The Climate Risk of Mello-Roos

By February 18, 2021 No Comments

Municipal Utility Districts in Texas have found themselves in the risQ’s climate crosshairs all too often, in part because their concentration close to the Gulf Coast has inherent risk from floods and hurricanes, but also because the geospatial shapefiles required to do meaningful analyses of a given MUD have been relatively readily available. The same cannot be said for California’s Mello-Roos Community Facilities Districts, but that’s just changed. A comprehensive set of CFDs is now available on the UI – around 760 in total – the shapefiles for which were all built by risQ making this a unique asset for evaluating climate risk, but also to look at the various demographic and socioeconomic data we put at your fingertips. While these issuers aren’t in everyone’s scope, there’s still a good $14 billion of par value to take a look at. With all that said, we can now take a look at climate risk structures of the cohort, and the notable risk fingerprints and patterns.

Comparing CFDs with MUDs directly, the highest risk locations compare pretty closely, using 2021 Property VaR as the indicative metric. That said, there is more sustained risk to be found in MUDs as you go down the rank orders of the two cohorts. Texas’ broader exposure to hurricanes, tropical storms and flooding in general , and concentration of a lot of MUDs in more frequently impacted locations pulls a greater part of a larger overall cohort into a tangible risk category. All that said, whether we’re talking about CFDs in California, MUDs in Texas or CDDs in Florida, a given issuer will generally be small in geographic footprint. If that geographic footprint is in the wrong place and without climate mitigation measures designed in, these will be some of the highest risk municipal bond issuers you’ll find in the entire municipal bond universe.

Its worth taking a look inside the highest risk CFDs to unpack the nature of the risks. The two highest risk cases carry both coastal and inland flood risk, with no wildfire contribution. From there, it gets messier with extreme wildfire risks registering – the 100th percentile wildfire nationally – across 10 of the next 23 highest risk CFDs. One notable case is Summerwinds Trails with both high inland flood and wildfire risk. Fair to say that this will also have severe mudslide risks.

Focusing on CFDs also allows a much more nuanced understanding to be conveyed about wildfire risk. For reasons stated above, CFDs can bring some extreme wildfire risk. They have a small footprint so easily destroyed in a given event, and they’re often new development areas on the periphery of established towns and cities, and at the Wildland Urban Interface (WUI) as a result. The highest wildfire risk CFDs are shown in a table below. A significant number of these are in the central Riverside County area, and specifically scattered across Beaumont, Calimesa, Hemet and Fontana.

These are certainly relatively high wildfire risk cities in their own right, with Beaumont and Calimesa being 99th percentile for cities, but their 2021 Wildfire Property VaRs are “only” 1.32% and 1.23%, respectively. That’s a full 3-15 times lower than the wildfire risks for the higher risk CFDs that fall within their boundaries. The series of images below show how these relative risk profiles come about. The left set of images show the locations of CFDs in Beaumont and Calimesa in terrain (top), dark (middle) and satellite (bottom) views. The right set also include the jurisdictional boundaries of Calimesa and the top (populated) half of Beaumont. Color coding of the areas goes from low (yellow) to high (red) wildfire risk. It can immediately be seen that the highest risk locations run along the southwest forested line, but that these areas have nonetheless been developed, as can be seen in the satellite images. Any severe wildfire impacting the greater Beaumont or Calimesa areas is in all likelihood going to come from these hills, putting these CFDs in harms way first and with much shorter time to react. By the same token, there are Beaumont CFDs that are actually lower in wildfire risk than Beaumont as a whole.

For those operating portfolios, funds and coverage universes in California, its critical to understand the spatial sensitivities of wildfire risk, and to look under the hood of the issuer to see where assets are concentrated in relation to wildfire-prone forests, foothills and WUI. For those who are active in CFDs specifically, being specific about climate risk will allow you to pull (relative) diamonds from the wildfire rough.

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