Approximately $2.6 Billion of Debt Affected, Including Current Offerings
General Obligation Bonds, Series 2010A (Build America Bonds)
Expected Sale Date
General Obligation Bonds, Series 2010B (Non-AMT)
Expected Sale Date
General Obligation Bonds,Series 2010C (Tax-Exempt)
Expected Sale Date
NEW YORK, Nov 23, 2010 -- Moody's Investors Service has assigned a Aa1 rating and stable outlook to the
City and County of Honolulu's General Obligation Bonds, Series 2010A Build
America Bonds (Taxable), Series 2010B Bonds (Non-AMT), and Series 2010C Bonds
(Tax-Exempt), expected to be issued in the aggregate amount of approximately
$460.0 million. The Series 2010A taxable bonds ($151.7 million) will
finance ongoing capital improvement needs and takeout portion of previously
issued commercial paper notes; the Series 2010B bonds ($187.83 million) will
fund a portion of the expansion of the city's H-Power facility, which is a
city-owned renewable energy plant, as well as takeout a portion of the city's
commercial paper notes; the Series 2010C taxable bonds ($120.3 million) will
refund outstanding general obligation bonds for debt service savings. In
conjunction with the current credit review, Moody's has also affirmed the Aa1
rating and stable outlook on the city's approximately $2.3 billion of
outstanding general obligation bonds. The bonds are secured by an unlimited
property tax pledge; debt service payments represent a first charge on the
city's General Fund.
The Aa1 rating primarily reflects the city's sizable economic base, above
average resident wealth, and sound financial operations despite recently
weakened reserve levels, as well as a manageable debt profile. Although the
local economy has begun to recover slightly, Moody's will continue to monitor
management's ability to prudently address long-term fixed costs, improve reserve
levels, and maintain overall fiscal stability.
HONOLULU'S ECONOMY BEGINS TO RECOVER, ALTHOUGH VISITOR TRAFFIC IS DOWN; ASSESSED
VALUE WILL DECLINE AGAIN IN 2012
Honolulu's economic recovery is beginning to outpace the nation as
construction, house prices and unemployment indicators slowly improve. The
tourism industry began to soften in calendar year 2006 and remained
relatively stagnant until recent 2010 data suggest year-to-date increases of
approximately 6%. Nevertheless, Honolulu remains a unique and attractive tourist
destination and officials have been successful in niche marketing the island.
Moody's notes that airline capacity serving the Hawaii tourism market relies on
the health of the financially volatile airline industry. Moody's also notes
improving diversity in the Honolulu economy which includes the military, health
care, and banking sectors as important contributors.
Real estate has been another important element of Honolulu's economic success,
leading to strong growth in assessed values in the period from 2001 to 2008.
However, between 2007 and 2009 home prices declined, although modestly relative
to the rest of the nation and since then has recovered gradually; as of the
second quarter 2010, home prices are up 9.1% from the prior year. It is notable
that Honolulu has not experienced high foreclosure activity given the relative
rarity of sub-prime financing in Hawaii. Following a period of rapid escalation
in property values in the late 1980s and early 1990s Honolulu's tax base
experienced significant erosion from 1996 through 2001, losing almost one-fifth
of its value during that period. Between 2006 and 2011, assessed valuation
(AV) has grown by an average of 6.1% annually, including a significant decline
of 7.8% in 2011 to a still sizeable $153.1 billion and management projects 2012
AV may decline slightly. Over the near-to-medium term horizon, several public
and private large-scale projects have begun construction in calendar year 2010.
In addition, the city's successful efforts to finance light rail development
through a general excise tax surcharge should help stimulate further housing and
business development in west Oahu, especially in the Kapolei and Ko Olina
areas. Further, the city's economy will benefit from the stability provided by
ongoing, substantial military activity. Despite the moderating influence of many
tourism-related service jobs, wealth indicators in Honolulu are favorable with
per capita and median family income at 107.1% and 149.3% of the
U.S., respectively. The city's full value per capita totals an
impressive $168,702, indicating an unusually wealthy tax base.
Honolulu's employment base has held up reasonably well during this
recession, due in part to the significant presence of government and military
jobs mentioned above. Unemployment in Honolulu improved year-to-date to 5.6%
(August, 2010) from 6.0% (2009) and remains favorable compared to 6.6% for the
state and 9.5% for the nation. Honolulu's economic activity represents roughly
three-fourths of statewide economic output, so local figures mirror those of the
state fairly closely.
GENERAL FUND BALANCE DECLINES IN FY 2008 AND FY 2009; INCREASED PROPERTY TAX
RATE AND PRUDENT BUDGETING EXPECTED TO IMPROVE FINANCIAL OPERATIONS
Over the last two audited fiscal years the city's reserve levels have declined,
but to still satisfactory levels and recent data suggest prudent budgetary and
revenue enhancement measures resulted in an improvement to the general fund and
other available reserves. However, Moody's notes the city will continue to face
significant financial challenges from increasing fixed costs such as pension,
health, benefits and debt service expenditures. Management's commitment to
maintaining budget balance and adequate reserve levels has been an important
factor in Moody's credit evaluation of Honolulu.
Audited results for fiscal 2008 showed a $10.3 million operating surplus in the
General Fund which resulted in total fund balance of $166.1 million, or 13.1% of
General Fund revenues; unreserved fund balance totaled $107.3 million, or
8.5% of revenues, which exceeds the city's target range of 5% to 8% of
expenditures. Fiscal 2009 reserves declined due to sluggish revenue growth
combined with increased salaries and retirement system contributions, a higher
transfer amount to the city's OPEB reserve as well as small increase to the
city's Reserve for Fiscal Stability Fund. The FY 2009 unreserved General Fund
balance was 5.2% of general fund revenues ($67.8 million); combined with the
Reserve for Fiscal Stability Fund ($26.1 million), available reserves totaled
7.2% of general fund revenues ($93.9 million).
Going into FY 2010, although management implemented aggressive
spending restrictions, department cuts and a hiring freeze to offset a
significant budget gap (approximately $127 million), the budget also indicated a
sizeable drawdown of the unreserved general fund balance. Positively, unaudited
results indicate management outperformed budgeted expectations which will result
in an improved general fund reserve and additional contributions to other
available reserves. The FY 2010 general fund reserve and the Reserve for Fiscal
Stability are expected to have increased slightly relative to FY 2009. For the
current fiscal year (2011) management continued various spending
restrictions and prudently increased the residential non-homeowner property tax
rate from $3.42 to $3.58 per $1,000 AV. In addition, management will again
contribute to its Reserve for Fiscal Stability Fund.
Moody's believes prudent budgeting measures will support both preservation and
gradual improvement of reserve levels in the near term. Nevertheless, similar to
most major municipalities, Honolulu will continue to face its share of budget
challenges in the near-term, in part due to the rising pension, health and
benefit costs. The city faces a substantial OPEB liability, currently
estimated at $1.95 billion (with no prefunding), with an associated annual cost
of $142.4 million. As mentioned above the city contributed $40.1 million to its
OPEB liability and plans to resume fully funding the annually required
contribution when economic conditions improve.
MANAGEABLE DEBT POSITION REFLECTS MODEST BORROWING PROGRAM AND SIZEABLE TAX BASE
Moody's expects that Honolulu's debt levels will continue to remain
manageable given reasonable borrowing assumptions and a relatively conservative
debt structure. In addition, Honolulu benefits from the active role the state
government plays in financing traditional municipal capital needs more typically
funded at the local level throughout the rest of the country including
transportation, health, justice, and education. In addition, management has
begun to fund the construction activities of various enterprise systems from
system rates rather than property taxes. As a result, future borrowings will
emphasize revenue bond offerings in addition to general obligation issuances.
The city's debt burden compares favorably to other cities and counties in the U.
S. with overall debt representing only 1.4% of fiscal 2011 taxable values.
Including the current offering, the city has approximately $2.6 billion of
outstanding general obligation bonds; the city has no exposure to long-term
variable rate debt or derivative instruments in its G.O. borrowing program.
Approximately 52.0% of the city's general obligation debt is retired in ten
The stable rating outlook on Honolulu's general obligation bonds
reflects Moody's expectation that the city's gradual economic recovery will
continue, albeit slowly, over the medium-term supported in part by the large and
stable government and military sectors. The stable credit outlook also
incorporates Moody's expectation that city management will continue to take the
actions necessary to ensure fiscal stability in light of flat revenue growth and
rising pension, health and benefit costs over the near- to medium-term.
What would make the rating go - UP
-Significant diversification of economic base
-Significant and sustained increase in reserve levels
What would make the rating go - DOWN
-Deterioration of financial operations and reserve levels
-Prolonged declines in assessed valuation
2010 population: 907,574
2007 per capita income: $28,033 (107.1% of U.S.)
2007 median family income: $74,667 (149.3% of U.S.)
2011 full valuation: $153.1 billion
2011 full value per capita: $168,702
Direct and overall debt burden: 1.4%
Payout of principal, 10 years: 52.0%
FY 2009 total General Fund balance: $116.7 million (9.0% of General Fund
FY 2009 unreserved General Fund balance: $67.8 million (5.2% of General Fund
FY 2009 unreserved GF balance and other available reserves: 93.9 million (7.2%
of general fund revenues)
The last rating action with respect to the City and County of
Honolulu's long-term rating was on October 30, 2009, when a General Obligation
bond rating of Aa2 was assigned. That rating was subsequently recalibrated to
Aa1, Stable Outlook on May 1, 2010
The principal methodology used in this rating was General Obligation
Bonds Issued by U.S. Local Governments rating methodology published in October,
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, and confidential and proprietary
Moody's Analytics information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Public Finance Group
Moody's Investors Service
Matthew A. Jones
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa1 RATING AND STABLE OUTLOOK TO CITY AND COUNTY OF HONOLULU'S G.O. BONDS
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