Officials in Hawaii Debate Ways to Use Bond Premium

Hawaii’s governor wants to use the premium gained off a recent bond sale to help replenish reserve funds, but the state’s social agencies think the money should be used to fund their programs.

Bills recommending both strategies were discussed and approved in separate committees last week.

“Hawaii sold $1.3 billion in par value general obligation bonds in late November with a closing date of Dec. 7, 2011, but received in excess of $1.4 billion,” finance director Kalbert Young said in an interview. “So that is an extra $100 million in premium, not debt. The administration wants to use that cash to recapitalize the reserves.”

SB 2784, the bill sent down by Gov. Neil Abercrombie and introduced in the Commerce and Consumer Protection Committee by Senate President Shan Tsutsui, a Democrat, would use the premium gained from the bond issue combined with general fund money to recapitalize the hurricane relief and rainy-day funds. The state’s reserve funds were tapped last year to help pay down a $1.25 billion deficit and in 2010 to help fund dozens of social programs.

The result is that there is only about $5.5 million left in the rainy-day fund and $25 million left in the hurricane relief fund.

Abercrombie wants to restore the rainy-day fund to its previous $60 million level over the next two years by adding $20 million this fiscal year and $43 million the following year, using a mix of bond proceeds and general fund money, Young said. Additionally, the Legislature would allocate $55 million to the hurricane relief fund this fiscal year, and $56 million next fiscal year in an attempt to get it back up to $125 million, he said.

“Number one, the funds have to be paid back, because we said we were going to pay them back,” said Senate Minority Leader Sam Slom, a Republican. “And, number two, it helps with our credit rating.”

The state’s plans to replenish the reserve funds were cited by the rating agencies, he said, “which is why we got the lowest interest rate we had ever received on a bond sale.”

Hawaii received ratings of AA from Fitch Ratings, AA-plus from Standard & Poor’s and Aa2 from Moody’s Investors Service, and traded at a 3.34% interest rate for the entire transaction.

In addition to citing the state’s plan to restore reserves in its report, Standard & Poor’s analysts also pointed to the governor’s willingness to implement aggressive solutions, totaling $1.32 billion, to balance the fiscal 2011-2013 biennial budget.

Moody’s analysts lauded the state for its history of fiscal conservation, including the practice of issuing all of its debt at a fixed rate, as well as rapid repayment schedules, with 95% of principal repaid in 15 years.

Sen. Suzanne Chun Oakland, the Democratic chairwoman of the Senate Human Services Committee, who authored the bill that proposes to use the money for social service programs, could not be reached for comment. Chun’s bill does not yet have a price tag, but Young said the cost will be hashed out later.

The governor’s bill was also voted out of committee, but with an amendment that would set a three-year target for replenishing the funds, rather than the two-year goal set by the administration.

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