DALLAS - Still reeling from the destruction of Hurricane Ike, the Galveston Independent School District has landed on two rating agency watch lists for a possible downgrade.

Fitch Ratings on Friday joined Moody's Investors Service in dimming the outlook to negative from stable. Moody's provides an underlying rating of A2, while Fitch rates the debt A-plus. Standard & Poor's, so far, has taken no action regarding its A-minus rating.

The outlook shift from stable to negative affects $76.8 million of A-plus rated general obligation bonds. However, the district's debt is secured by a pledge from the Texas Permanent School Fund, which provides triple-A ratings.

The school district is preparing to issue $5 million of bonds as it seeks to extend its debt to reduce stress on cash flows.

Moody's on Nov. 3 also shifted the outlook on the city of Galveston's A2 rating from stable to negative. The agency affirmed its Aa2 rating on Galveston County, which is planning a $7 million issue this month.

The hurricane's aftermath creates "both near-term and longer-term economic and financial repercussions," noted a team of Fitch analysts led by Steve Murray.

"Fitch's primary concerns include the likely drop in taxable assessed value 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," the analysts wrote. "Current enrollment is about 80% of the pre-storm level."

District officials expect to restructure $5 million in debt service due in 2009-2011, moving it out seven years, officials said.

Ike struck Galveston on Sept. 12-13, flooding about three-quarters of homes and businesses on the island. The Bolivar Peninsula, which is part of Galveston ISD, was particularly hard hit. Most buildings in the peninsula's Crystal Beach and Gilchrist communities were destroyed by storm surge.

Recovery is expected to take years, with displaced residents and property damage making tax collections difficult. Texas law allows storm-affected taxpayers the option of slowing their tax payment without penalties. Property taxes are the district's largest general fund revenue source, making up 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," the analysts wrote. "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."

Galveston's economy is anchored by tourism, port activities, and the University of Texas Medical Branch. Falling oil prices could also affect offshore drilling activities serviced from Galveston Bay.

Recovery prospects worsened last week when the University of Texas Board of Regents voted to eliminate 3,800 jobs at UTMB, which is the city's largest employer and suffered an estimated $700 million in damages and lost revenue. The layoff represents nearly half of the pre-storm employment.

Fitch also issued a draft on July 31 proposing a recalibration of the city's tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of the rating.

In July, Standard & Poor's raised the city's GO debt to A-plus from A-minus, coinciding with a combined $18.9 million issue of tax and surplus utility system revenue certificates of obligation.

Galveston ISD serves the city of Galveston, which sits on a 32-mile island, as well as Pelican Island and the Bolivar Peninsula. The district's population declined to 59,000 in 2004 from 62,000 in 2000 due to an economic downturn, as well as increased competition from other public and private schools.

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