The deal’s refunding component “is a moving target,” said Hawaii Finance Director Wes Machida.

LOS ANGELES — Hawaii received one-notch upgrades from two rating agencies ahead of plans to price $675.58 million in general obligation bonds the week of Sept. 26.

Last week, Moody's Investors Service upgraded Hawaii's GO bonds to Aa1 from Aa2 and S&P Global Ratings raised them to AA-plus from AA.

Fitch Ratings affirmed Hawaii at AA.

Hawaii plans to sell the bonds in four series with retail orders slated for Wednesday followed by institutional pricing Thursday, said Wes Machida, Hawaii's Director of Finance.

Citi is lead manager with Bank of America Merrill Lynch and Morgan Stanley as co-lead managers. FirstSouthwest is the pricing advisor. Katten Muchin Rosenman LLP is bond counsel.

The bonds are being priced as a $375 million new money GO series, two GO refundings totaling $275.58 million and a $28 million taxable GO series, according to preliminary offering documents.

As interest rates have started to tick up, Machida said the team has been checking the bond markets two or three times a week to determine if it should adjust the amount planned for sale.

"We had about $300 million for refunding and about $400 million for new money, but it is a moving target," Machida said.

The new money proceeds will pay for a new hospital and repairs and maintenance to schools. Unlike other states, Hawaii schools are funded and administered wholly at the state level.

The upgrades come a few weeks after the U.S. Securities and Exchange Administration announced that Hawaii was one of two states that self-disclosed disclosure violations in bond offerings.

Machida said he wasn't surprised that Hawaii earned the ratings upgrades so soon after the SEC's Municipalities Continuing Disclosure Cooperation Initiative report came out, because of sound fiscal moves made by the governor and state legislature.

"With respect to MCDC that was a reporting issue that took place several years ago," Machida said. "We have made it a point to make sure we issue the comprehensive annual financial reports on time."

The violations stem from a failure to report in 2011 and 2013 bond offerings that the state was extremely tardy in completing comprehensive annual financial reports for fiscal 2009 and 2010.

Hawaii and Minnesota were the only two states among the 71 issuers that self-reported disclosure failures between 2011 and 2014.

The MCDC initiative promised underwriters and issuers lenient settlement terms if they self-reported instances over the last five years in which issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements.

"I think the SEC announcement does reflect dated information, because the state has endeavored to produce its CAFRs in a much more timely manner over the last several years," said Gabriel Petek, an S&P analyst.

The efforts to get the CAFRs filed in a timely manner began under Gov. Neil Abercrombie's administration and has continued under Gov. David Ige, Petek said.

"Just because the announcement came out now, doesn't reflect current management practices," Petek said. "I would even go a step further and say financial management was a key driver in the ratings increase, because that is something they have sustained across administrations."

Those efforts have included a focus on the structural condition of the state budget, increasing reserves and steps taken to control and address long term liabilities, Petek said.

The state passed a law in 2013 to pay down other post-employment liabilities and has been implementing it ahead of schedule, he said.

"There is an operational deficit for fiscal 2017 of $368 million, but when the cause of the operational shortfalls has to do with putting revenue in a rainy day fund and prefunding OPEB more aggressively, we view it as a good reason to have a shortfall; it's not viewed the same as a structural deficit," Petek said.

S&P estimated in its report that the state could end the fiscal year with combined reserves of $1.1 billion or 14.9% of expenditures. The state's projected operating gap has shrunk from the state's earlier forecasts and the state is anticipated to have a balanced operating budget in fiscal 2018, the report said.

Hawaii began fiscal 2017 in a strong position, according to S&P.

"On a combined basis, its fiscal 2016 general fund ending balance of $1.03 billion together with its emergency and budget reserve fund of $100.9 million and Hawaii Hurricane Relief Fund of $182.4 million equaled 19.2% of general fund expenditures," its report said. "The state has accumulated these balances in recent years by maintaining conservative fiscal practices even as the economy has continued to expand."

Despite the positives, the state's pension liability profile means Hawaii does not have a lot of margin for error, Petek said.

"We have raised the rating and it reflects on their credit quality," he said. "In the event of an unanticipated slowdown or if revenues missed the mark and strained the budget, there is less margin for error in Hawaii than in other states."

Machida acknowledged that despite the financial strides Hawaii has made over the past several years there is still work to be done.

The state doesn't expect pensions to be fully funded at 100% for another 26 years, and OPEB will not be pre-funded until well after that.

In addition to the strong management practices of the state, however, the Hawaii economy has diversified in the years since the recession.

Hawaii has a population of 1.4 million, of whom two-thirds reside on Oahu, one of its seven inhabited islands.

The state's employment and economy has diversified into five strong drivers including the U.S. military and professional and business services, according to Machida. Tourism, once 30% of gross domestic product, has dropped to 17%, Machida said.

"Population and labor force growth have exceeded U.S. medians over the past 10 years and nominal personal income levels are relatively high, although below average in real terms as a result of the state's high cost of living," according to Fitch's ratings report.

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