The September 11th attack
S&P credit watch no deterrent to state plan
| • | State drops tax cut proposal |
By Kevin Dayton
Advertiser Capitol Bureau Chief
Gov. Ben Cayetano said he will press ahead with plans to borrow and spend $1 billion on state construction projects despite a credit watch issued yesterday for the state of Hawai'i by Standard & Poor's.
The credit watch means bonds backed by Hawai'i and some other areas — including Disneyland's home, Anaheim, Calif. — may face downgrades because of reduced tourism, the rating company said.
Fewer people are traveling since Sept. 11, when hijackers crashed jetliners into the World Trade Center and Pentagon in the worst terrorist strikes in U.S. history. Because of the downturn, municipalities that rely on tourism for tax revenue may have less to pay bondholders, Standard & Poor's said.
Despite the rating company's concerns, Cayetano said it is still an excellent time to borrow money for public works projects.
"That kind of thing never bothered me," Cayetano said of the credit watch. "We've always been able to sell our bonds, and if the bond rating goes down, we insure the bonds and we are still able to sell our bonds. We have a very, very good reputation in the bond market."
The drop in air travel marks a reversal of fortune for Hawai'i. Standard & Poor's in July raised the state's general obligation bond rating to "AA-" from "A+," citing increased tourism and an economic rebound. Moody's last year also upgraded its assessment of Hawai'i's general obligation bonds, which means the state can pay lower interest rates on the bonds because they are considered less risky for investors.
"The potential impact of steep declines in tourism is large, particularly for a state" dependent on air travel as a source of visitors, Standard & Poor's said in its statement yesterday.
But some said it is too early to make such assessments.
"We understand what they did, but we believe it was premature," said Neal Miyahira, Hawai'i's director of finance. "Nobody has any hard data. Everybody's just guessing in terms of the long-term implications of this."
Miyahira said tourism in Hawai'i looks somewhat better than it did in the bleak days immediately following the terrorist attacks. "For us the situation has improved," he said, adding that most overseas flights to and from Hawai'i have not been cut and that the number of passengers is rising. "We're not sure where we're going to normalize out."
A tourism promotion campaign being developed by state and industry officials also should help the market, Miyahira said. "We're doing what we have to do," he said.
Other analysts also said Standard & Poor's acted too quickly.
"We need to get a couple of months more down the road before we really know" how much the state's finances will be hurt by reduced air travel, said Robert MacIntosh, who runs the $18 million Eaton Vance Hawaii Municipals Fund.
As of Sept. 1 the state owed $3.55 billion in outstanding general obligation bonds, which are paid from its general treasury. The state will pay more than $406 million this year in principal and interest.
That does not include $450 million in new construction spending the Legislature authorized this year, or the additional $1 billion that Cayetano has proposed for construction projects to help offset the economic downturn since Sept. 11.
It also does not include other state borrowing for airport and highway construction activities, which are counted separately.
State legislators have said they will move cautiously on Cayetano's proposal to borrow an extra $1 billion, out of fear the borrowing might push the state debt too high.
Cayetano said the idea is to prop up the state's construction industry by borrowing and spending money now on projects the state had planned to do. That would offset cutbacks in building or renovations by private companies, he said.
Cayetano said the state has a backlog in school repair and maintenance projects, and "we will never be able to catch up unless these guys suck it up and go into the bond market now while interest rates are favorable, and make investments."
Standard & Poor's said Anaheim also is vulnerable to a slowdown at Disneyland because hotel and sales taxes account for about half the city's general fund revenue. The rating company said it might lower the "AA" rating on Anaheim's general obligation bonds.
Moody's Investors Service last week cut Walt Disney Co.'s ratings for the first time in five years, citing concern that attendance at its theme parks would dwindle.
Reduced tourism in Washington, D.C., also may take a toll on bonds sold by the Washington Convention Center Authority, Standard & Poor's said. The authority's bonds are rated "AAA" based on insurance against default. Without insurance, the rating would be "BBB," according to Standard & Poor's.
Still, some cities and states popular with travelers have enough financial cushion to weather a slump.
"I don't think you should expect every issuer that is close to water" to face a possible downgrade, said Colleen Woodell, a managing director at Standard & Poor's. "Hawai'i and Anaheim are two of the extremes."
Orlando, Fla., where Walt Disney World and other theme parks are based, has "substantial" reserves from diversified taxes, Standard & Poor's said, as does the state of Florida.
