State of Hawai i General Obligation Bonds of 2018 $775,000,000* - - PowerPoint PPT Presentation

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State of Hawai i General Obligation Bonds of 2018 $775,000,000* Investor Presentation January 23, 2018 *Preliminary, subject to change Disclaimer This electronic Investor Presentation you are about to view is provided as of January 23,

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State of Hawai‘i

General Obligation Bonds of 2018

$775,000,000* Investor Presentation January 23, 2018

*Preliminary, subject to change

SLIDE 2

Disclaimer

This electronic Investor Presentation you are about to view is provided as of January 23, 2018 for a proposed offering by the State of Hawai‘i (the “State”) of its General Obligation Bonds of 2018 (“the Bonds”). If you are viewing this presentation after January 23, 2018, there may have been events that occurred subsequent to such date that would have a material adverse effect on the financial information that is presented herein, and neither the State, nor Bank of America Merrill Lynch as Representative of the Underwriters, has undertaken any obligation to update this electronic presentation. All market prices, financial presentation prices, data and other information provided herein are not warranted as to completeness or accuracy and are subject to change without notice. This Investor Presentation is provided for your information and convenience only. Any investment decisions regarding the Bonds should only be made after a careful review of the complete Preliminary Official Statement. By accessing this presentation, you agree not to duplicate, copy, download, screen capture, electronically store or record this Investor Presentation, nor to produce, publish or distribute this Investor Presentation in any form whatsoever. This Investor Presentation does not constitute a recommendation or an offer or solicitation for the purchase or sale of any security or other financial instrument, including the Bonds, or to adopt any investment strategy. Any offer or solicitation with respect to the Bonds will be made solely by means of the Preliminary Official Statement and Official Statement, which describe the actual terms of such Bonds. In no event shall the Underwriters or the State be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction mentioned herein. Neither the State nor the Underwriters make any representations as to the legal, tax, credit or accounting treatment of any transactions mentioned herein, or any other effects such transactions may have on you and your affiliates or any other parties to such transactions and their respective affiliates. You should consult with your own advisors as to such matters and the consequences of the purchase and ownership of the Bonds. Nothing in these materials constitutes a commitment by the State, Underwriters or any of their affiliates to enter into any transaction. No assurance can be given that any transaction mentioned herein could in fact be executed. Past performance is not indicative of future returns, which will vary. Transactions involving the Bonds may not be suitable for all investors. You should consult with your own advisors as to the suitability of the Bonds for your particular circumstances. Clients should contact their salesperson at, and execute transactions through, an entity of the Underwriters or other syndicate member entity qualified in their home jurisdiction unless governing law permits otherwise.

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Transaction Summary

Issuer: State of Hawai‘i Offering: General Obligation Bonds of 2018 Estimated Par Amount: $775,000,000*, consisting of the Series FT, FU and FV Bonds Financing Structure: All Fixed Rate Serial Bonds* Series FT ($647,920,000): January 1, 2022-2038 Series FU ($50,000,000): January 1, 2019-2021 Series FV ($77,080,000): March 1, 2018 Tax Status: Series FT: Federal and State Tax-Exempt Series FU & FV: Federally Taxable and State Tax-Exempt Security: Full Faith and Credit of the State of Hawai‘i Call Provisions: To Be Determined Ratings: S&P: AA+ (Stable) Moody’s: Aa1 (Stable) Fitch: AA (Positive) Use of Proceeds: New money bonds Senior Manager: Bank of America Merrill Lynch Co-Senior Managers: Goldman Sachs & Co. LLC, Morgan Stanley Co-Managers: Barclays Capital, Citigroup Global Markets Inc. Pricing: Retail Order Period: January 29, 2018* Institutional Order Period: January 30, 2018* Closing: February 14, 2018*

* Preliminary, subject to change

SLIDE 4

Developments Since Last Bond Sale

General Obligation Bonds of 2017 (May 2017) General Obligation Bonds of 2018 (January 2018) Economy Unemployment Rate 2.7% (Feb.) 1.7% (Dec.) Visitor Arrivals +3.3% (Feb.) +4.7% (July) & +4.9% (through Nov.) Visitor Expenditures +9.0% (Feb.) +8.9% (July) & +6.6% (through Nov.) Pension & OPEB ERS Investment Returns

0.78% (FY2016)

+13.90% (FY2017) Actuarial Value of Assets ~$15 billion (FY2016) ~$16 billion (FY2017) Pension Funded Ratio 54.7% (FY2016) 54.9% (FY2017) Increased Contributions Legislation Proposed Act 17 Effective on July 1, 2017 Maui Hospital Resolution Legislation Proposed Act 18 Effective on July 1, 2017 OPEB Fund Balance $481 million (FY2016) $880 million (FY2017) Reserves EBRF Balance $100.9 million (FY2016) $311.3 million (FY2017) HHRF Balance $186.9 million (FY2016) $182.2 million (FY2017) Council on Revenues Projections FY 2017 2.5% Projected 2.0% Actual FY 2018 4.0% Projected 4.5% Projected FY 2019 4.0% Projected 4.3% Projected FY 2020 to FY 2024 4.5% Projected each year 4.0% Projected each year

SLIDE 5

Vibrant and Diversified Economy

(1) Not seasonally adjusted Source: State of Hawai‘i, Department of Labor and Industrial Relations, U.S. Bureau of Economic Analysis (Military Jobs).

Diversified Hawai‘i Employment Base First Ten Months of CY 2017



Hawai’i had the lowest state unemployment rate in December of 1.7%1



Hawai‘i’s labor force, employment and job count reached record levels in 2016 and has remained at record levels for 2017



Wage and salary job count grew 1.4% in 2016 and is projected to grow 1.0% in 2017



The State's economy continues to diversify (see chart to the right) with growth in Private Health Care and Professional and Business Services

―

Tourism now accounts for only 17% of State GDP, compared to 33% in 1988



Government jobs have consistently represented 20% – 22% of jobs since 1990



Hawai‘i military payroll jobs have remained consistent over the past 15 years despite changes in federal administrations

Trade, Transportation & Utilities Leisure & Hospitality Professional & Business Services Federal military

incl. DOD

civilians Federal Civilian Non-DOD Private Health Care State Government Local Government Natural Resources, Mining, Construction Financial Activities Private Education Manufacturing Information Other Services 17% 17% 12% 10% 2% 10% 10% 3% 5% 4% 2% 2% 1% 4%

SLIDE 6

Labor Market Update

Median Household Income (CY 2008 to 2016)

Source: U.S. Census Bureau , Bureau of Labor Statistics. (1) Not seasonally adjusted, as of December 2017

Historical Unemployment Rates (CY 2008 to Present)

Current (1) United States 3.9% Hawai‘i 1.7% Honolulu 1.7% 0% 2% 4% 6% 8% 10% 12% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Honolulu State of Hawai'i United States

$70,951 $67,744 $68,537 $66,146 $71,404 $73,388 $74,634 $77,273 $80,513 $67,214 $64,098 $63,030 $61,821 $66,259 $68,020 $69,592 $73,486 $74,511 $52,029 $50,221 $50,046 $50,502 $51,371 $52,250 $53,657 $55,775 $57,617

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 Honolulu State of Hawai‘i United States

SLIDE 7

$12,180 $14,365 $14,521 $14,973 $15,111 $15,911 $16,979 $17,639 $18,272 $18,921 $0 $5,000 $10,000 $15,000 $20,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 7.3 8.0 8.2 8.3 8.7 8.9 9.3 9.6 9.7 9.8 0.0 2.0 4.0 6.0 8.0 10.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Tourism and Economic Outlook

Calendar Year

Visitor Arrivals (mm)(1) Visitor Expenditures ($mm)(1)

Source: DBEDT, Smith Travel Research, Hospitality Advisors LLC. (1) 2017- 2020 data is projected.

Calendar Year 35% 55%

 Visitor arrivals and expenditures continue to be

strong, with both increasing in 2017 — For the first 11 months of 2017, visitor arrivals were up 4.9% and expenditures were up 6.6%

 In terms of major market areas, in the first

three quarters of 2017, arrivals from the U.S. West, U.S. East and Japan were up 4.4%, 5.7% and 6.7%, respectively from the same period of the previous year

 The statewide hotel occupancy rate averaged

81.3% in the third quarter of 2017, 0.8% higher than the same period in 2016

 Hawaii’s economy is expected to continue on

its expansion path with growth projected through 2020

SLIDE 8

 The ERS Board proactively adopted more

conservative actuarial assumptions

―Reduced the discount rate from 7.65% in

FY 2015 to 7.00% for FY 2016 and beyond ($2 billion impact on UAAL)

―Revised mortality expectations ($1 billion

impact on UAAL)

 Higher than expected payroll growth for both

employee groups had a $300 million adverse impact on the UAAL in FY 2016

 FY 2017 valuation was positively impacted by

13.9% investment returns

―Continued positive investment returns and

increased contributions helped increase total assets to $16.3 billion as of September 2017

Pension System Overview and Update

ERS Total Valuation Summary ($mm)1

FY 2015 FY 2016 FY 2017 Total Assets Market Value $14,505 $14,070 $15,698 Actuarial Value $14,464 $14,999 $15,721 Actuarial Accrued Liability $23,238 $27,439 $28,649 Unfunded AAL $8,775 $12,440 $12,928 Funded Ratio Market Value 62.4% 51.3% 54.8% Actuarial Value 62.2% 54.7% 54.9% Funding Period (Years) 26 66(2) 26 Active Members 67,310 67,377 65,911 Retired & Beneficiaries 44,283 45,506 46,927 Employer Contribution Rate 17.89% 17.91% 19.16% Employer Contributions $718 $757 $817

Source: Gabriel Roeder Smith & Co. Note: Projections assume constant active membership and that all assumptions are exactly met including a 7.0% return on market value of assets. (1) Data shown are ERS totals for all employers; based on the most recent available GASB 67 and 68 valuation report, for June 30, 2016, the State’s proportionate share of the ERS Net Pension Liability was approximately 56.6%. (2) Does not reflect the impact of increased contribution rates adopted by Legislature on May 2, 2017; these rates reduce the projected funding period to 30 years.

SLIDE 9

Pension Reforms and Projections



Reduced benefit costs for new employees and higher contribution rates will accelerate the expected amortization of the unfunded liability



To meet the commitment that ERS achieve full funding within a 30-year horizon, the State enacted legislation to phase-in higher system wide employer contribution rates in steps through FY 2021

―Employer contribution rates to increase in four annual steps from 25% to 41% for public safety and 17% to 24% for

general employees

―Increased contribution rates will result in approximately $15 billion of expected savings over the funding period $(5) $0 $5 $10 $15 $20 $25 $30 $35

2017 2021 2025 2029 2033 2037 2041 2045

($ in billions)

UAAL(1)

30% 40% 50% 60% 70% 80% 90% 100% 110%

2017 2021 2025 2029 2033 2037 2041 2045 Fiscal Year

% of UAAL Amortized(1)

Valuation Based on Increased Contribution Rates Valuation Based on Assumptions as of 6/30/2017

Fiscal Year

(1) Preliminary 2017 Valuation Report. Projections assume constant active membership and that all assumptions are exactly met including a 7.0% return on market value of assets.

SLIDE 10

OPEB Funding Actions

Hawai‘i OPEB Contributions ($mm) (FY 2014 – 2019)

Adopted in FY 2013, Act 268, SLH 2013 requires phase-in of contributions beginning in FY 2015 to fund the full ARC by FY 2019

(1) Actual. (2) Minimum projected. (3) Fiscal years 2014, 2015, 2016, and 2017 are actual, 2018 and 2019 are projected and included in the State’s General Fund Financial Plan.



The State’s OPEB prefunding contributions have totaled nearly $800 million, $323 million above statutory requirements through FY 2017

$0 $83 $164 $230 $297 $424 $100 $117 $250 $333 $297 $424 55% 59% 79% 93% 85% 100% 0% 20% 40% 60% 80% 100% $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Prefunding Requirements Total Prefunding Contributions % ARC 2014(1) 2015(1) 2016(1) 2017(1) 2018(2) 2019(2)

SLIDE 11

State Revenues and Council on Revenues Update

General Fund Tax Revenue Collections & Projections ($mm)

ACTUAL PROJECTED



The General Excise Tax (GET) and Individual Income Tax comprise

ver 86% of the State’s annual General Fund tax revenues



Quarterly forecasts by the independent Council on Revenues support intra-year adjustments and long-term planning



In January 2018, the Council made the following updates:

‒

Increased growth projection for FY 2018 from 4.3% to 4.5%

‒

Maintained forecast of 4.3% for FY 2019 and 4.0% for FY 2020-2024



Tax collections for the first six months of FY 2018 were up 5.6%

$4,426 $4,590 $4,640 $4,202 $4,364 $4,324 $4,973 $5,468 $5,371 $5,735 $6,194 $6,315 $6,599 $6,883 $7,159 $7,445 $7,743 $8,052 $8,374

$3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500 $8,000 $8,500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Fiscal Year

State General Fund Tax Revenue Composition (FY 2017)

General Excise & Use Individual Income Tax Trans. Accomm. Tax/Time Share Occup. Tax Insurance Premiums Public Service Co. Other 51% 35% 5% 3% 2% 5%

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General Fund Financial Plan



The General Fund Financial Plan is updated regularly in response to the independent Council on Revenues' quarterly revenue forecasts, expense projections and actual revenue collections



Financial Plan includes the following assumptions:

―

COR revenue projections as of January 2018

―

Proposed new taxes per annum on individual vacation rental units

―

Increased pension contributions to amortize UAAL within 30 years

―

Increased OPEB contributions per the 2017 valuation report

―

Collective bargaining contracts for the FB 2017-19 biennium

Updated General Fund Financial Plan ($mm)

Sources: Department of Accounting and General Services; Department of Budget and Finance, January 2018. Note: Reflects Act 49, SLH 2017. Due to rounding, details may not add to totals. Executive Branch’s FY 2018-19 expenditures include the FY 2017-19 Executive Budget as amended by the Governor’s Budget Messages #1-4 and B&F’s recommended adjustments. (1) Unaudited. The State’s modified cash-basis statements are not directly comparable with the State's audited financial statements, which are on a modified accrual basis. (2) Reflects 2017 actual revenue collections as reported by the Department of Accounting and General Services. (3) Reflects FY 2018 - 2023 Council on Revenues’ January 2018 projections. (4) Reflects specific appropriations from 2015-2017 and estimated out year costs; and additional expenditures to meet the Annual Required Contribution from the 2017 Other Post-Employment Benefit actuarial valuation. (5) Reflects $201 million transferred to the EBRF in FY 2017. (6) FY 2024 expenditures are not yet available, therefore FY 2023 expenditures were used for FY 2024.

Actual Est. Est. Est. Est. Est. Est. Est. FY 171 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23 FY 246 Total Revenues2,3 7,351.6 7,455.9 7,671.6 8,023.8 8,347.4 8,659.6 8,985.2 9,308.3 Total Expenditures4 7,485.6 7,393.6 7,885.7 8,294.1 8,591.9 8,795.4 8,979.1 8,979.1 Revenue Over (Under) Expenditures5

134.0

62.3

214.2
270.2
244.4
135.8

6.2 329.2 Carry-Over Balance Beginning 1,027.8 893.8 956.1 741.9 471.7 227.3 91.4 97.6 Ending 893.8 956.1 741.9 471.7 227.3 91.4 97.6 426.8 Ending Fund Balance (% of Prior Yr. Revenues) 13.0% 10.0% 6.1% 2.8% 1.1% 1.1% 4.8%

SLIDE 13

Reserves and Liquidity

Emergency Budget and Reserve Fund ("EBRF")



Estimated FY 2017 ending balance of $311.3 million, which includes a $210.4 million increase in FY 2017



No EBRF draws are included during the current General Fund Financial Plan period



Estimated FY 2017 market valuation of $182.2 million



While not a formal budgetary reserve, HHRF remains available as a flexible liquidity source, if needed

Historical EBRF and HHRF Balances ($mm) Hawaii Hurricane Relief Fund (“HHRF”)

$83.2 $90.2 $100.9 $311.3 $126.6 $182.4 $186.9 $182.2 $0 $100 $200 $300 $400 $500 $600 EBRF HHRF 2011 2012 2013 2014 2015 2016 2017 $30.8 $45.3 $45.0 $209.8 $272.6 $287.8 $493.5

(1) Excess investment earnings swept from HHRF.

(1) 12

SLIDE 14

General Obligation Debt Management



G.O. Bonds have a first pledge and the full faith and credit

f State General Fund resources



G.O. Bonds have conservative Constitutional constraints ‒ Limits final maturity to 25 years and principal only can be deferred up to 5 years ‒ Requires level debt service or level principal amortization ‒ Maximum annual debt service can be no more than 18.5% of the average of the prior three year General Fund revenues



No statewide ballot initiatives required for debt issuance



The State conservatively manages its debt portfolio ‒ Bonds issued with 20 year maturity and level debt service ‒ Short amortization of taxable bonds minimizes interest cost ‒ 100% fixed rate debt with no derivatives ‒ 61% of principal amortizes over the next 10 years and 87% in 15 years ‒ BABs debt service is budgeted on a gross basis



G.O. debt service as a percentage of General Fund revenues has been relatively constant across multiple economic cycles

G.O. Debt Service Profile(1)

(1) Excludes $387 million of reimbursable G.O. Bonds. The State also has a de minimis amount of Certificates of Participation outstanding. (2) Excludes reimbursable G.O. Bond debt service.

Debt Service as % of General Fund Revenues(2)

Fiscal Year Fiscal Year

Millions

0% 4% 8% 12% 16% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$0 $100 $200 $300 $400 $500 $600 $700 $800 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 University of Hawai'I (14%) Department of Education (40%) General State Projects (46%)

SLIDE 15

Financing Schedule, Investor Relations Link and Contact Information

For questions, please contact the following individuals: State of Hawai‘i, Department of Budget & Finance Scott Kami (scott.a.kami@hawaii.gov, 808-586-1612) Marilyn Chock (marilyn.e.chock@hawaii.gov, 808-586-1615) Linda Shintani (linda.k.shintani@hawaii.gov, 808-586-1630) Senior Manager: Bank of America Merrill Lynch Frank Lauterbur (frank.lauterbur@baml.com, 213-345-9575) Co-Senior Managers: Goldman Sachs & Morgan Stanley Paul Bloom (paul.bloom@gs.com, 310-407-5590) Adam Aranda (adam.aranda@morganstanley.com, 415-576-2087)

Financing Schedule*

Date Event January 23 POS Posted Investor Presentation Posted January 26 Retail Broker Meeting January 29 Retail Order Period New York Investor Luncheon January 30 Institutional Order Period February 14 Closing Additional information may also be found at: http://investorrelations.hawaii.gov/ (pictured)

*Preliminary, subject to change

SLIDE 16

Investor Luncheon

Mahalo!

Please join us for an Investor Luncheon to discuss the

State of Hawai‘i

$775,000,000* General Obligation Bonds of 2018 INVESTOR LUNCHEON

Monday, January 29th at 12:00pm EST Goldman Sachs 200 West Street New York, NY 10282

PARTICIPANTS

Laurel Johnston, Acting Director of Finance Scott Kami, Administrator, Finance

PRICING SCHEDULE

Monday, January 29th – Retail Order Period Tuesday, January 30th – Institutional Order Period To RSVP, please contact Elliana Jin at elliana.jin@gs.com or (310) 407-5743 For those not able to attend the event, the State will be available for one-on-one conversations or meetings through January 30, 2018. If you would like to schedule a time, please reach out to your sales representative at Bank of America Merrill Lynch, Goldman Sachs or Morgan Stanley.

*Preliminary, subject to change