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Weekly Preliminary OS Climate Risk Review (2/18/21)

By February 26, 2021 No Comments

Opening an Official Statement from a Florida issuer is often a Forrest Gump’s proverbial box of chocolates from the best-in-class Miami cohort of issuers to the opposite end of the spectrum. It just so happens that this week’s focus has a risQ Score of 5.0, pegging the meter on our new simplified scoring metric. This week’s climate risk non-disclosure distinction goes to:

Town of Palm Beach, Florida — Series 2021 General Obligation Bonds (Underground Utility Project)

The Bonds are payable via special assessments on property in the Underground Utility assessment area, and backstopped by a pledge of ad valorem taxes levied and collected in the Town on all taxable property. There is a section for climate risk “disclosure” under Climate Change and Natural Disasters in its POS document. The contents of the disclosure is boilerplate to say the least, leaving much to the imagination. The paragraph on climate risk is sandwiched between a disclosure of Cybersecurity risk and a lengthier (two page) disclosure of COVID-19 related risk. It is not diminishing the impacts cyber or the pandemic to say that neither comes close to climate change in terms of existential threat to Palm Beach.

The Series’ maturity date schedule runs from 2022 out to 2047 annually, callable in 2030. risQ projects that the cumulative property value at risk in Palm Beach by the year 2030 is 60%, ranking in the 99th percentile nationally and the 85th percentile statewide. We project that Palm Beach’s cumulative property value at risk by the final maturity year of 2047 will be 202%, largely driven by climate change induced increases in severe hurricane risk (any value at risk percentage above 100% means that risQ projects the issuer in question could sustain cumulative losses above 100% of aggregate property or GDP value between now and the specified time horizon).

These are big numbers — unfortunately, the climate risk “disclosure” subtly ensconced in the POS doesn’t do them justice. The weak attempt at disclosure could be partially due to the fact that Palm Beach has gotten (relatively) lucky with Hurricane activity in recent decades. Both Hurricanes Matthew (2016) and Dorian (2019) came within miles of Southeast Florida, but missed directly hitting Palm Beach. Dorian’s hurricane force winds came within just 60 miles of Palm Beach, while Matthew came within just 20 miles of the coast (source). This fortuitous streak isn’t telling of the likelihood of hurricanes reaching the area, however. In fact, Palm Beach has a 6.6% annual probability of being hit by a Cat 1 or greater hurricane, which is the 99.8th percentile nationally for hurricane likelihood; only Miami-Dade and Monroe County in Florida have a higher annual probability percentile nationwide. To that end, Palm Beach was damaged during Hurricanes Irma (2017) and Wilma (2005) — causing approximately $300 million in damage to Palm Beach County during Irma (source), and $2.9 billion throughout the  County during Wilma (source).

You can’t drive a car looking through the rearview mirror. Looking ahead to future hurricane events, risQ projects that a Cat 4 hurricane hitting the Town of Palm Beach could result in 62% of property value at risk, and GDP impairment equivalent to 107% of the town’s annual GDP. Assuming the RCP 45 scenario — described by the IPCC as an intermediate climate warming scenario — the probability of this level of catastrophic event occurring by 2030 is 19%, and jumps up over 53% by 2047. If we assume RCP 85 (emissions business-as-usual out to 2100), the odds of a Cat 4 or greater event striking Palm Beach could jump to 22% by 2030, and over 69% by 2047.

It should be recognized that these bonds are specifically for taking legacy utility infrastructure underground. This assuredly helps in certain aspects of vulnerability for wind and debris, but underground infrastructure in coastal areas of Florida – and the town fits that description in the extreme – need to think about 1) water, 2) water and 3) more water when it comes to climate risk. In the absence of hermetically sealing the new hardware, does the risk go up or down when you go below ground and water comes calling? Beyond all this, there is the inherent issue of salt water intrusion even in the absence of a long tail flooding event. Generally, salt water isn’t great for any human-made infrastructure. This might be one step forward and two steps back in terms of climate resiliency and risk mitigation.

Setting all that aside, Palm Beach real estate continues to see high demand. Palm Beach saw real estate growth increase 72% between 2012-2018, according to the Zillow Home Value Index, which ranks 98th percentile nationally. This growth stands in contrast to the County’s eroding beaches which are one of the amenities that make the real estate in this area so desirable. In Palm Beach County, 33 of the county’s 47 miles of beach are critically eroded. ‘In many places expansive beach playgrounds have turned into skinny, eroded sand cliffs that have left homes and high-rises a chip shot away from rising seas. The $50 million allocated annually by the Legislature to replenish Florida’s disappearing beaches falls far short of what’s required to address the problem’ (source). Combine this with the fact that due to losses from hurricanes, coastal flooding, sea-level rise and climate change, Florida’s insurance carriers have applied for 26% to 34% rate increases on property insurance (~$700 increase to the average homeowner’s annual insurance premium costs), one has to wonder what type of impact these real estate conditions will have on the future of growth in the area, the climate deficit now embedded in the system, and the great repricing (to steal a phrase from Jeff Gitterman) that is bound to result. Like watching an ice-cream on a hot Florida day, you kind of know the result.

Honorable Mentions

Wharton Independent School District, TX (risQ Score 4.5; Highest Peril Score 4.7 (Flood)): 98th percentile nationally and 96th percentile in the state of Texas would require a best-faith effort towards climate risk disclosure. Nine lines of text on page 34 under a “Impact of Recent Hurricane” heading, which indeed lays out the “minimal damage” to district facilities, before going into the $3.2 million in damage to the same district facilities. No mention of the potential for such events to become more common or more severe with climate change. Just as critically, on page 33, the enrollment numbers drop 5% from 2017 to 2018, an the delta between daily attendance at enrollment in 2017 is significant. The enrollment has in fact dropped steadily since, with 2021 enrollments down 13.5% versus pre-Harvey numbers. This is a direct impact of Hurricane Harvey that goes unmentioned in the aforementioned “Impact of Recent Hurricane” language. Note that Wharton County is in the worst 2% of counties nationally for NFIP flood claims/capita/year at $44,700, and much of the residential property is uninsured for flood and not part of this number. Its not just damage and risk to school property that matters as people get up and leave when climate events become too common. Population loss and climate events are corelated and Wharton ISD is a case in point. What’s worse, no mention of any efforts towards adaptation and risk mitigation for the district’s property or for the district as a whole.

East Moline School District (Rock Island County) IL (risQ Score 2.6; Highest Peril Score 4.3 (Flood)): “Flood” is mentioned only once in the OS and on page 33 and in a very peripheral context. No mention of any salient risks or mitigation efforts under way in the district or Rock Island County. That said, both the City of Moline and Rock Island County are part of the NFIP Community Rating Survey, with scores of 8 and 7 respectively. This indicates some recognition and discussion of risk although not concrete mitigation. Good reason to see why flood would be on the radar. Severe events as recently as 2019 and FEMA property buyouts of flood prone properties in the highest 3% of counties nationally (recognizing that this retires such property from the ad valorem tax base). Not surprisingly, population and property value have suffered as well. Population loss for the county of 1.2% is noted in the OS from 2000 to 2010 (page 16) and has continued an additional 2.9% from 2012-2018 based on our data. In parallel, property value growth in the bottom 6% of all counties nationally. These are both consistent with correlations we have noted between inland flood and how population and property viability.

Summit County, UT (risQ Score 3.3; Highest Peril Score 4.6 (Wildfire)): Page 6-7 has a section on climate change and natural disaster risk which, while not comprehensive, at least acknowledges the serial droughts experienced over the past 5 years and also discusses the prevalence of wildfires and their impacts. Rightly so as well as the county is 98th percentile for wildfire risk, had fires both within the county (Fire Canyon Fire) and around the county (East Fork, Saddle Fires) in 2020. The Wildland Fire District referenced in the OS is the county’s separate Special Revenue Fund for firefighting. The financials of this fund as well as a handful of specific fire districts are outlined in the OS. The costs of fires and fighting them is clearly a major issue for the county given that “fire” is mentioned no less than 68 times in the OS.

University of South Alabama (risQ Score 3.5; Highest Peril Score 3.3 (Hurricane)): Just seems weird to us to not even mention “hurricane” or “flood”. Plenty of example of the greater Mobile area being impacted by flooding and hurricanes and even examples of university facilities flooding in such events. With the county as a whole being in the top 4% for NFIP claims/capita/year, top 2% for property buyouts it doesn’t bode well for the off-campus living arrangements of the staff and student populations either.

The University of North Carolina at Charlotte, NC: Has a peculiarly high flood risk on campus – 25% Cumulative Property VaR to 2030 –  but a rapid drop-off in the immediately surrounding area. The POS makes no mention on the flood risk, although page C-8 in the Appendix discusses insurance coverage required by covenants. Public records show recent examples of flooding impacting the campus including a severe flash flood event in November 2020. Just as importantly, the City of Charlotte is in the middle of capital project specific to storm water infrastructure in the extreme flood risk area in our analysis. The project, details of which can be found at https://charlottenc.gov/StormWater/Projects/Pages/MallardCreekTobyCreekatUNCC.aspx, is due for completion in March 2022. Can’t for the life of us imagine why this wasn’t mentioned in the OS. At the same time, the pursuit of the project should be seen as a confirmation of sorts that our flood maps identify such anomalously high risk areas correctly.

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