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Climate Risk (non-)Disclosure of the Week: 11/2 to 11/6

By November 12, 2020 No Comments

Last week we focused on a Maine hospital system and the climate risks to the respective facilities and service areas of the three obligated hospitals. This week, we’re again looking at a facility, but a higher education campus. Coming from a university family in New Zealand, I can tell you first hand how natural disasters can flow through to enrollment revenue as well as costs that aren’t reimbursed by other sources for a higher education provider. Florida International University (FIU) will soon be pricing a $72 million series of revenue bonds for new dormitory facilities, the Preliminary Official Statement for which can be found on MuniOS here.

Some quick basics first on FIU’s location and climate risk profile. The  campus area specifically has a cumulative Property VaR of 25% to 2030 – the call date – placing FIU at the 97th percentile for higher education campuses nationally, although only 61st percentile in the state of Florida. Through both accumulation over years as well as the impacts of climate change, that grows to 107% out to 2050, the longest maturity in the series, which drives the percentile to 98th nationally and 66th in the state. Using a 20 minute drivetime distance around the campus as the living radius of faculty and students, 2030 Property VaR in 2030 climbs to 41% (98th percentile) and to 174% (99th percentile) when stretched to 2050. 

Lying directly west of downtown Miami, its not surprising that the risk profile is heavily hurricane-derived and that is reflected in the OS. Page 28 and 29 has a section covering Environmental Risks that discusses state-level initiatives with respect to hurricane, and in Appendix B with statutory language regarding insurance for campus housing buildings. This is all good and fine, but bordering on boilerplate. What is not language you could find in any OS comes later wherein specific tuition waiver costs were incurred as a result of Hurricane Maria. What is not mentioned is that Hurricane Irma caused damage to an FIU dorm the same year resulting in students being displaced, no doubt at cost to the university. Appendix H carries details of the damage amounts covered (and not covered) for facilities with respect to specific event categories, and its not all covered by any means. What is also not covered at all are any specific programs to mitigate risk on campus or any active efforts in the surrounding area or county with respect to climate risk mitigation. Perhaps most egregiously, the potential impacts (or even the existence of) climate change is not mentioned at all which is a serious problem for any Florida issuer. Note that the probabilities of hurricanes are only going to increase going forward, only raising the probabilities and severities of similar financial disruption. For example, the probability of a Category 3 hurricane or greater in 2030 is 4.5% but this climbs to 8.4% for 2050 assuming a midpoint between RCP4.5 and RCP8.5 scenarios we’re now tracking towards.

Beyond the dormitory itself, there is a damage profile that will impact the faculty and students living off-campus. In fact, the university’s own Metropolitan Center’s report quantifies the level of risk in great detail in their own 2020 report. Contrary to the OS’s statements, the backstops in place will not be enough to make the region whole. Currently the residential population of Miami Dade County has a 61% of its flood risk uninsured. Much of the housing stock in and around the campus is also dated and less likely to be up to current code, given that the median year a house was built in the 20 minute drivetime is 1979. This implies a large proportion of the rental properties used by FIU students are uninsured and lack inherent resilience. In some ways, this makes living in a dormitory more appealing, but it does little to help the greater viability and appeal of the university overall. Repetitive natural disasters are only going to cause more frequent disruption and potentially drive students away over time. Around 10% of enrollments are from out of state now, and this is a higher revenue generating cohort for a university. As Florida’s reputation for severe climate events inevitably grows, whether through a higher frequency or higher severity events (or both), the appeals of FIU to such students is certainly not going to grow. We can point to other examples where enrollments have been impacted by such reputation-based drivers. There is no mention of such a connection in the OS, and that is a massive gap in risk recognition.

As an aside, from a broader ESG perspective there are certainly merits to the dormitory project in its own right. Of the renters in the 20 minute drivetime area, 48% of them qualify as stressed renters, wherein greater than 40% of income goes to paying rent. That is in the 99th percentile for higher education campuses so one could argue the dormitory addition is long overdue to mitigate financial and competitive pressure on the renting student population. as much as 29% of enrollment comes from outside the county and is likely to rely on either local rental or university-provided accommodation.

Certainly issuers in sectors such as healthcare, higher education, charter schools and like are more nuanced in terms of climate risk. That said, there should still be an expectation to disclose risk, consider risks to the customer base of a facility and discuss efforts to physically mitigate that risk.

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