Hawaii's Proactive Budget Management Techniques And Healthy Reserves Support Its 'AA' GO Rating, S&P Report Says

Hawaii's 'AA' general obligation (GO) bond rating reflects our view of management's well-established budget monitoring practices and strong reserve levels, according to a report published today by Standard & Poor's Ratings Services.


"We believe that Hawaii's proactive budget management techniques will result in manageable out-year gaps that state officials will successfully resolve without a significant impact to reserve designations," said Standard & Poor's credit analyst Paul Dyson. "Moreover, in our opinion, the state's level of reserves provides us with credit comfort at the current rating level."

Fiscal 2008 combined reserves, including carry-over and various funds, totaled $590 million, or 11% of expenditures; according to state estimates, combined reserves will decline to $208 million, or 3.9% of expenditures, in fiscal 2009, below the $253 million, or 4.9% of expenditures, forecasted in May 2009. Officials believe various corrective actions including expenditure cuts and revenue enhancements for fiscals 2010 and 2011 should produce ending combined reserve balances closer to 5%-6% of expenditures; however, without such measures, combined reserves could fall to 2%-3% during fiscals 2010 and 2011, and negative by fiscal 2012.

The state constitution requires that the governor and legislature begin to provide tax refunds or credits if the general fund balance exceeds 5% of expenditures for two consecutive years; however, it does not require that refunds or credits immediately lower fund balances to the 5% target, permitting the legislature to retain balances above these levels in recent years. The legislature has faced the situation in the past several fiscal years, which has led to increased appropriation of existing carry-over fund balances for one-time and recurring use. We believe the likely result will be a decrease in the current budgeted and GAAP general fund balance relative to fiscals 2006 through 2008, with an increase most likely dependent on a faster or more robust economic recovery. In our opinion, further significant expenditure reductions will be difficult, but we also recognize that the state and governor have been willing to make them in the past.

After sustained economic expansion between 2003 and 2007, when many sectors performed at record levels, Hawaii's (population 1.3 million) economic trends decelerated and, in many cases, turned negative in 2008 and 2009. However, unlike many markets, the Hawaii housing market experienced only a moderate housing decline: Median home prices as of July 2009 were down just 10% from 2006 levels and only 2.3% of loans went into foreclosure over the last 18 months, ranking it eighth best in the nation. Hawaii's nominal personal income is more stable, and actually increased more than the U.S.' in both 2008 and the first quarter of 2009. The state's median household income was what we consider a strong 121% of the national average as of 2008.

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