Weekly Preliminary OS Climate Risk Review (7/8/21)

By July 16, 2021 No Comments

The Texas Tribune, May 21 2021: Houston, Harris County get nothing in latest round of $1 billion federal Hurricane Harvey relief funding.

This week, via parallel issuers, we’re appraising the climate risk pseudo-disclosure and poor financial assumptions of a city, county and state with some post-Harvey intergovernmental drama mixed in:

– $275,000,000* Harris County Flood Control District Improvement Refunding Bonds, Series 2021a

– $32,685,000* City Of Houston, Texas Convention & Entertainment Facilities Department Hotel Occupancy Tax And Special Revenue Refunding Bonds, Series 2021

Harris County is the most populous county in Texas (3rd nationally) and home to Houston, the largest city in Texas (4th nationally). The Harris County Flood Control District (HCFCD; risQ Score 3.2; Flood risQ Score 3.1) has boundaries coterminous with the County, its bonds secured and payable from ad valorem taxes levied on all taxable property within the County; the City of Houston (risQ Score 2.9; Flood risQ Score 2.7) series is payable from a portion of revenues generated by the City through a Hotel Occupancy Tax as well as fees generated at Parking Facilities.

The issuers both disappoint on depth and breadth of climate risk disclosure, especially in light of the massively disruptive Hurricane Harvey event in 2017 as well as subsequent issues with procuring federal aid. HCFCD omits any mention of climate change or global warming in its disclosure, merely borrowing boilerplate language from past weather risk-related disclosure sections contained in pre-Harvey official statements. The issuer also provides a courtesy disclosure of impacts following the February 2021 Winter Storm Uri, but there’s no actual information of any value provided — non-disclosure fluff.

The City of Houston provides a marginally better climate risk disclosure, namely in its delineating the threat of expanded FEMA floodplains on property values within the City, stating that “residential, commercial, and industrial properties in the City that recently have been reclassified as being within the 100-year floodplain could experience a diminution in value, the extent of which has not yet been determined. It is anticipated that a pending federal climate study will result in floodplain map changes that will significantly increase the 100-year flood elevation and floodplain. (POS pg. 64)” The HCFCD issuer frames the risk of updated FEMA flood zones in conditional terms, stating that “[p]roperties that are currently located outside of a designated flood-prone area may suffer a reduction in value if they are placed within the boundaries of a special flood hazard area the next time FEMA updates and revises its flood maps. (POS pg. 26)”

Each issuer’s overview on the implications that expanded FEMA floodplains could have on property values is materially more robust than what we typically find in, say, Florida issuer POS; however, both issuers still provide only the bare minimum disclosure, with no attempt to investigate or quantify emerging risks in a format that is actually valuable to prospective investors.

A recent event that has catalyzed the discourse surrounding the merits of expanding FEMA floodplains was Hurricane Harvey in 2017. Harvey was a major economic disruptor and property loss driver for both Harris County and the City of Houston. The Category 4 hurricane caused over $125 billion in damage across the State of Texas, damaging over 300,000 building structures in Harris County. During the 6-day period that Harvey rained over Texas and Louisiana, the storm dropped a total 27 trillion tons of water. According to Harris County Flood Control District (no, not in its POS, on its website…), Harvey was the third 500-year event recorded in the Houston area in a 3-year period. At the time, only an approximate 15% of homes in the County had NFIP coverage — despite the relatively low percentage of homes in Harris County with flood coverage, losses from Harvey accounted for $6.5 billion of the $10 billion in FEMA NFIP claim during the 2000-2020 period. Both issuers’ POSs provide a Hurricane Harvey-related disclosure section, though fail to sufficiently describe the residual impacts of that event that are still being felt in the area today, almost 4 years later. Houston does a slightly better job than Harris:

City of Houston — Hurricane Harvey and Weather-Related Risks (POS pg. 32)

  • The storm resulted in flooding of the Tranquility Park and Civic Center parking garages, which provide the majority of the Pledged Parking Revenues.
  • These garages were closed for approximately three months and restored to partial operation in November 2017.
  • Because of the damage caused by Hurricane Harvey in Fiscal year 2018, Pledged Parking Revenues dropped to $5.23 million in such Fiscal Year from $9.59 million in Fiscal Year 2017. 
  • The total repair cost of Hurricane Harvey related damage to the Parking Facilities was approximately $78.2 million.
  • In addition to Hurricane Harvey, the greater Houston area, including the City, has experienced three storms exceeding a 0.2% probability (i.e. “500‐year flood” event) since 2015.
  • A hurricane or other storm of great severity that hits the City could significantly decrease Pledged Revenues due to damage sustained by the Parking Facilities, hotels, motels and other vendors of sleeping accommodations, and other vital infrastructure in the area.

Harris County Flood Control District – Hurricane Harvey (POS pg. 27)

  • Property values in the District were impacted temporarily for homes that sustained flood damage and were still being repaired on January 1, 2018.
  • Once fully repaired, these homes generally returned to their pre-storm values. The assessed real property values in the District as of the end of the Fiscal Years ended February 29, 2019 and February 28, 2020 were both up overall by 7.5% and 4.9%, respectively. 
  • As with similar events, there was not a significant impact on property values for the District, due to continued growth in both residential and business property.
  • On August 25, 2018, voters approved $2,500,000,000 in bonds for the purpose of financing flood control.
  • The District currently also receives an annual allocation of $120 million of property tax revenue for use in flood control efforts.

We appreciate that the HCFCD issuer is maintaining a glass-half-full perspective on the world post-Harvey, but, we’ll take a hard pass on whatever Kool-Aid they’re drinking. The bolded highlights are evidence of the issuer’s blatant misdirection in disclosing climate risk, positioning the County’s recent growth in post-Harvey ‘assessed’ property value as a credit positive. Indeed, 2019 home value appraisals reflected value appreciation of 20 percent or higher than pre-Harvey levels. However, what the issuer fails to mention is the fact that these appraisal increases are in fact coming at the expense of homeowners in the County, many of which are “worry[ing] they could be paying taxes on a home that wouldn’t sell for anything close to the price it was appraised. (source)” Hmm…is Harris County shaking down its taxpayers…? Such disparities between assessed and market values, often to the detriment of owners of lower value property and correlated along racial lines are an active area of research for risQ and our academic partners.

According to the findings of a 2020 study conducted by FreddieMac, home prices fell in the City of Houston’s 100-year floodplain on average 4.6% compared to homes located outside the floodplain. Floodplain home prices were already discounted 2.3% compared to non-floodplain homes pre-Harvey — that discount popped to 5.5% post-Harvey. Even with these material discounts in floodplain vs. non-floodplain situated home values, we estimate that only 22% of Harris County’s flood risk is currently contained within FEMA floodplains, implying that most flood-prone homeowners in Harris County are not yet even paying for needed flood coverage, home prices have yet to properly reflect actual flood risk, and that the vast majority of future-year flood losses will not be covered by the National Flood Insurance Program. With the imminent expansion of 100-year FEMA floodplains across the U.S., as well as the imminent adoption of NFIP’s Risk Rating 2.0 aimed at calibrating insurance premiums to actual flood risk, the cost of living in Harris County will inevitably increase and the County government’s ability to raise appraisal values and shakedown their property taxpayers will only erode, leaving the County in an increasingly unsustainable and financially precarious position. With Harris County already ranking #1 in the entire country in terms of FEMA-funded property buyouts being (apparently poorly) conducted through the HCFCD, increasing Harvery-level hurricane activity is only expected to add additional pressure to buyout programs and the need for flood control infrastructure.

Hurricane Harvey was a Category 4 event; we project that an event of at least that magnitude has a ~20% chance of occurring in the next 20 years. A Category 5 event has a 9% probability of occurring during the same time period, and would result in ~20% losses to property within the County.

Perhaps Harris County can engineer its way out of sinking into a vicious cycle of increasing flood risk and increasing costs of living due to higher insurance premiums and property taxes…?

Although Harris County approved a major $2.5 billion issuance in 2018 to finance flood control projects in an effort to bolster the County’s resilience to future storms, as of March 2021 those projects are facing a $1.4 billion shortfall that could threaten their completion. The massive deficit is a direct result of a billion-dollar miscalculation by Harris County leadership regarding how much federal aid would flow through to County coffers. This shortfall is expected to have an outsized impact on the Greater Houston Area’s poorest, most disadvantaged neighborhoods that have experienced repeated flooding in recent decades albeit receiving less project funding than the more affluent (and politically-connected?) communities in Harris County (read: Harris County’s gamble on flood control bond leaves projects in poorest communities underfunded (April 23 2021)).

Relatively vulnerable and flood-prone neighborhoods that are in need of resilience funding are widely prevalent in Houston. Harris County and the City of Houston have similar climate risk profiles, both ranking in the top 15% and 7% in their respective cohorts for expected natural hazard-driven property value-at-risk and GDP impairment by 2031. A hurricane event of any magnitude has an annual probability of occurrence in the shared region of approximately 2.1% (~18% over a 10-year period), and is expected to effect 7.5% in property value losses as a function of flooding alone (remember, Harvey dropped 27 trillion gallons of water…). 

The County and City have essentially the same levels of exposure to the same hazards. Where the profile differs materially is in each issuer’s levels of vulnerability population. Provided below is a view of the risQ Social Impact profile for each location — while the City has a more stable profile in terms of Educational Attainment (25.9) and Prestige Employment (25.2) (lower Social Impact Scores equate to more favorable socioeconomic conditions), the City lags behind the County in a few critical areas, namely:

  • Low Affluence (39.4, +26.90%) — indication of populations with lower household incomes, per capita incomes, and higher income inequality. One example use case for this score is where investors aim to allocate money to places that are broadly underserved in terms of well-paying jobs, affordable housing, and public services.
  • Poverty Concentration (62.6, +18.05%) — seen in areas with populations that have higher rates of poverty, as well as the extent of that poverty — an important factor for investors that aim to direct funding to areas that are broadly underserved in terms of robust economic activity and social programs.
  • Persistent Health Obstacles (68.2, +19.50%) — high scores are seen where populations have higher rates of underlying health conditions/risks and often lack health insurance, important for investors looking to put money in places that are in need of critical healthcare services.

The City also outpaces the County in terms of Income Spent on Housing (78.9) — which is expected to continue to increase as a function of increased flood risk — as well as Non-White/Minority Population (85.6). It’s clear that Houston’s relatively vulnerable population has a greater need for flood protection funding — unfortunately, the State of Texas isn’t making that effort any easier for the City. Houston recently sued the Texas General Land Office in July 2020 over $1.27 billion in funding provided by the U.S. Department of Housing and Urban Development, which it had expected to allocate to residents of Houston who lost their homes during Harvey. And, in May of this year, it was announced that neither Harris County nor the City of Houston would be awarded any of the over $1 billion in funding for which they had applied, a major setback for the County in closing its $1.4 billion shortfall in flood protection financing. On a positive note, Harris County has recently decided to take the situation into its own hands, taking initial steps to make up that $1.4 billion deficit by leveraging County toll road revenue as well as proceeds of future Harris County Toll Road Authority debt issuances. However, the toll road revenue financing plan is still expected to leave the County $950 million short of financing approved flood resilience projects, potentially driving the County to issue additional debt and/or increase taxes within the Flood Control District.

None of this ongoing intergovernmental drama, fiscal and financial mismanagement, and flood project funding shortfalls are disclosed in either issuers’ preliminary official statement. That is a major cause for concern. Putting aside the fact that neither issuer discloses its risks posed by climate change, both issuers’ disclosure of Harvey- and FEMA floodplain-related impacts provide nothing more than a diversion from the emerging and more material issues unraveling in that region — financially, politically and socially. The proceeds of the $275 million Harris County Flood Control District issuance isn’t even being used to finance flood control projects, but rather to refund the District’s outstanding 2018 Notes. And, although the City of Houston does an exemplary job of summarizing the financial impacts that Hurricane Harvey had on its Pledged Parking Revenues at the time, the failure to discuss increasing risks made worse under climate change leaves us wondering — are these municipalities incompetent, ignorant, or just indifferent?

Honorable Mentions

Sonoma County Community College District, CA (risQ Score 2.2; Wildfire risQ Score 3.1)

Proceeds of the issuance are financing student housing on the Santa Rosa Junior College campus. Unfortunately, Santa Rosa City has historically been a victim of severe wildfire damage —  the Tubbs Fire in 2017 burned 36,000 acres and destroyed more than 5,600 structures, including multiple blocks within the City. While the POS mentions that the Tubbs Fire spared the District’s facilities, the same was not true for students and employees of the District; more than 200 students and 50 employees lost their homes during the Tubbs event.

Three years later the District experienced another major fire when the Glass Fire stormed through and consumed 67,000 acres throughout Napa and Sonoma Counties. The wildfire risk in the District is “robust”, with a Wildfire risQ Score of 3.1 and a 500-year wildfire event putting 37% of property value at risk. The District operates two campuses, the main campus in Santa Rosa (Wildfire risQ Score 2.8), and a campus in Petaluma. Between the two, the Petaluma Campus (Wildfire risQ Score 3.3) has more wildfire risk when comparing the campuses at a 20-minute drive time radius. That Petaluma risk climbs in higher (to 3.6) in the direct 6 minute vicinity of the campus. as it sits close to the Wildland Urban Interface. Fortunately, Santa Rosa Junior College Petaluma Campus is responsible for a smaller share of enrollment, about 10% total. 

While the District has experienced major wildfire events in recent years, it is also failing to sustain levels of enrollment.  Student enrollment is down across the District’s campuses: ~9% lower in 2019 than in 2015 (pg A-8).  Furthermore, in 2020, the District drew 75% of its student body from wildfire-prone Sonoma County (pg A-9), presumably within commuting distance of the campuses. The District is implementing policies that promote the new housing development, such as requiring international students to reside on campus for one year (pg 3), but such policies may not be enough to fill up this housing project in a wildfire-prone area with dwindling enrollment.

Diamondhead Water and Sewer, MS (risQ Score 3.7; Flood risQ Score 4.0; Wildfire risQ Score 3.8)

Five lines of text under “Hurricane Risk” on page 10 and eleven lines of text under “Climate Change” on page 11 are what you get in the POS. The former states that catastrophic damage is “virtually certain” to occur before the final maturity of this 2021 bond series. The latter reads like a proverbial shrug of the shoulders. Lets maybe look at what’s not in the POS to see just how bad it

As a part of the Gulfport-Biloxi Metropolitan Area, Diamondhead began as a resort community  50 miles northeast from the cultural hotspot of New Orleans. Ironically, the City established itself after assessing the damage from an extreme weather event (Hurricane Camille) in the summer of 1969. The topography of Diamondhead has some elevation, a geological characteristic unlike most of the flat plain that makes up the Gulf Coast; this buffered the area from the worst of the hurricane damage and contractors decided to go forward with construction. Made up of mostly affluent white retirees, Diamondhead became known as a haven of leisure for those exiting the workforce from government employers like NASA, Stennis Space Center in Mississippi, and Michoud Assembly Facility in New Orleans. Today, the City’s demographics lean younger, yet the population, around 8,000, remains white and affluent, with a Social Impact Score of 19.8 (with underlying Minority Population Score 26.6; Low Affluence Score 30.0) and with employment centered around recreation and tourism. (see “Diamondhead: Where Living is Easy.”). This unique location, however, is experiencing accelerated erosion and drainage issues in recent months caused by a worsening climate which has resulted in decreased revenue and rising expenses for the Utility District.

As for recent natural disasters, Hurricane Katrina laid waste to Diamondhead in 2005. The City lost half of its community including over 2,000 homes, a marina, yacht club, an airport, and a hangar. Those who remained post-Katrina were left without water and power for 21 days. The leftover debris accumulated in Clermont Harbor and remained there until as recently as 2015. One year later, massive pockets of rain flooded the City and outpaced the Utility’s drainage and discharge methods. A handful of yearly flood events later, and we arrive in 2021: Diamondhead allocated $1.8 million to address drainage issues per that brief two-paragraph summary on climate change (pg 11). Despite this, Tropical Storm Claudette rolled through Hancock County last month, once again endangering lives and once again outpacing drainage efforts. Pretty telling as well that “flood” only appears twice in 190 pages of POS from a water and sewer district, and certainly without any salient recent details.

Oh, by the way, we haven’t even addressed the absurdly high wildfire risk…High coastal winds have been a key driver of wildfire spread in Hancock County, and Diamondhead also ranks 96th and 100th percentile for wildfire risk nationally and statewide, respectively, as part of that. If this area wants to survive—not to mention taking it easy—a more comprehensive mitigation plan is warranted. Each year brings more erosion, flooding, and fire. $1.8 million isn’t enough funding to address the problems this district is facing; in the face of revenues that have decreased by 3.6% ($156,830) and operating expenses that increased by 2.7% ($62,861), finding workable solutions won’t be easy.

Grand Strand Water and Sewer System, SC (risQ Score 3.0; Flood risQ Score 3.8)

Located in and around greater Myrtle Beach and the City of Conway, Grand Strand Water and Sewer System’s (GSWSA) disclosure is a refreshing take on flood mitigation in the face of climate change. With the Utility sitting in the 85th and 86th percentile nationally for hurricane flood and wind respectively, the POS offers a deeper dive into existing infrastructure plans and other initiatives such as performing drainage studies, construction of berms, improving operational flexibility of treatment systems to combat future flood risks, as well as grants from FEMA, RIA and CDBG (pg. 64). The City of Conway is also proactive in its objective to mitigate the County’s flood risk, as seen with the recent $6 million grant by the Economic Development Association (EDA) for wastewater system infrastructure upgrades and eliminating overflow during flood events making headlines early this year. 

GSWSA has been struck by a number of hurricanes in the past, with Hurricane Matthew costing the Utility roughly $2.5 million in preparation and recovery costs (pg. 36). The POS mentions the possibility of revenue loss from escalated recovery costs and interruptions to services, as well declines in tourism. The focus on maintaining infrastructure resiliency only addresses the former concern; but with tourism making up a significant part of the County’s revenue, future climate hazards could mean potential financial losses that are not being discussed enough. The issuer also has a moderately high Social Impact Score of 65.3, driven largely by Persistent Health Obstacles (76.9) and Income Spent on Housing (69.6). With fairly high reported eviction rates of 7.6%, and 37% of the population paying rent that exceeds 40% of their income, affordable and secure housing is a murky subject to say the least.

Terrebonne Parish, LA (risQ Score 4.6; Flood risQ Score 4.9)

Terrebonne Parish, southwest of New Orleans, ranks in the 100th percentile for both GDP impairment and property value at risk, with a Cat 3 hurricane expected to drive losses to around 60% of property values. Hurricane Zeta, a Cat 2 hurricane that tore through the Parish last October, left nearly half of its residents without electricity. The POS does an exemplary job of hurricane disclosure delving into perils and plans of action. The POS mentions the area’s vulnerability and susceptibility to storms, storm surge, and flooding (pg. 20), the deterioration of coastal marshes from saltwater intrusion (pg. 18) and even the risk hurricane activity poses to state mineral royalties (pg. C-33). To no one’s surprise, the Parish has heavily invested (approximately $1 billion, pg. 18) in risk mitigation systems, and is protected by five levels of hurricane risk reduction through Parish constructed levees and the Morganza to the Gulf (MTG) Risk Reduction Project. These strategies include extensive levees that span 70 miles, floodgate structures, and control gates designed to enhance natural protective barriers (barrier islands and marsh) and protect developed areas. The Parish also released an adaptation strategy in 2019. The POS notes that in comparison to Hurricane Rita in 2005, the number of properties damaged by Hurricane Barry in 2019 reduced 99.99% as a result of the MTG Project (pg. 19). Climate adaptation and resilience pays off. 

The POS also isn’t shy about its financial risk—the amount of sales tax collections in the Parish is heavily exposed to oil and gas industry regulations (pg. 21). Five out of the ten top taxpayers in the Parish in 2020 were fossil fuel industries (pg. B-4). Around 11% of jobs in the Parish are related to mining, quarrying, and oil and gas extraction. From 2014 to 2021, sales tax collections declined by 20% which the POS attributes to the decline in the offshore oil and gas industry (pg. C-33). Biden’s recent executive orders restricting the fossil fuel industry foreshadow increasingly stringent environmental policies that may impact oil and gas activity in the Parish (pg. 21). Neither the State nor the Parish has released greenhouse gas emissions reductions targets, but Terrebonne clearly has some carbon transition risk to navigate.

The Parish scored relatively high on the Social Impact Score with 71.7 from a combination of a large Minority Population, Low Education Attainment, Persistent Health Obstacles, and a high Poverty Concentration. BIPOC communities are disproportionately impacted by climate change due to redlining, inadequate infrastructure, and lack of access to resources. The United Houma Nation, an indigenous tribe living in Terrebonne Parish, relies on fishing, shrimping, trapping and other subsistence activities, but the increasing threat of climate change has inhibited these activities. Additionally, around 20% of Terrebonne’s residents live below the poverty line— climate change will only compound that inequality. From an ESG perspective, the quality of disclosure, the high Social Impact and the active attention to climate risk mitigation make this a much more compelling proposition than the likes of Diamondhead Water & Sewer above.