Debt guidelines suspended to facilitate rail financing

City Managing Director Douglas Chin quietly approved a request to suspend city debt guidelines last year in a move that clears the way for the extraordinary borrowing necessary to finance the city’s $5.27 billion rail project.

Chin’s decision in October to suspend "debt affordability guidelines" adopted by the City Council was never publicly announced, and Council Budget Committee Chairwoman Ann Kobayashi said even she was never notified.

Information on the suspension surfaced in a financial assessment of the Honolulu rail project obtained by the Star-Advertiser under the U.S. Freedom of Information Act.

The report on rail finances was commissioned by the Federal Transit Administration, and compiled by consultant Porter & Associates Inc.

Chin said there was no legal requirement that Mayor Peter Carlisle’s administration notify the Council that he had suspended the debt policy, and acknowledged the administration never wrote to Council members to tell them.

However, Chin said Michael R. Hansen, director of the city Budget and Fiscal Services Department, provided the Council with budget data last March showing that borrowing for the rail project would cause the city to exceed the Council’s debt guidelines in the years ahead.

"I don’t feel like this was just buried in a bunch of graphs that we sent over to Council," Chin said. "I feel like this was shown to them."

Hansen, who functions as chief financial officer for the city, said suspension of the debt guidelines was justified because Council members had not considered a project like rail when the guidelines were adopted in 1996.

The city will borrow hundreds of millions of dollars beginning in 2013 to maintain the cash flow needed to pay contractors while the 20-mile rail line is under construction.

Borrowing will peak in 2017 and 2018. Outstanding debt for rail will total more than $1 billion at the end of both years, according to the report by Porter & Associates Inc.

However, city officials say this debt is unlike any other city borrowing. Normally, city general obligation bonds are repaid from general fund revenues, including property tax collections.

City officials say rail construction debt is different because all debt associated with the project is to be repaid by 2023 with federal funds, or with money from a half-percent general excise tax surcharge imposed on Oahu residents to help pay for rail.

That excise surcharge went into effect in 2007, and is expected to provide more than $3.154 billion. The surcharge is scheduled to expire at the end of 2022.

The debt guidelines, established by the City Council in 1996 and updated in 2006, are designed to limit the amount of money the city spends each year to repay general obligation bond debt.

The guidelines say the money spent on debt service should amount to no more than 20 percent of the city’s total annual operating budget.

The guidelines also instruct the administration to limit what the city spends to repay debt each year to no more than 20 percent of the amount the city general fund receives from property taxes and other sources.

The Council resolution that established those guidelines also states that they "may be suspended for emergency purposes or because of unusual circumstances."

Chin and Hansen said they are unaware of any other time when the debt guidelines were suspended, but Hansen argued in an Oct. 26 letter to Chin that the guidelines should be suspended now because the rail construction period qualifies as "clearly unusual circumstances."

Kobayashi said the Carlisle administration has the authority to waive the debt affordability guidelines, but that she had not been notified that they had done so.

"I didn’t realize they were doing that," she said. She said the 20 percent guideline is important because it helps limit annual growth of the operating budget so the budget doesn’t get out of hand.

The debt affordability guidelines were formulated during a formal process that included public hearings and Council discussion and debate, Kobayashi said.

"If the administration had problems with the guidelines, they should have asked us to amend it, because they certainly have that right to offer amendments to the guidelines," she said.

"That’s what we keep hearing from the administration, ‘Yes, let’s work together, we’ll be transparent, we want more transparency, etc., but if they’re going to start by waiving the guidelines and not even letting us know, that isn’t too cool," Kobayashi said.

The Porter report notes that the Council’s debt guidelines are considered by rating agencies when evaluating the city’s bond rating, but Hansen and Chin said the administration does not believe the rail debt will have any effect on the city’s AA+ and Aa1 credit ratings.

"We’ve always been clear through the financial plan, and through any accurate representation of the rail debt, that it was supposed to be paid off by the GET surcharge and by the federal funding, and we don’t see any reason for us deviating from that course," Chin said.

Former Gov. Ben Caye­tano, who opposes the rail project and is running for mayor, said in emailed comments that suspending the Council’s debt guidelines "will undoubtedly affect the city’s bond rating because the bond raters relied on the limits on debt in rating the city. Such waivers should be made only for emergencies or unusual circumstances — neither of which exist in this case."

City Council Chairman Ernie Martin did not respond to a request for comment.

The borrowing for the rail project discussed in the Porter report does not include a $450 million line of credit that Carlisle has said he plans to establish for rail.

Carlisle proposed the city-backed $450 million line of credit after the FTA insisted last year that the city demonstrate it has access to additional funding to cope with any unexpected cost increases in the project.

City officials say they have adequate contingency funding and that they do not expect to draw on the line of credit.

However, the Porter report’s review of the city’s rail financial plan last month concluded "there is no room in the cash flow to accommodate additional project cost."