SAN FRANCISCO — Hawaii Gov. Neil Abercrombie signed a $21.9 billion, two-year budget into law Thursday that addresses rising debt-service costs and a bond-financing mistake.

"The budget passed by the Legislature requires our administration to operate with hundreds of millions less than we believed necessary to restore core government functions," Abercrombie said in a statement Thursday. "Despite tax increases passed by the Legislature, services and programs will still have to be significantly cut."

The governor said the lawmakers' budget came in $383 million below what he requested over the two-year period, even though spending increased from last year to cover Medicaid, state employee heath care, and debt service. That means Abercrombie must make new cuts, in addition to major cuts made in past years, to balance the budget.

The Legislature's budget closed a $1.3 billion shortfall, which came after addressing a $1.2 billion budget hole in 2010.

The signed budget sets general fund spending at $5.4 billion for fiscal 2012 and $5.5 billion for fiscal 2013. Overall spending is targeted for $11 billion in the first fiscal year and $10.9 billion the following year.

The Legislature noted in budget documents that it expects debt service to substantially increase beginning in fiscal 2016 because of a 2009 refinancing.

Additionally, an error in the accounting of general obligation bond authorizations for state education facilities improvement special funds forced the lawmakers to allocate $390 million for fiscal 2012 to meet obligations, according to the Legislature's budget summary.

"The current problem the $390 million is intended to fix is a manifestation of a larger, systemic problem with the SEFI financing mechanism that requires further evaluation and deliberation," the summary said.

Hawaii's debt ratios are among the highest in the nation, according to Moody's Investors Service.

In the budget, the Legislature slated for immediate implementation GO-funded projects ranked as "essential" for health and safety and deemed "shovel ready."

In addition to the budget, Abercrombie signed a bill to address rising pension and retiree medical benefit costs. The state's current liability for its employee retirement systems, the governor said, is $7 billion. It adopts lower benefit tiers for future hires and raises contribution rates.

In May, Moody's downgraded the state's GOs to Aa2 from Aa1, affecting $5.1 billion of outstanding debt.

The 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.

Moody's noted that Hawaii has relied on one-time fixes to fill recent budget gaps. It added that its emergency budget reserve is nearly depleted and it will be dipping into its hurricane relief fund to help fill the hole.

Fitch Ratings assigns a AA-plus to Hawaii's GOs. Standard & Poor's rates them AA.

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