DALLAS – The fiscal bruises caused by Hurricane Harvey’s blow to the Texas coast are becoming more evident as ratings analysts, economists and government officials take a closer look at the damage.

The easternmost Texas city of Orange was among the first to see its AA-minus rating land on S&P Global Ratings’ watch list for a possible downgrade. A port city in the Beaumont-Port Arthur region that teems with refineries and chemical plants, Orange suffered its third hit from a hurricane in 12 years when Harvey landed Aug. 29.

Texas Gov. Greg Abbott, fourth from left, outlines plans at a recent meeting of the Commission to Rebuild Texas after Hurricane Harvey.
Texas Gov. Greg Abbott, fourth from left, outlines plans at a recent meeting of the Commission to Rebuild Texas after Hurricane Harvey. Texas Governor's Office

"The CreditWatch placement reflects our uncertainty regarding potential deterioration in the city's tax base, financial flexibility, and liquidity available to fund expenditures related to Hurricane Harvey recovery and cleanup efforts," said S&P Global Ratings credit analyst Nora Wittstruck. “The CreditWatch placement reflects our view that there is at least a one-in-three chance that we will lower the rating or revise the outlook to negative within the next 90 days.”

The town of Rockport, near dead-center when Harvey struck the coastline, also landed on S&P's watch list. S&P rates the city AA.

"The CreditWatch placement reflects our view of the risk that the city's tax base will deteriorate as well as its uncertain financial flexibility and liquidity available to fund expenditures related to Hurricane Harvey recovery and cleanup efforts," analyst Sarah Smaardyk said. "Following a discussion with officials on Sept. 21, 2017, we understand that approximately 80% of structures located in Aransas County, where Rockport is located, sustained some type of damage from Hurricane Harvey.”

In a report Monday, Moody’s Investors Service said that Texas public finance issuers affected by Hurricane Harvey and the related flooding that struck in August will generally experience manageable credit effects.

“Local governments and hospitals look to face the most credit challenges over the next few months to a year,” analyst Adebola Kushimo wrote. “The economy, level of financial assistance and extent of rebuilding needs will determine the recovery prospects for issuers in Houston (Aa3 negative) – the nation's fourth largest city -- and the surrounding region.”

Moody’s initial assessment resulted in 37 of over 450 Moody's- rated municipal issuers -- mostly municipal utility districts -- being placed on review for possible downgrade, the report said.

“Additional issuers may be put on review as more information becomes available,” Kushimo wrote. “Beyond local governments, no credits in the other public finance sectors have been placed under review.”

In the industrial city of Baytown bordering Houston, Moody’s sees no impact on the city’s Aa2 credit as it prepares to issue $19.2 million of certificates of obligation Wednesday.

“The stable outlook reflects our view that industrial district agreement revenues will provide a stable source of revenue as the city manages its recovery from Hurricane Harvey and that the city's property tax base will continue to provide an adequate source of debt service funds despite potential declines caused by storm damage,” analysts Alex Rawlings and Dan Steed wrote in their rating report.

Based on initial assessments, Baytown estimates $2 million in damage to city facilities, infrastructure, and equipment, according to Moody’s. The city estimates that debris removal will cost about $6 million, for which it will seek reimbursement from the Federal Emergency Management Agency and its insurance carriers.

“Moody's baseline scenario when evaluating the potential impact of Hurricane Harvey on the city's tax base assumes a complete loss of 30% of the city's residential valuation, which is substantially greater than impact estimates provided by city staff,” analysts wrote. “Under this scenario, we project that based on fiscal 2018 tax rates the city's debt service tax revenues would be $633,670 below fiscal 2019 debt service requirements. The tax rate increase required to cover this shortfall would be minimal at $0.208 per $1,000 of valuation. This scenario also assumes no use of the city's debt service reserve.”

On Friday, Houston Mayor Sylvester Turner called off plans to seek a temporary property tax increase after Gov. Greg Abbott presented the city with $50 million for storm relief. Turner last week developed plans for the tax hike, saying he did not know how much the state would provide or when.

At a joint news conference with Turner, Abbott said the money comes from the $100 million disaster relief fund appropriated to Abbott's office during the last legislative session.

Abbott said that funding for long-term recovery and preventative measures from the federal government and the state's $10 billion rainy day fund must wait until exact costs for recovery are known.

"The time to use the thrust of the Rainy Day Fund is when the expenses are known," Abbott said. "So the members of the Legislature know how best to use the Rainy Day Fund."

Long-term prevention could involve bond funding for projects such as a third reservoir for the city at a projected cost of $400 million, officials indicated. Much of the residential flood damage in the area was caused by releases from rain-swollen reservoirs. The damage caused by the dam releases is already the subject of litigation.

Expanding Houston’s bayous could cost $311 million, officials estimate.

Abbott and Turner said they have also discussed a protective seawall and floodgate system along the coast, which Turner estimated to be a roughly $12 billion project.

“We can’t ask people to build in the same place unless we are taking the steps to mitigate the risk of flooding down the road,” Turner said.

The neighboring cities of Pearland, Sugar Land, Missouri City and Galveston are seeking tax hikes to pay for recovery.

In Houston and its suburbs, S&P analysts last week said the effects on the five largest rated school districts based on debt are becoming clearer.

“All of the districts sustained some damage, to dramatically varying degrees, but S&P Global Ratings believes that these districts are well prepared to withstand the effects and we don't anticipate rating impact as a result,” analyst Joshua Travis wrote.

The five districts, with a combined enrollment of more than 513,000 students, are the state’s largest Houston Independent School District, Conroe Independent School District and Klein ISD to the north, Cypress-Fairbanks ISD to the northwest, and Katy ISD to the west.

Of the five districts, Houston ISD took the hardest blow, Travis said.

“The majority of its 284 campuses suffered damage, with seven sustaining severe damage that will not allow them to reopen until the spring semester of the 2017-18 school year,” he said.

The district devised rolling start dates for its schools, with most campuses opening on Sept. 11. However, 25 of the most severely damaged campuses delayed openings, with school days extended to make up for lost teaching time.

Students at the seven closed campuses have been distributed to other schools with available capacity. HISD expects to lose 3,000 of its 216,000 students because of the storm.

“After initially estimating damage at as much as $700 million, the district now estimates a much lower cost, though it hasn't provided new estimates,” Travis said. “The district maintains flood and other insurance policies that will help offset some of these expenses (by a maximum of $150 million).”

HISD faces increased costs related to transportation, staffing, counseling, and other needs to support students and employees, Travis said.

The district reports that it was able to make its debt service payments due in September without issue, while it has already accumulated funds for December payments in the debt service fund.

In another sector, public power utilities affected by the hurricane have shown their financial capacity to absorb most of the immediate cleanup costs and revenue shortfalls, according to a Sept. 29 report from S&P.