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Weekly Preliminary OS Climate Risk Review (8/26/21)

By September 3, 2021 No Comments

American Heritage Education Foundation serves approximately 2,200 K-12 students through its charter schools in Escondido, CA. While one geographic trend may stand out — most of the schools are located down the street from one another — less apparent is the major wildfire risk these facilities face due to the Borrower’s lack of disclosure. 

This week’s climate risk non-disclosure offender:

California Municipal Finance Authority Education Revenue Bonds (American Heritage Education Foundation Project)

$13,495,000*, California Municipal Finance Authority, Education Revenue Bonds, (American Heritage Education Foundation Project), Series 2021A

$910,000*, California Municipal Finance Authority, Education Revenue Bonds, (American Heritage Education Foundation Project), Taxable Series 2021B

The Bonds

The two revenue bonds series are tied to 5 charter school facilities: Escondido Charter High School, Escondido Junior High & Gymnasium (being acquired with the bonds), Heritage Elementary, Heritage K-8 Modulars (Heritage Flex), and Heritage Junior High. S&P rated the bonds as BBB- with a negative outlook. The bonds will finance improvements to various existing facilities and cover the construction and acquisition costs of a new facility.  

Portfolio risQ Score: 3.2; Wildfire risQ Score: 4.0 (45-min drive time)

All 5 of the obligated facilities have extreme wildfire risk. Below we show wildfire and drought risk within the immediate vicinity of the schools (6 minute drive time radius) as well as for the broader catchment area (20 minute drive time radius) capturing the populations they serve, for a 2030 climate.

Strikingly, the facilities themselves are exposed to some of the highest wildfire risk in the nation, especially those further east in Escondido, a region that very much falls within the Wildland Urban Interface. 
This isn’t a problem down the road; there is significant wildfire risk right now. There have been active wildfires in San Diego County as recently as two months ago.

The populations living closest to them are also socioeconomically vulnerable — especially in comparison to the broader 20-minute drive time radius catchment area. The community captured by a 6-minute drive time radius from Heritage Elementary School is about 60,000 people, 62%  of whom are Latino. The community has a Percent of Income Spent on Housing Score of 97, and has a Poverty Concentration Score of 86. Almost half of the renting population spends >= 40% of household income on rent, and the majority of residents work in service sectors — Retail Trade, Educational Services, and Health Care & Social assistance. Heritage’s local (6-minute drive time) socioeconomic profile is very similar to the other facilities. 

In total, the population most at risk to wildfires is among the most vulnerable and marginalized populations in the country. Unfortunately, this issuance is a poster child example of the social, economic, and climate risk dynamics we detailed in a recent in depth research piece on wildfire and climate injustice.

Related to wildfire risk, our drought model does not portend well for the City of Escondido. (And of course for anyone remotely tuned in to what’s already going on out west with water scarcity, this shouldn’t be surprising). In the mid 1990s, the city was experiencing drought conditions during ~28% of months. By 2030, the City is expected to experience drought conditions during 46-62% of months depending on greenhouse gas trajectory. By 2050, the outlook is even more grim, with drought conditions persisting during 50-77% of months. Lets also not forget the air quality implications of being in and around wildfires on a consistent basis. Water, Air, Shelter, Safety…its like a runsheet of Maslow’s worst nightmare.

Lack of Climate Risk Disclosure, and Lack of a Social Vulnerability Focus

This issuance fails to mention that the obligated schools are clearly exposed to some of the highest wildfire risks in the country. The preliminary OS does mention climate change, but in such vague high-level terms, one almost gets the sense that there was an explicit decision to avoid mentioning wildfires altogether — while “checking the climate risk disclosure box”.

“The Borrower and the Corporations could be adversely affected by the passage of new climate change, defense, environmental, infrastructure and other laws, policies and regulations. Growing concerns about climate change and greenhouse gases, such as those adopted under the United Nations COP-21 Paris Agreement or the EPA Clean Power Plan, may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions regulations could increase the costs of a construction project or, in some cases, prevent a project from going forward.”

The document also quickly mentions fire as a force majeure that could be reason for default as a bit of boilerplate and also that the facilities are insured for “certain risks”, a term opaque enough to warrant concern over whether that covers wildfire. In other words, the facilities themselves are not necessarily safe from wildfires from an insurance perspective. As or even more importantly, and regardless of the insuredness of the facilities themselves, the at-risk population and economy underlying the schools are the basis for revenue that services the debt. 

Overall, this kind of disclosure is analogous to a teenager mentioning to her parents that “a couple people at the party last night were drinking” as some kind of oblique attempt at feigned honesty — to preempt or distract from the fact that she drove the family Buick home at 3am after having somewhere between 6-10 shots of vodka.

The populations closest to the schools could certainly benefit from investment, resources and aid of some form — but this particular issuance isn’t particularly oriented toward solving social problems. The issuance speaks about potential unionization of educators and workers as a potential financial risk. Be that as it may, that characterization does not put the issuer in a favorable light in terms of advancing social and racial equity for those that continue to be on the front lines of the ongoing pandemic and the rapidly accelerating climate crisis.

Honorable Mentions

Infirmary Health System, AL (risQ Score 3.2; Flood risQ Score 2.9) $73,600,000

Infirmary Health System’s (IHS) facilities are located in coastal Alabama, each fraught with sizable risQ Scores largely driven by flood and hurricane. Just last year, Hurricane Zeta and Hurricane Sally rocked the region. The System’s largest facility, Mobile Infirmary Medical Center (risQ Score 3.2, Flood risQ Score 3.0) ranks in the 96th percentile statewide for property VaR from hurricane wind and flood. Unfortunately, the POS doesn’t mention flood, hurricane, or climate change once. Despite the area’s infamous relationship with coastal storms, IHS has decided not to maintain insurance coverage for damage caused by “named storms” (pg. A-44). The region also sports some hefty Carbon Transition Risk, ranking in the 81st percentile nationally for per capita carbon emissions. No mention of that in the POS either.  However, the System is the single largest healthcare provider (pg. A-17) in a region with a large minority population (Nonwhite/Minority Population Score 85.7) and health challenges (Persistent Health Obstacles Score 92.9). A recent surge in COVID cases and hospitalizations has placed additional burdens on the System which subsequently elected to pause non-essential procedures (A-36). COVID’s disruptions to normal operations may adversely affect revenues and the System’s operations (pg. 18). Portions of the bond will be directed towards capital improvement projects (pg. A-13) across IHS. Though the POS did a sub-par job on climate disclosure, the area is in need of health services.

AtlantiCare Health, NJ (risQ Score 2.8; Flood risQ Score 4.7) $200,460,000

It’s always disheartening to discover that there’s no attention given to climate disclosure when reading through an issuer’s POS, especially when the proceeds are being used to finance critical infrastructure. In May we covered a risQ-y amusement park within a 10 minute drive of the Health System that disclosed none of the potential risks in the area despite having a risQ Score of 4.9. New Jersey seems to have an affinity for neglecting the effects of climate. Covering two locations in its System, the lengthy POS — 411 pages — mentions the word “flood” twice; once in a section listing the General Factors Affecting the Obligated Group’s Revenues (pg 59) and again within the force majeure clause in Appendix B referencing. These mentions aren’t there to inform investors of potential climate risks. They are simply boilerplate statements that exist for the purposes of legal compliance.

The Atlantic City location, with a drive time band of 6 minutes, ranks 98th percentile nationwide for property losses driven by coastal flood events. A 100-year coastal flood event is expected to drive losses to over 20% of property. The Mainland location fairs a little better at the same 6-minute radius (Flood risQ Score 0.6), but at a 15-minute drive time  (Flood risQ Score 3.5) it ranks 89th percentile nationally for combined property value-at-risk. These metrics could (as we’ve seen in the past) translate into financial impairment that ultimately sends businesses into a freefall and the economy towards collapse. 


Neglecting to disclose the implications of climate is harmful to the already struggling population of Atlantic City and surrounding areas. Keeping within our 6-minute drive time, The Atlantic City location has a Social Impact Score of 96.7/100. 36% of the population in the area lives below the poverty line (Poverty Concentration Score 88.0). Redlining has affected the community, drastically devaluing assets, including homes, in Black neighborhoods while Black residents (Nonwhite/Minority Population Score 93.1) have incurred racist penalties in the form of a “segregation tax”. Unemployment, poverty, and discrimination have been generational blights, leading to greater health risks (Persistent Health Obstacles Score 92.9). However, that’s not the full story. With Carbon Transition Risk ranked in the 98th percentile nationally, we can assume that this will have dire effects on the economy over time.  Without addressing or even disclosing these issues, does the Health System truly seek to heal its community?

California Institute of the Arts, CA (risQ Score 3.5; Wildfire risQ Score 4.3) $32,040,000

Located in the Santa Clarita Valley area of northwestern Los Angeles County , this POS offers a less than boilerplate discussion on climate risk exposure. Page 13 explores wildfire risk in one paragraph, indicating that the area is susceptible to fire danger and that large fires occur every ten years. Other than that, there is no mention of the word “climate” or any discussion about resilience/ adaptation plans. This is especially disconcerting, considering that the area sits in a very high fire hazard zone (99th percentile nationally for property value at risk from wildfire). The OS fails to mention any of recent fires (Bobcat, Lake, North, etc..) that have triggered mandatory evacuation orders and threatened the safety of residents. 

The area is also exposed to severe drought concerns, with the region’s 2030 drought risk sitting in the 92nd percentile. The percentage of months in a 30 year period with drought is seen to increase from 29% historically to 62% by 2030 under the RCP 8.5 scenario. Although CalArts has a Social Impact Score of 14.9, Poverty Concentration Score of 14.3 and Persistent Health Obstacles Score of 4.2 at a 20 min drive time radius, signifying a fair bit of affluence within the community, disappointingly little consideration is being shown for climate risk disclosure. Perhaps a better ESG impact would be felt in other investments that acknowledge the existence of the very real threat that is climate change. 

MiamiDade County, FL (risQ Score 4.6; Hurricane risQ Score 3.8; Flood risQ Score 3.5) $113,730,000

We like this investment opportunity from an ESG point of view because the bond proceeds are serving community needs. In 2013 voters authorized up to $830 million to modernize and equip the county-owned Jackson Health System facilities (pg. 15) and these bonds are a remarketed bunch of the original authorization. Jackson Health’s facilities serve the general community and are a major provider of health services to the poor and near poor residents of the County (pg. 14). Miami-Dade County has a Persistent Health Obstacles Score of 90 and 25% of residents ages 18-64 are without insurance (97th percentile nationally, 100th statewide). Additionally, the County has a Poverty Concentration Score of 70 with 19% of residents living below the poverty line. From a governance point of view, the County’s planned improvements and increased access to healthcare facilities are steps in the right direction to serve the community’s needs. Another instance of aligning governance actions with social needs is the County’s climate adaptation plans. We know that Miami-Dade is the epicenter for climate risk, especially regarding hurricanes, sea level rise, and water salinization concerns. Piling on this the area is expecting 50-75 more days a year with Heat Index above 100 degrees under 2030 climate conditions, it is the 100th percentile for moderate Drought risk, and has high Carbon Transition Risk (90th percentile for per capita electricity emissions). All these add up to big bills coming due no doubt. At the same time, Miami-Dade is stepping up to the challenges. The POS cites numerous climate adaptation plans which take aim at sea level rise management, water conservation, and cutting greenhouse gas emissions (pg. 22). All in all, Miami-Dade County is demonstrating conscious governance by building out health services to those in need and at the same time mitigating exposure to risk through numerous climate adaptation plans.

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