Japanese Disaster Affects Tourism in Hawaii; Moody's Cuts State's Credit Rating

May 19, 2011 — -- While known for its stunning beaches and beautiful flora, Hawaii's economy has seen sunnier days. The state's bonds were downgraded by credit agency Moody's Investors Service, though they're still at least a notch above troubled New Jersey, California and Illinois in terms of fiscal stability.

Hawaii's outstanding general obligation bonds were downgraded from Aa1 to Aa2 because of the state's "strained financial operations," the credit-rating agency said. That will make borrowing more expensive for Hawaii, which already has $5.1 billion in outstanding debt.

The Aa2 designation is one out of 10 possible ratings and two steps away from the best possible rating of AAA, but it still sheds light on an economy some say could be too closely entwined with tourism.

"It's always been a premier tourist destination – a lot of international tourism not just U.S. domestic, but this recession was so severe and hit globally and domestically so it really affected them," Nicole Johnson, senior analyst with Moody's public finance group, said.

Alan Schankel, director of fixed income research with Janney Capital Markets, said Hawaii is more reliant on tourism than most states if not all states.

"The double whammy of the Japanese quake and nuclear issues has Japanese visitors coming less and the other problem is energy prices," he said.

Schankel said increasing airlines fares also create a barrier for tourists. "You can't just jump in a car and go to Hawaii," he said.

However, Johnson, who wrote Moody's latest report and gave the state a "stable" outlook, said Hawaii will remain a "premier" tourism destination.

"Their forecast is there will be a temporary drop in Japanese tourists but they expect that to come back," she said. "It has remained very popular with west coast travelers because it's not so far, and in fact some of them have homes there."

Mike McCartney, CEO of the Hawai'i Tourism Authority, said while the recovery progress has been slowed by the tragedy in Japan, the state is doing better than projected. There was a 23.3 percent decrease in visitors from Japan in April compared to last year, not as bad as the 45 percent decrease that was expected.

For the first quarter of this year, visitor spending was up 16.9 percent compared to the same period last year, adding $3.1 billion for Hawaii's economy. The latest tally shows that the total number of visitors who arrived in March 2011 rose to 633,365 – up 4.2 percent from a year ago. The Tourism Authority has not yet released April's figures.

"Tourism continues to be in recovery mode following the economic recession," he told ABC News.

McCartney also said the tourism group is broadening its market for meetings and conventions so the state is viewed as a destination for both leisure and business travel.

Moody's last changed Hawaii's rating in May 2005, when it increased to Aa2 from Aa3. In April 2010, Moody's recalibrated every state to its global scale from a municipal scale, thereby changing Hawaii's rating to Aa1 from Aa2.

Ten other states plus the District of Columbia have the Aa2 rating: Connecticut, Louisiana, Maine, Michigan, Mississippi, Nevada, New York, Oklahoma, Rhode Island and Wisconsin.

The state with the lowest rating is Illinois, which has a rating of A1 and a negative outlook. California also has a rating of A1, but with a stable outlook. New Jersey is third-worst with an Aa3 rating.

There are 13 states with the highest possible rating of Aaa: Alaska, Delaware, Georgia, Maryland, Missouri, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Utah, Vermont, and Virginia.

Moody's reports that Hawaii's state revenues have fallen over the last several years and tourism has suffered in part by the natural disasters in Japan and higher petroleum prices.

Hawaii's Education System Suffers With its Economy

Hawaii's budget is roughly $5 billion for fiscal 2010 and its budget shortfall is just under 10 percent of revenues, according to Johnson.

While the shortfall sounds sizeable, it is not out of line with what other states are facing, Johnson said.

Spending on education has been a point of contention between the previous governor, teachers and Board of Education, which manages the country's only statewide school system.

Two years ago, the governor's office instituted 14 "furlough Fridays" to help the state's budget shortfall, thereby shortening the school year. After negotiations for this current school year, teachers now take six mandatory furlough days during professional development training time, which are not instructional days for students.

Wil Okabe, president of the Hawaii State Teachers Association, said his organization is negotiating with the Gov. Neil Abercrombie, who took office in December, regarding education spending for the next fiscal year.

"Because of the economy, the budget, all public sectors and services definitely have been affected," he said.

The state recently limited the availability of its high school driver's education classes, forcing some students to pay close to $500 for private instruction, Okabe said.

There are 180,000 students and 13,500 teachers in the state's public education system, according to Okabe.

Dr. Kanoe Naone, CEO of the Institute for Native Pacific Education and Culture, INPEACE, in Hawaii, said stripping money away from education will only lead to further budget problems. She said every $1 spent in early education leads to a cost savings of $4.20 in long term social services.

"The general public says they are for education and for kids, but when there is an economic crisis, it seems like education is the first to go. It's understandable but short sighted," she said. "Until we prioritize education or at least early education, we're going to continue to have economic difficulties."

One of Moody's major concerns about Hawaii's public fiscal situation is that Hawaii's pension funded ratio - or its ability to pay for pensions obligations - is low relative to other states, according to Johnson. The ratio was 61.5 percent as of June 30, 2010. Florida has ratio of about 87 percent and Wisconsin has a ratio close to 100 percent, which is "very good," said Johnson.

Hawaii's "other post-employment benefits" obligation is "quite sizeable" at $7.2 billion for state employees and $1.6 billion for teachers, which reflect full health benefits paid by the state, according to the report.

"For the present time, the state plans to continue funding these obligations on a pay-go basis as is the case in many other states," Moody's report states.

However, the Hawaiian government has "already taken actions" to fix their fiscal problems and will deplete their "rainy day fund" that's designated for emergencies, by the end of this year, according to Johnson.

"So it doesn't give them a lot of flexibility, and they probably won't rebuild it for a couple of years," she said. "But if revenues begin to turn around, they are projected to stabilize."