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Honolulu and rail receive good news from bond rating firms

By Randy Havre

POSTED:
LAST UPDATED: 02:23 p.m. HST, Aug 05, 2011



The taxpayers for the City and County of Honolulu got some good news the other day as the administration gets ready to issue additional general obligation bonds (GOs). Whenever municipal bonds go up for sale, the different rating agencies, in this case Fitch and Moody's, take a fresh look at the financial condition of the issuer and its ability to not only service the debt but also to repay the bonds.

Both agencies gave Honolulu pretty close to top ratings: Moody's Aa1 and Fitch AA+, just one notch down from "triple A."

Fitch's write-up highlights the rebound in tourism from 2010 to 2011 with higher average daily room rates and hotel occupancy, and a "solid tourism infrastructure to promote, maintain and develop the tourism base." It cites the large military presence balancing "tourism's inherent volatility" and the planned $5.4 billion mass transit system, which should revitalize the construction industry.

Unemployment is relatively good at 4.9 percent in May, especially when compared to other U.S. municipalities of 1 million or more (Honolulu did not make the list with 2011 population of 950,000). The best was Oklahoma City, tied with Honolulu at 4.9 percent, with Riverside, Calif., ranked 49th at 13.2 percent.

A very important component to the rating is the city's financial position, which "remains sound, with healthy fund balance levels and stable revenues," "as the city continues to control spending to below budget levels."

So why is this so important to us, the taxpayers, besides just reaffirming Honolulu as a good place to live?

It is pretty simple: The better the rating, the lower the interest rate we have to pay to service our debt. Currently the city has approximately $2.5 billion in outstanding GO bonds, a moderate amount for the size of the city. This means for every 1-percentage point (100 basis points) higher on the negotiated interest rate, we need to pay an additional $25 million in annual interest.

This is money that would have to be "found," most likely from cutting other city services.

What is also significant in obtaining such a good rating is that the rating agencies have been under fire the last couple of years for being too lenient, some saying that it contributed to the deep recession we are still trying to get out from under. On Wall Street, Meredith Whitney, a well-respected bank analyst, has been warning of tremendous losses in the municipal bond market as municipalities get into financial trouble.

So being able to be one notch below AAA is quite advantageous when going to the bond market to negotiate the interest rate. It truly gives Honolulu a leg up and makes our bonds more desirable to the institutions, muni-bond funds and high-net-worth individuals who typically invest in these types of securities. (For those investors who reside in Hawaii, the bonds interest is tax-free, both state and federal; check with your financial consultant.)

Looking forward, if we can maintain that fiscal responsibility, it means that when the city goes to the bond market to assist in the financing of the rail project, it will be able to get favorable terms and rates.

And even though I am not a fan of rail (I have been living in Kahaluu for 30 years), it will be the single best stimulus program revitalizing our construction industry where good wages are paid, generating discretionary income and economic activity, besides increased property taxes as the value of the property around proposed rail stations rise.

The bond market is always known as the "smart market" in comparison to equity markets (New York Stock Exchange, etc). Bond values are based on objective financial facts, where equities are driven by hopes and dreams.






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