The following commentary was originally published in Honolulu Civil Beat on Friday, April 7, 2023.
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.
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.
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.
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.
Jonathan Helton is a policy researcher at the Grassroot Institute of Hawaii.