Climate Risk (non-)Disclosure of the Week: 11/16 to 11/20

By December 3, 2020 No Comments

Back to a more vanilla issuer this week versus last week’s focus on Florida’s DOT bonds we took an advanced run at before it priced this week. It sure looks like some coastal towns are struggling to realize there’s climate risk out there even when they have a history of (serial) flooding events. This week we cracking open the Preliminary Official Statement from the Town of Westport, CT associated with their $11.5 million GO bonds out to a 2028 maturity.

The quick rundown of the climate risk first. Westport is at the 94th percentile nationally for Property Value at Risk to cities, and at the 97th percentile for GDP Impairment Risk (IR). The primary hazards are coastal flooding and inland flooding, although the balance changes for Property VaR (where coastal flood risk is higher) compared to GDP IR (where inland flood is higher). This is not unusual given the general penchant for delightful ocean views from residential abodes, and the generally high property value we’ll stomach for such a location. Between now and 2028, there is a projected 22% property damage on an equivalent insured loss basis. That’s a pretty robust number given a taxable property base of over $11 billion.

Looking at the Official Statement from the town, you won’t find “flood”, “storm” or “climate” mentioned at all. There is one mention of “natural disasters” buried in boilerplate language in the appendix (page A-68), but that’s the sum total of risks mentioned. Given the lack of mention of risk, you wouldn’t expect to see any language about mitigating such risks, and you’d be right. As always, it doesn’t take much effort to find events worthy of note that i) might have been worth a mention, and ii) validate that we’re not making this stuff up when we have Westport in a high risk cohort. Major named storms have caused severe damage whether Gloria (1985) or for a more recent instance, Irene did some quality work on the area in 2011. The latter resulted in 100+ homes and 30 businesses being flooded and caused over $0.5 million in damage to public infrastructure. Not long after, Sandy (2012) left a solid mark, while just this year Isaias rolled through taking down power for 93% of the town with many still without power several days later. Generally speaking, being without power is a positive thing for a town’s economy or its population.

To put some more quantitative and comparative metrics on the risks, NFIP claims per capita/year for the area are in the highest 7% nationally since 2012 so the issues are systemic versus the rest of the country. In terms of financial resilience to flood events, the town has inherently high affluence (100th percentile for population below the poverty line) but, at closer look, has a tail of inequality with a Gini Index of 0.53, which is in the highest 2% nationally. So many will have the capability to recover from flood damage, but others will not. Combine this with the level of flood insurance uptake which we estimate at only 13% and there’ll certainly be population that has a more limited financial backstop. Finally, the areas flood maps are also likely inducing a false sense of security even in light of the aforementioned storm events. Close to 2/3 of the flood risk in the area is unaccounted for in the current 100 year flood maps FEMA provides which, as we know are often used a tacit guidance of minimized risk by local jurisdictions and their residents. The town has done little in any recognized way for establishing flood risk mitigation either. While an early entrant into FEMA’s Community Rating Survey program, they have not progressed from a score of 8 since 2000, and that rating requires very little of substance and also provides little subsidized relief from flood insurance costs (which might also explain some of the low uptake rate discussed above). Eventually, flooding does come around to impact property value and population as we’ve been able to show. This shows up in inland locations more strongly, but the beginnings can also be seen in coastal areas such as Westport. While assessed property values have been increasing per the OS, the market value of property based on Zillow Home Value Index data has been tepid and sits in the bottom 5% nationally for Fairfield County overall. Population growth is also low versus the cohort of like areas, in the bottom 4%, in fact.

Westport’s high affluence population and incumbent property value is unlikely to put it in massive financial peril in the near term, to be sure. That said, the risks to the town’s population and property are material enough to warrant some dialogue now and certainly warrant increased risk mitigation efforts before they accelerate down a slippery climate risk slope.

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