I don't know much about the FS-65 but a little research tells me that, in that year range, they cam equipped with one of the following:
7.2L Caterpillar 3126/C7 I6
5.9L Cummins ISB I6
6.4L Detroit Diesel/Mercedes-Benz MBE900 I6
Of those three the 5.9 Cummins is the only one that I would get excited about. From a power standpoint, the Cat would come out ahead. Affordability & availability of repairs would favor the Cummis strongly.
I am afraid though, that the 5.9 may be a bit modest on the HP side for a rig that size as a highway rig. My preference would be an 8.3 Cummins (imagine that....) but it was not offered in that bus.
As far as transmission goes, in those years i would expect to see an Allison 2000/3000 series. Either one would be fin behind the 5.9. My preference (today) runs to the MD-3060. I think that you would be hard pressed to hurt the MD-3060 behind a 5.9. The 2000 or 2500 is a newer design and able to handle the 5.9 acceptably. I have heard some tales of maintenance challenges and rough shifting in the 2000's.
I am sure that the subject of increasing the power in the 5.9 will come up. Keep in mind that there is a reason why when you buy a 5.9 in a 11k lb GVRW vehicle you will find options well over 300hp (with a little work mine makes about 425). And when you buy a 26k lb GVRW rig your factory horsepower options are closer to 190hp-260hp. It is all about reliability and longevity.
One more thing regarding the 5.9 Cummins, it is not a "wet sleeve" motor like the Cat and cannot be rebuilt "in-frame". I would still stick with the 5.9 myself.