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Bond rating firms take note of Hawaii's risky finances

By Richard Borreca

LAST UPDATED: 06:27 p.m. HST, Aug 05, 2011

When the big boys get ready to loan money to the state of Hawaii, they go to the bond rating agencies to check us out.

Two of those agencies, Moody's Investor Services and Fitch Ratings, just finished kicking the fiscal tires out here. Both downgraded the state. Not by much, but the small thumbs-down adds a bit of reality to the glowing reports that the budget is balanced, this is the best of all possible worlds and that Gov. Neil Abercrombie's "New Day Hawaii" is working.

Both rating services picked up on the fact that Hawaii plans to spend most of its reserve funds, the Hurricane Relief Fund and the rainy day fund. The $180 million once tucked away in the HRF was a favorite for the bond rating agencies.

The boys on Wall Street could look at that fund and think, "Well, Hawaii can always tap the Hurricane Fund if things get really bad."

So we spent it. Now what?

"The downgrade reflects the state's minimal financial cushion against risks inherent in an economy dominated by the volatile tourism sector following the depletion of previously large balances, as well as the state's significant and growing long-term liabilities," Fitch dryly observes.

What it means is: "Those magic beans we bought to plant, well, we ate them last night for supper."

Back in the day (fiscal year 2006-07), Hawaii was packing a $785.8 million surplus.

Clearly not believing the vows that we must balance the budget every year, the agency warned that in the real world, this year's tax increases may be permanent.

"While the plan projects that ending balances will grow from the projected fiscal 2011 level, absent extension of the temporary tax increases or offsetting spending reductions in the next biennium, Fitch expects it may be difficult to retain those balances in future years," said the June 15 report.

Moody's, which issued its report last month, was no more upbeat.

"We expect available balances will also be negative at the end of fiscal 2011, representing three consecutive years of balance sheet deterioration," wrote the Moody's analysts.

They also had a difficult time believing the "temporary" tax increase was only temporary.

"The Legislature could decide to keep the temporary measures in place in the future in the event of continued revenue underperformance," Moody's suggested.

Moody's also pointed to a pet peeve of state Rep. Isaac Choy (D, Manoa) who is a CPA: Hawaii is chronically late turning in its financial data.

The Department of Accounting and General Services, which publishes the Comprehensive Annual Financial Report, put out its last report for 2009 financial year.

Moody's called the tardiness "a weak trend that detracts from the state's other relatively strong governance practices."

Choy called the late report "embarrassing."

"The late submission of a timely financial statement is a sign that something is wrong," Choy warned.

The bond rating agencies do not prescribe a way out of Hawaii's financial trouble, except as Choy noted, the "power of our state general excise tax" to raise money quickly, which if not foreshadowing, is certainly not encouraging.

Richard Borreca writes on politics on Sundays, Tuesdays and Fridays. He can be reached at rborreca@staradvertiser.com.

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