Moody's Drops $5.1B of Hawaii GO Debt a Notch to Aa2

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SAN FRANCISCO  — Moody’s Investors Service on Monday downgraded Hawaii to Aa2 from Aa1, affecting $5.1 billion of outstanding debt.

The rating agency said falling revenues, due partly to the recession and Japan’s recent tsunami and earthquake, have damaged tourism and cut into state’s ability to right its budget.

“Hawaii’s financial operations have been strained as the state struggles to rebalance following the revenue deterioration of the last several years,” Moody’s analyst Nicole Johnson said in the report.

Moody’s also downgraded the state’s $40 million of certificates of participation issued in 2009 to Aa3 from Aa2 and $24 million of 2006 COPs to A1 from Aa3.

The outlook is stable.

Hawaii’s fiscal 2011 revenue projections are about 8% below the most recent peak in fiscal 2008, according to Moody’s.

Analysts said the state is facing a $1 billion deficit, equal to almost 10% of revenue, for the next two-year budget cycle from 2012 to 2013.

The slow pace of the national and international economic recovery, the natural disasters in Japan — a major source of tourism — tax refund delays; and high gas prices have all weighed on the state’s finances, the report said.

Johnson also noted that the state has relied on one-time fixes to fill recent budget gaps. She said Hawaii’s emergency budget reserve is nearly depleted and the state will be dipping into its hurricane relief fund to help fill the hole.

“Hawaii compares unfavorably with other states on measures such as debt ratios that are among the highest in the nation, pension funding levels that are below average, and [other post-employment benefit] liabilities that are nearly twice the size of the state’s annual operating budget,” Johnson said.

Hawaii’s debt ratios are so high, the report said, due to bonds sold to fund school projects. The state government operates Hawaii’s K-12 public schools.

The state employee retirement system had a 61% funded ratio as of June 30, while its OPEB obligation is $7.2 billion for state employees and $1.6 billion for teachers, according to Moody’s.

Officials have been working on the fiscal problems, including program cuts, a 5% pay cut from its largest union, and splitting health care costs with employees. The state will also reduce benefits for new hires at the end of fiscal 2012.

The rating agency also noted that Hawaii will likely remain a major tourism spot despite high oil prices that have helped drive up airfares.

The state’s unemployment rate of 6.3% in March remained well below the national average of 8.8%. Fitch Ratings assigns a AA-plus rating to Hawaii GOs, and Standard & Poor’s rates them AA.

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