Weekly Preliminary OS Climate Risk Review (9/2/21)

By September 9, 2021 No Comments

This week we have our eyes on a health system in Grand Forks, North Dakota: a region of the County that experiences chronic flooding and at the same time doesn’t have the wide-spread recognition of being a high-risk area. You may be surprised to learn that North Dakota has the second highest inland flood risk nationwide behind only Louisiana. To their dis-credit, the Borrower is doing their part to keep these facts sequestered — failing to mention their exposure to flooding or the facilities’ proxy to the Red River, which has a history of catastrophic flooding events. Beyond the physical risk to the area, social demographics and carbon transition risk stand to possibly inhibit steady revenue streams.

This week’s climate risk non-disclosure provider:

City of Grand Forks, North Dakota Health Care System Revenue Bonds (Altru Health System) Series 2021, $382,635,000

The Bonds

The Series 2021 Bonds are dated out to 2041 and secured by a pledge of gross receivables of the Altru Health System, as well as lien on the mortgage tied to the replacement hospital facility project located in the City of Grand Forks. The obligated group comprises Altru Health System — an integrated healthcare system comprising 257 inpatient beds at its Columbia Road Campus, as well as a 40 bed specialty center. The proceeds of the debt issuance will be used to finance the refunding of the issuer’s Series 2012 and 2020 bonds, as well as finance the costs of the replacement hospital facility project.

Altru Health System is the largest employer in Grand Forks according to the City’s 2018 Annual Report, employing approximately 4,200 people.

Portfolio risQ Score 1.4; Flood risQ Score 3.4 (30-min drive time)

Both campuses have high flood risk given their positioning on the Red River, which serves as a border between North Dakota and Minnesota.

In 1997, the Red River experienced its most severe flooding event since 1826. Cities in the Grand Forks area were crushed with water and snowmelt, and flooding reached more than 3 miles inland from the River. The event wasn’t caused by extreme rainfall but rather as a result of ice formations and above-average snow melt along the River — all told, total damage surpassed $4 billion, 80% of homes in Grand Forks suffered flood damage and over half of the businesses were either damaged or destroyed. Towns along the Red River have experienced flooding events since, but none as catastrophic as the spring flooding event in 1997, which was considered the worst flood in American history pre-Katrina. Within days following the event, Congress approved $5.6 billion in disaster relief aid to fund property buyouts, small business loans and repairs to infrastructure. To put the magnitude of that aid package into perspective: on a per-capita basis, the $5.6 billion amount is proportional to nearly $100 billion in funding for the region of New Orleans that was impacted by Katrina. Population dipped 10% following the Red River Valley flooding event, but has since risen to pre-1997 levels.

The dike in Grand Forks failed in preventing the Red River from causing catastrophic flooding to homes in the Spring of 1997 (Courtesy of Brian Peterson, Star Tribune)

The 1997 Red River flood isn’t mentioned once in the entire preliminary official statement. The only mention of flood risk can be found on page 50 of the Other Risk Factors section of the POS:

“The occurrences of natural disasters, including floods and earthquakes, may damage some or all of the facilities, interrupt utility service to some or all of the facilities or otherwise impair the operation of some or all of the facilities operated by the Corporation or the generation of revenues from some or all of the facilities. Business interruption insurance may not be adequate in such circumstances.”

This ^ is essentially the exact same natural hazard risk disclosure language as is embedded in a handful of prior preliminary official statements published by the same City of Grand Forks/Altru Health System issuer/obligor pair, dating back to 2005.

The below Figure 1 graphic shows our projections for Altru Hospital’s flood risk with a time horizon of 2041. Projections of flood risk within different drive time bands provide a view of just how much exposure the Hospital’s service area has. While the area within a 6-minute drive time radius ranks only 69th percentile nationally in terms of flood-driven property losses, that percentile ranking jumps above 80th when we increase the scope to 30-minutes. Within the 30-minute drive time service area, a 500-year inland flood event is expected to drive impairment to 61% of GDP. It’s critical to consider GDP impairment when translating climate events to credit risk for the healthcare sector. Hospitals partially rely on discretionary income to drive revenue, which is both diverted towards property repairs and adversely impacted by the shocks to local economies following a climate event; decreases in discretionary income translate to decreases in elective health procedure revenues for hospitals.

Figure 1: 2041 flood risk in the area surrounding Altru Hospital at drive time bands ranging from 6- to 60-minutes.

Altru Hospital’s Service Area — Socioeconomic Profile

Exacerbating the risks that flooding could pose to hospital revenues is the fact that the population within the immediate surrounding area has a relatively high cost of living. The population also appears to be relatively healthy which could be an indication of low demand for health services.

Figure 2: Key Social Impact Scores at various drive time bands surrounding the Altru Hospital project

Across various drive time bands ranging from 6- to 60-minute radii, those living in the areas surrounding Altru Hospital appear to have a low Persistent Health Obstacles Score given the generally high population health in the Grand Forks region.

  • Persistent Health Obstacles Score (3630) — lower scores are seen in areas where the populations have low rates of underlying health conditions/risks and more access to health insurance. Percentages of the population aged  ≥18 years with prior health conditions such as chronic kidney disease, high cholesterol, high blood pressure, stroke, coronary heart disease, and chronic obstructive pulmonary disease are relatively low, ranking in the 24th-34th percentiles range within the 30-minute drive of Altru Hospital.

Zooming in, the population residing in the immediate vicinity of the Hospital — within a 6-minute drive — have higher Scores in the Social Impact categories that are reflective of economic and financial vulnerability.

  • Poverty Concentration Score (67) — higher scores are seen in areas where the populations have higher rates of poverty. 23% of the population within a 6-minute drive of Altru Hospital live below the poverty line, ranking 81st percentile nationally.
  • Low Affluence Score (74) — higher scores are seen in areas where the populations with lower household incomes, per capita incomes, and higher income inequality. Median household income within a 6-minute drive of Altru Hospital is less than $46,000, ranking 28th percentile nationally.
  • Income Spent on Housing Score (85) — higher scores are seen in areas with populations that on average spend a higher percentage of income on housing. 40% of the population within a 6-minute drive of Altru Hospital are considered stressed renters (40%+ rent-to-income ratio), ranking 81st percentile nationally.

Shown above, the Percent of Income Spent on Housing Score decreases from 85 to 54 as we expand our drive time radius out to 60-minutes. However, given the prominence of flood risk even in areas well removed from Red River (see Figure 1 above), one must wonder what will happen to household budgets if flood insurance premiums increase as a result of FEMA’s imminent transition to Risk Rating 2.0 (“RR2.0”), which intends to calibrate insurance premiums to actual flood risk and is expected to drive up premiums in Special Flood Hazard Areas (SFHAs). Even in lieu of any changes to FEMA’s methodology for calculating insurance premiums, the Grands Forks County area’s flood risk transfer system is already fundamentally flawed. FEMA is partially responsible — only 4.5% (731/16,362) of single family homes within the County are included in FEMA’s SFHAs and are therefore required to secure flood coverage. This percentage is disproportionately low given that total annual expected losses (calculated by risQ) for all non-SFHA single family homes in the County is nearly 3x greater than the total annual expected losses for SFHA homes ($10m vs $3.5m, respectively). Bottom-line is, unless FEMA properly recalibrates and climate-conditions its views of flood risk (which adds to the cost of living in Grand Forks), homeowners in the County will continue to be left holding the bag (which adds to the cost of living in Grand Forks) — it’s a lose-lose proposition for the region.

Carbon Transition Risk

An additional emerging climate-related risk that could put inflationary pressure on household budgets and business operating expenses is the relatively high carbon emissions within the area surrounding Altru Hospital. Along with our collaborator DPC Data, we’re currently exploring the potential impacts of carbon transition risk on municipalities and the implications of these emerging risks on municipal credit quality. We’ve seen these impacts play-out before in the municipal market, wherein carbon transition and environmental regulatory exposure have had an impact on municipal balance sheets. A 2019 Brookings Institute study linked the collapse of the coal industry to the inability of coal-dependent communities to service debt obligations. Campbell County in Wyoming was one cited example, wherein the County’s assessed value dropped from $6.2 billion in the 2015–2016 fiscal year down to $4.19 billion for the 2017–2018 fiscal year, driven primarily by falling coal revenues.

North Dakota ranks 3rd behind Wyoming and West Virginia in electricity production CO2 emissions when calculated on a per capita basis (42 metric tons of CO2 per capita, annually). Various sectors operating in the area surrounding Altru Hospital rank especially high in terms of per capita CO2 emissions — the electricity production sector ranks 93rd percentile, industrial sector ranks 95th, commercial real estate ranks 93rd and airport ranks 97th (Grand Forks International Airport is just a 15 minute drive from Altru Hospital). The State’s total per capita emissions clock in at ~65 metric tons of CO2 per capita — an annual effective per person liability of around $3,300 that hasn’t hit the state’s budget yet.

Given the area’s exposure to carbon-intensive industries, the Grand Forks’ tax-base and Altru’s service area could be impacted if carbon transition mandates go into effect at various levels of government. Carbon-intensive electricity production counties could see job loss and slowing economic activity. Depending on the level of localized distribution of electricity from fossil fuel generation assets, there is also the potential for higher electricity costs from emissions mitigation or cap-and-trade to flow through to the cost lines of the local economy and population, neither of which will be beneficial to long-term growth for the municipality.

To recap:

  • High flood risk in the area surrounding the Altru Hospital, given its location along the Red River which flooded in 1997 and decimated the Grand Forks region, costing American taxpayers $5.6 billion.
  • Relatively high cost of living for the population living within the Hospital’s immediate service area, putting financial pressure on households that may be considering elective health procedures or forced to pick up the tab for uninsured flood damage.
  • Exposure to carbon transition mandates given the Hospital catchment’s high per capita emissions (ranking 82nd percentile overall, and 93rd percentile in the electricity production sector) could ultimately add another layer of spending power erosion given the direct and indirect impacts of carbon transition initiatives on households and businesses.

And yet, absolutely no climate or flood risk disclosure beyond the boilerplate language that was originally written into the issuer’s 2005 preliminary official statement.

Honorable Mentions

City of Orange, TX (risQ Score 3.5; Flood risQ Score 3.7) $4,070,000

The City of Orange, Texas falls within the Beaumont-Port Arthur Metropolitan Area and borders the state of Louisiana. It’s an area that’s quite familiar with coastal flooding and historic hurricane activity. Usually, an issuer opting not to disclose their climate risks will have boilerplate references to “acts of God” and other uninspired legalese relating to property, infrastructure, et cetera at the bare minimum. However, with this particular POS, there is nothing. Climate, hurricane, and flood are completely nonexistent throughout the 96 pages therein. Considering the climate disasters that have taken place in and around the City, some could consider this POS incomplete and negligent in informing investors of the most important risks attached to the $4 million in bonds secured by sales tax revenues within the City.

Let’s fill in some important gaps. On September 13, 2008, Hurricane Ike brought a 22-foot storm surge that flooded the City and several others within Orange County and surrounding areas. The entire City of around 17,000 flooded as the hurricane left three people dead in Orange County and hundreds in need of medical attention. Hurricane Harvey hit the City on August 29, 2017 with torrential rainfall; around 60” in 48 hours. 85 percent of homes were affected by Harvey and the City was inundated for more than a week. 2031 predictions map GDP impairment at 95 percent with property value-at-risk from physical risk to be in the 95th percentile nationally. A Cat 5 storm surge event drives 60 percent of property losses in the City. Hurricane Laura passed through last year and  while Ida curved east, many cities, including Orange, are burdened with storm evacuees from Louisiana.

Another important aspect to consider about Orange, Texas is the population. 19 percent of its residents live below the poverty line — a percentage higher than the national average of 12.3 percent, with a Social Impact Score of 77. The economy revolves around industrial and chemical plants (Low Prestige Employment Score 79), most of which are in the direct sightline of almost every major climate event in the southeast United States. This area will have physical and transition  repercussions well into the future for a place ranking in the 95th percentile nationally for per capita CO2 emissions and plans for a new Entergy plant to power 230,000 Texas homes. None of this, however, was worth mentioning in the POS and remains undisclosed to those who need it most.

College of Charleston, SC (risQ Score 3.5; Flood risQ Score 4.4) $41,180,000

The College of Charleston is located in the heart of the city and serves approximately 11,000 students. From the POS’s point of view, things are on the up-and-up: new student enrollment for Fall 2021 is at a 10-year high and campus improvements are planned over the next five years (pg. 28, 30). One thing you won’t find in the POS is any mention of the area’s susceptibility to flooding, which is surprising. Flooding is so rampant in Charleston that the City’s website hosts a presentation called, “Why Does it Seem Like Charleston Always Floods When It Rains?”. Since 2000, residents of Charleston County have made over $55 million in FEMA National Flood Insurance Program (NFIP) claims from severe weather events such as rainfall, and is the 94th percentile nationally in per capita NFIP losses. It’s not just precipitation-based flooding that’s a concern, sea level rise is projected to have a dramatic impact. Within a 6-minute drive of the campus, the expected property value loss from coastal flooding over the next 10 years is 13% (95th percentile nationally). The Army Corps of Engineers and the City are considering a 12-foot-tall, 9-mile, multiple-billion-dollar seawall around Charleston’s lower peninsula (where the campus is located) to protect the historic city from tidal inundation and hurricane storm surge. One thing is certain: the city will have to find a way to protect itself, a Cat 1 storm surge event puts 15% of property value at risk and could be devastating to the City’s irreplaceable historic structures, such as the College’s where 55% of its building stock is 100+ years old (pg. 28).

Aside from sea level rise and hurricane vulnerabilities, another issue that needs to be addressed is housing affordability. Within a 6-minute drive from the campus the Income Spent on Housing Score is 97 and it remains high out to a 15-minute radius with a Score of 89. Within the 15-minute radius, 39% of renters spend more than 40% of their income on housing. The College’s facilities house approximately 3,300 students (pg. 16), so the majority of students live in the surrounding area. Housing costs in the surrounding area are a major consideration for students when selecting a school. Add the fact that the area has unresolved flooding issues and these two factors become major points of consideration for families selecting colleges.

Silicon Valley Clean Water, CA (risQ Score 1.7; Flood risQ Score 3.8) $142,740,000

Silicon Valley Clean Water (SVCW) is a wastewater utility in coastal California. The Facility sits in the 74th percentile nationally for property VaR from inland flood and in the 88th percentile nationally for GDP impairment from all risks. The POS’ disclosure of their climate risk was a breath of fresh air, outlining potential threats from earthquakes, fire, drought, and flood (pg. 47-48). The POS notes that recent drought conditions in 2021 prompted California’s Governor to sign an executive order calling on residents to voluntarily reduce water by 15% from 2020 levels (pg. 48). The number of months with drought is expected to increase by 10% by 2050 under RCP 8.5 conditions. Fortunately, many California cities, under the leadership of the State, have developed climate resilience plans. The Facility’s affluent service area (Low Affluence Score 2.5) includes Redwood City, San Carlos, West Bay, and Belmont—three of which have already developed a climate action plan (see Redwood City, Belmont, and San Carlos) (pg. 53). Even SVCW has released an Environmental Impact Report. SVCW does not carry insurance for either flood risk or seismic activity.

The bonds will provide interim financing for the Regional Environmental Sewer Conveyance Upgrade Program (RESCU) and Wastewater Treatment Plant Reliability Upgrades Program (WWTP) (pg. i). RESCU will rehabilitate, repurpose, or replace existing assets, including the construction of a gravity pipeline and pump stations, while WWTP consists of upgrades to the wastewater treatment plant (pgs. 9-10). Both projects were awarded funding through the EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) loans in 2020.