News Column

Fitch Rates Maui County, HI's GOs 'AA+'; Outlook Stable

June 13, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Maui County, HI (the county) general obligation bonds (GOs):

--$65.0 million GOs, series 2014.

The bonds will sell competitively on June 25. Proceeds will be used to fund various capital projects and to refund outstanding GO bonds for interest savings.

In addition, Fitch affirms the 'AA+' rating on the following bonds:

--$228.7 million outstanding GOs, series 2001B&C, 2004B, 2005A,B&C, 2006A,B&C, 2008A, 2010A (taxable), 2010B, and 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the full faith and credit of the county and an unlimited property tax levied on all taxable property within its jurisdiction.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The 'AA+' rating reflects the county's strong financial position, supported by substantial reserves, consistently balanced operations, demonstrated revenue flexibility, and prudent management practices.

STABILIZING ECONOMY REMAINS CONCENTRATED: Maui's economy has stabilized following the recent downturn but remains highly concentrated in the tourism sector, with hotels and resorts accounting for most major employers and taxpayers. Wealth levels are high and unemployment is below average.

TAX BASE TURNAROUND: Assessed values (AV) returned to growth in fiscal 2014 and 2015 following a substantial decline during the downturn, but remain well below pre-recession peaks.

MANAGEABLE LONG-TERM OBLIGATIONS: Debt levels are low due to the absence of overlapping jurisdictions and state government's responsibility for funding public education, while amortization is rapid. Liabilities for retiree benefits are mixed, with substantial pension liabilities offset by near-term plans to fully fund other post-employment benefits (OPEBs).

RATING SENSITIVITIES

STRONG FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit strengths, including the county's healthy financial position and stabilizing economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely in the near-term. Upwards rating movement is constrained by significant concentration in the county's tourism-based economy.

CREDIT PROFILE

The county serves a population of 160,000 (11% of the state total) on the islands of Maui, Molokai, and Lanai and the uninhabited island of Kahoolawe.

STRONG FINANCIAL OPERATIONS

The county's financial operations remain strong and are distinguished by high reserve levels, consistently balanced operations, and revenue flexibility. Unrestricted fund balances reached a very high 63% of general fund spending ($165 million) in fiscal 2013. Financial flexibility is further supported by dedicated reserves for emergencies, affordable housing, open space, and other post-employment benefits. Unrestricted balances across all governmental funds were equivalent to 52% of expenditures ($226 million) in 2013.

The county achieved four consecutive years of strong operating results between fiscal 2010 and 2013 and appears likely to continue this positive trend in 2014. A deficit in fiscal 2012 resulted from the planned drawdown of reserves for one-time purposes. The county's fiscal 2015 budget is balanced and reflects continued prudent planning with further additions to reserves.

Property taxes accounted for a high 82% of general fund revenues in fiscal 2013 but the county has substantial ability to adjust rates to increase revenue and offset fluctuations in AV. The county's tax structure also provides for large homeowner exemptions and differential rates depending on property type, allowing the county to minimize the tax burden on residents. While AV fell a cumulative 25% between fiscal 2010 and 2013, the property tax levy fell by just 8% during the same period as the council approved recurring tax rate hikes. An additional rate hike in fiscal 2014 was followed by a reduction for fiscal 2015, as renewed AV growth supported increased tax revenues. AV increased by 3% in fiscal 2014 and 8% in fiscal 2015 but remains 16% below the fiscal 2010 peak.

Property tax rate increases have met minimal political opposition and are not subject to legal limits, so further revenue flexibility remains good. Transient accommodation tax (TAT) provides the county's second largest source of revenue (8% of general fund revenues in 2013) but growth is limited by recent state actions to cap allocations to counties.

STABILIZING ECONOMY REMAINS CONCENTRATED

Maui's economy has been recovering well after suffering a steep decline in visitors during the economic downturn. Visitor arrivals fell by 23% between 2007 and 2009 while total visitor expenditures declined by 27%. Both visitor arrivals and expenditures have since recovered to levels near or above pre-recession peaks. Rising hotel revenues and occupancy rates similarly reflect the recovery of the county's tourism base, although employment levels remain below previous highs. Unemployment rates were below average at 4.9% as of March 2014, yet well above the historic low of 2.4% in 2006.

Wealth levels for the county are above average with median household incomes 20% above national levels. The county's wealth is also reflected in real property market values of $226,000 per capita as of fiscal 2015.

Tourism remains the chief engine of the county's economy despite increasing diversification. Approximately one-third of county employment is in the leisure and hospitality sector. Resort and time-share properties account for five of the county's top ten employers and nine of its top ten taxpayers. Fitch considers this degree of concentration a material credit weakness despite the recent strong performance of the county's economy.

MANAGEABLE LONG-TERM OBLIGATIONS

Overlapping debt levels are very low at just $1,703 per capita and 0.8% of market value, while amortization is rapid. This strong debt profile reflects the state's responsibility for public education and the absence of overlapping jurisdictions, an arrangement unique to Hawaii.

The six-year capital improvement plan (CIP) is sizeable at $1 billion and reflects the broad responsibilities of county government in Hawaii. Much of the plan focuses on water, sewer, and road projects financed through non-general fund sources. Approximately 44% of appropriations for 2015 are funded from state loans and GO bonds, with the balance from pay-go revenue sources. No further debt issuances are anticipated before 2016.

The county is a participant in the state-sponsored employee retirement system and will likely face ongoing contribution rate increases to address a low funding ratio. The state plan reported a 60% funded ratio as of 2013 assuming an investment return rate of 7.75%, while Fitch estimates the funded ratio at just 55.4% assuming 7% returns. Contribution rates are set by statute and total contributions in recent years have fallen short of amounts required to amortize actuarially-determined liabilities.

The county's reported unfunded liability for OPEBs is substantial at $344.6 million as of 2011 (1.1% of market value), but is expected to decline substantially following the planned transfer of $110 million in reserves to a state-managed irrevocable trust in 2014 and 2015. The county has regularly funded its actuarially-determined annual required contribution for such benefits since fiscal 2008, well in advance of a state requirement for full funding by fiscal 2019. Carrying costs for debt service and retiree benefits is affordable at 16% of governmental expenditures in fiscal 2013.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and Zillow.com.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834602

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Stephen Walsh, +1 415-732-7573

Director

Fitch Ratings, Inc.

650 California Street

San Francisco, CA 94108

or

Secondary Analyst

Scott Monroe, +1 415-732-5618

Director

or

Committee Chairperson

Michael Rinaldi, +1 212-908-1833

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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