Weekly Preliminary OS Climate Risk Review (7/22/21)

By July 29, 2021 No Comments

This week we focus on an issuer stuck placing risky bets at both the climate and COVID-19 roulette tables:

Bullhead City Fire District, Certificates Of Participation, Taxable Series 2021, $35,000,000

Bullhead City sits at the intersection of Nevada, California and Arizona, right along the Colorado River about a 3 hour drive west of Flagstaff. The Series runs out to 2038, with nearly $23 million coming due after 2030. The proceeds of the Certificates are being used to fund a portion of the Arizona Public Safety Personnel Retirement System pension plan, as well as the District’s reserve fund. The Bonds are payable from lease payments made by the District for the Leased Property — fire stations, fire engines, brush trucks, etc — all of which are located within the District’s boundaries of and operated by the District. The District provides services to the entire City of Bullhead, and the majority of the District’s revenue comes from taxes derived from property within the City.

This issuance from Bullhead’s Fire District comes in the middle of a year when U.S. municipalities have issued a record amount of fire and rescue bonds, given the severe drought and wildfire experienced in the Southwest and Rocky Mountain regions. According to Bloomberg, so far this calendar year there have been 58 fire and rescue bond issuances totaling $381 million — these debt levels are on pace to break the record set in 2016 of $427.7 million.

Bullhead (risQ Score 1.9; Wildfire risQ Score 2.1; Flood risQ Score 3.8) is the second highest population city in Arizona’s Mohave County, which has experienced devastating wildfire activity so far this summer. In April, Mohave County issued an emergency declaration due to extreme wildfire activity, and as of July 16th, 5 of the 26 active wildfires in Arizona were burning in Mohave (there are 15 counties in Arizona). Bullhead City doesn’t have a history of wildfire events, though it sits awfully close to areas that have burned in recent years. In 2015, a wildfire erupted in the Havasu National Wildlife Refuge less than 25 miles south of Bullhead, leading to the mandated evacuation of residents from 1,000 homes.

While the District sits in a pocket of Arizona with relatively high wildfire risk, it’s actually the potential for flooding that poses the greatest risk to Bullhead. The District ranks 92nd and 97th percentile statewide and nationally, respectively, for inland flood risk. A 100-year flood event is projected to drive losses to 14% of properties in the District, while a 500-year event is projected to drive 19% property losses.

A Tale of Two Cities: GDP impairment is projected at 12% by 2038 in Bullhead City Fire District, which only ranks 78th percentile (across the utility sector cohort), nationally. However, this view of GDP risk only tells half the story — GDP impairment is expected to hit 33% by 2038 in the City of Laughlin, which ranks 94th percentile nationally. Bullhead’s economy is heavily reliant on Laughlin’s gaming industry. Economic and property losses are primarily driven by inland flooding; wildfire risk is relatively low given the built environment of each City.

The mixture of wildfire and flood exposure makes for a rather unsightly climate risk profile. Arizona just recently witnessed the severe impacts of post-wildfire flooding — recent, as in, less than one week ago. On July 16th, Arizona Governor Doug Ducey issued an emergency declaration for Coconino County in response to flash flooding that impacted the Flagstaff area (risQ Score 2.9; Wildfire risQ Score 3.8; Flood risQ Score 2.1). “Severe post-wildfire flooding is creating dangerous challenges for communities in northern Arizona,” Governor Ducey said last Friday. The potential for extreme rainfall-induced flooding is known to increase substantially following wildfire events, given the impacts that fire events have on the terrain, ground conditions and vegetation within the affected area. When wildfires incinerate vegetation, it makes it much more difficult for the underlying soil to absorb precipitation and runoff. Ensuing damage caused by post-fire flooding also grows worse, given the highly destructive debris flow resulting from surface erosion and landslides.

The District makes no mention of climate change in its POS, and no disclosure of its flooding, wildfire or drought exposure. That’s right, none. However, the POS does allude to the City’s exposure to the tourism- and gaming-based economy of neighboring Laughlin City: “the economy of the City is primarily based on tourism and services…the growth of Laughlin’s gaming industry directly affects development of the City” (pg. A-3). Bullhead sits right across the Colorado River from the City of Laughlin (risQ Score 1.8; Wildfire risQ Score 1.6; Flood risQ Score 3.8), which was recently named Nevada’s second largest gaming community in terms of income. Many of the residents of Bullhead are employed by the ten casinos located in Laughlin, and it shows in Bullhead’s workplace distribution — 22% jobs in retail trade and 13% in the accommodation and food services sector, both proxies for the tourism industry. There are also 23% of workers in the health care and social assistance sector, no surprise given that Western Arizona Regional Medical Center (30-minute drive time band: risQ Score 2.0; Wildfire risQ Score 2.3; Flood risQ Score 3.8) is the largest employer in the Bullhead City Metropolitan Area. With COVID-19 reemerging, Bullhead debt investors would be wise to keep an eye towards the resulting impacts on the Laughlin economy, and derivative impacts on the Bullhead workforce and associated property values. Laughlin saw gaming revenues 30% lower in February 2021 vs the month of February 2020, one year prior.

The reemergence of COVID would have an adverse impact on property and economic value in Bullhead, given the City’s dependence on the tourism and gaming industry, as well as the City’s level of vulnerability across a number of socioeconomic spheres. Looking at both risQ’s Social Impact Score as well as recently collected empirical evidence, Bullhead appears at-risk of low vaccination rates and high exposure to health impacts as a result of COVID-19. Investors can use risQ’s Social Impact Scores to identify investments that could broadly serve communities that need more resources, such as the City of Bullhead:

  • Poverty Concentration Score 83.3/100 — higher Scores are seen in areas with high rates of poverty (and the extent of that poverty), and that are underserved in terms of well-paying jobs, affordable housing, and public services in general.
  • Low Affluence Score 80.5/100 higher Scores are seen in areas with populations with lower household incomes, per capita incomes, and higher income inequality.
  • Low Educational Attainment Score 89.4/100 — higher Scores are seen in areas with populations that are broadly underserved in terms of public school district funding, charter school funding, and/or university funding.
  • Persistent Health Obstacles Score 78.2/100 — higher Scores are seen where populations have higher rates of underlying health conditions/risks and more often lack health insurance. The City of Bullhead’s Persistent Health Obstacles Score of 78.2/100 is ~11% higher than Mohave County’s (69.8/100), ~24% higher than the City of Laughlin’s (59.1/100), and ~53% higher than the Arizona state average (36.8/100).

Bullhead’s population is aging and at-risk — the City only ranks 8th percentile nationally for ‘high income young homeowners’, and 10th nationally for children under the age of 18. According to numbers released by the Arizona Department of Health Services earlier this month, only ~37% of Mohave County residents have received at least one dose of the vaccine, compared to a full vaccination rate of ~45% statewide, and ~50% nationally. Bullhead has been the hardest hit city in the County, with 202 deaths to date. None of this is properly disclosed in the District’s POS…

The City has low vaccination rates, a high number of health-related risk factors, no climate risk disclosure and uninformative COVID-19 risk disclosure, high wildfire and even higher inland flood risk that only gets worse after a wildfire has occurred. For those looking to invest in ESG, this Bullhead issuance appears to have an ESG rating with much more room for upward rather than downward movement.

Honorable Mentions

San Francisco CFD No. 2016-01 (Treasure Island IA No. I), CA (risQ Score 0.1; Flood risQ Score 0.5)

Last week we highlighted San Francisco CFD No. 2016-01 (Treasure Island) for its noteworthy 3.9 Flood risQ Score. but there is a rare correction to make as this was an instance where we wrongly assigned the jurisdictional boundary. Upon closer investigation, we find that this issuance only obligates a small portion of the Community Facilities District, which is well insulated from the effects of coastal flooding. Treasure Island Improvement Area No. I benefits from steep coastal slopes and a summit ~300 feet above sea level, while the encompassing Treasure Island CFD project area has higher coastal exposure. This series is secured by taxes levied on Improvement Area No. 1, which is 15 acres of the approximately 461 acre Treasure Island development.

The term “sea level rise” (SLR) appears in the POS 44 times, and rightly so — Treasure Island ranks in the 88th percentile statewide for property value at risk and 90th percentile for GDP impairment from coastal flooding. The POS cites that tides have risen 9” in the Bay since 1854 and a 2020 Regional SLR Vulnerability Study that determined 48” of SLR in the Bay area would cause job relocation and housing displacement (pg. 72-73). That said, Improvement Area No. 1 is seemingly well positioned for the future given the climate resilience afforded by its topography (emphasizing the benefit of having geospatially precise views of risk). The POS provides a statement mirroring the outputs of risQ’s flood modeling: “[the development] is expected to remain above the 100-year floodplain based on current estimates for sea level rise” (pg. 52). In addition, in 2016 Treasure Island established a $250 million capital reserve fund for public projects aimed at protecting vulnerable portions of the island from SLR and is continuing to add to the fund in subsequent years (pg. 24, 73). 

South Carolina Jobs – Economic Development Authority (Seafields at Kiawah Island), SC (risQ Score 4.0; Flood risQ Score 5.0)

The retirement community is situated in a network of river deltas, a stone’s throw from the coastline. This screams coastal hazards—flooding and hurricanes—but oddly enough, the POS does not mention climate change or the impact of natural disasters once, and the only reference to flooding is in relation to insurance (pg. A-8). Here’s what that disclosure should’ve looked like: Seafields at Kiawah Island sits in the 100th percentile statewide for property VaR from all perils risQ measures (hurricane wind, hurricane storm surge, hurricane flood, inland flood, coastal flood, and wildfire). A 100-year coastal flood drives losses to 37% for property sitting within a 6-minute drive time of the facility. In Charleston County (where the community will be located), the past eight years have ranked in the top ten in terms of highest number of flooding events since 1922. A recent blog post we published with Municipal Market Analytics discusses the relationship between climate risk and municipal bond issuer impairment. In CCRCs, risQ Scores (total and by peril) are correlated with impairment propensities. As climate change materializes in more frequent and severe hazards, issuers already facing impairment will be most heavily affected. The County’s climate resilience planning is limited to its Hazard Mitigation Plan. The Plan discusses ongoing efforts including property protection (retrofits, acquisition of repetitive loss properties, insurance), drainage improvement projects, floodplain/resource preservation, and emergency services. These initiatives seem too little too late. 

Miami Lakes Water and Sewer System, FL (risQ Score 4.5; Hurricane risQ Score 3.8)

The proceeds of this issuance are primarily for drainage system and flood mitigation improvements in several locations throughout the Town of Miami Lakes (pg. 2-4). When presented with the reality that Miami Lakes experiences torrential flooding multiple times a year, these improvements could be viewed as too late and providing too little mitigation amidst the Town’s worsening flood risk under climate change.

The service area of the Water and Sewer System ranks in the 95th percentile nationally for property loss due to hurricane wind and hurricane flood; and, it doesn’t even take a hurricane to cause extreme property damage and loss: Tropical Storm Eta, the 29th storm of last year’s hurricane season, did so without reaching hurricane-level intensity. From November 7th through 9th, Eta dropped historic rainfall on the Town, resulting in widespread power outages and property loss. A water main broke less than a month before the tropical storm and caused flooding enough to disrupt traffic (Some residents took to their boats and Jet-Skis). The Utility struggles to stay ahead of its climate exposure — add in the fact that residents of Miami Lake already have a high cost of living (Percent of Income Spent on Housing of 86.2), and there’s even more reasons why residents may choose not to stick around. 

Residents and investors have plenty to consider this year. Playing catchup repairing outdated drainage systems seems lackluster given the reality of Miami Lakes’ climate. The youth are aware of what awaits in their immediate futures, while leadership continues to spout the same stagnant rhetoric: meaningful change is too expensive. Excluding a short paragraph about the Town entering in a line of credit agreement with BankUnited to provide liquidity for emergency response (pg. B-33), the immediacy for climate action seems like an afterthought.

SER-Niños Schools, TX (risQ Score 2.9; Flood risQ Score 2.8)

Located in the Gulfton area of Houston, TX, SER-Niños aims to offer a dual language curriculum to at-risk children through private and public funding. Currently operating three schools, proceeds of the issuance are expected to finance the plans to construct a fourth, to accommodate grades 9-12. Although the mission statement is detailed and rather commendable, there is no mention of climate change or any hazards in the POS. The only climate-related mention is on pg. 48, suggesting that the average daily attendance may be adjusted depending on extreme weather conditions. The absence of robust discussion on climate and natural disaster risk is unsettling considering that these schools are located in flood-prone Houston and the final maturity of the 2021A series isn’t until 2051 (although optional redemption begins in 2031). If we look at property value at risk and GDP impairment within a 20 minute drive of the new high school out to the year 2050, those numbers pop to 16.9% and 65.8% respectively.

With a Social Impact Score in the low 50s for all 4 locations and a Minority Population Score in the high 80s, the level of racial inequality is stark. The drastic changes in Social Impact Scores across different drive time radii also provide a compelling view of the surrounding area’s socioeconomic profile. The Social Impact Score for SER-Ninos Elementary School II drops from 76.6 within a 6-minute drive time to 36.0 when expanded to encompass the area covered in a 20-minute drive time. Similarly, the Social Impact Score for SER-Niños Middle School drops from 81.7 at a 6-minute radius to 18.9 at a 12-minute radius. This large change may be attributed to the change in neighborhoods, from Gulfton to Bellaire. The income and economic disparities between the two communities are widely documented. While a lot of the Gulfton residents are from the working class community, primarily Hispanic, and working for minimum wage, Bellaire is considered to be one of the richest cities in Texas. According to The Episcopal Health Foundation, the average life expectancy in Bellaire is 87 years, whereas Gulfton has a life expectancy of 75.9, i.e., a decade less within a driving time of 10-20 minutes. Whether the stated social mission of the schools ends up being served will come down to whether the enrollment looks like a geospatial donut.