“While the District is not aware of any particular risk of wildfire within the District, there can be no assurances that wildfires won’t occur within the District.” Is that issuer-speak for “Sorry, not sorry”?
This week’s climate risk non-disclosure non-apologist:
$21,455,000* City Of Ontario Community Facilities District No. 53 (Tevelde Facilities) Special Tax Bonds, Series 2021
The City of Ontario is located near the nexus of four California counties — Los Angeles, Orange, Riverside and San Bernardino. The proceeds of the issuance will be used to finance the development of a master planned community known as Shadetree, which will contain 432 single-family homes (so watch for that to wind its way into an agency RMBS CUSIP or two…we know that securitization rates increase with wildfire probability). Shadetree sits within a larger master-planned community development known as Ontario Ranch, which is 3,500 acres in size and will ultimately comprise 18,000 units. The Series 2021 Bonds are special obligations of the Ontario CFD and payable from revenues generated from a tax levied on property within the boundaries of the District.
In determining the robustness of an issuer’s risk disclosure, one must consider both historical events and future projections of risk. Although Ontario Ranch has not been directly impacted by a wildfire event in recorded history, the amount of activity in the surrounding area in recent years is putting heat on the area (pun intended). According to the USDA Forest Service and USGS Monitoring Trends in Burn Severity (MTBS) Data Explorer, there have been dozens of high severity wildfire events in close proximity to the District in recent years:
- Country Fire (1996), 5.6 miles northwest, 1346 acres burned, severity moderate
- Gran Prix Fire (2003), 12.5 miles due north, 50,799 acres burned, severity moderate
- Freeway Complex Fire (2008), 5.8 miles southwest, 29,350 acres burned, severity low
- Highway Fire (2015), 5 miles south, 1212 acres burned, severity moderate
- Blue Ridge Fire (2020), 5.5 miles southwest, 14,000 acres, severity moderate
Though the District hasn’t experienced direct property damage or losses from past wildfire events, the resulting impacts on air quality have become increasingly apparent in Southern California in recent years. If you live in the northeast, you’ve most likely noticed days in recent weeks where the sky has been covered in haze. In just the past week, it was reported that wildfire smoke from the west coast contributed to New York City’s worst air quality in 15 years, and led to an ‘unhealthy’ air quality alert in Massachusetts. These states are thousands of miles away from the ongoing wildfire events out west — the Ontario CFD, on the other hand, is within less than a half-hour’s drive of the recent Blue Ridge Fire in Chino Hills, which ripped through 14,000 acres this past October. Given the economic shutdown caused by COVID-19 last year, most of the world has seen pollution decrease and air quality improve. Not California. Wildfire activity throughout the State led to air quality levels that ranked amongst the worst in the world. In October 2020, Southern California was reported as having the worst air quality in the nation following wildfires burning in the counties of (yep, you guessed it) Los Angeles, Orange, Riverside and San Bernardino.
One could make the case that the District’s population is healthy enough to withstand air quality issues — the population has a Persistent Health Obstacles Score of just 2.2/100, indicating that the population has a relatively low rate of underlying health conditions/risks. The District is home to a younger, affluent population, where 41% are considered ‘high income young homeowners’, ranking in the 89th percentile statewide (Low Affluence Score is 11.2/100). As wildfire activity continues to increase in severity and prevalence in future years, wildfire-driven property losses may evolve into a far more concerning risk for this Ontario CFD than air quality issues, especially considering the younger, more mobile population living within the District. We project that by 2031, wildfires will drive 4.2% property losses in the District, and a 500-year wildfire event (6% probability over a 30-year time horizon) would drive 58.7% property losses in the District (the Series 2021 Bonds are currently dated out to the year 2051).
It’s a sound assumption that the insurers underwriting policies for homeowners in the Ontario CFD aren’t weighing wildfire risk heavily in their catastrophe and actuarial modeling — again, there’s no historical precedent for property-loss causing wildfire events within Ontario. As climate change drives Ontario’s wildfire exposure higher, and as insurers adopt modeling methodologies that explicitly account for an evolving wildfire risk landscape, residents of Ontario CFD should expect their rates to increase in the Ontario area. Cost of living is already high within the District. The Percent of Income Spent on Housing Score is 88.8/100. Stressed renters (40%+ rent-to-income) comprise 48% of the population (83rd percentile statewide), and median monthly housing costs ranks 78th percentile nationally.
Okay, we’ve given you a lot to process. To be fair, why don’t we let the issuer weigh-in. Lets dig into the POS on pages 51-52 under the section header Geologic, Topographic and Climatic Conditions, and distill down to the sections that speak to wildfire risk, specifically.
The District, like all California communities, may be subject to unpredictable seismic activity, fires, flood, or other natural disasters.
In recent years, portions of Southern California have experienced wildfires that have burned thousands of acres and destroyed thousands of homes and structures, even in areas not previously thought to be prone to wildfires. While the District is not aware of any particular risk of wildfire within the District, there can be no assurances that wildfires won’t occur within the District. Property damage due to wildfire could result in a significant decrease in the market value of property in [the] District and in the ability or willingness of property owners to pay Special Taxes when due.
In the event of a severe earthquake, fire, flood or other natural disaster, there may be significant damage to both property and infrastructure in the District. As a result, a substantial portion of the property owners may be unable or unwilling to pay the Special Taxes when due. In addition, the value of land in the District could be diminished in the aftermath of such a natural disaster, reducing the resulting proceeds of foreclosure sales in the event of delinquencies in the payment of the Special Taxes.
Honestly, at first glance, the wildfire risk disclosure could be worse. Sure there’s no mention of climate change (a bit odd to see in a California issuer’s POS…); that being said, it’s relatively robust as compared to the copy-and-paste risk disclosure we see published by Florida issuers week-after-week. We’re sure a California issuer wouldn’t stoop to the same level of risk disclosure piracy as a Florida issuer would…right? Right?
Ugh. Plugging a sentence from the Ontario CFD’s wildfire risk disclosure section into Google points us to multiple preliminary official statements tied to California CFD issuances that were underwritten by the same brokerage firm, two from 2020 and one from 2018. The texts in two of the disclosures is essentially identical to that of the Ontario CFD’s; the third disclosure, from Jurupa Community Services District, provides a mix of disclosure copy-and-paste and paraphrasing, but at least notes that “climate change will lead to even more frequent and more damaging wildfires in the futures” (albeit, they cite “some commentators” as a source for that claim).
Although the four disclosure-sharing Districts sit in close proximity to each other, they have wildly different climate risk profiles. The Ontario CFD has the highest wildfire exposure, ranking 91st percentile nationally. Just a 20-minute drive south of Ontario CFD, the Corona-Norco CFD has virtually 0 wildfire risk — instead, the Corona-Norco CFD has an eye-popping Flood risQ Score of 4.9, and ranks in the 98th percentile statewide for inland flood risk across the Dirt Deal cohort (the Ontario CFD’s Flood risQ Score is 1.3). The Jurupa CFD is embedded within the much larger Jurupa Community Services District, and they share a relatively similar climate risk profile, though the CFD has a Total risQ Score and Combined Property VaR (by 2031) double that of the encompassing District. The Jurupa Districts are both within a short jog of the Ontario CFD, but both have an order-of-magnitude lower wildfire exposure.
Again: same climate risk disclosures, same geographic area, wildly different climate risk. The shared disclosure sentence that really bugs us is “While the District is not aware of any particular risk of wildfire within the District, there can be no assurances that wildfires won’t occur within the District.” This is like one’s significant other saying on the altar “While I’m not aware of any particular risk of us needing a prenuptial agreement, there can be no assurances that I won’t leave you within 10 years.” The statement isn’t technically wrong, it’s just…a turn-off. I suppose we shouldn’t be too hard on the climate risk disclosure pirating — we’ve seen it before and for many years it’s been business-as-usual for many of these municipal issuers (and underwriters). That being said, this lackluster climate risk accounting is either a display of blatant incompetence or indifference.
Baptist Health South Florida, FL (risQ Score 4.4; Hurricane risQ Score 3.8; Flood risQ Score 3.4)
Baptist Health South Florida (BHSF) operates a string of eleven hospitals along the southeast coast of Florida which traverse Fort Lauderdale, Miami, and the Keys. All of which boast significant risQ Scores. Given the hospitals’ exposure, you’d expect a decent disclosure. Alas, no. The POS offers a half-hearted effort, merely stating that the service areas are subject to hurricanes and to the effects of climate change (pg. 11). The POS notes that the cost and availability of insurance coverage is liable to extreme weather, such as hurricane wind (pg. A-49), but fails to mention flood even once; 2 of the hospitals in the system have a Flood risQ Score above 4.5 and 10 hospitals boast Flood risQ Scores above 3.5.
In 2017, Hurricane Irma damaged Fishermen’s Community Hospital (risQ Score 5.0; Hurricane risQ Score 4.8; Flood risQ Score 5.0), a critical access hospital located in the Keys, beyond repair (pg. A-16). FEMA awarded the State nearly $1.5 million to help BHSF defray the costs of the emergency response. In Fall 2021, a new $43.7 million facility will be opened in the old one’s place. The Facility is designed to withstand wind from a Cat 5 hurricane, but there is this thing called water that often comes with hurricanes and is even more destructive if you go by the numbers. Beyond that, which other facilities are waiting their turn and haven’t been rebuilt at higher specifications? The POS mentions Boca Raton Regional Hospital (risQ Score 4.0; Hurricane risQ Score 3.4; Flood risQ Score 3.9) was built in 1967 (pg. A-16). Though Florida has adopted up-to-date building codes, old buildings are not required to comply. Beyond the climate resilience design noted in the new Fishermen’s Community Hospital, the POS did not clarify how BHSF is fortifying its other properties. Southeast Florida, however, does have a Regional Climate Change Compact which covers most of the BHSF’s service area.
Las Vegas SID No. 816 (Summerlin Village 22), NV (risQ Score 1.8; Wildfire risQ Score 2.6)
Summerlin Village 22 is on the west side of Las Vegas near the Red Rock Canyon Conservation Area. It’s located in the Summerlin West development area (Wildfire risQ Score 3.4) and is part of the larger 22,500 acres Summerlin residential community. The Red Rock Conservation area is no stranger to wildfires — one of the largest in recent memory was the Carpenter 1 fire in 2013 which burned ~28,000 acres 10 miles west of Summerlin Village. There was also the Cottonwood fire in 2020 which consumed ~2,800 acres 10 miles southwest of the Village and the 2006 Scenic fire which burned ~16,000 acres 6 miles to the southwest. risQ projects that a 500-year fire would put 28% of property value at risk within the Village. With the history of wildfires lurking on the District’s nearby boundaries, and with exposure to future events, one would think that wildfire risk may at least get a passing mention in the POS. Nope…the only mention of fire comes in the context of fire protection services; no mention of how climate change may impact the district either
However, it might not be wildfires that have residents feeling the heat: a more frequent climate-induced problem in the area is extreme heat days, which Clark County experienced with record-setting temperatures earlier this month. The region is known for its “very hot and dry” days with temperatures often exceeding 100 degrees Fahrenheit (pg. 23). We can project the changes in the number of days over 90 and 100 degrees under future climate conditions as follows. Historically, Clark County has 100-125 days over 90 degrees and 50-75 days over 100 degrees. Under greenhouse gas emissions scenario RCP 8.5 — defined as a business-as-usual trajectory which some argue is the most relevant scenario for short and medium-term planning horizons — Clark County is expected to see a ~15% increase in the average number of days per year above 90 degrees and ~45% increase in the average number of days over 100 by the year 2030. If we look out to 2050, which aligns with the series’ final maturity date, the change is even more drastic: a 25% increase in the average number of days over 90 degrees per year and 60% more days above 100 degrees per year by 2050 compared to historic observations.
Summerlin Village 22 is one of the most affluent areas in the state — with per capita income, average house value, and median household income all ranking in the 100th percentile statewide — so it’s safe to say they’ll be able to afford the higher A/C bills; however, more extreme heat days mixed with a tick of wildfire risk may have some residents reconsidering whether to replant their roots.
Boise Air Terminal/Gowen Field, ID (risQ Score 2.0; Wildfire risQ Score 3.1)
At first glance, it looks like Boise City’s Air Terminal has moderately-high wildfire risk and a City government that is proactively seeking to mitigate climate change, but not climate risk.
The City, to its credit, is involved in several climate-related initiatives; they have a climate action goal of going carbon neutral by 2050 and have developed a Climate Roadmap to achieve this objective (pg 48). This includes a timeline that aims to accomplish 100% Clean Electricity for Boise government facilities by 2030, 100% Clean Electricity for the Boise community, and a carbon neutral city government by 2035. The POS also mentions projects taken up by the airport to improve energy efficiency and sustainability such as installing solar hot water systems, electric heaters, and recycling programs (pg. 48) In addition, the airlines are continuing research and investment in sustainable aviation fuels which they are gradually introducing into their operations to address climate change (pg A-60).
However, while these actions are steps in the right direction, they do little to address the physical threats that the City (Wildfire risQ Score 3.6) and the airport currently face. At a 6-minute drive time radius from the airport, the Wildfire risQ Score stands at a whooping 4.7, only decreasing further away from the airport to 3.8 at a 15-minute drive time and 3.1 at a 30-minute drive time radius. According to the Eastern Idaho Interagency Fire Center, Idaho has seen a total of 2,805 fires in the last 20 years, averaging about 133 fires per year, and there are more than 20 active fires burning in Idaho currently. While it’s great to see a City and an airport operator doing their part to reduce carbon emissions, equal consideration needs to be given to how to mitigate the physical risks that are already present.
Jefferson Energy Terminal, TX (risQ Score 3.9; Hurricane risQ Score 3.2; Flood risQ Score 3.2)
Before considering future investments in the Jefferson Energy Terminal, located in the Beaumont/ Port Arthur area, we should take a look at its origins. Hurricane Ike made landfall during the 2008 Atlantic hurricane season as the sixth-costliest hurricane in United States history. With over $38 billion in damages, 214 fatalities, punctured pipelines and destroyed facilities that dumped 500,000 gallons of crude oil into the Gulf of Mexico, Ike left devastating scars. Four years later, Jefferson Energy Terminal was built on a 250-acre site on the east bank of the Neches River Ship Channel (Flood risQ Score 3.2) at the Port of Beaumont (Hurricane risQ Score 3.2), on the land scarred by Hurricane Ike. In 2012, the Jefferson County Industrial Development Corporation issued its $46,875,000 in Hurricane Ike Disaster Area Revenue Bonds to finance Jefferson’s initial terminal infrastructure project (pg. 46). Hurricanes Katrina and Harvey also left behind deep economic scars in the billions. Ideally, you never want to walk in front of a dartboard…
Carbon transition will be most difficult for communities reliant on crude oil plants and refineries as major taxpayers and employers. Jefferson County is home to oil and petrochemical companies that make up the top five taxpayers in the County, totaling ~$25 billion in assessed value. ExxonMobil Oil Corporation, the second-highest taxpayer in the County, is the third-highest employer in the City of Beaumont. The County has a large carbon transition liability on top of a high Persistent Health Obstacles Score (79.2) brought on by a dense area of petrochemical plants. They seem fully aware of the importance of investor and stakeholder commitments to ESG practices (pg. 91), so why remain silent about potential risks?
With $425 million in 2021 bonds for facilities expansion, stakeholders would be remiss to bury their heads in the sand of this transition risk hotspot that ranks in the 76th percentile nationally for combined property value-at-risk –a Cat 4 hurricane event (Remember Harvey?) would drive losses to 35% of properties sitting within a 45-minute drive time radius of the Terminal. It’s hard trying to justify why Jefferson didn’t consider these risks in their POS. This myopic failure to disclose leaves investors and taxpayers staring down a volley of incoming darts.