CREDIT QUESTION: Moody's downgrades state's
status but Standard & Poor's leaves it unchangedS&P changes outlook to negative for Honolulu city bonds.
By Russ Lynch
Star-BulletinRating Hawaii's economy as the poorest among the 50 states, Moody's Investors Services today downgraded Hawaii's $3.1 billion of government debt by one notch.
The change could cost Hawaii millions in higher interest charges because it comes just a week before the state is about to sell another $640 million in state bonds.
Often a lower rating means higher interest costs. The cost can't be estimated now, but if a rating lifts the interest rates on Hawaii's bonds by just one-tenth of a percentage point that would add $640,000 a year to the cost.
The upcoming issues are $300 million, for 20 years, in new general obligation bonds and $340 million for 11 years to refinance existing bonds.
Budget Director Earl Anzai called the downgrade "disappointing" but said just how Hawaii will fare in selling the new bonds won't be known until the sale day, so far scheduled for next Thursday. "The key thing is to look at the interest rate we have to pay. The proof of the pudding is in the sale Thursday," Anzai said.
Gov. Ben Cayetano later today called the rating good and said it is still a strong rating. "It is the same rating shared with states such as California, Rhode Island and West Virginia, also Maui County."
Anzai and the state's agents in the bond markets watch market trends closely and try to sell the bonds when rates are the most favorable, local bond experts say.
Also, the Moody's one-notch downgrade -- to A1 from Aa3 -- still leaves Hawaii high up the list as a quality investment, they said.
"The downgrade was not unanticipated," said Lorene Okimoto of Pacific Century Trust, a co-manager of the biggest Hawaii municipal bond funds, the Aquila Hawaiian Tax-Free Fund.
The upcoming bonds, like the other recent ones, will be insured, and while that will cost the state more, it really makes them a more solid investment than the Moody's rating indicates, she said.
Market value depends on other things, too, such as whether other big municipals are offered at the same time. But the negative report "continues to add to the dull patina of Hawaii bonds," she said.
"It's still investment grade," said Gregory Kowal, manager of municipal bond trading at First Honolulu Securities Inc., meaning the rating is still a strong one.
But Moody's had a lot of negative things to say about the state's economy and its prospects.
"Poor economic performance since the early 1990s reflects the vulnerability of a tourism-dependent economy severely affected by adverse trends in Hawaii's primary markets," Moody's said.
"Recent economic and currency weakening in Asia will further erode Hawaii's economy," the report said. Moody's expects Hawaii to experience "sustained economic weakness."
Another big bond-rating service, Standard & Poor's, set an A-plus rating on the upcoming Hawaii bond issue, the same as it has on Hawaii's existing bonds, and reaffirmed the existing rating.
Like Moody's, S&P noted the overall stability of the state's finances and noted that the state is taking measures to pull itself out of a slump.
Both services, however, took negative views of Hawaii's heavy reliance on tourism, now seen as threatened by economic turmoil in Asia.
Moody's said Hawaii has been losing jobs and has a relatively high unemployment rate. Per capita personal income has grown on an annual basis by only 3.6 percent, the rating service said.
Tax revenues going into the state general fund have slipped and the state has had an operating budget deficit in five of the last six years, Moody's said.
The state Department of Taxation said today that tax revenues going into the state general fund for the first nine months of the fiscal year, through March 31, were up only 0.5 percent compared with the same period of the last fiscal year.
The Council on Revenues, which advises the state, has its latest estimate for the year ending June 30 at a 1.2 percent increase in tax revenues.
RETIREMENT PAY:
Lawmakers must find money to fund
By Mike Yuen
recalculated retirement pay for educators
Star-BulletinThe state Legislature's job of balancing the budget is now tougher, says House Finance Chairman Calvin Say.
Say (D, Palolo) said he has learned that lawmakers must find an additional $80 million because the Employees' Retirement System miscalculated retirement pay for principals, vice principals and teachers.
The financial impact on the budget is a "a bombshell," Say said.
The new financial dilemma for the state stems from the state Supreme Court's ruling late last month that said Attorney General Margery Bronster did not have the authority to appeal a ruling the Circuit Court made in 1996.
Bronster had appealed Circuit Judge Gail Nakatani's decision that the state retirement system had been miscalculating retirement benefits for former principals, vice principals and teachers. But the state high court decided that Bronster couldn't because the retirement system's board had not authorized the challenge.
"At this point, I really can't say how we're going to address the (financial) problem," Say said yesterday.
The Senate's version of the budget must be approved by its Ways and Means Committee before a deadline of midnight today. The Senate is scheduled to vote on the budget next week.
Ways and Means Co-Chairwomen Rosalyn Baker (D, Lahaina) and Carol Fukunaga (D, Makiki) declined yesterday to comment on the pension issue or on any other budget matter.
The new $80 million shortfall could end up being addressed in House-Senate conference negotiations.
Inouye says tax plan
By Mike Yuen
is ‘bitter medicine’
Star-BulletinU.S. Sen. Daniel Inouye is backing the recommendations of Gov. Ben Cayetano's economic revitalization task force, including an increase in the 4 percent general excise tax.
"The recommendations are painful," Inouye said before a meeting this morning with state Senate President Norman Mizuguchi (D, Aiea), whose chamber opposes an excise tax hike.
"Just like any health problem, sometimes the medicine you take will be bitter. But we have this opportunity to address our problems. The way to do it is with the recommendations, which are creative and imaginative."
For state lawmakers to back the task force's proposals, including the controversial excise tax increase, will take "an act of courage, personal and political," Inouye said.
Inouye insisted that he was not visiting Mizuguchi to lobby him; it was simply a courtesy call. Inouye is scheduled to meet with state House Speaker Joe Souki (D, Wailuku) later today, and with Cayetano tomorrow.
Inouye's meetings come at a time when supporters of the tax hike, which include state House leaders, Hawaii's two leading banks and public employee unions, are making a concerted push to have the tax increase and other task recommendations approved by the Legislature, which is at a key juncture in its deliberations.
Cayetano is pushing tax relief for isle taxpayers by proposing personal income tax cuts of up to 35 percent. His task force proposed raising the excise tax to 5.35 percent to shift more of the tax burden to tourists and nonresidents.
The House, by only a three-vote margin, has passed a bill calling for raising the excise tax to only 4.50 percent.
Critics of the tax hike contend it could close small businesses already struggling in Hawaii's sluggish economy.
When the House sent its version of the supplemental budget to the Senate last month, it did not include a $24 million reduction in tax revenues, which was based on a lowered income forecast for the state by the Council of Revenues.
The House plan slashed $229 million from the two-year budget approved last year.
Attorney Charles Khim represented the retirees who objected to the retirement system's decision to exclude summer salaries in calculating the average compensation for retirement-pay purposes. Khim doubted that the state will have to pay anything more because of Nakatani's ruling.
The $7.9 billion retirement fund with $1.1 billion in earnings last year can easily handle what is owed without dipping into state funds, Khim said.
Khim added that he doesn't know where Say is getting the $80 million figure.
The pension fund's actuaries estimated that the amount owed the retirees would be $4 million, he said. "I think whoever gave Calvin Say that figure (of $80 million) is engaging in scare tactics," Khim said.
Khim also said retirement system actuaries estimated that the state's contributions to cover the difference for all current teachers, principals and vice principals for the next 30 years would be $20 million to $40 million.
Stanley Siu, pension fund administrator, said the case affects 6,000 retired principals, vice principals and teachers whose retirement pay must now be recalculated. He has no idea how long that would take.
Both Siu and Cynthia Quinn, special assistant to the attorney general, emphasized that Bronster's appeal was rejected for technical reasons and that Nakatani's ruling did not address the issue at hand.
The attorney general's office, Quinn said, is exploring what step it should take next.
She said Bronster is urging lawmakers to look at how they might be able to address the case as well.
Because of deadline requirements for filing the appeal, the attorney general's office did not have sufficient time to get authorization from the retirement system, Quinn said.
The Associated Press contributed to this report
