DALLAS — Two years after Hurricane Ike devastated the tourism-oriented island of Galveston, the Texas city of the same name is making a steady comeback, despite the added burden of a deep recession.

The city's improving fortunes are reflected in last week's Standard & Poor's upgrade to A with a positive outlook from BBB with a stable outlook on its general obligation debt.

"We based our upgrade and outlook revisions on the city's economic improvement after Hurricane Ike impacted the local tax base in September 2008, as well as management's commitment to maintain a strong financial position, despite the use of some reserves for storm-related expenses," said analyst Kate Choban. "Galveston's financial position remains strong, in our view."

Historically, the population of the island had been stable at roughly 58,200 before Ike hit on Sept. 13, 2008. However, many of the people who evacuated ahead of the storm did not come back, which reduced the population to 50,308.

The city's property tax revenue stood at $3.97 billion in fiscal 2009 but fell by 21.9% to $3.46 billion in fiscal 2010 after the storm damaged properties and beach land.

One of the biggest blows was the partial closure of the University of Texas Medical Branch due to flood damage estimated at $600 million. In addition to serving as the largest medical center on the island, the medical school was also the largest employer, with a payroll of about 12,000 employees. Of those, 3,000 were laid off, and there were fears that the UT System would move the school to the mainland.

The surge from the storm flooded about 70% of the island's businesses and housing, completely eroding beach front properties in some cases. Private and commercial property damage surpassed $2.5 billion. The Port of Galveston suffered $500 million of destruction, including an estimated $123 million of damage to city buildings and infrastructure.

Since then, the city and the separately governed Galveston County have tightened their belts as they put federal funds to work rebuilding the island.

The city reduced an anticipated $3.6 million operating deficit in fiscal 2009 through cost-saving measures that included a citywide hiring freeze, a suspension of all discretionary spending, a reduction in nonessential expenditures, and staff reductions of almost 20%.

Audited results for fiscal 2009 indicate an operating surplus in the general fund of approximately $2.5 million, according to Standard &Poor's. That brought the city's unreserved general fund balance to $13.7 million, or what analysts consider a "very strong" 35% of expenditures.

"The positive outlook also reflects our view that the city's tax base could continue to grow due to reconstruction efforts and that revenues will likely begin to increase, placing upward pressure on the rating within the next two years," Choban said.

On Aug. 1, 2009, the UTMB trauma center reopened after being closed due to hurricane damage. Since then, the hospital has reinstated about 1,500 employees. The UT System, which expects to receive more than $1 billion from the Federal Emergency Management Agency, plans to build a new tower on the campus, with the goal of restoring the hospital's pre-storm capacity.

The city, state, and county have also worked to restore beaches. The Galveston Parks Board and the State General Land Office completed most of the restoration on March 31, 2009. Funding is now underway to restore the island's west end beaches.

Hurricane Ike closed one of the most visible hotels on the island, the Flagship, which stood atop a pier that extended off the beach. Three years before the hurricane, the Landry's restaurant chain bought the hotel from the city for $500,000 with plans to restore, sell, or demolish it. But the hurricane damaged a ramp to the hotel, which has remained vacant ever since.

In October, Landry's proposed a plan to demolish the hotel and build an amusement park on the pier. Plans call for a double-decker carousel, a Ferris wheel, and 1940s-style amusements similar to those originally built on the pier in 1943.

Last week officials broke ground on a $1.5 million project to improve Seawall Fort Crockett Park as the first part of a $15 million Seawall Boulevard transit, streetscape, and park revitalization. The project is expected to be complete by May.

Financing includes a $1 million gift from Frito-Lay SunChips and the Kroger Co., combined with a $500,000 grant from the Federal Transit Administration. The city is working with Galveston County, the Galveston Island Park Board of Trustees, the U.S. Army Corps of Engineers, the Texas Historical Commission, the Texas General Land Office, and other agencies.

Galveston's 32 miles of beaches draw about five million visitors to the island each year, delivering an economic impact of $800 million, officials estimate.

However, behind its beach front hotels and historic downtown that cater to economy-minded vacationers from Texas and neighboring states, Galveston's population includes a sizable swath of poverty. Median income is about 73% of the national average.

With $59 million of outstanding debt, overall net debt burden is what Choban calls "moderate" at $4,181 per capita and 5.6% of market value. Debt-service carrying charges are "low" at 4% of fiscal 2009 expenditures. Amortization is slightly slower than average, with approximately 45% of principal due to be retired in 10 years, and 72% of principal due to be retired in 20 years.

"Officials indicate that there are no plans to issue additional GO debt within the next 12 to 18 months," Choban said.

Still hanging over the city is a negative outlook on Moody's Investors Service's A2 rating issued Oct. 22, 2009.

"On balance, the negative outlook factors in the significant challenges the city will face on the longer-term road to recovery," Moody's analyst Robyn Rosenblatt said at the time.

To demonstrate its resistance to repeated hurricanes, Galveston in 2011 plans to celebrate a symbol of survival, the centennial of the Galvez Hotel, a classic Spanish-style hotel on the seawall that caters to upscale lodgers. Built in the wake of the devastating 1900 hurricane that turned virtually every structure to piles of timber, the Galvez was built to prove that the city would come back.

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