While we’re now on the downslope of the 2020 hurricane season, climate-vulnerable issuers across the Southeast are still coming to market with bond maturities into the 2030’s, which means the forward-facing risks from climate change need to be layered onto the current baselines. In that regard, this week we’re taking a look at the Official Statement (found here) for the City of Weslaco, TX and the $15.2 million of debt sold out to a 2034 maturity.
Weslaco is in Hidalgo County, one county inland from the coast but along the Mexico border. The cumulative Property Value at Risk (VaR) of 30% to 2034 is at the 91st percentile nationally for cities, while the annualized GDP Impairment Risk of 6.4% is at the 95th percentile. The risk is essentially flood driven, with ~2/3 coming from inland flooding, and the remainder from flooding due to extreme precipitation from hurricanes. To give you a sense of scale, the Property VaR from a 100 year event inland flood is a robust 17%, while an average hurricane event has a 18% Property VaR. The annual probability for a hurricane flood event in 2020 is 3.1% and grows to 4.2% by 2034, so there is solid odds of this occurring at least once in the interim if you roll up those annual probabilities.
A closer look at the map above shows a bunch of waterways winding their way through the city so let’s go to the OS and see if this is all captured. You’ll find precisely zero mention of “flood” or “hurricane”, and they didn’t even try to insult our intelligence by invoking outmoded and misleading FEMA floodplain maps and documents. Apparently, in this city, floods don’t happen in any way that someone buying these bonds should know about. By now, you know where this story is going. Hurricane Hanna made landfall in late July this year made with 90 mph winds and still 65-75+ in Hidalgo County, dropping up to 12 inches of rain in quick order, requiring evacuations, and leaving many without power, including Weslaco High School. In 2019, a June rain event set a new daily record for the month of 7 inches, causing flooding and crop damage outside the city. We won’t belabor this further. You can do a cursory search for yourselves to find further histories and severities.
This flows through to a prior reliance on financial backstops that have to be stress-tested for reliability moving forward. NFIP claims/capita/per year for the Hidalgo County are at the 80th percentile nationally at $2,410. In this marginally inland area of southern Texas – the greater Starr/Hidalgo/Brooks county area – less than 20% of the flood risk is insured in a given jurisdiction and insurance uptake rates are in the 4-7% range. Much of the flood risk is not accounted for in FEMA maps with 1.5 to 2 times the flood risk not accounted for versus what is captured. No mention of Weslaco or Hidalgo County in the NFIP’s Community Rating Survey which means no corresponding insurance discounts for the residents and no NFIP-vetted efforts focused on flood mitigation. Property owners are on their own which, with a per capita income of only $17,100 – only 14th percentile in the state of Texas and 6th percentile nationally – and 27% of the population below the poverty line – the worst 8% of cities nationally, is a real problem when it comes to recovery and resilience of the population.
Given the events of 2020, there just isn’t any excuse for issuers proximate to the Gulf Coast to omit climate risk from their Official Statements, and especially those issuing strips of maturities into the out-years. Risks only accumulate and climate change is only going in one direction with respect to extreme precipitation severities and frequencies.