Lots of non-disclosure bad behavior this week. A hospital system in Kentucky, charter school in California, and utility on the South Carolina coast, all of which did an abysmal job of disclosing climate risk. However, the climate risk non-disclosure clause of this issuer’s preliminary official statement is so stale, so vanilla, so boilerplate that we couldn’t keep our hands off:
City Of Port St. Lucie, Florida Utility System Revenue Bonds Series 2021, $30,730,000
The City (risQ Score 3.5) is located approximately 50 miles north of West Palm Beach, on the Atlantic coast of Florida. Since its incorporation in 1961, the population of Port St. Lucie has grown at a steady rate, more than doubling from ~89,000 residents in 2000 to over 200,000 in 2020.
The bonds are secured by the pledged revenues derived from the operations of the water and wastewater utility (risQ Score 3.7) owned and operated by the City. The boundaries of the utility’s service area aren’t exactly coterminous with Port St. Lucie — the service area consists of the area within the City, excluding the areas serviced by St. Lucie West Services Utility system and the Reserve Utility/Go Team Industrial Park. The Utility also serves some unincorporated areas of the County. The proceeds of the issuance will be primarily used for financing construction of and capital improvements to the utility system.
The issuer’s 500-page preliminary official statement covers everything from COVID to the City’s thriving tourism industry, down to the exact number of licensed dining establishments (319) and acres of open space sparks (659). However, not a single number provided in the climate risk disclosure section, which borrows most of the copy from previous disclosures from other Floridian issuers:
“The State of Florida is naturally susceptible to the effects of extreme weather events and natural disasters including floods, droughts, and hurricanes, which could result in negative economic impacts on communities including the City. Such effects can be exacerbated by a longer term shift in the climate over several decades (commonly referred to as climate change, generally discussed below), including increasing global temperatures and rising sea levels. The occurrence of such extreme weather events could damage local infrastructure that provides essential services to the City, including the System. The economic impacts resulting from such extreme weather events could include a loss of revenue, interruption of service, and escalated recovery costs.”
We’d hope that whoever originally authored this boilerplate climate risk disclosure paragraph above signed some kind of royalty deal. If we had a nickel for every time we’ve read that exact disclosure language in an official statement… (According to a Miami Herald article from 2019, Miami-Dade began including this exact language about climate change risks in their official statements in July 2018…).
The word “hurricane” pops up just 3 times in the issuer’s POS, despite the costly hurricane activity that Port St. Lucie has been subject to over the past 20 years. Between 2000-2020, over $101 million in claims have been filed with the FEMA National Flood Insurance Program (NFIP) by residents of St. Lucie County, including claims tied to Hurricanes Frances (2004), Jeanne (2004), Ivan (2004), Tammy (2005), Wilma (2005), Fay (2008), Isaac (2012), Matthew (2016), Irma (2017). According to risQ’s data, Irma was the third most expensive single event; both Frances 2004 and Jeanne 2004 led to higher amounts of claims than Irma in St. Lucie County. Following Hurricane Irma in 2018, The City was reimbursed $2.9 million in 2018, with a portion of the reimbursement proceeds covering repairs to the Utility’s Westport Wastewater Treatment Facility (WWTF) operated by the Utility. Hurricane Irma is referenced just once in the POS (as an expenditures line item) and the damage to the Westport WWTF isn’t disclosed at all.
The issuer follows the boilerplate disclosure paragraph with a second paragraph which provides some more specific information regarding what actions the City is taking to combat extreme weather risk:
“The City has been hardening its facilities and infrastructure in an effort to absorb such risks and events. All System facilities are connected with fiber optic links to monitor treatment facilities and are prepared with backup generators. The City has a goal to maintain at least 10 days’ supply of fuel if electricity goes out. During a storm, water supply is not produced and the City is able to keep approximately a day and a half of water storage with remote tanks. With respect to rising sea levels, the City is minimally impacted as a result of its location and the City does not believe any of the System facilities are located in any possible impact areas.”
The City’s utility comprises a water and wastewater system, each with two treatment plants, multiple pump stations, and miles of collection, transmission and distribution lines. The facilities are well insulated from the Florida coastline — while the issuer is technically correct claiming that “the System facilities are [not] located in any possible impact areas” directly exposed to sea level rise, the issuer is entirely missing the bigger issues at hand. Sea level rise is inherently bad for coastal water utilities in Florida as salt water incursion is not going to be good for underwater infrastructure and Florida’s literal foundation is relatively porous and susceptible to this impact as sea levels rise. Beyond that, the risk profile of the city is plenty bad enough from inland flood and hurricane flood, even before sea levels rising tide starts to make hurricane storm surge a growing component of the problem. Beyond that, even if the utilities physical assets are in less exposed locations, the population that lives there are uses those services most certainly are not.
Sea level rise and climate change are analogous phenomena, perturbing the baseline parameters of any risk quantification framework, including Port St. Lucie’s. Looking out to the year 2041 — the longest dated maturity year for this bond series — the Utility’s climate risk profile looks bleak, especially when we dig into the GDP impairment outputs, which signifies an estimate of the expected economic productivity impairment as a percentage of the total annual GDP produced within a given location. We weight GDP impairment higher for issuers in the utility cohort given that the loss of business activity and impact to property will both flow into utility revenue streams. And, for a City like Port St. Lucie that is heavily reliant on tourism for economic stimulus, long-term GDP impairment as a result of natural hazards will have as material an impact on credit quality as property value/tax losses.
Hurricane-induced flooding will drive the greatest economic losses within the Utility service area, with 30% GDP impairment by 2041, ranking in the 91st percentile nationally. Precipitation-induced flooding from a hurricane event of any Category (37% probability of occurring by 2041, when considering the impacts of climate change and warming sea surface temperatures) would result in 63% GDP impairment. Rolling up our climate risk modeling outputs across all hazards, GDP impairment is expected to reach above 67% in aggregate by 2041, ranking in the 84th percentile nationally. Property value loss from hurricane events is less concerning, yet still material, with 10% property value-at-risk by 2041 from hurricane flooding alone.
Port St. Lucie’s climate risk disclosure tells us two things. First, that Florida issuers continue to tax American taxpayers with their rampant and often foolhardy physical infrastructure and property build-outs. Week after week, we come across issuers in the State of Florida that have been impacted by natural hazards in the past and have relied heavily on FEMA disaster relief funding in order to bounce back to business-as-usual. Yet, most Florida municipal issuer official statements contain the same exact climate risk disclosure language. We’re looking forward to the day when real climate risk disclosure becomes a mandate, and issuers like Port St. Lucie feel the pressure to put in more effort than ‘copy + paste’.
Second lesson learned from this week’s POS: it’s clear that the Port St. Lucie issuer is a bit of a linear thinker. Sure, the City appears minimally impacted by sea level rise, and the Utility facilities are well insulated from coastal flood risk. However, the issuer makes no effort to explore or disclose the material risks that hurricane and inland flood risk will pose to the industrial and residential customers within the Utility’s service area. There are three emerging and somewhat inevitable risks that will impact the Utility’s customer base over the coming decades: 1) FEMA’s increased threshold requirements for disaster declarations, which will decrease the amount of relief funding municipalities will be awarded, 2) adoption of NFIP’s Risk Rating 2.0 will calibrate insurance premiums to actual flood risk, and 3) increasing frequency and severity of hurricane events will drive economic and property losses, as well as increase premiums to unsustainable levels for coastal communities in Florida. The issuer appears to have no real understanding of just how bad their situation really is.
St. Petersburg, FL (risQ Score 3.7; Hurricane risQ Score 2.8)
It doesn’t take much to flood St. Pete, although its topography is actually inherently less prone to flooding than many other major coastal population centers in the state. Storm surge from a Cat 1 threatens 24% of property value. The city sits in the 91st percentile nationally for property value at risk from hurricane precipitation flooding. The POS doesn’t obscure this risk, calling out the entire state for its susceptibility to climate hazards. The POS is also not shy about disclosing their climate action including an Integrated Sustainability Action Plan (ISAP), an Integrated Water Resources Management Plan (IWRMP), and a Stormwater Management Master Plan (SMMP). The ISAP focuses on emission reductions and clean energy while the latter two deal with everything water—from potable water, stormwater, to waste water.
This is all well and good. However, this past October the city council voted to loosen rules that prohibited increasing building density in the Coastal High Hazard Area. The Coastal High Hazard Area is defined as zones that exhibit flooding during a Cat 1 hurricane in federal models. Let’s re-read the first two sentence shall we? Though increased housing might reduce climate migration and gentrification inland, it seems like the city is tempting fate.
Elsinore Valley Municipal Water District, CA (risQ Score 3.4; Wildfire risQ Score 4.7)
Elsinore Valley Water District thoroughly discusses water security issues in the context of climate change (pg 25); however, they fall short of giving equal voice to the district’s wildfire risk. This is particularly concerning considering the majority of the district’s territory is within Very High Fire Hazard Zones.
Elsinore Valley is situated in western Riverside County (98th percentile statewide for property value at risk from wildfire) and encompasses Lake Elsinore City (home to previously featured high risk Issuers). As recent as last week, Riverside County battled two fires, the larger of which blazed through 75 acres. But that’s small potatoes compared to the Holy Jim Canyon fire in 2018 which consumed more than 25,000 acres, including land within Elsinore Valley (pg 26).
For all the ways the Issuer discusses their vulnerabilities to water security, and acknowledges that climate change is driving these changes, we would’ve liked to see more acknowledgement of wildfire vulnerabilities.. this district is 99.5th percentile nationally and 98th percentile statewide for wildfire risk to property after all.
Southwest Florida International Airport, Lee County, FL (risQ Score 5.0; Hurricane risQ Score 4.8; Flood risQ Score 4.8)
With both a Flood risQ Score and Hurricane risQ Score of 4.8, the POS would be cavalier to ignore the two huge elephants in the room. The county has only faced one major hurricane — Hurricane Irma in 2017— in the last 5 years, but it made quite a lasting impression. In response, the county enacted a three phase project to improve resilience and reduce flood impacts (pg 63). Phase 1 and 2 aimed to identify and remove obstructions in waterways and impediments to flow. Phase 3 includes the development of a flood mitigation plan to complement its hurricane preparedness plan. The airport took proactive steps to reduce damage — including topping off backup fuel generators tanks, minimizing airport staff, and clearing drainage ditches — but still suffered from closures, cancellations, and a 16.4% decline in passengers at the airport from the previous year during the same month. No additional resiliency measures are proposed for the airport.
Appalachian Regional Healthcare, KY (risQ Score 2.4; Flood risQ Score 4.2)
Appalachian Regional Healthcare (ARH) receives extra attention this week for its remarkably high flood risk. Across its 12 hospitals, 83% of them have a Flood risQ Score greater than 3.5; the whole portfolio has an average Flood risQ Score 4.2! Both these insights are made clear with a newly available feature in the risQ UI which provides a Portfolio Summary for folders.
Most of the hospital system is concentrated in eastern Kentucky — the most flood prone area of the state — and there are two facilities in southeastern West Virginia. Earlier this year eastern Kentucky was ravished with historic flooding; less than a month later Middlesboro, home to Middlesboro ARH Hospital (Flood risQ Score 4.0), experienced a second round of flooding that damaged homes and led to road closures.
Flooding in the hospitals’ service areas can impact population trends, property values, and the long-term viability of hospitals. Also concerning is when flooding affects facility operations such as facility damage or road closures. In the case of ARH, 4 hospitals have higher Flood risQ Scores at a 6 minute radius than at a 30 minute radius. Mary Breckinridge sees the greatest jump by shrinking the radius – going from a Flood risQ Score of 4.3 to 4.7.
An unfortunate aspect of the hazard risk is that these hospitals serve catchment areas from disadvantaged or vulnerable populations. Picking out some of the relevant information from our demographic data, the areas within 30 minutes of the hospitals are on average >90th percentile nationally for people living below the poverty line, 90th percentile for obese adults, and 10 of the 12 hospitals serve catchment areas with populations in the lower half of health insurance coverage. Climate risk is often intractably linked to climate (in)justice.
Charleston Water & Sewer System, SC (risQ Score 3.5; Flood risQ Score 4.6)
Charleston Water & Sewer System services Charleston city and surrounding areas. The area is in the 97th percentile for both GDP and property value at risk. You wouldn’t guess from reading the POS which doesn’t mention climate change, flood, hurricane, or hazard once. The only allusion to this risk is a generic statement that lumps together various sources of risk. Charleston is notorious for flooding — around ⅓ of the $1 billion flood payouts made to South Carolina in the past 40 years went to Charleston. Within the span of three years (2015-17) the city suffered three historic flood events— resulting from Hurricane Joaquin, Hurricane Matthew, and Hurricane Irma.
Charleston has released a Climate Action Plan and a Sea Level Rise Strategy. Adaptation strategies include an 8 mile seawall around the perimeter of the main peninsula, as well as, road elevations, flood barriers, and drainage improvement projects. But there is inequity in exposure and investment. Redlining and gentrification has pushed low-income communities and communities of color into low lying and flood prone areas. Yet, investment into flood mitigation and adaptation seems to concentrate in white, affluent, and tourist-centered neighborhoods. Climate resilience needs to serve everyone, not just the white and wealthy.
Imagine Charter School at North Manatee, FL (risQ Score 3.9; Flood risQ Score 3.9)
Some good ‘ol boilerplate disclosure from this Florida Issuer. In terms of disclosure, they mention that the facility is located in a FEMA flood plain, but we hope we have educated you as to the limitations of relying on even that level of disclosure. One interesting theme that we’re starting to see recognized occasionally in POS’s: acknowledgement that hurricanes, whether or not they impact the facilities, can lead to volatility in property insurance that may lead to unaffordable insurance rates> We’ve seen this increasingly in school districts, but charter schools are also not immune to making tough choices between sky-rocketing flood insurance and not having the same coverage as they used to. Most are choosing to leave themselves more exposed to climate risk.