Fitch Rates Honolulu, Hawaii $483MM GO's 'AA'

Business Wire, Oct 26, 2007

SAN FRANCISCO -- Fitch rates the City and County of Honolulu, Hawaii's general obligation (GO) bonds, series 2007A, B and C 'AA'. The bond issues are:

--Approximately $260 million series 2007A;

--Approximately $100 million series 2007B;

--Approximately $177 million series 2007C.

The bonds will be sold through negotiation by UBS Securities LLC and for the series 2007A and B only Merrill Lynch & Co. on or about Nov. 14. Also, Fitch affirms the 'AA' rating on $1.8 billion in outstanding bonds. The Rating Outlook for all GO bonds is Stable.

Honolulu's credit strength rests in the sound fundamentals of its tourism-based economy, good financial operations and reserves, low debt burden, and strong fiscal management. The island's tourism base has adapted to a shift to more domestic-based visitors, while the area's role as the commercial center and state capital and a sizable military presence add stability. Tourism on the island is highly developed and has strong underpinnings, providing continual demand and industry investment. Recent very strong tax-base growth has eased financial operations and enabled reserves to increase. The low debt burden reflects the state's sizable role in financing education facilities. Credit concerns reflect rising labor costs including pensions and retiree health care and vulnerability to decline in the housing market given the recent run-up in residential prices and the declines the county experienced earlier this decade.

Honolulu is coterminous with the island of Oahu, and the island's tourism draw is based on sustainable elements such as natural beauty, diverse accommodations and activities, and proximity to sizable North American markets. Tourism activity exhibits volatility typical of the sector, surging in recent years following a long decline. Total visitors surged in 2004 and 2005, with 2005 narrowly exceeding the 2000 peak. However, the number fell about 2% in 2006 and results through August 2007 show stability. The rise follows a precipitous drop in 2001 and relative stability through 2003. Visitors from the U.S. rose faster than international, largely Asian, visitors, as has been the case in most recent years. Domestic visitors now make up about 60% of total visitors.

Other tourism indicators have been strongly positive, with hotel occupancy at 83.1% in 2006, the second highest level in over a decade. The increase is notable given the 27% rise in the average hotel room rate since the 1998 peak.

Honolulu's non-tourism economy is substantial and adds balance as the state's commercial and business center, state capitol, and home of the University of Hawaii. U.S. military also is a major economic element. Honolulu makes up 71% of Hawaii's population, about 60% of the visitors, and about one-half of the hotel rooms statewide. Employment has risen steadily, and the unemployment rate continues to be well below the national average at 2.3% in 2006.

The real estate market has returned to strong activity, but now could be vulnerable to decline. Taxable value rose 14.6% per year on average since fiscal 2002, following weakness in several prior years. Residential prices have risen considerably, resulting in well-above-average price-to-income ratios. Building permit activity has been strong, including several sizable hotel/resort/timeshare projects and other commercial development.

Financial operations are sound, relying primarily on property taxes. The general fund ran operating surpluses in five of the last six fiscal years, and unaudited results for fiscal 2007 suggest another strong surplus. The fiscal 2006 general fund balance rose to $98.6 million, a sound 11.6% of spending, about the level held prior to the economic downturn. In addition, the city maintains a reserve for fiscal stability, expected to increase to $10 million in fiscal 2007 and $17.5 million in fiscal 2008. Fitch views the current reserve levels as prudent for a tourism-based economy during a strong economic period.

Honolulu's strong financial position primarily reflects effective management response to revenue performance, with expenditure growth kept to low levels through organizational restructuring and employee reductions. Management is proactively setting aside funds for retiree health care, a program that is handled at the state level for all government employees. Honolulu will continue to be challenged by sizable increases in pension and retiree health care costs, as well as salary raises, all expenditures controlled by statewide actions, limiting the city's fiscal autonomy.

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