Honorable Mention – Climate Risk (Misdirecting) Disclosure of the Week: 6/12-6/18

By June 21, 2020 No Comments

While wildfire and drought are usually the headlines associated with California, inland areas are prone to heavy downfalls and flooding immediately west of the mountains. For this reason, this week we’re taking a look at:

Palo Verde Unified School District

the Preliminary Official Statement for which can be found here.

Our analysis places the Palo Verde USD in the top 3% of climate risk overall for school districts nationally, and in the top 1% in terms of inland flood risk. Furthermore, a 100 year inland flood event is predicted to cause 36% of the property value across the school district to need replacing on an equivalent insured loss basis. This is a high damage number for such a return period.

Palo Verde USD sits at the very eastern extreme of Riverside County, a county that covers a diverse range of landscapes and topographies from deserts to valleys and mountains, and drought-prone to flood-prone regions. Palo Verde USD’s risk profile is extreme within the county with 33% GDP Impairment risk to 2030, and 29% Property Value at Risk to the same year. Again, this is in the worst 3% of school districts nationally, including the more well-known flooding hot-spots and commonly invoked areas in the southeast. The Property Value at Risk number climbs to 34% when only residential property is considered, and 99.9% of that risk is associated with inland flooding, not wildfire. In contrast, for Riverside County as a whole, the GDP and Property metrics are 11.7% and 4.6% respectively, and only just over half of the Property risk is inland flooding, with the rest being wildfire risk.

It is interesting to then look at population and property value growth comparisons for Palo Verde USD in the context of Riverside. Between 2012 and 2018 the school district’s population grew at 21% the rate of the county overall and the property value  grew at only 31% of the county’s rate. The consistency and disruption of flooding in the Palo Verde USD region has negatively impacted population and property value growth versus the rest of the county, an outcome that we have seen elsewhere in the country in flood-prone municipal bond issuers.

Curiously, the county has been part of the NFIP’s Community Rating System program since 2010, and with a rating of 7 on the 1-11 scale (where a 1 is best) does enable discounts on property insurance for flooding. The relative paucity of flood risk elsewhere in the county would suggest its the eastern areas like in and around Palo Verde USD that have driven that action.

There is discussion of flood risk in the OS, but is somewhat generic and blended in with wildfire and drought commentary, suggesting a copy/paste (or sourcing from) language associated with broader areas, whether county or state, and lacking the nuance and specificity of the actual risk to the district. For example, there is mention in the appendix of “$918 million in additional funding to identify and implement recommendations and solutions to reduce wildfire risk, bolster the state’s emergency preparedness capacity and protect vulnerable communities” but no mention of specific measures regarding flooding.

Curious to see an apparently good faith effort at climate risk disclosure fail to focus on what the true climate risk components actually are. How would an investor know the gritty but critical detail in order to make an informed decision about the actual risk?

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