ALAMEDA, Calif. — Hawaii’s new finance director plans to review the way the state picks bond underwriters.
“The selection criteria may not be contemporary enough to recognize the changing market,” Kalbert Young said in a phone interview.
Young is stepping into his position as director of the Department of Budget and Finance as part of a new administration. He was appointed by Gov. Neil Abercrombie, a Democrat who took office in December, replacing Republican Linda Lingle. Young previously was the budget director for Maui County.
Young outlined a series of short-term and long-term goals to the state Senate Ways and Means Committee, which voted last week to recommend Young’s nomination to the full Senate. He also must wrestle with a state budget thrown deeply out of balance by the recession.
In the interview, Young said that revisiting the underwriter-selection process is one of his short-term goals. “The criticism is that the state in the [general obligation] bond space had really only used one underwriter for the most part, Citigroup, so we’re taking a look at the underwriting selection criteria and formula,” he said.
Between them, Citi and Bank of America Merrill Lynch mopped up more than 85% of the 2010 municipal bond issuance volume for all Hawaii issuers, according to Thomson Reuters.
The state’s existing criteria heavily weights the number of overall municipal issues a bank underwrites, Young said, adding that such criteria may not properly weigh the capabilities offered today by regional banks.
“Is more better? That’s one of the questions we’re going to review,” he said.
With Maui County’s last bond issue under Young, in November, the county departed from its previous practice by having a co-manager instead of a single underwriter, and by using a financial adviser on the $74 million deal.
Young said he also plans to place a high priority on reviewing recommendations the state’s independent auditor made last year in a critical review of the department.
That review was launched after the state found itself holding more than $1 billion of illiquid student loan-backed auction-rate securities after the ARS market froze in 2008, leaving Hawaii unable to access almost 30% of its Treasury account, which is supposed to be liquid.
Citi sold the ARS to Hawaii, and in late 2010 the state agreed to a legal settlement with the bank in which Citi agreed to purchase the state’s remaining $869 million ARS portfolio at par by 2015. Young said he is tightening up his agency’s handling of the state treasury to avoid a repeat.
From a policy standpoint, Young said he plans to push to improve the funding level of Hawaii’s public employee retirement system.
Moody’s Investors Service, when it announced in January that it plans to combine net tax-supported debt and unfunded pension-liability figures when evaluating state ratings, cited Hawaii as one of four states with the highest debt and pension-funding needs.
“That’s a very serious indictment of how active we’ve been to address the unfunded liability issue,” Young said.
There are efforts in the works this year that would slow the growth of the liability, he said, such as creating a lower benefit tier for new hires.
“In the longer term, we will have to go beyond that and do something to actually fund up the liability,” Young said. “I’m not saying we’re going to see pension obligation bonds that convert it to a hard liability, but we’ve got to do something more targeted to proactively reducing the liability.”
Hawaii’s GOs are rated AA with a stable outlook by Standard & Poor’s, Aa1 with a negative outlook by Moody’s, and AA-plus with a negative outlook by Fitch Ratings.
“The state has a rather high credit rating, but two of the agencies have negative outlooks,” Young said. “The first order of business would be to get that removed.”