Hawaii governor leans into bond financing in proposed budget

Hawaii Gov. Josh Green unveiled last week a proposed $19.2 billion supplemental budget and the results of an oversubscribed $750 million general obligation bond sale.

In his proposed budget, Green shifted some capital improvement spending from the general fund to bond funding, pointing to ongoing costs from the Aug. 8 Maui wildfire. Revenue expectations also dropped from the Council of Revenues May forecast.

When Green presented his proposed budget for the fiscal year that begins July 1, he estimated recovery from the disaster that burned down the town of Lahaina and killed 100 people will cost the state about $500 million, including $60 million to settle claims by survivors who lost family members. His budget includes $40 million in additional funding to prevent or fight future fires.

He still wants to move ahead with a $38 million package of tax credits for working families, although the general fund and reserves surplus that had swelled to $3.9 billion in fiscal year 2023 has fallen to $1.5 billion, according to financial data provided in an investor presentation ahead of the bond sale.

“We obviously have been heartsick over the loss on Maui, and we are going to continue to live up to that commitment completely,” Green said.

He added that he recognizes there are many other priorities across the state, and his budgetary focus will be on housing, homelessness, healthcare, and mental health services, in particular.

He proposed $890 million in GOs for capital improvement projects statewide with general fund capital improvement projects to be reauthorized as GO bonds to maintain strong reserves and keep the projects on track. Green said “repurposing state resources” in this way will ensure that general funds are available to allow continued support for statewide priorities and respond to the impacts of the Maui wildfires.

“This approach frees up valuable general funds for wildfire recovery costs while supporting the continuation of projects by providing them with a longer implementation period through bond financing,” said Director of Finance Luis P. Salaveria.

“The full costs of the recovery will unfold over time, and we are financially prepared to address those needs, but we cannot afford to stop our progress on our key priorities,” Green said. “This budget allows us to consider our important initiatives and support the recovery and resiliency of our state.”

He also renewed efforts to pass a “green fee” — a levy on visitors to deal with climate change. Green believes it would bring in $50 million annually. The plan died in the Legislature.

The Council of Revenues in September reduced expectations for fiscal year 2024 general fund revenues to $9.32 billion, or 1.3% year-over-year growth, down from 4% growth anticipated in May, according to the investor presentation. It anticipates 5.2% higher revenues in fiscal 2025, however. It maintains the outlook of 3.5% revenue growth of 3.5.% from 2026-2030. COR next meets on Jan. 8.

The $750 million in taxable GOs priced on Dec. 6 will pay for public buildings and facilities, schools, community colleges and university buildings, highways and other public improvement projects.

“My administration is deeply committed to investing in Hawaii’s future, strengthening the local economy, and prudent fiscal management,” Green said. “The success of this bond sale is a critical step forward in delivering on these promises.”

He added that the state sold bonds at an opportune time, as interest rates have decreased more than 0.75% since October.

The bonds were priced by lead manager Morgan Stanley, with BofA Securities and Citigroup as co-senior managers. Another eight co-managers rounded out the syndicate.

The bonds priced from a low yield of 4.509% for 2027 maturities to 5.418% for 2042. The 2024 to 2026 maturities priced at higher yields.

Spreads to Treasuries for the double-A rated bonds ranged from 2 basis points for the October 2024 maturity that priced to yield 5.101% to 120 bp for the 2038s that yielded 5.321%.

The bonds were oversubscribed with $2.5 billion in orders from 76 investors, according to the governor’s release. The state partially attributed the success to a robust marketing campaign that included an online investor presentation, meetings with on-island investors and a live virtual presentation to institutional investors.

Institutional investors placed $2.1 billion of the $2.5 billion orders, according to the release. The breakdown of the remaining orders was: $300 million from U.S. municipalities, $32 million from on-island retail investors, who are exempt from state taxes on the interest, and $36 million from other U.S. retail investors, and $60 million from international investors including Japan, Canada, Sweden and Norway.

The state’s bond ratings were affirmed ahead of the sale at AA-plus, Aa2 and AA from S&P Global Ratings, Moody’s Investors Service and Fitch Ratings, respectively. Stable outlooks from all three were retained.

The agencies cited the state’s strong financial position, prudent fiscal planning and oversight and long-standing commitment to reducing pension and other-post employment benefit liabilities.

S&P cited Hawaii’s proactive financial management and oversight for the affirmation of the AA-plus rating. S&P analysts added that the rating “incorporates our view of its demonstrated commitment to sustainable adjustments to close budgetary gaps and the state’s use of comprehensive long-term forecasting to align its finances with evolving economic conditions and manage its elevated long-term liabilities.”

While the state’s economy has experienced some pressure from pandemic-related contraction in its leisure and hospitality sector as well as from the wildfires, the long-term rating is supported by recent recovery in domestic and international tourism activity and visitor spending, S&P analysts said.

“We expect Hawaii’s economy to remain on an improving trajectory, supporting its ability to maintain structural budget performance and build on already very strong reserve and liquidity levels,” S&P analysts wrote.

S&P added, however, that it continues to monitor the effect on the state’s finances and economy from the Lahaina fire. Current capital exposure is estimated by S&P at $5.5 billion, with insured losses of roughly $3.2 billion.

“We view the timing and magnitude of federal emergency aid and the state’s redirection of appropriations to its major disaster fund as critical pieces to facilitate reimbursements to residents and assist infrastructure rebuilding and economic recovery efforts,” S&P analysts wrote.

The University of Hawaii Economic Research Organization estimates that nearly 7,000 individuals were displaced and 10,000 jobs were lost in Maui County as a result of the fires, according to the S&P report. UHERO also forecasted that the wildfires could dampen Hawaii’s gross state product by 0.5% for both calendar years 2023 and 2024.

“We believe the state remains well-positioned to respond to short-to-medium-term effects of the wildfires and softening economic growth expectations, given its strong financial footing at the conclusions of the fiscal 2023-2023 biennium,” S&P analysts wrote. “On a budgetary basis, the state ended fiscal 2023 with a $360 million general fund surplus (net of one-time contributions to the state’s emergency and budget reserve fund and a deposit to the state’s pension accumulation fund.”

The state’s general excise tax collections, which are its largest revenue source, outperformed the previous fiscal year by $432.7 million, or 10.8%, according to the S&P report.

S&P also cited the state’s investments in housing, healthcare, education and infrastructure, and efforts to bolster the rainy day fund for the AA-plus rating.