AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed Galveston Independent School District, Texas' (the district's) outstanding obligations as follows:
--$3.5 million series 2003 and series 2004 unlimited tax bonds outstanding at 'AA-'.
The Rating Outlook is Stable.
SECURITY
Bonds are direct obligations of the district, payable from an unlimited ad valorem tax levied against all taxable property within the district.
KEY RATING DRIVERS
SOUND FINANCIAL MANAGEMENT: The district has successfully maintained healthy fiscal operations despite the loss of nearly one fifth of its tax base due to Hurricane Ike. Sizable reserves and ample liquidity continue to provide future operating flexibility.
TOURISM/MARITIME BASED ECONOMY: The district's economy is centered in leisure, hospitality and port operations, subjecting it to above-average economic cyclicality. However, expanding health services and top government and education sector employers help to stabilize the local economy.
ECONOMIC RECOVERY CONTINUES: Galveston suffered severe flooding damage during Hurricane Ike in 2008. Economic recovery continues at a solid pace, evidenced by an expanding tourism sector, numerous infrastructure projects, and broad-based commercial and residential development.
MODERATE DEBT PROFILE: Fitch anticipates the district's overall debt to remain in the moderate range based on the lack of debt plans and moderate amortization rate. Carrying costs, including debt service, pension and other post-employment benefits (OPEB), are low.
STABILIZING ENROLLMENT: Precipitous enrollment declines realized after Hurricane Ike, have reversed course with sound annual growth over the past several years.
RATING SENSITIVITIES
STABLE FINANCIAL PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The district encompasses 95 square miles and serves the residents of Galveston Island as well as portions of Bolivar Peninsula. It includes the city of Galveston with a 2010 population of approximately 45,000.
IMPACT OF HURRICANE IKE WANING
Hurricane Ike hit the upper Texas coast in September 2008, resulting in widespread flood damage across the island. District facilities sustained damage amounting to approximately $43 million with much of repair costs covered by insurance proceeds and FEMA funds. Only one elementary school rebuild remains from Ike. Its scheduled completion is fiscal 2015.
Enrollment dropped by 30% immediately after the storm, but has regained a good share of its pre-storm level. Current student population count of 6,500 represents about 75% of the recent peak. Fitch considers the district's projection for ongoing moderate enrollment gains reasonable in light of residential development underway.
Evidence of the local recovery is found in the district's 36% post-hurricane tax base growth (taxable assessed value suffered a 22% storm-related decline and upward adjustments are limited to 10% annually), as well as the city of Galveston's sales tax growth averaging 5% over the past two years.
FINANCIAL PROFILE A CREDIT PLUS
Financial operations have been well-managed in light of the severe disruptions and the volatile student body. Steep reductions were made to staff, capital expenditures and student transportation costs while state legislation enabled the district to forego its wealth equalization payments in both fiscals 2009 and 2010.
Rapid TAV growth out-paced enrollment in fiscal years 2011 and 2012, increasing the district's wealth equalization payments to the state. A portion of the district's fiscal 2011 and 2012 wealth equalization payments are recognized as a liability due to the failure of a 2006 election to determine the mechanism by which the district would equalize its wealth. The district continues to work with TEA and the state attorney general to remain compliant with state provisions to resolve the issue. Fitch does not believe the resolution will affect credit quality as the $6.6 million (5.3% of combined fiscal 2011 and 2012 spending) in payments are not included as part of reserves and liquidity should be sufficient if and when the funds are redirected.
Despite ongoing cost reductions, the district realized modest net deficits, but maintains healthy reserves. The fiscal 2012 unrestricted general fund balance of $30.7 million represents 46.2% of spending and transfers out. Officials anticipate bettering the fiscal 2013 budget with an estimated $4.5 million net deficit, consistent with the district's plans to bring balances down to a targeted four months of spending or about 30% to 40% of general fund operating costs. Fitch considers this strong range to be important to credit quality given the demonstrated potential for disruptions to operations.
MODERATE DEBT BURDEN/LACK OF DEBT PLANS
Overlapping debt burden is in the moderate range at 2.7% and $4,527 per capita. With completion of the final elementary school slated for fiscal 2015, the district will have ample capacity into the foreseeable future. The district has no remaining bond authorization and no immediate debt plans. In 2010, district voters rejected a $35 million bond authorization to build a new stadium by a two to one margin.
District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the state of Texas on behalf of the district, thus eliminating any liability for the district. The system also offers other post-employment (OPEB) benefits to retirees. As such, the district has no liability for pension or OPEB costs. The district's carrying costs, in this case only debt service, represent a low 10% of fiscal 2012 general government (net of capital) expenditures.
STABLE LOCAL ECONOMY
The district's tax base is diverse and the top taxpayers include a mix of energy and tourist-related businesses. The district's direct tax rates are generally below those of neighboring districts. Tax collections are historically strong and remained so throughout the recession and recovery.
The county's economy relies upon a combination of petrochemical manufacturing, tourism, health care and port activities. The University of Texas Medical Branch (UTMB) anchors the city's health and education service sector, provides primary indigent health care, and serves as a teaching hospital and hub for medical research. UTMB is constructing a $438 million 13-story hospital to replace a facility damaged by Hurricane Ike; the opening is projected for 2016. UTMP employs 11,568 representing approximately 8% of the county's total employment base.
Port activities have expanded rapidly over the past several years and future increases are expected with its growing cruise line business. County unemployment of 7.4% as of January 2013 is improved from a year ago on the strength of gains to the employment base. The rate compares favorably to the U.S. (8.5%) but remains elevated in relation to Texas (6.9%).
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789210
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