Caldwell Defends the State of Honolulu's Finances In Face of Rail Costs

Sep 23, 2019

Honolulu Mayor Kirk Caldwell sought to reassure the public on Monday that the city has enough money to cover the operational costs of the controversial rail project.

This comes after what the mayor said were media reports that he didn't identify, which have suggested the funding of rail threatens the city's financial stability. 

The Honolulu Authority for Rapid Transportation estimated that the operation and maintenance of rail will grow from $39 million, beginning at the end of fiscal year 2021 when limited service starts, to $127 million annually in fiscal year 2026 to cover full-service.

Caldwell compared that $127 million to the operation and maintenance of Honolulu’s bus transit system which he says amounts to $276 million annually.

“Nobody has come up to me, grabbed me by the shoulders, shaken me and said, ‘Mayor, we’re really worried about how you’re going to pay for [operation and maintenance] of [the] bus,’” Caldwell said. “We just raise the revenue and cover the [operation and maintenance] of TheBus.”

He points to the city's decision this year to increase property taxes for hotels, resorts and residential properties worth over $1 million not used as primary homes as proof that the city has taken the proper steps to cover the expected cost of running the rail system.

The move increased the existing hotel and resort property tax rate of $12.90 per $1,000 valuation by $1.

“This administration is putting in place revenue raising measures or sources to address the future demands of the operation and maintenance of rail,” Caldwell said. “There’s no absolute certainty ever. The best we can do is plan and then implement measures to make sure the costs are controlled and revenue is there to cover the operation of maintenance.”

The cost of the the rail system has come under heavy criticism, including from The Wall Street Journal, which in March called the project a "$9 billion debacle" for its delays and cost overruns.

Last week, the University of Hawaii’s Economic Research Organization published a pessimistic economic forecast for the state. The report pointed to softness in the tourism industry due to global events and Oahu’s crackdown on illegal vacation rentals as potential issues that may negatively impact the local economy.

Nelson Koyanagi, Honolulu Department of Budget and Fiscal Services director, said in the event a decline in the tourism industry affects the state’s economy, the city will have 18 to 24 months to adjust because its main source of revenue is real property taxes.

“Tourism slows down and the state’s revenue plummets immediately,” he said. “But for real property taxes, it’s not directly impacted. There’s a pretty substantial lag.”

Officials said the city’s contribution to the construction of the rail system is 2.3 percent; the main funding are from the state general excise tax and the Hawaii transient accommodations tax —both of which are heavily dependent on the tourism industry.

Koyanagi said if those tax revenues drop, it's possible the city would have to raise its contribution to rail construction, but the city has other funding options.

“If the city had to put in more money for rail construction, we could technically issue bonds,” he said.

He explained those bonds could be issued over a 25-year period, unlike the short-term bonds that are currently issued for the rail project and will be paid off upon the completion of the project.

“It would become a cost, but it would be spread out like a mortgage,” Koyanagi said.

Moody's Investors Service, the credit rating agency, issued a AA1 stable credit rating to the city in its latest report on general obligation bonds issued for the rail project. 

Fitch Ratings gave Hawaii a AA+ rating, a step below the highest rating of AAA. But Fitch Ratings also cited Honolulu's high expenditures for debt service and retiree benefits as an issue, especially in the event of an economic downturn.

The mayor's office pointed to the city's fiscal stability fund, which grew from $30 million in 2012 to $120.3 million in 2019 that could be tapped in the event of a natural emergency or substaintial economic hardship.

"The other name for it is the rainy day fund, so if something happens, we have the money to weather the storm," Koyanagi said.