium-term. The revenue profiles of the state and the city and county are quite different. The state is much more exposed to volatile revenue sources such as general excise tax and transient accommodation tax (TAT). By contrast, property tax collections are the largest single source of city and county revenues, at over 75% of general fund revenues, transfers in and other sources in fiscal 2019, and the most stable. The payment of property taxes is not closely tied to the decision-making of out-of-state visitors and the owners of tourism businesses….

Overall tax base growth has been strong, with annual increases of between 2% and 10% during fiscal years 2014 to 2020. Ongoing tax base growth in fiscal 2021, tied to taxable assessed valuations set prior to the pandemic, has been almost entirely offset by an increase in the residential homeowner's exemption, so taxable assessed valuation is flat this fiscal year. The city and county estimates that 52% of its fiscal 2021 property tax revenues will come from residential properties, which represent almost 78% of the tax base and are predominantly primary residences, with proportionately fewer second homes or vacation rentals than in other counties. Meanwhile, hotels and resorts are projected to generate 16% of property tax revenues, despite being only 7% of the tax base. The city and county can unilaterally adjust its various property tax rates as necessary to meet its policy and fiscal goals, and has historically demonstrated its willingness to do so. The city and county is not projecting a significant increase in property tax delinquencies in fiscal 2021. However, a prolonged economic downturn could put downward pressure on taxable assessed valuations and property tax payments in fiscal 2022 onwards.

The expenditure profiles of the state and the city and county are also quite different. While the city and county provides a broad range of municipal services, the state provides cost-intensive education and health and human services. Therefore, while the city and county of Honolulu is clearly a key driver of the state economy, Fitch expects its medium-term financial resilience to be less directly impacted by volatile revenue streams and expenditure pressures than the state's.

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