Rail Debt Gimmick Comes Back To Bite Honolulu Taxpayers - Honolulu Civil Beat

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About the Author

Jonathan Helton

Jonathan Helton is a policy researcher at the Grassroot Institute of Hawaii.

Moody’s downgrade should serve as a warning to state and county lawmakers.

In 2012, Honolulu officials thought they could protect the county’s credit rating by not counting bond issues for the Honolulu rail in the county’s “debt affordability limit.”

But they were wrong.

In early February, Moody’s Investors Service lowered Honolulu County’s credit score from Aa1 to Aa2, citing the county’s increased debt burden due to general obligation bonds “issued for construction of the rapid transit system.”

This downgrade highlights the ongoing challenges of the beleaguered rail project and should serve as a warning to state and county lawmakers about the downsides of big spending projects.

It should also prompt the Honolulu City Council to review how it calculates its “debt affordability limit.”

This limit, established in 2006, was intended to “maintain good relations with financial and bond rating agencies” and to “preserve the credit quality” of the city, as stated in Resolution 06-222.

The limit aimed to ensure that no more than 20% of general fund revenue went toward paying debt service — the interest and principal payments the city owes on its bonds.

This limit made financial sense. If the city ever surpassed it, it would be a signal to county lawmakers and investors that something needed to change.

Rail station construction continues along the HART line and at various stations along the way including the stop along DillinghamBoulevard. But can the project be financially sustained? (David Croxford/Civil Beat/2023)

Unfortunately, the rail project got a free pass.

County bureaucrats cut rail debt from the debt-affordability equation in 2012, which seems to have been a major oversight, since rating agencies still consider that debt in their credit ratings.

Last year, the city’s managing director explained the reasoning for leaving rail debt out of the calculation.

“HART is a semi-autonomous agency with its own sources of revenues that is responsible for paying the debt service related to the rail transit project,” he said.

But just because HART is “semi” independent from the city does not mean that its debt doesn’t affect city taxpayers.

‘Negative’ Outlook

The city’s general excise tax surcharge and transient accommodation tax monies go toward paying for the rail and the debt associated with it, and rating agencies still look at HART’s debt.

But it’s not like this rating change blindsided the city — at least, it shouldn’t have.

Exempting rail debt from the debt limit “will undoubtedly affect the city’s bond rating because the bond raters relied on the limits on debt in rating the city,” former Gov. Ben Cayetano warned in 2012.

And this announcement followed two years of Moody’s giving Honolulu’s bond ratings a “negative” outlook.

It also followed more than a decade of ballooning rail spending and debt. The project is already a decade behind schedule and $7 billion over budget.

And like many big infrastructure projects, the rail has been largely funded by new debt.
In 2012, total city debt stood at $4.4 billion. In 2022, it totaled $6.85 billion, of which HART’s outstanding debt made up almost $1 billion.

For the 2024 fiscal year, HART is asking for an operating budget of $109 million, 95% of which will be used for debt service.

That’s money that could have been used to fix potholes, repair pipes, hire additional police officers and firefighters or cut taxes.

Honolulu’s situation in this regard is not unique. Any state, city or county government that takes on large amounts of debt to pay for infrastructure gambles with its credit rating and tax dollars. Once large amounts of debt pile up, city bond ratings can suffer.

Rail has been largely funded by new debt.

If a big project is over budget or behind schedule, taxpayers lose out. Bond investors still need their interest payments. The piper must be paid.

Clearly, the recent news about Honolulu’s credit downgrade should give Council members pause and should lead to a reevaluation of the city’s debt-affordability limit.

Should the rail debt still be exempt from the city’s debt-affordability limit — since it is clear that investors consider it anyway?

Would Honolulu residents be better served if the city tightened its budget and stopped borrowing as much for new infrastructure?

City leaders need to give honest answers to these questions before issuing any new debt for this boondoggle project.

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About the Author

Jonathan Helton

Jonathan Helton is a policy researcher at the Grassroot Institute of Hawaii.

Latest Comments (0)

Well, there's not much else to say that hasn't already been laid out here. But to surmise. many of us where misled, or even lied to by at least two mayors and many city and even state officials, all so that rail could not only start, but keep rolling even when it exceeded its initial $5.4B budget. We are where we are now because of that and Moody's is only doing what is right, which makes borrowing more expensive for all city projects in the future. That is another direct consequence of rail. And all of these costs and issues should be addressed by rails architect and cheerleader, now hiding as hotel tourism appointee.

wailani1961 · 7 months ago

According to the budget presentation that was given to the Honolulu City Council last month, bond debt service will be just over 25% of the city's operating budget in 2030. That's the peak year of a 10-year projection and is due to most of the projected remaining rail debt repayment.The city's portion of debt service is projected to remain pretty steady at 10%. That's down from over 12% from the period 2015 - 2025, so at least it looks like the city has been controlling its use of bonds.I wonder, however, exactly how these percentages are calculated. If I take the debt service in Bill 11 (2023), which is the operating budget for next fiscal year, debt service is about $436 million (excluding sewer bonds). The city budget is $3.411 billion. This results in debt service of about 12.8%, which doesn't match the graphs in the presentation. My guess is that one "debt service" line item includes principal and that the other also includes interest and issuance fees, but that's just a guess.It would be good to know why there is a difference and whether it makes sense.

Natalie_Iwasa · 7 months ago

Public finance isn't only done with general obligation bonds. Often, governments use revenue bonds for project finance. Revenue bonds aren't paid from general tax revenues, but from the revenues of the project to be financed such as a toll road or an MRI unit. The underwriters have to make sure that the incoming cash flow over time can pay the debt service. Our rail project was too big for revenue bonds, but without financial experts looking at it to make sure it had some viability relative to the cost, there wasn't much numerical discipline associated with it. In addition to the other problems.

Fallback25 · 7 months ago

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