This week we focus on a charter school owner-operator-obligor facing an ESG perfect storm — severe climate risk, high cost of living, and poor governance — all of which are left shamefully under-disclosed in their preliminary official statement.
Just remember as you’re reading this, in our collaboration with MMA, overlaying our climate risk data with MMA’s financial impairment data showed a clear correlation of climate risk and financial risk, and no more so than for charter schools. With that, this week’s non-disclosure honor goes to:
Florida Development Finance Corporation, Educational Facilities Revenue Bonds, Global Outreach Charter Academy Projects, Series 2021A / Taxable Series 2021B
The three Schools are located in the Arlington neighborhood of Jacksonville. Two of the Global Outreach Charter Academy (GOCA) campuses — Cub (grades K-2, risQ Score 3.4) and Grizzly (grades 3-8, risQ Score 3.4) — have been operational since the 2009-2010 school year. The High School campus known as Kodiak (risQ Score 3.5) commenced operations in August 2020 with grades 9-10, and is planning to expand to serve grade 11 for the 2021-22 school year and grade 12 for the 2022-23 school year. Enrollment at the elementary school has grown a robust 36% since 2017, while enrollment at the high school is expected to grow over 200% during the next 5 years as the school adds additional capacity.
The proceeds of this issuance will be primarily used to refund the outstanding revenue bonds that were used by GOCA to acquire the Grizzly and Kodiak campuses, as well as finance capital expenditures for the Schools. Revenues of the Obligated Group, derived from all three Campuses, are pledged as security, as well as the land and facilities related to the Grizzly and Kodiak campuses. Moody’s assigned a Ba2 rating to the issuance last week, citing the GOCA’s “below average academic performance” and the coronavirus outbreak as a social risk under their ESG framework.
Moody’s also cited governance as a key credit driver of their rating, and rightly so given GOCA’s track record. GOCA’s previous charter school project in Flagler County closed abruptly in 2013, leaving parents of over 120 kids scrambling to find alternative schooling options. Over $250,000 in contributions made to GOCA by Flagler County were lost. GOCA struggled to meet its financial obligations and were unable to complete necessary renovations to its school building; the financial stress was blamed on high rent and high cost of living in the area, which prevented GOCA from hiring teachers. GOCA also failed to secure $250,000 in start-up funds offered by the Florida Department of Education, which was the first time a charter school in Flagler County failed to secure that funding. Administrators had bet heavily on those funds being made available, and when they weren’t, they were left in a dire financial position.
Poor governance: ✔
Unsurprisingly, this failure in governance was not mentioned in the preliminary official statement. One potential reason for this lack of disclosure could be the fact that poor charter school management is presumed business-as-usual in the State of Florida. In 2019, the National Education Association (NEA) gave a rating of “very poor” to Florida charter school laws (one level above ‘abysmal’) and a grade of F in a report card issued by the NEA. The Association also found that FL charter school laws fell short of protecting students and risked leaving taxpayers on the hook for fraud and waste.
Despite the poor governance of Florida charter schools, enrollment has popped in recent years. Charter school student enrollment in the State increased from ~270,000 in 2015 to almost 330,000 in 2020, equating to an over 22% increase. Enrollment is outpacing capacity, stressing the FL charter school ecosystem and creating enough competition to affect a critical shortage in the teacher talent pool. Open teaching positions in Florida increased 10% from 2019 to 2020, according to the Florida Education Association (FEA) and as demand for Florida real estate continues to drive property values through the roof, many prospective teachers have been driven out of the market for housing in the areas surrounding popular charter schools. Unless teacher salaries increase (Florida ranks 46th nationally for teacher salaries, according to FEA) demand for charter school teachers will continue to outweigh supply. Duval County, home to the three GOCA campuses, saw 8% population growth during the 2012-2018 period (ranking 90th percentile nationally) and real estate values increase 58% during that same period (ranking 95th percentile nationally). The high cost of living is already apparent in the areas surrounding the 3 GOCA campuses — approximately 35% of renters within a 30-minute drive of the three schools are considered stressed (meaning at least 40% rent-to-income ratio), and lack of health insurance amongst 18-64 years in the area was ~20%, ranking in the 87th percentile nationally.
Unsustainably high cost of living and stagnant talent pool: ✔
Increasing flood risk driven by climate change will unequivocally make matters worse. We estimate that only 21% of Duval County flood risk falls within a FEMA 100-year flood zone, meaning that most properties in the County are lacking flood insurance afforded by the National Flood Insurance Program. During the 2000-2019 period, we estimate that per capita annual NFIP claims in Duval County were approximately $6,750, ranking in the 91st percentile nationally amongst counties, and far outweighing the premiums paid per capita to the NFIP by homeowners.
While the NFIP has effectively incentivized and subsidized development in high flood risk areas for years, keeping premiums superficially low for homeowners, the flood insurance burden is expected to increase substantially in the near term. NFIP’s Risk Rating 2.0 (“RR2.0”) initiative intends to build toward fixing the program by calibrating insurance premiums to actual flood risk. Although political friction is blocking the progress of this initiative (Senate Majority Leader Chuck Shumer has continued to derail RR2.0), the NFIP will need to launch RR2.0 eventually if it wants to remain solvent — this will have a material impact on Florida’s real estate market, and will increase the cost of living across the board. These impacts, made worse under climate change, are already starting to bubble up in the Florida real estate market — a piece published by the Wall Street Journal last month noted that one Miami area homeowner’s insurance premium jumped to $9,644 this year, equating to an 85% increase.
The issuer provides a general disclosure of its hazard and insurance-availability risk within the POS, specifying that Florida “has experienced significant property damage in recent years caused by severe adverse weather conditions” and that while “the facilities are insured against certain risks…there can be no assurance that the amount of insurance required to be obtained will be available at commercially-reasonable rates in the near or long-term future” (POS pg. 65). (Nothing is assured except for death and taxes, unless you’re a non-disclosing issuer in Florida relying on county tax dollars to service your debt or provide charter school funding…). The Climate Change section provides even less specificity. The section mostly pirates familiar language from past official statements published by issuers in Florida (“The State…is susceptible to the effects of extreme weather events and…” blah blah blah). The one statement that caught our eye was, “While none of the campuses have experienced any flooding in the past five years, no assurances can be given that a future extreme weather event driven by climate change will not adversely affect the operations of the Obligated Group or the Schools.” There they go with the “no assurances” caveat again. Maybe the issuer should try to publish a preliminary official statement that just says NO ASSURANCES in big block letters on a single page, instead of publishing a 428 page magnum opus.
All kidding aside, GOCA’s climate risk is material and worthy of a much more robust disclosure. Riskier weather conditions made worse under climate change will only lead to higher costs of living and will have adverse impacts on the GOCA schools. Inland flood risk is the largest driver of loss in the area surrounding the three campuses — property value losses resulting from inland flooding events are expected to reach around 10% over the next 10 years for the area within a 20 minute drive of each of the three campuses, ranking in the 92nd percentile nationally. While GOCA’s inland flood risk is expected to provide a steady stream of property value losses for years to come, it’s the lower probability tropical cyclone events that could have an even greater impact on both property values and the local economy, as well as potentially catalyze the transition to NFIP Risk Rating 2.0 and push up the costs of homeownership.
A hurricane event of at least Category 1 or 2 has a relatively high probability of occurring over the next 20 years, but isn’t expected to have a material impact on property value or economic losses. Material risk really starts to shake out when we look at an event at least as large as Category 3, which has a 13.7% probability of occurring by 2041. An event of this magnitude would result in losses to over 20% of property value in Duval county and over 33% of annual GDP. The numbers pop much higher for a > Category 4 event (7.7% probability by 2041), which would cause over 37% of property value loss and over 65% GDP impairment.
High climate risk and low climate risk disclosure: ✔
The only thing as bearish as the names for the 3 GOCA campuses (Cub, Grizzly, Kodiak) is GOCA’s ESG outlook. There’s too much uncertainty here: high cost of living, labor shortage and increasing wages, high rent, increasing climate risk, increasing insurance premiums, poor governance, no substantive climate disclosure. ESG portfolios would be wise to avoid this issuance.
State of Maine (risQ Score 2.0; Flood risQ Score 3.6)
Maine certainly doesn’t receive as much air time as its counterparts in the southeast US, but it boasts a hefty Flood risQ Score of 3.6 (the highest in New England, and 4th highest nationally). The OS dedicates a whole page to climate resiliency efforts which mainly revolve around flooding, unsurprisingly. The State’s a bit sly for excluding past flood damages and events — sitting at the 92nd percentile for property VaR nationally, it seems an odd (potentially purposeful?) oversight. What it lacks in this department it makes up for in its climate awareness.
Maine’s current climate action plan (CAP), Maine Won’t Wait, is a data-driven mitigation and adaptation strategy. The OS highlights its adaptation initiatives through reformed building codes, community resilience programs, and vulnerability assessments. Recent investments in renewable energy and other climate related projects (pgs A-44, A-45, and A-49) reflect Maine’s earnest commitment to climate resilience. The CAP outlines specific metrics to measure progress and the state publishes annual emissions inventory updates. And it pays off: Maine is a leading state in emission reductions, even beating out California.
Orlando Utilities Commission, FL (risQ Score 3.5; Flood risQ Score 3.3)
Orlando, Florida is a climate risk hotspot, especially when it comes to hurricanes and flooding. Orlando Utilities Commission (OUC) has been struck by several tropical storms and hurricanes over the last few years; Hurricane Dorian, Irma, and Matthew cost the utility roughly $35 million in storm preparation and restoration costs. So far OUC has received $14.2 in grant reimbursements (less than half the expenses incurred for those doing the math). They seem hopeful for more to come as they work with State agencies to complete the final grant disbursement audit. With $4.5 million already ruled ineligible for reimbursement through FEMA, it seems that no matter what OUC will sustain some losses (pg 54-55).
Losses from hurricanes are not the only concerns for this utility. OUC also highlights certain risk factors affecting the electric system, including greenhouse gas emissions, coal combustion residual regulations, and President Biden’s executive order, “Tackling the Climate Crisis at Home and Abroad.” To that end, the utilities commission plans to omit coal usage from their power plants by 2027 and have zero carbon emissions by 2050. This year the Sierra Club, a nationwide environmental organization, awarded OUC the highest rating in the southeast for their initiative on coal.
OUC’s service area ranks 88th percentile nationally for GDP impairment across all hazards with a cumulative expected impairment of 27% by the time bonds mature in 2027.
Deer Park Independent School District, TX (risQ Score 3.4; Hurricane risQ Score 2.6)
Deer Park, located in the greater Houston area, affords one paragraph discussing weather events on page 3, acknowledging that the area has experienced multiple 500-year flood events since 2015. Since then Harris County residents have filed nearly $8 billion in NFIP Flood Claims with about $6.5 billion coming from Harvey. Given that this area has seen devastating natural disasters and that it’s the 91st percentile nationally for total property value at risk, some comfort should be taken in the fact that “Texas law allows school districts to increase property taxes rates without voter approval upon the occurrence of certain disasters such as floods and upon gubernatorial or presidential declarations of disaster” (POS pg3). The 8% decline in enrollment since the 2015/16 school year (pg B-1) suggests residents have noted the growing financial risk of flooding and moved away. It doesn’t bode well that these bonds are secured by property taxes. As an additional note, at the time of writing this commentary, Harris County has been left off the list of recipients of $1 billion in post-Harvey federal aid, and the projects partially funded by a Harris County 2018 bond issuance remain $1.4 billion short of funding. This is doing the flood risk of places like Deer Park ISD no favors.
The final maturity of this bond series is in 2043. That’s 23 times the annual probability of a hurricane (2.1%) gets to roll the dice. Given this, there’s a 44% probability of a Cat 1 or greater event happening by 2043. That’s worrisome considering that a single hurricane precipitation-induced flooding event can put ~17% of property value at risk.
Cass County Joint Water Authority, ND (risQ Score 1.7; Flood risQ Score 3.8)
Let’s call this one pleasantly surprising. We were sharpening our quills to highlight Cass County’s staggering flood risk, but were happy to put them back in their inkwells once we saw what these bond proceeds are for — projects to mitigate the county’s flood risk!
The Water Authority manages waterways & floodplains by deepening and widening water bodies, and constructing reservoirs to prevent flooding damages. It operates 4 flood management districts that, put together, are coterminous with the county boundary. The county is the 96th percentile statewide for property value at risk (VaR) from inland flooding with an expected cumulative VaR of 16.6% by 2031. Furthermore, a 100-year flood puts 21% of property value at risk while a 500-year event puts 30% at risk.
The bonds are being issued in part to finance a storm water diversion channel designed to protect the Fargo-Moorhead Metropolitan Area against 100-year and 500-year flood events. Pages 8 and 9 show the drastic difference in flood protection resulting from the County’s Comprehensive Project.
Los Angeles City Department of Water and Power, CA (risQ Score 1.5; Flood risQ Score 2.6)
LA Water & Power’s POS offers dozens of pages detailing water conservation efforts, City-level policies, and state legislative action all aimed at ensuring a resilient, sustainable water supply for Los Angeles. “Climate change” is mentioned no less than 13 times, “drought” 51 times and there is even a section on wildfire resilience efforts on page 73.
Changes in precipitation and snow accumulation under a changing climate can affect the water supply in California (pg 70-71). In response, the State is proactively mitigating risks: CA’s Urban Water Management Planning (UWMP) Act requires water supplies like LA Water & Power to develop long-term resource plans to ensure adequate water supplies for future water demands, taking into consideration, among other things, vulnerability assessments of water supplies and reporting on climate change impacts (pg 45).
In their 2020 UWMP, the LA Water & Power Department committed to reducing per capita water use by 25% compared to previous levels by 2035; this builds on their achievement of reducing per capita water use by 20% in 2017. This was made possible through 1) City leadership, mainly the Sustainable City pLAn in 2015 which established water-conservation targets, and 2) the Department’s technological solutions. The Department deploys a myriad of water-conservation measures — including incentive programs for low-flush toilets, shower heads, and washing machines — as well as replaces irrigation controls and turf with native plants to foster water-savings. Beyond that, the City is redesigning its storm water capture system to increase the local water supply (pg 47).
Clearly the City of Los Angeles is positioning themselves for the future by improving the City’s water security in the context of climate change vulnerabilities.
Rhode Island Health and Educational Building Corporation – Town of Westerly (risQ Score 2.4; Flood risQ Score 4.1)
Rhode Island issuers continue to get the climate risk disclosure job done, with Westerly’s POS walking through their climate resilience plans — although for good reason. Since the Great Flood of 2010 and Sandy in 2012 which devastated substations and infrastructure (Resilient Rhody pg 28, 45) Westerly has worked to improve its resilience to climate hazards. Westerly has leveraged the Rhode Island Infrastructure Bank for road and bridge projects, ecosystem restoration, and solar installation (as detailed on pg A-5 to A-6). These projects fortify the town from flooding and sitting at the 90th percentile nationally for property value at risk (VaR). Better that they are acting now than paying for the damage later. We wish others in muniland would follow this example.