Recent efforts to shore up the state’s public worker pension and health care funds are helping Hawaii distinguish itself from other states competing for the attention of investors in the crowded municipal bond market.
Hawaii’s sale of nearly $900 million of general obligation bonds last month produced an average yield lower than what states with comparable credit ratings are able to achieve, said Kalbert Young, state director of finance.
Strong investor demand for the Hawaii paper means lower yields, which translates into lower borrowing costs for the state, Young noted.
The bonds with maturities from five to 20 years had coupons ranging from 1.5 percent to 5 percent. The average interest cost to the state from the bonds is 3.69 percent.
Hawaii fared well in an environment where it has become more difficult to sell bonds because of rising interest rates, Young said. There are also more bond offerings to chose from. Municipal bond issuance is expected to reach $458 billion this year, up from $420 billion in 2012, according to the Securities Industry and Financial Markets Association.
"Hawaii has done a lot over the last three years to help shore up and improve its financial condition," Young said, referring to reforms designed to tackle the unfunded liabilities of the pension and health care funds. "Investors like that. It resonates with them," he said.
The most recent action taken by the state was the Legislature’s approval of a bill that commits the state and counties to a payment schedule to fund future public worker retiree health benefits. The Hawaii Employer-Union Health Benefits Trust Fund needs an estimated $16 billion to meet its future obligations.
The Employees’ Retirement System, the state’s largest public pension fund, is underfunded by $8.4 billion. Steps taken in the past two years by the pension plan’s trustees, Gov. Neil Abercrombie and the Legislature are projected to rectify the unfunded liability in 30 years if certain assumptions are met.
The issue of unfunded liabilities nationwide has "really become a cornerstone for investors scrutinizing credit," Young said. "A lot of states have really not done a significant amount of legwork to move the needle. Hawaii has," he said.
Both Standard and Poor’s and Moody’s Investor Service acknowledged the progress Hawaii has made when they issued their credit ratings for the bond issue. Both agencies rated the bonds three notches below AAA, which is the highest rating.
"We have previously cited the state’s large unfunded liabilities as a limiting rating factor. But now the state has turned to tackling its pension and other post employment benefit (OPEB) liabilities as well," S&P analyst Gabriel Petek wrote in a research report.
"Estimates of the state’s long-term liabilities are likely to improve only gradually. But once the improving trajectory is established, assuming the state follows through on implementing the reforms, its credit quality could strengthen prior to the charges being fully reflected in the state’s various liability ratios," according to the report.
Moody’s cited several financial and economic factors favoring Hawaii.
"The rating outlook for Hawaii is stable, reflecting expectations of continued revenue growth, healthy economic performance and continued improvement in the state’s available reserves," according to the report.
"The state’s proactive measures to improve the funded status of its retirement systems and OPEB obligations should yield positive results over the long term, although significant increases in OPEB funding could add budget challenges."
While Young welcomed Hawaii’s improving economic and fiscal health, he said the state must always keep a lookout for the next economic downturn.
"When times are good and you’re getting a lot of revenue, people want to spend a lot of money," Young said. "What we’ve been trying to preach to the Legislature, the general public and the labor unions is that you have to be more thoughtful to plan for sustainability and take long-term funding approaches."
"Under state statute we are required to have a six-year financial plan. It’s been very difficult to keep the state managed across six years because everybody is spending for one," Young said. "And as the economists are predicting, and what I see, is that the next economic cycle is going to come within six years. So we should be planning for that."
