OREANDA-NEWS. Fitch Ratings has assigned a rating of 'AA-' to the following general obligation (GO) refunding bonds of the city of Galveston, Texas:

--$17.895 million series 2016.

The bonds are expected to price via negotiation the week of Jan. 25, 2016, depending on market conditions. Proceeds will be used to refund for debt service savings a portion of the city's outstanding debt.

In addition, Fitch affirms the following ratings:

--$42.1 million (pre-refunding) of outstanding GOs and combination tax and revenue bonds (COs).

The Rating Outlook is revised to Positive from Stable.

SECURITY

The GOs and the city's COs are payable by an annual property tax levy, limited to $0.70 per $100 taxable assessed valuation (TAV). All COs are additionally payable from the city's enterprise operations - surplus sanitation, water & sewer and wharfage revenues.

KEY RATING DRIVERS

SOUND FINANCIAL PROFILE: The Positive Outlook recognizes the city's history of consistent operating performance, healthy reserves, and more recent enhancements to its planning and forecasting practices. The city's strong reserve position is an important rating factor given its coastal location and exposure to economically sensitive sales taxes.

MODERATE DEBT: Fitch expects the city's debt burden to remain moderate based on current issuance plans and a rapid amortization rate. Carrying costs associated with outstanding debt and retiree liabilities are manageable.

GROWING REGIONAL ECONOMY: Galveston benefits from its participation in the diverse and growing Houston area economy. The city's low unemployment rate reflects an expanding local employment base driven by commercial and industrial growth.

RATING SENSITIVITIES
SOUND FINANCES; MODERATE DEBT: Maintenance of sound finances and a moderate long-term liability burden could lead to positive rating action.

CREDIT PROFILE
The city of Galveston is located on Galveston Island, approximately 45 miles from Houston in southeast Texas. With a population of approximately 50,104 the city is the county seat of Galveston County (rated 'AA+'; Stable Outlook).

SOUND FINANCIAL PROFILE

Galveston has a history of conservative forecasting, and operations are expected to remain structurally balanced over the near term. Strong revenue recovery and cost controls in the wake of widespread flood damage caused by Hurricane Ike in September 2008 demonstrate the city's financial resilience.

Galveston realized surplus results over the past four years through fiscal 2015, benefiting from a leaner cost structure and strong ad valorem and sales tax trends. The city completed fiscal 2014 with unrestricted reserves of $17.3 million, a healthy 37.6% of spending. An unaudited fiscal 2015 operating surplus (after transfers) of $0.9 million maintains the city's strong financial cushion and the city's fiscal 2016 budget is structurally balanced.

The city has maintained healthy reserves for an extended period, with a recent low in fiscal 2010 equaling a still solid 19.6% of spending. Fitch views the city's healthy fund balance level as a mitigating factor to its exposure to economically sensitive sales tax revenue (31.8% of fiscal 2015 general fund revenues) and its tourism-centered economy. Subsequent to a 14% post-Hurricane Ike decline, the city's sales tax revenues have averaged five-year annual growth of 4.4%. The city's long-term financial plan reflects its policy goal for 90 days of general fund working capital.

MODERATE DEBT; MANAGEABLE RETIREE COSTS

Fitch expects the city's debt burden, 2.9% of fiscal 2016 market value, to remain moderate based on current issuance plans and a rapid 69% 10-year amortization rate. The city's $273.6 million five-year capital plan will be funded primarily with grant monies (23%), future revenue and tax-supported bond sales (44%), and operating revenue/cash(17%). Management anticipates seeking up to $30 million in GO authorization in the spring of 2016.

The city sponsors three single-employer defined benefit pension plans: Galveston Employees Retirement Plan for City Employees, Galveston Firefighters Pension Plan, and Galveston Employees Retirement Plan for Police. The city also acts as a conduit for the provision of retiree health care benefits (at the retiree's cost).

Under GASB 67 and 68 the city reports a fiscal 2015 net pension liability (NPL) of $11.1 million for the employee plan, with fiduciary assets covering 80.1% of total pension liabilities at the plan's 8% investment return assumption (approximately 72.2% based on a lower 7% investment return assumption). The NPLs for the city's fire and police plans are $18.1 million and $25.3 million, respectively. Fiduciary assets cover 69.6% and 47% of total pension liabilities for fire and police at the plans' 8% return assumption (approximately 62.7% and 42% each for fire and police based on a lower 7% rate assumption).

The NPL of the plans represent a modest 1% of the city's fiscal 2015 market value. City officials anticipate exploring plan design changes during fiscal 2016 to achieve long-term plan sustainability. The city's carrying costs including annual debt service, pension and other post-employment benefit contributions represent a moderate 13.2% of fiscal 2014 governmental spending.

GROWING TEXAS COASTAL COMMUNITY

Galveston benefits from its participation in the diversified and growing Houston-area economy. Galveston's local economy is centered in healthcare, maritime and tourism industries. The University of Texas Medical Branch (UTMB) anchors the city's health and education service sector and serves as a teaching hospital and hub for medical research. UTMB is nearing completion of a $438 million 13-story hospital to replace a facility damaged by Hurricane Ike. UTMB reports total fiscal 2014 personnel at 11,534 representing about 7.5% of the county's total employment base and a likely higher proportion of the city's base. The city's improved unemployment rate of 4.9% as of October 2015 reflects new job growth, but continues to trail the average Texas rate of 4.5% for the same period.

The Port of Galveston and nearby Pelican Island support growing industrial operations, cargo transportation and petroleum support services. Recent and near-term infrastructure improvements, including a new bridge to Pelican Island, bode well for growth in the island's maritime trade.

INFRASTRUCTURE IMPROVEMENTS CONTRIBUTE TO THRIVING TOURISM TRADE

Hurricane Ike hit the upper Texas coast in September 2008 resulting in widespread flood damage across the island. The city's population and tourism declined subsequent to the storm, but 90% of the city's hotel stock was undamaged due to its proximity to the seawall which extends along the city's beachfront.

Texas' strong economic growth and over $2 billion in disaster recovery monies have continued to expand the island's tourism trade as measured by visitors to the island, hotel spending and cruise passenger trends. Evidence of the recovery is found in the city's 32.4% post-hurricane tax base growth (TAV suffered a 14% storm-related decline and upward adjustments are limited to 10% annually), as well as sales tax growth averaging over 4.4% in the past five years.

The Galveston port is home to three year-round cruise ships, contributing to the port's ranking as among the largest home ports as measured by embarkations. The city's recent beachfront pier redevelopment and ongoing beachfront improvements further contribute to the growing tourism trade. Fiscal 2014 HOT collections represent the fifth consecutive year of post-Hurricane Ike growth, gaining a total of 64.2% after dropping 21.3% in fiscal 2009, immediately after the storm.