HomeMy WebLinkAboutCOM 0037.007 2002-2004To: James Arakaki, Council Chair
Via: Constance Kirin, Legislative Auditor �{
From: Rodney Oshiro, Legislative Assistan G�6 ,-
Donald Ikeda, Legislative Assistant
Date: December 27, 2002
Subject: An Analysis of Indebtedness
You asked that we conduct an analysis of the County's bond indebtedness including an
additional debt of $21,000,000. The purpose of the additional debt is to fund the
following projects:
Project Name/Cost
Ke Ala O Keauhou (Ali`i Partway)
ADA Curb Cuts
ADA Parks Facilities Renovation
West Hawaii Civic Center-Design/Construction
Fire -Land Acquisition/Renovation
Puna County Complex
Police Communication Facility (Radio Shop)
Insurance Costs
Total
Amount
$ 9,000,000
2,900,000
1,600,000
2,000,000
2,500,000
1,250,000
750,000
l .000 ,000
$21,000,000
The administration's debt service projection provides for the issuance of a General
Obligation (G.O.) Bond of $21,000,000 at a projected interest rate of 51ro for a twenty-
year period. The schedule of payments will begin with interest only of $1,050,000 for the
first two -years and principal and interest payments of$1,796,471, thereafter.
This analysis does not judge the importance, priority or benefits that might outweigh the
additional debt. It contains an overview of the County's current debt from FY1992
through FY2002 and the possible impact of the new debt for FY2003 and FY2004.
Debt Overview of the County of Hawaii
The Constitution of the State limits the funded debt outstanding and unpaid at any time
for the counties at 15% of the total assessed values for tax rate.purposes of real property
as determined by the last tax assessment rolls. The county charter and code are silent on
this issue. Currently, the county is well below the constitutional limit at 1.6% of the total
real property assessed values for FY2002. Table A, Computation of Legal Debt dated
June 30, 2002 reflects the total amount of debt applicable to the debt limit. Comm. No
File No.
1 RelBAfed
Ref. Date .JAN 2 2 2003
TABLE A
COUNTY OF HAWAII
Computation of Legal Debt Margin
June 30, 2002
Total assessed value
Limitation as set by the Constitution of
the State of Hawaii (A)
Amount of debt applicable to debt limit: (B)
Less.
County general obligation bonds $ t55,939,400
State Revolving Fetid loans 32,999,781
Otherdebt 1,101,772
190,040,953
Bonds maturing in current fiscal year 9,847,800
SRF loan principal maturing in current fiscal year 2,087,896
Bonds reimbursable by DWS 16,794,600
28.730.296
Total amount of debt applicable to debt limit
Legal debt margin
$1 1,07 1326,052
1,660,698,908
161,3 10,657
$1,499,388,251
(A) The bonded debt limitation of the County of Hawaii is established at 15% of the
total assessed value of all county real property as established for lax purposes on the
last tax assessment rolls.
(B) The Constitution of the State of Hawaii, as amended in 1978, states that the debt
limitation is not applicable to indebtedness incurred under revenue bond statutes;
or by a public enterprise when the only security for such indebtedness is the
revenues of such enterprise: or of indebtedness incurred under special
unprovemeni statutes when the security for such indebtedness is the properties
benefited or improved or the assessments thereon; or, under certain conditions,
to certain types of general obligation bonds issued by the County or State of Hawaii.
2
Debt increased by $71,036,750 (79%) from $90,273,907 in FY 1992 to $161,310,657 in
FY2002. The County's G.O. Bonds outstanding as of June 30, 2002 are as follows:
Bond Year
1977 A
1989A (Less DWS)
1993A (Less DWS)
1996A
1996B
1997A
1999A
1999B Ref
2001A (Less DWS)
2001P1
"Total
Amount Outstanding $
24 t,000
450,000
50,7 t 0,000
25,340,000
619,000
3,324,500
30,000,000
12,410,000
15,000,000
_75.000
138, t69,500
Add: State Revolving Fund Loans and others 23,141,157
(Less principal reductions)
Total applicable to debt limit 161,310.657
A Schedule of Indebtedness attached (Table B) reflects the County's historic trend of
increases and possible projections including essential indicators like the ratio of debt
service, ratio of net bonded debt and the debt per capita. When these ratios are examined
over a period of time and compared to other similar entities, it will reflect the magnitude
of change and differences. Debt service ratiu compares debt service expense as a
percentage of total operating expenses. The ratio of net bonded debt compares the
burden of debt to total real property assessed value. Debt per capita computes a dollar
value borne by the population.
Debt service ratio increased from 8% in FYI 992 to 10.6% in FY2002, while debt per
capita increased from $688 in FY 1992 to $1,061 in FY2002 due to debt service expense
and gross bonded debt increasing faster than total expenditures and the population. The
ratio of net bonded debt increased slightly from 1.2% in FY 1992 to 1.5% in FY2002 as
gross bonded debt grew faster than the net assessed real property values.
"fable C, Essential Ratios 1992-2002 of the County, illustrates the historical increase in
debt from FYI 992 through FY2002.
A comparison of FY200 t of the other counties with available information is reflected
below for the states of Hawaii, Washington and Oregon. Out-of-state counties have
additional information for comparison. The emphasis for comparison should be made
with the neighboring counties in the state, as the services provided are similar.
3
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Fiscal Gross Bond
Year Debt
1992 $ 90,273,907
1993 $ 112,581,138
1994 $ 108,388,377
1995 $ 106,255,790
1996 $ 136,062,774
1997 $ 141,144,771
1998 $ 133,641,322
1999 $ 129,633,204
2000 $ 162,716,490
2001 $ 156,636,220
2002 $ 161,310,657
Fiscal Ratio of Debt
Year Service %
Debt per Capita
1992
8.0
1993
8 1
1994
8.4
1995
8.3
1996
8.1
1997
8.9
1998
8.9
1999
97
2000
10 5
2001
10.4
2002
10.6
Fiscal
Year
Debt per Capita
1992
$
688
1993
$
839
1994
$
795
1995
$
767
1996
$
974
1997
$
995
1998
$
934
1999
$
910
2000
$
1,094
2001
$
1,030
2002
$
1,061
TABLE C
COUNTY OF HAWAI'I
ESSENTIAL RATIOS FY1992-FY2002
DECEMBER 14, 2002
$180,000,000
$160,000,000
$140,000,000
$120,000,000
$100,000,000
0
EE $80,000,000
$60,900,000
$40,000,000
$20,000,000
120
100
m
8.0
rn
m 60
v
a
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2.0
$1,200
$1,000
$800
c
'o $600
E
a
$100
$200
$
Gross Bond Debt
I I I
n1Zn�,
992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
)92 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
5
^°
IleN°���
�°00�
�
^p0� ^CO,
�°C�
�(�0
Year
��1
y�OL
Ratio
of Debt
Service
992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
)92 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
5
Comparison with Other Counties for FY2001
—moo I
DEBT $
DEBT
DEBT TO TOTAL
DEBT
1VIOCiD-
SERVICE TO
REAL
PER
BOND
TOTAL
PROPERTY
CAPITA
RATING
EXPENSES%
ASSESSED
VALUE(NET
BONDED DEBT)
_
_
Hatvai`i
_ 156,636,220
__
A2
Honolulu
-------1-16-----
1,103,05? 000
16.0
-
1.6
_1,030
1,259
Aae
Maui
_ 229,702,325
-
— --
t,791
——
Aa3
Kauai
55,333,475
6.3
_1.52
0
__
946
156
AI
AI
hmsion,
32,502,655
2.44
352
WA
King,WA-
495,L1?957
6.59
.0024
253
A��
.lackson,
OR '
141,625,908
4.4
.36
199
At
r rwrswn �-Uumy, wasmngton rias a population of Z1U,000, a total assessed real property
value of $13,037,972,080, a gross bonded debt of $32,802,655 and total general
expenditures of $121,079,512.
King County, Washington has a population of 1,758,300, a total assessed real property
of $210,996,600,903, a gross bonded debt of $498,112,957 and total general expenditures
of $ L 1 1 1,414, 356.
'Jackson County, Oregon has a population of 182,200, a total assessed real property value
of $9,937,604,000, a gross bonded debt of $16,260,000 and total general expenditures of
$100,131,206.
Moody's Investors Services is one of three major rating agencies that provide an
assessment of credit quality. The long-tenn debt of the highest quality is designated Aaa,
very high quality is designated Aa, and high or strong quality is designated A. Moody's
also applies a numerical modifier (1,2 or 3) in each rating classification from Aa through
Caa. The modifier I indicates that the obligation ranks in the higher end of its rating
category, while the modifier 3 indicates a lower end rating. A higher Moody's rating
indicates a higher quality investment and a lower rate of interest charged to the bond
issue. Rating agencies evaluate bond issues based on the economy, debt, financial and
governmental factors. Moody's rating of the County of Hawaii is an A2, which is a high
or strong quality investment category, however, it is lower than the other counties listed
above
Theessential debt ratios of the four counties in the State of Hawaii are shown in
Table D. Our debt service to total real property assessed value is the highest in the state
along with the City and County of Honolulu, while the ratio of debt service and debt per
capita are below the average of the state (average for debt service and debt per capita are
1 1% and $1,257, respectively).
6
County FY2001
Hawaii $ 156,636,220
Honolulu $ 1,103,082,000
Maui $ 229,702,325
Kauai $ 55,333,475
TABLE D
COMPARISON OF COUNTIES
DECEMBER 14, 2002
$1200,000,000
$1 om 000,000
$800,.00.000
E$600,000,000
n1n) OW WO
$200.0W,000
S-
County FY2001
Hunolulu
20
Hawaii
10.4
Debt Service Ratio
II
1.s
Honolulu
Honolulu
16.0
MIS
Maui
11.6
m 70
Kauai
6.3
0
I
1LL1
a 5
1.0
a
o.s
0
lawai
Hunolulu
W..
K.iva
Hawaii
Debt Service Ratio
II
1.s
County
FY2001
$2.000
Hawaii
$
II
1.s
Honolulu
$
1,259
$1500
Maui
$
1,791
12
Kauai
�
I
1LL1
Kauai
County
FY2001
$2.000
Hawaii
$
1,030
1.s
Honolulu
$
1,259
$1500
Maui
$
1,791
12
Kauai
$
946
o $1.000
Kauai
1.0
a
o.s
a
$500
0.2
County
2001
1.8
1.s
Hawaii
1.6
1A
Honolulu
1.6
m
12
Maui
1.5
100.8
Kauai
1.0
a
o.s
0A
0.2
0.0
lawai i Honolulu Maui Kaua-i
Debt per Capita
awai'i Honolulu Maul Kaua
Debt to Total Real Property Assessed Value
awai'i Honolulu Maui Kauai
7
Impact of New Debt
The County of Hawaii proposed outstanding debt for FY2003 would increase debt by
$9,0707900 (5.6%) to $170,381,557.
Total Debt (Jane 30, 20o'.)
—� —
-----
$ 6 t ,3 I QGi7
Add. Proposed Debt
�— - $21,544,042
------ 21,00,000
Less: Principal Reduction hom FY2003 Budget
]--t,9-19---- -
'100
_
Cuta1 d DFRY-1—
Proposeebt FY2170,381
__
557
The debt service expense projected below considers additional cost to FY2003 Budget of
both principal and interest expense versus interest only expense, which would increase
debt service expense of $1,546,471 (7.2%) and $800,000 (3.7°'f respectively. In
addition, the FY2003 Operating Budget Ordinance Number 02-76 provides for an
increase of debt service expenses for FY -2004 with a projection of $2'_,639,748 (an
increase of $1,095,709 or 5.1 °b over FY2003 appropriation that includes interest expense
for $10,000,000 G.O. Bond). FY2004 projections include a revenue increase of
$8,704,077 (4.1 %) to $214,091,248. The $21,000,000 G.O. Bond payment schedule will
begin with interest payments in FY2004, white interest and principal reduction payments
is projected to commence in FY2006. AC that time, the administration will take into
account the principal reduction payment in the budget projections.
Annualdebtservice
FY2003 Projected
Budget (increase of
prmcipul and interest
payment)
FY2003 Pio_iecied
Budget (increase of
interest only)
--- $21,544,042
FY2003 Budget Ord.
No. 0-'-6, FYM-t
projections
— $2',619,748
�— - $21,544,042
payments
Add: Proposed deb[
(,796 d71
payment based on the
poncipal and interest
Payment
Add_ Proposed debt
-250,000
1,050,000
5)0,000
payment based on
less: Prolecued
-250,000
Add: Interest cos[ not
interest only
additional interest cost
Less. Projected interest
piolected.
cost
Annual projected debt
$23,090,513
$22,344,642
$29,189,74
service expense
The projected debt service ratio will increase slightly f om 10.5°o to FY2003 to IQS"'%o in
FY2004. Debt to total ussessed real property value will be stable in FY200 and then
decrease slightly due to the declining debt (debt reduction expense) and assumed stable
total real property assessed value. Debt per capita is projected to increase slightly in
FZ"2003, then decrease to FY2004 based on 2001 U.S. Census estimated population
being stable and declining debt (debt reduction expense) for FY2004.
8
Lack of a Debt Policy
The County of Hawat'i lacks a debt policy, which should at least consider the following:
1. Acceptable levels of both short-term and long-term debt,
_'. purpose for which debt will be issued,
3. Use of rax -supported, general obligation bonds versus self-supporting, revenue bonds,
4. 1l'lix of pay-as-you-N;o and debt financing,
S_ Debt maturity_ . and
6. Preservation of the credit worthiness of the counry and desire of the highest possible
bond stint;.
A review of the debt policies of severtl counties and the State of llawai'i that includes
quantitative measures are as follows.
blunlcrpuliry or ware D1.ax. Debi Service Ratio ax. Debt ro Assessed Max Debr per Capjro $
o -
u
ltl�nohilu -- ---- )0,
sraie of Hawaii 18.
ChurhilL NV — ---- — lU
1 akima. w-1
sedKwid.,hS� — ----
Summary
Real prmerty Value %
15
— -- ----- -- -
25 Soo
1.0
5.
Do[ ing the FY2003 Budget process, the mayor proposed an increase in real property raa
rind a status quo budder rn government services_ However, increased debt ",III always
add additionat st ain to government expenditures. It takes away revenues, which may be
used for other county services- In order to stay even with FY2002 (10.6% debt service
nitio) and based on the projected principal and interest payment of $1,796,471 for the
S_' 1,000,000 additional debr, revenues should increase by $16,947,839 or a $1,796,4'I
reduction in expense is needed. (1.00 / 10.6°-0 = $9.43 and '61,796,471 x $9.43
$1 o,947,839) lnrerest only payments as provided for first two -years of rhe bond will
require less. Another alternative is to refund old debt so that the monthly payments stay
the same. This would entail extending debt longer for the refunding debt_ Revenues arrd
e.rpentditures must increase or decrease correspontdingfp or debt service expenses will
continue to increase its portion of the expemfirio e pie.
Large capital improv; enaeot projects rust be properly administered and must benetlr [lieconununitV, The County dors nor have the available cash or revenue resources to pay-as-
you-go. The capacity of debt repayment relle5 on [lie County's resources (revenuesl.
9
Nevertheless, a moratorium or restriction of debt would stifle borrowings at the current
favorable rates and would delay much needed capital improvements that would improve
the quality of life for residents of the County.
Debt service expense could probably increase to 12.0% or 15.0% based on other counties
debt policies, provided revenues continue to increase. Debt could possibly increase
$10,000,000 per year due to the annual reduction of debt, however debt structure will be
important as the increase in debt may increase debt service expense. Some counties will
compute debt service expense to General Fund expense instead of total expenditures and
have a proviso that it does not exceed 101o. The County exceeds this proviso for FY2001
and FY2002 at 13.5% and 13.3%, respectively. Net Bonded Debt or debt to total real
property assessed value is the highest in the state along with the City and County of
Honolulu based on FY2001, but still below the statute limit.
The administration's FY2003 Budget Ordinance Number 02-76 torecasts increased
revenues and the expenses may be re -arranged to take care of the projected additional
debt service expense. The revenue increase combined with a decrease of certain
expenses may provide a satisfactory operational budget for FY2004 and beyond.
This analysis reviewed the existing debt position and projects possible impacts of the
debt increase. Increased debt is possible, however a corresponding increase in revenues
and total real property assessed values or a decrease of expenses are required. The
Council must consider the following in its review:
I . The purpose of the bond issue, the priority of the projects when examining their
overall benefits to the community.
2. Review the revenue forecast of Ordinance 02-76 FY2003 Budget and a possible
update of the projection for FY2004.
3. Assurance from the administration that the County is of sound financial status and
that the increased debt will not reduce its credit worthiness.
4. Possible reduction of the borrowed amount to satisfy those important projects that
will be completed within the next three -years, thus minimizing the affect of the
increased debt position.
5. The consistency of proposed projects with the General Plan,
6. Fot7nulating a debt policy for the County of Hawaii.
10