LOS ANGELES -- Standard & Poor’s analysts lauded Hawaii for passing laws that mandate budgetary constraints, but also cautioned that the changes might be harder to maintain during lean economic years.

Helped by a stronger revenue outlook, the AA-rated state took steps on several fronts in its recently enacted budget to shore up its financial position, S&P analysts said in a report published Tuesday.

“I thought it was very positive -- and we’re actually glad to hear that one of the rating agencies has recognized what the state of Hawaii has been pushing toward for the last several years,” said Kalbert Young, Hawaii’s finance director

Hawaii Gov. Neil Abercrombie signed three budget bills on July 3 aimed at replenishing Hawaii’s reserves and eventually pre-funding 100% of its other post-employment benefit liabilities such as retiree healthcare.

Abercrombie had tapped into the state’s reserve funds to restore services that had been cut by predecessor Linda Lingle, after the economy crashed in 2008.

“We had to use some of the reserves in the first year that Gov. Abercrombie came into office to get through the fiscal year,” Young said.

Revenues were projected to be less than expenditures -- and if Abercrombie had not tapped into the reserve funds, the state would have had a deficit, Young said.

The plan assumed the reserve fund would be replenished during the following biennium, which is what Senate bills 1092 and 1094 are designed to do.

House Bill 546 will prefund OPEB liabilities for the first time. By fiscal 2019, the actuarially required contributions are to be prefunded by 100%.

“For a long time, we have said that the state’s growing OPEB liabilities were a threat to its credit position,” said Gabriel Petek, S&P’s senior director of U.S. Public Finance.

The steps the state has taken are positive, but it will take several years for the measures to be fully in place, so follow-through is key, Petek said.

“Setting it up in law to ramp up contributions is very favorable, but they are also doing it at a time of economic expansion,” Petek said.

S&P analysts will be watching to see if the state can stay the course when the economy slows.

“Right now they are paying $275 million a year to pre-fund and the ARC liability is close to a $1 billion,” Petek said. “It makes sense that they need to phase in such a large differential, but the challenge will be whether they will be able to commit when times are tougher.”

While Young understands the concerns S&P expressed, he added that the state has shown through the legislation that it recognizes the liability is a threat to the state’s credit position.

“We are mindful that as the economic cycle shifts down, those decisions will be more difficult,” Young said. “We wanted to make sure by enacting the laws that the state would have the fortitude to stay with the priorities -- and prefunding OPEB is one of those priorities.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.