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Weekly Preliminary OS Climate Risk Review (3/11/21)

By March 18, 2021 March 26th, 2021 No Comments

Our next guest needs no introduction. This week’s climate risk non-disclosure distinction goes to:

St. Johns County Florida Taxable Water and Sewer Revenue Refunding Bonds, Series 2021

St. Johns County is located in Northeast Florida, just below Nassau and Duval counties. The County gets its name from St. Johns River, the longest river in the State of Florida, running from Jacksonville approximately 500km into Lake George (the other Lake George). St. Johns is one of the fastest growing counties in the State of Florida — population increased 25.8% between 2012-2018 (99.58th percentile nationally), and taxable property value and tourist development tax revenue have both increased steadily since the 2008 recession1. This debt offering — estimated at $42,030,000 — is payable from the net revenues derived from the operation of the water and sewer system that is owned, operated and maintained by the County. The system’s service area includes St. Augustine and St. Augustine Beach, as well as other portions of the unincorporated area of the County (POS pg. 22).

Coastal erosion caused by Hurricane Matthew in 2016 left oceanfront property in St. Johns County on the brink of collapse (Credit: St. Augustine Record)

The County’s largest customer is JEA, followed by golf clubs, beach resorts, and vacation condominium complexes (POS pg. 40). The County’s second largest customer — responsible for over 20 million gallons of water consumption annually and almost $190 thousand* in revenue — is Sawgrass Marriott Resort & Spa, the five-star hotel nearest TPC Sawgrass, the golf course that annually hosts The Players Championship (who needs a vacation?).

(*An earlier version of this piece should have read “$190 thousand” in revenue, not “$190 million“. This was a typo.)

The bonds are dated 2022-2042, and are being issued on a parity with the County’s existing $196 million in outstanding Water and Sewer Revenue Bonds, most of which mature after 2030 (POS pg. 21).

Despite what you might (not) see in St. Johns disclosure documents, the County is no stranger to catastrophic flooding. Storm surge from Hurricane Irma (2017) left oceanfront properties on Vilano and Ponte Vedra Beach extensively damaged, some of which became uninhabitable2. Previous year’s Hurricane Matthew (2016) was even more destructive — County officials estimated that it would cost $120 million to restore the damage to the beaches caused by Matthew, and the preliminary damage assessment the County sent to Florida’s Division of Emergency Management totaled a staggering $138.7 million.3 (FEMA’s Public Assistance Grant program approved ~$10 million for debris removal and dredging on Treasure Beach alone (source)).

St Johns general fund balance decreased significantly in 2017 following Hurricane Matthew, before rebounding in 2018 into 2019. FEMA reimbursements following Matthew “replenished the fund balance in 2018 and 2019.” (POS, B-14)

Fortunately for St Johns, FEMA will typically cover 75 percent of losses, leaving the state and local governments with only 25% of the bill. Unfortunately for everyone else, taxpayers pick up St. Johns tab year-after-year, and not just for catastrophic disasters, but for everyday events. Per capita annual NFIP claims (i.e. taxpayer losses) in St. Johns County during the period 2000-2019 were $29,472 (!) which is in the 97th percentile for counties. This price tag is higher than the per capita income of $27,554 in (e.g.) Oneida County, NY, which ranks 67th percentile nationally — this means that even the median earner in the United States wouldn’t be able to cover St Johns per capita flood losses. This seems *slightly* unfair.

In 2016, over 10,000 structures were removed from flood zones within St. Johns, while only ~1,600 were added.4 In 2018, it was reported that St. Augustine currently had 10 flooding / storm water mitigation projects ongoing, four of which were funded by FEMA.5 It appears that the County is well aware of its risks, but is both 1) not disclosing those risks properly, and 2) relying heavily on the American taxpayer for risk mitigation.

St Johns County is ranked in the 99th percentile (nationally) for both property value at risk and GDP impairment by 2030

And the outlook is bleak. risQ projects that by 2030, St John’s cumulative GDP impairment will be 102%* (99th percentile nationally, 90th statewide) and property value-at-risk will be 42% (also 99th percentile nationally, and 88th statewide). These VaR metrics are primarily driven by hurricane-induced flood, wind and storm surge, as well as inland flood. Coastal flood is the primary loss driver, projected to cause an absolute value at risk of over 27%, putting it in the 94th percentile statewide.

(*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).

We’d cite the 2042 numbers, but that would just be mean.

Golf is tough. 17th hold Sawgrass, 1982 (Credit: Getty Images/PGA Tour)

Golf is a tough game. Losing a ball in the water is no fun, and typically results in a one stroke penalty for the golfer. St. Johns keeps hitting birdies and eagles, year after year — increasing population, property values, and tourism revenue growth. But on occasion, St. Johns hits a ball into the water. And, instead of taking one-stroke penalties, the County continues taking taxpayer-funded mulligans. Eventually the County will find itself alone on the 17th hole, surrounded by water.

By the way, the word “flood” isn’t mentioned once in the entire 366 page preliminary official statement.

Honorable Mention

Hillsborough County (Wastewater), FL (risQ Score 4.3; Notable Peril Scores: 4.3 (Hurricane))

Pages 36-37 spend some time discussing the risk associated with floods and hurricanes, and that sea level rise and climate change more broadly may cause these risks to increase. Towards the end there is also mention of a study being done by the University of South Florida that will be used as the basis for future planning in the future. Credit where credit is due that a plan to make a plan has been initiated but, seriously, tick tock. The disruption from flooding in particular is very problematic for water and wastewater infrastructure, and for the broader population if that infrastructure fails and Hillsborough County is 93rd percentile nationally across all counties and in the higher risk half of Florida counties, so there’s some risk to manage, to be sure. Also remember, we’re looking at a strip of bonds going all the way out to a 2039 maturity here. By that point, under an RCP8.5 scenario, the Property Value at Risk from hurricane flooding may be 65% higher than now and more than doubles in terms of risk from Hurricane Storm Surge. This is some robust growth in risk to manage if you have to maintain the wastewater infrastructure and also comes with commensurate risk to the property value and population that underpins the revenue that will service these bonds. In reality, not the most egregious non-disclosure of climate risk that we’ve seen, but way short of where it should be for a county with the resources and the risk that Hillsborough has.

Orlando Utilities Commission, FL (risQ Score 3.8; Notable Peril Scores: 3.7 (Hurricane) and 3.4 (Flood))

A few interesting nuggets in the parallel 2021A and 2021B POS’s covering $305 million overall. Using the former as the source, on page 47 (in the first section of Certain Factors Affecting the Electric System you’ll find the first mention we’ve seen of President Biden’s “Tackling the Climate Crisis at Home and Abroad” executive order. Nothing more specific, but clearly loosely flagging the need to be ready for what follows. You’ll find “hurricane” mentioned no less than 29 times in the document, mostly discussing the costs incurred the vast majority of which will not be reimbursed by FEMA or anyone else for that matter. You’ll find good laundry lists of hurricanes and service and financial impacts on page 58 (under Emergency Response), the $40 million spent since 2016 on hurricane recovery on A-32 (in Notes to the Financial Statements). Again, and for the record, climate events are not good for municipal finance and FEMA does not get anywhere near to making an impacted issuer financially whole. There are no specific mentions of resiliency programs or system hardening for future hurricanes which is a big gap given the aforementioned events and their financial impacts. To their credit, from a carbon transition perspective, page 37-38 discussed a Clean Energy Plan approved in December 2020, which includes the wind down of coal generation at two sites and paper commitments to hit clean energy targets in future years.

North Kingstown, RI (risQ Score 2.7; Notable Peril Scores: 4.2 (Flood))

On page 9 of the POS, and as the first item in the Risk Management section, you’ll find four paragraphs discussing Climate Change and how the town incorporates this risk into all planning decisions. You’ll even find a call-out of the town’s participation in the NFIP Community Rating Survey. Later in the document – on page 17 of the Financial Section – climate change and risk from sea level rise is overtly included as a factor in the town’s 2022 budget process. While the focus is very much on risk from sea level rise, it is worth noting that for a city at the 91st percentile of risk nationally, around 50% of the risk to property and 60% of the risk to GDP is actually from inland flooding. The present day projected damage from 100 year and 500 year event inland floods are each around 20% higher than the comparative coastal flood events. That said, there is little doubt that planning for sea level rise and the risk profile it will increasingly carry over time demands forward planning and North Kingstown overtly discuss this in the POS and are taking genuine action to a much greater degree than many coastal towns and cities, many of which have higher risk than this.

Providence Redevelopment Agency, RI (risQ Score 1.4; Notable Peril Scores: 2.4 (Flood))

Firstly, let’s not overlook that the use of proceeds for these special obligation bonds is affordable housing and its certainly an area to address. Our demographic data shows the City of Providence is in the worst 25% of cities nationally in terms of percentage of stressed renters (37%), the worst 10% for percentage of population below the poverty line (27%) and Gini Index (0.49). From a climate risk perspective, Climate Change is the first item discussed under Investment Considerations on page A-7. While not as verbose as their Rhode Island brethren from down in North Kingstown, the language is densely informative, guides to other information including the city’s Climate Justice Plan (see https://www.providenceri.gov/sustainability/climate-justice-action-plan-providence/), and levels of climate resilience spending in the city’s Capital Improvement Plan. All this from a city whose relative climate risk to property is actually low (18th percentile) and while GDP risk is much higher (82nd percentile). Seems like Rhode Island issuers are on their ESG game is a massively outsized way compared to other parts of the country.

Pleasants County School District, WV (risQ Score 2.3; Notable Peril Scores: 4.4 (Flood))

This issuer already made our WYNTK Negotiated Sales watch list on Monday, but the POS fell into this weekly review window so a good opportunity to review and check if you saw what we’re now seeing. For the record, we’re looking at 98th percentile nationally for inland flood risQ to property across all school districts. Pleasants is in the worst 25% of WV counties, which is no small feat given West Virginia has the 2nd highest inland flood risk of any state. Jumping into the POS, one mention of “flood” on page 19 in the context of a flood insurance policy for up to $800,000 in damage. That’s about it, which is a problem as you don’t have to look too hard to find serial flooding events. In terms of other health indicators we can correlate to flood risk, overall population and enrollment have been falling and property value growth is in the bottom 30% of counties nationally. You won’t find Pleasants County anywhere in the NFIP CRS so no active mitigation efforts being planned or documented through that channel, and no subsidized flood insurance for local residents as a result. Eight other counties in the state have engaged, including some with lower risk than Pleasants, so really no excuse. From a carbon transition perspective, much of the local economy and property tax base is linked to aging, fossil fuel related assets (as can be seen on page 9 of the POS).

Brevard County Housing Finance Authority (Tropical Manor Apartments) FL (risQ Score 4.7; Notable Peril Scores: 4.9 (Flood), 4.4 (Hurricane))

The Tropical Manor Apartments are located on Merritt Island, a climate tenuous strip of land sitting over a coastal waterway between Melbourne and Titusville. There’s no mention of climate change, but can probably give that a pass given the 2024 maturity on the bonds. You’ll find “flood” or “hurricane” mentioned just once each in the POS and, even then, it’s buried down on page B-20 in the Appendix. The property itself sits one block back from the ocean so its not the first to flood, but the immediate neighborhood will be impaired by just about any event, and any event even marginally in the tail risk will roll into impacting portions of the property itself. Its essentially a climate risk crapshoot on this one as your playing a probabilistic game of what events and of what severity will impact the property and the immediate area. What we do know is that there shouldn’t be a POS from a coastally based issuer/obligor in Florida that doesn’t make some sort of best faith effort regarding hurricanes and floods. In terms of any external evidence of mitigation efforts, both Brevard County and the City of Titusville have NFIP Community Ratings of 7, so at least some initial efforts being exerted on potential risks and their mitigation, but well short of what a high risk area such as this should merit.

1http://www.sjcfl.us/OMB/media/FY2020/FY2020FinancialPlan.pdf

2Vilano Beach homes torn apart by Irma, worsened by severe erosion https://www.firstcoastnews.com/article/weather/irma/vilano-beach-homes-torn-apart-by-irma-worsened-by-severe-erosion/77-474407963

3St. Johns County estimates $120 million in storm damage to beaches https://www.jacksonville.com/news/2016-11-01/st-johns-county-estimates-120-million-storm-damage-beaches

410,000 St. Johns County homes to be removed from flood zone designations under new plan https://www.jacksonville.com/news/metro/2016-07-13/story/10000-st-johns-county-homes-be-removed-flood-zone-designations-under-new

5FEMA, locals spending millions to mitigate future storm damage https://www.staugustine.com/news/20180906/fema-locals-spending-millions-to-mitigate-future-storm-damage

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