Fitch Ratings affirms its 'A+' rating on Galveston Independent School District (ISD), Texas' $76.8 million in unlimited tax general obligation (GO) bonds. The Rating Outlook has been revised to Negative from Stable.
Fitch takes this action in response to the impact of Hurricane Ike on the district and the current uncertainty regarding both near-term and longer-term economic and financial repercussions from the storm. Fitch's primary concerns include the likely drop in taxable assessed value (TAV) due to property damage, slowed and reduced property tax collections, the possibility of the storm's displaced families adding to the existing declining enrollment trend, and the near and longer-term outlook for future economic activity. Current enrollment is about 80% of the pre-storm level. Also, district officials estimate damage to facilities, including clean-up and damage mitigation, at between $55 million and $65 million, with four of 12 schools closed. These concerns are balanced by the district's substantial current reserve level, near term operational flexibility, and the expectation that Federal Emergency Management Agency reimbursements will reduce the district's net costs to a manageable amount.
Damage totals suggest a significant decline in TAV for fiscal 2010 is likely, which would force district officials to consider either a property tax rate increase or expenditure reductions for fiscal 2010, or a combination of the two. TAV for fiscal 2009 totals more than $4.5 billion, a modest increase of 2.5% from the prior year. TAV growth had been healthy over the previous five fiscal years, averaging more than 10% annual gains from fiscal 2004-2008. Ike, which came ashore at Galveston on Sept. 12-13, flooded approximately 75% of homes and businesses on the island. Damage was particularly severe on Bolivar Peninsula just to the east of Galveston, where the vast majority of structures in the communities of Crystal Beach and Gilchrist were destroyed by storm surge. These areas also are within district boundaries.
Displaced residents and property damage also likely will affect property tax collections for the current fiscal year, thereby impacting cash flow. State law allows storm impacted taxpayers the option of slowing their tax payment without penalties, with the final amount due six months after the traditional date and just one month before the fiscal year-end. Property taxes are the largest general fund revenue source, comprising more than 80% of total operating revenues.
Fitch believes operational risk is largely mitigated for the remainder of fiscal 2009 by the district's sizeable operating reserves. District officials report that general fund cash and investments at the Aug. 31, 2008 fiscal year-end (unaudited) totaled roughly $37 million, which is nearly 50% of the original fiscal 2009 budget general fund expenditures of $80 million. This cushion also could be used to make up for lower property tax collections for debt service, if needed. The district's Feb. 1, 2009 debt payment totals nearly $4.6 million, and the debt service fund presently has roughly $1.4 million. The district exects to restructure $5 million in debt service due in 2009-2011, moving it out seven years, offering some near-term relief.
District staff plans to present a revised fiscal 2009 budget to the school board later this month, which will include new revenue and expenditure projections. The original fiscal 2009 budget contained a $6 million drawdown of general fund reserves, primarily for one-time outlays. Also, the board voted earlier this week not to re-appraise property values on a pro rata basis for the current fiscal year, citing minimal financial advantage for taxpayers and a negative impact on the district's financial profile.
Given the extent of the damage to Galveston, Fitch expects the recovery process to take a period of years. The dislocation of residents and business closings are having an obvious immediate economic impact on the city, and the magnitude of the long-term economic effect will depend on the number of residents and businesses that return and the area's ability to regain its sizable tourism base. Galveston's economy is anchored by tourism, port activities and the University of Texas Medical Branch (UTMB). Recovery prospects were dimmed earlier this week when the University of Texas Board of Regents voted to eliminate 3,800 jobs at UTMB, which is the city's largest employer. UTMB suffered an estimated $700 million in damages and lost revenue, and this layoff represents nearly one-half of the pre-storm employment total.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Contacts:
Steve Murray, +1-512-215-3729
Mark
Campa, +1-512-215-3727
Cindy Stoller, +1-212-908-0526
(Media
Relations, New York)
cindy.stoller@fitchratings.com
