Plan to balance budget raises city's debt burden

By Johnny Brannon
Advertiser Staff Writer

Mayor Jeremy Harris' plan to restructure some city bond debt would help balance next year's operating budget but increase the final cost to taxpayers by more than $46 million over the next 25 years, adding to a growing debt burden that could trigger property tax increases after he leaves office.

Harris, who plans to run for governor in November as a Democrat, has proposed borrowing new money to pay off $52.8 million in debt and interest that is due soon. But others say the city has already run up too much debt during the mayor's tenure, and that the bills have become a fast-ticking time-bomb.

"The impact on taxpayers is going to be tremendous," said City Council Budget Committee Chairwoman Ann Kobayashi. "We're on the edge of financial disaster."

The administration insists such concerns are overblown and that the city's excellent credit ratings make it clear that spending is under control.

"Restructuring our debt makes good financial sense," City Managing Director Ben Lee told the council during a marathon budget hearing Wednesday at City Hall. "It's like refinancing your house while interest rates are low."

Indeed, one of the city's bond underwriters, UBS PaineWebber, issued a statement earlier this month praising Honolulu for its creditworthiness and declaring that "any suggestion of its potential bankruptcy or insolvency is wholly unfounded and without merit."

The company also noted that additional debt restructuring, hiring restrictions, and a greater reliance on fees could be required to balance future budgets, however, and that "we expect that Honolulu will continue to take whatever steps are needed to address budget gaps."

The city's total outstanding debt as of April 1 was $1.8 billion, not including the interest that will be paid.

The Harris administration's own financial projections show that spending on debt service will skyrocket after the mayor leaves office, shooting from $153.2 million in 2003 to more than $300 million in 2008.

"These guys are crazy. I can't think of another word for it," said Lowell Kalapa, head of the independent Hawai'i Tax Foundation and a member of a city budget advisory panel. "You're going to eat the cost from somewhere, so what are you going to cut then?"

The administration has refinanced bonds before and borrowed at lower rates, which has allowed Harris to present budgets that avoided laying off workers or raising taxes and fees.

But the new borrowing has also pushed debt payments back for years and made property tax hikes very likely soon, council members say.

"All it does is mortgage the future of all of us," Councilman Gary Okino said. "It's not a matter of whether we have a problem or not. We have a major problem."

Harris' current debt plan is to refinance portions of several city bonds issued between 1992 and 1999, including $51.5 million in principal and $1.3 million in interest. Virtually all major cities issue such bonds to pay for construction projects and expensive equipment.

When Honolulu's bonds mature next year, the city will have already paid $20.1 million in interest on the $51.5 million it borrowed. But taxpayers would spend about $46.5 million on additional interest during the next 25 years under Harris' plan to roll the debt over into new debt instruments: first into tax exempt commercial paper and later into new bonds.

That means the city would ultimately pay $66.6 million in interest on the $51.5 million it originally borrowed.

"It doesn't make sense to me," Kobayashi said. "That's why we're looking at reducing spending."

City Budget Director Caroll Takahashi said that although the restructuring is more costly, payments will be spread over a longer time to adjust to Hawai'i's present economic conditions.

"We're trying to correct what happened in earlier years, when we were flooded with property tax revenue because of the Japanese bubble," she said, referring to the Asian economic boom that brought a wave of real estate investment to Hawai'i.

The city's borrowing policies had been geared toward paying off debt more aggressively than in other cities because more money was available, she said, but the approach must be more conservative now that revenues have declined.

"Hawai'i's economy has always been so different because it's had periods of ups and downs," said UBS PaineWebber analyst Frank Lauterbur. "During the Japanese bubble economy, paying off debt aggressively was a good option, and other municipalities on the Mainland didn't have that option."

Harris submitted a balanced budget to the council in March, but Kobayashi is among those who don't like the method he used to pay for city services without raising taxes. Harris proposed a $1.1 billion city budget that does not raise taxes or fees and concentrates on basic city services while restructuring debt to reduce payments now. His spending plan includes a $475.5 million construction budget for the 2002-03 fiscal year.

Harris' budget also relies on money that would be taken out of two special funds: $60 million set aside for sewer repairs and $18 million to handle garbage. The administration says using that money would simply reimburse the city's general fund for cash spent on sewers and garbage before the special funds were created.

But council members say that no matter how the move is characterized, the result will be the same: The city will have to replace the money in the future, either by raising sewer and garbage fees or by borrowing more.

O'ahu is facing an estimated $1 billion in sewer repairs over the next 20 years, with spending projected to rise from $81.4 million this year to $257.9 million in 2005. Many planned sewer upgrades are required by court orders to meet federal environmental guidelines.

The council wants to trim $19.2 million from the administration's $1.1 billion operating budget and slice about $175 million from the $475 million construction budget. To reject the debt restructuring plan would require more drastic budget cuts, so that is very unlikely, Kobayashi said.

"I wish we could cut $53 million out of the budget and pay it just to end the misery," she said. "They should have planned for this."

About $160 million included in Harris' construction budget is for projects that are required by law or court order, and council members say some spending for other projects, such as swimming pools and park improvements, should be postponed until more debt is payed off.

"We have to do things now to avoid having a big hit next year," Okino said. "There's no such thing as a free lunch. We're eating ourselves, we're eating our reserves, we're eating every resource we have in the city. Next year, the only thing we're going to have left is a tax increase."

Hundreds of residents, business people and city employees packed last week's hearing to loudly protest the proposed cuts, many of them waving signs with slogans such as "It ain't broke, don't fix it."

"The message needs to be loud and clear," Harris told a crowd of cheering supporters before the meeting began. "We have a balanced budget. It's virtually the same as last year, and we've answered all their questions."

Harris stressed that his spending plan did not seek tax hikes or require layoffs, but said nothing about the borrowing and fund transfers that it relies on, and council members say such omissions paint a distorted view of the city's finances.

Manny Menendez, director of Harris' Economic Development Office, dismissed such concerns as mere politics.

"This mayor and this administration have done a good job, and they want to discredit that," he told the crowd. "We're not going to let them."

The council itself has helped run up the city's bills by approving previous spending and debt restructuring plans. The panel added nearly $81 million to Harris' proposed $498.2 million construction budget last year, for example, making it nearly the largest ever.

Harris later declined to be interviewed about the city's debt situation and the questions council members have raised. And detailed information about the debt restructuring plan has been hard to come by.

Budget documents the administration first submitted to the council, for instance, stated only that the restructuring "will result in a debt service savings of $52.8 million," and included no explanation of the resulting costs in later years.

And charts supplied with the budget to map out debt service before and after the restructuring simply remove the $52.8 million that would be refinanced, without showing the added debt payments that would be triggered later. Takahashi later discussed the debt plan in detail and provided additional figures.

The cuts proposed by the council would require most city departments to reduce spending by 5 percent. The police and fire departments would be trimmed by 1 percent.

Police and fire officials worry that even small cuts could force the cancellation of recruit training classes and lead to serious personnel shortages, but council members vowed to make sure that would not happen.

Kalapa said the looming debt presents a more frightening scenario: Spending on debt service is scheduled to increase in a far greater proportion than spending on police and fire services in coming years.

"Public safety is the bread and butter of city spending, but it's not going to grow as fast as debt service," he said. "There's something wrong here."

The city plans to spend nearly $100 million more on public safety departments than debt service next year. But more would be spent paying off debt by 2008 than on any other budget category, according to the administration's projections.

Debt service spending would increase from $153.2 million to $301.6 million, or from 13.5 percent of the total city operating budget to 20.3 percent, with the budget itself growing from about $1.1 billion to $1.4 billion.

During the same time period, the public safety budget would grow from $251.3 million to $295.4 million, but shrink from about 22.2 percent of the total budget to 19.9 percent.

Spending on social services would increase from $63.5 million to $69.8 million, but slide from 5.6 percent of the total to 4.7 percent.

And money for highway and street repair would increase from $16.8 million to $18.5 million, but decrease from about 1.4 percent of the total to 1.2 percent.

Advertiser staff writer Robbie Dingeman contributed to this report. Reach Johnny Brannon at jbrannon@honolululadvertiser.com or 525-8070.

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