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Oh Galveston: Look What Ike Wrought

DALLAS - Just two months after winning an upgrade from Standard & Poor's for its growing tax base and sound management, Galveston, Tex., last September faced the onslaught of Hurricane Ike, an event some compare to the 1900 storm that leveled the city.

Though not as deadly as the 1900 hurricane, Ike could prove even more costly because its storm surge flooded 75% of the island's housing, closed businesses and schools and, at least temporarily, reduced the city's 60,000 population by a third. Some of the tax base literally washed out to sea, eliminating lots that once held traditional beach homes.

"We've never seen anything of this magnitude in our lifetimes," said city finance director Jeff Miller. "We're talking about a 100-year event. In terms of property damage, it's probably more costly than the 1900 hurricane."

Now, the city is on watch for a downgrade of its A-plus rating from Standard & Poor's and its A2 from Moody's Investors Service. Standard & Poor's conferred a two-notch upgrade in July as the city prepared to issue $19 million of certificates of obligation. Analysts also put the A-minus rating for water and sewer debt on negative watch.

"While the exact long-term effects the hurricane will have on the local economy, and consequently on government revenues and short-term cash flows, are unknown at this time, it is anticipated that some tourism and sales tax revenues will be lost," Standard & Poor's analyst Kate Choban wrote in a report issued last week. "In addition, any loss of the tax and employment bases due to the island's shore being washed away may also strain the city and its tax collections."

With the Texas economy worsening on top of the post-hurricane fiscal distress, Galveston is sending out an SOS to state lawmakers, pleading for financial help in restoring the island after reserve funds were tapped for debris removal and other emergency measures.

The state earned high marks for its pre-storm evacuation assistance and emergency services in the immediate aftermath. But Texas is one of the few states that does not assist local governments with finances after a disaster, Miller noted.

The state did create a disaster contingency fund in 2007 to deal with such emergencies, but the fund has no money because the Legislature never appropriated any.

The Federal Emergency Management Agency helps cover half the recovery costs and will ultimately reimburse Galveston for another 25%, Miller said. But with recovery costs rising and revenues falling in a collapsing economy, the city says it urgently needs more help.

With an $80 million budget that went into effect Oct. 1, two weeks after Ike came ashore, Galveston has instituted 10% cuts across the board. Crime has risen sharply, and the city must cover $178 million in damage to buildings, roads and other infrastructure.

In a hearing before the Texas House Select Committee on Hurricane Ike this month, Mayor Lyda Ann Thomas and city manager Steve LeBlanc pleaded with lawmakers to come to the city's rescue.

City officials want the Legislature, which begins its 2009 session next week, to return the state's share of the sales tax to Galveston to help with recovery costs. With the sales tax at 8.25 cents per dollar, the state keeps 6.25 cents and rebates the rest.

"By rebating the [state's share of] sales tax for a set time for areas devastated by Ike you would be enabling us in the Gulf Coast to rebuild our homes and mitigate against future disasters," Thomas told the committee.

The committee will make a recommendation to the Legislature, including recovery funding priorities, by the end of the month.

Also seeking help was the city's largest employer, the University of Texas Medical Branch, whose president David Callendar sought $335 million in emergency funds to help get the medical school and hospital back in service. Without funding to operate the hospital, the UT Regents announced in November that they were laying off 3,000 employees in an effort to save $106 million.

The storm flooded almost every building on the campus when it made landfall Sept. 13, leaving the institution with an estimated $435 million in damage and $275 in lost revenue.

Medical branch officials have worked with analysts from FEMA to get a more accurate idea of damage to the campus, which is now estimated at $667.5 million, including measures to protect the facility from future flood damage, Callender said. But the federal agency will cover only 75% of that cost. The rest - $167 million - must be matched by the medical branch.

The storm damaged 75% of the island's housing,
closed businesses and schools, and reduced the population by a third.
Rep. Craig Eiland, D-Galveston, who serves on the committee, criticized the UT Regents for not demanding more money from the Legislature sooner. Now, the medical school is talking about moving some of its operations off the island to reduce the risk of storm damage in the future. However, the university said it has no plans to relocate its highly regarded John Sealy Hospital, which treats indigent and trauma patients.

Since the hurricane, the Galveston Independent School District has lost 4,000 students or about 25% of its enrollment, officials said. Four of the district's 12 schools that have closed may remain that way indefinitely.

With outstanding debt of nearly $77 million, the district's upcoming Feb. 1 debt payment totals nearly $4.6 million, and the debt service fund has roughly $1.4 million. The district expects to restructure $5 million in debt service due over the next two years, moving it out seven years to provide some near-term relief.

Like the city and the Galveston County, the school district will be keenly interested in how many property owners pay taxes by the traditional due date of Jan. 31. Texas law allows storm-affected taxpayers to slow their tax payments 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 district's largest general fund revenue source, comprising more than 80% of total operating revenues.

At a public meeting this month, superintendent Lynne Cleveland told parents and teachers that the declining enrollment comes as the district is facing about $65 million in recovery costs.

The district is considering its options now, and "once we get the details, we'll come back to the table and start making the tough decisions about the future of our district," she said.

Fitch Ratings has already changed its outlook on the school system's A-plus credit to negative "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."

Moody's last month also shifted the outlook on the district's A2 rating to negative.

Prospects for a strong recovery do not look promising, given the nation's deepening recession that has now taken hold of Texas. The lingering effects of the last recession reduced Galveston ISD's population by 3,000 in 2004 and reduced enrollment by 10%.

Both the economy and the hurricane have seriously damaged tourism, on which the island is heavily dependent.

Despite the troubles, Galveston voters continued to support tax and bond measures in last November's election, which came less than two months after Ike.

In the city election, voters approved extension of a half-cent sales tax that was intended for ordinary street, drainage, and parks projects but was repositioned as an Ike-recovery measure. The revenue will raise about $4 million per year, but the city is not even considering using the stream to back bonds right now, Miller said.

The city's last debt issue was in July for $18 million of certificates of obligation, which prompted the upgrade from A-minus to A-plus from Standard & Poor's.

Meanwhile, Galveston County voters in November approved bond issues totaling $165 million for road, drainage, and facilities improvements.

Auditor Cliff Billingsley said the county is waiting for appraisers to evaluate the impact of Ike on the tax base and to see how many residents are able to pay their property taxes due at the end of the month. Galveston County includes several cities on the mainland, as well as the city of Galveston.

With its heavy dependence on tourism, criminals are doing the island no favors by occupying abandoned apartment buildings and raising the crime statistics, police say.

Galveston's history of hurricane devastation has attracted some visitors, particularly those interested in the 1900 storm that reduced the city to piles of kindling and killed 6,000 to 12,000 people. That hurricane also led the city to build the seawall that has held back the kind of storm surge that proved so devastating. Still, the seawall could not prevent the 110-mph winds and storm surge that accompanied Ike.

"It's going to be a five-to-10 year period before this little government gets back to normal," Miller said. "It's very serious."

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