By Derrick DePledge
Standard & Poor's has recognized Hawaii's attempt to contain its $16 billion unfunded liability in the Employer-Union Health Benefits Trust Fund.
The credit-rating agency found that addressing the unfunded liability and replenishing the state's hurricane relief and rainy day funds demonstrate a commitment to fiscal soundness. However, S&P expressed caution about new spending in the state budget, noting that general-fund spending is growing faster than personal income growth.
Helped by a stronger revenue outlook, Hawaii took steps on several fronts in its recently enacted budget to shore up its financial position.
Benefits from the new provisions, passed as part of the budget and as distinct statutes during the legislative session, will strengthen the state's fiscal position in both the near and longer term, in Standard & Poor's Ratings Services' view. Most notably, in our opinion, the state initiated a multiple year process of increasingly prefunding its other postemployment benefit (OPEB) liability in the form of its large retiree health care benefit. It also took advantage of an improving revenue picture to rebuild budget reserves, which it had been drawing down in recent years. And finally, with an eye to the state's finances beyond the two-year budget window, the state made permanent some temporary tax revenue enhancements that were scheduled to sunset in fiscal 2015.
Taken together, we view these actions as having favorable implications for the state's credit profile.
At the same time, however, we believe the budget also includes some new spending on program enhancements that could eventually result in fiscal pressure. In particular, general fund spending, budgeted to increase 10.9% in fiscal 2014 and a more modest 1.2% in fiscal 2015, is growing faster than the state's 4.7% average total personal income growth since 2000. Some of the growth relates to the state's new pre-kindergarten education program and some reinvestment in computer technology and accounting systems that may offerlonger term efficiencies.
For the current biennium, the state's economic climate and rising revenue trajectory help accommodate the efforts at both fiscal consolidation and program expansion. And, in our view, by rebuilding its "rainy day" reserves and beginning to confront long-term debt pressures while the economy is growing, the state is exhibiting the financial management characteristics consistent with its rating category. A key to the state's future credit trajectory likely hinges on its ability to follow through on its OPEB funding measures when revenue growth ebbs lower.
In our view, building up its budgetary reserves now helps enhance its future fiscal flexibility and better positions it to weather an economic slowdown should one occur.