We’re nearing the end of what’s typically considered the final month of wildfire season, so we couldn’t help but go back-to-back weeks ragging on California issuers with high wildfire and drought risk and awful disclosure practices.
This week’s climate risk disclosure dry spell:
- $13,705,000* Community Facilities District No. 2017-79 (Eagle Crest) Of Eastern Municipal Water District 2021 Special Tax Bonds
- $4,285,000* Community Facilities District No. 2016-74 (Menifee Town Center) Of Eastern Municipal Water District Improvement Area A 2021 Special Tax Bonds
Background on Bonds
The Eagle Crest and Menifee Community Facilities Districts (CFD) are located an approximately 25-minute drive from one another, nearly 50 miles southwest of Los Angeles in the western section of Riverside County. The Eagle Crest master planned 303-home/98-acre development comprises three different sections of single-family homes named after flowers: Ambrosia, Poppy and Verbana. The Menifee Improvement Area comprises 151 single-family homes marketed as Camden Place. Both issuances are special obligations of their respective Community Facilities Districts and payable primarily from revenues derived from special taxes levied on the taxable property within the boundaries of each CFD. Proceeds from each issuance will be used to finance “various public improvements needed to develop property,” and both Series are tentatively dated out to 2051.
Copy and Paste Disclosure
Where do we start?
Last week we called out the Riverside County Transportation Commission for embedding wildfire risk disclosure language that could be found in multiple official statements recently published by California issuers, two of which had Wildfire risQ Score of 0.0. Similar theme this week, with identical or at least near-identical language from both the Eagle Crest and Menifees POSs popping up in OSs published as far back as 2012.
To start, the wildfire risk disclosures embedded within the Eagle Crest & Menifee POSs are practically identical (we highlight similar and identical language in yellow):
The market value of the property within the [Community Facilities District / Improvement Area A] can be adversely affected by a variety of factors which may affect public and private improvements. Such additional factors include, without limitation, geologic conditions (such as earthquakes), topographic conditions (such as earth movements) and climatic conditions (such as droughts, fire hazard and floods)….In recent years, wildfires have caused extensive damage throughout the State, including within the County. Certain of these fires have burned thousands of acres and destroyed hundreds and in some cases thousands of homes. In some instances, entire neighborhoods have been destroyed. Several of the fires that occurred recently damaged or destroyed property in areas that were not previously considered to be at risk from such events. (Geologic, Topographic and Climatic Conditions in both POSs).
The second portion of that disclosure pops up in a handful of previously published OSs, two of which are particularly noteworthy given how much lower their wildfire risk is as compared to Eagle Crest and Menifee:
- Jurupa Community Services District Water Revenue Refunding Bonds, Series 2020 — Wildfire risQ Score = 1.4 (OS pg. 30 Natural Disasters: In recent years, wildfires have caused extensive damage throughout the State. In some instances, entire neighborhoods have been destroyed. Several of the fires that occurred in recent years damaged or destroyed property in areas that were not previously considered to be at risk from such events.)
In that same section, Jurupa CSD does go a step further to mention that “Some commentators believe that climate change will lead to even more frequent and more damaging wildfires in the future.” The designation “commentators” is an interesting word choice — the scientists we partner with at the US Forest Service that have shown linkage between climate and increased wildfire risk (e.g., this selected 2016 work) might not love that term. Still, Jurupa CSD does a substantially better job of disclosing wildfire and climate risk than the Eagle Crest and Menifee CFDs, even going as far as to provide standalone sections on Climate Change (pg. 30), Drought Measures (pg. 26), which this week’s pair of CFDs do not.
- Town of Atherton 2020 Certificates of Participation (Town Center Project) (Bank Qualified) — Wildfire risQ Score 1.2 (POS pg.48 Fire Hazards: In recent years, wildfires have caused extensive damage throughout the State. Certain of these fires have burned thousands of acres and destroyed hundreds and in some cases thousands of homes. In some instances, entire neighborhoods have been destroyed.
Atherton — despite having a Wildfire risQ Score half of that of Eagle Crest and Menifee — follows up the boilerplate disclosure with a mention (pg. 49) of a recent catastrophic wildfire event that impacted California municipalities: Several fires which occurred in 2017 damaged or destroyed property in areas that were not previously considered to be at risk from such events. In November 2018, the Camp Fire occurred in Butte County, California. The Camp Fire is the deadliest and most destructive wildfire in the recorded history of the State burning more than 150,000 acres and destroying more than 11,500 structures, including most of the structures in the City of Paradise, California.” The Town of Atherton issuer doesn’t stop there, also providing sections dedicated to Recent Droughts (pg. 49), as well as sections on the risks posed by Sea Level Rise, Flood, and Tsunami (pgs. 47-49).
Well done Jurupa and Atherton (or, should we say, at least their climate risk disclosures aren’t cooked medium rare…)
Eagle Crest and Menifee continue their mediocre-at-best wildfire risk disclosure with brief sections on the risks specific to their position in southwestern California though much of it is identical language:
- Eagle Crest: The majority of the Community Facilities District is located within an area that the California Public Utilities Commission has designated as a Tier 2 – Elevated fire threat area. The Community Facilities District experiences high winds known as Santa Ana winds which frequently accompany and magnify the intensity of wildfires. There is a risk of homes within the Community Facilities District being destroyed by wildfires and no assurance can be given as to the severity or frequency of wildfires within the vicinity of the Community Facilities District. Additionally, property located adjacent to burn areas can be subject to mudslides and flooding, which can cause significant damage and destruction to property.
- Menifee Town Center: Improvement Area A is not located within an area that the California Public Utilities Commission has designated as an area of increased risk for utility associated wildfires. Improvement Area A also experiences high winds known as Santa Ana winds which frequently accompany and magnify the intensity of wildfires. There is a risk of homes within Improvement Area A being destroyed by wildfires and no assurance can be given as to the severity or frequency of wildfires within the vicinity of Improvement Area A. Additionally, property located adjacent to burn areas can be subject to mudslides and flooding, which can cause significant damage and destruction to property.
It reads like a bad game of risk disclosure mad-libs.
For more Eagle Crest and Menifee risk disclosure copy-and-paste, you need only turn to pages 34 and 35, respectively:
The value of the land within the [Community Facilities District / Improvement Area A] is an important factor in determining the investment quality of the Bonds. If a property owner is delinquent in the payment of Special Taxes, the [Community Facilities District / Improvement Area A] only remedy is to commence foreclosure proceedings in an attempt to obtain funds to pay the Special Taxes. Reductions in property values due to a downturn in the economy, physical events such as earthquakes, wildfires or floods, stricter land use regulations, delays in development or other events will adversely impact the security underlying the Special Taxes. (Reductions in Property Values in both POSs).
A search for California OSs with similar disclosure language yields a handful of results, two of which are tied to issuances dated >6 years ago:
- Community Facilities District No. 2006-1 (Marblehead Coastal) Of The City Of San Clemente 2015 Special Tax Bonds — risQ Score 0.0; Wildfire risQ Score 1.2 (OS pg. 45 Land Values)
- Community Facilities District No. 1 (Miramar Ranch North) Special Tax Refunding Bonds Series 2012 — risQ Score 2.7; Wildfire risQ Score 3.7 (OS pg. 28 Property Values; Value-to-Lien Ratios)
You get the point; between last week and this week, we’re fairly certain that there is generally little-to-no correlation between the breadth or quality of a California muni’s wildfire risk disclosure and that muni’s actual level of wildfire risk. That correlation might be even weaker (non-existent?) when it comes to drought risk.
Implications of Increasing Drought Risk
Wildfire is already a material risk for the area, with both the Eagle Crest and Menifee CFDs ranking in the ~95th percentile nationally for property losses driven by wildfire over the next decade. Eagle Crest CFD is expected to see 7% property losses driven by wildfire events over the next decade, while Menifee CFD is expected to see property losses exceeding 8%. And, while wildfire risk is at least kinda-sorta disclosed in their POSs, the drought risk is omitted almost entirely. The fact that neither issuer properly discloses its drought risk is a display of sheer negligence at best, and blatantly ignores the statewide water crisis that is unfolding day-by-day.
Increasing drought risk could spell trouble for these two districts that have historically depended on a stable supply of water from nearby Skinner and Diamond Valley Lakes, both operated by the Metropolitan Water District. Diamond Valley Lake in Riverside County was recently proclaimed an “inland ocean” by the Regional Chief of Operations for the Metropolitan District — the 7 square mile man-made reservoir is considered a critical water resource for Southern California. Both Diamond Valley Lake and Lake Skinner — another water resource for MWD, which sits directly adjacent to the Eagle Crest CFD — were reported last month as being 80% full, an indication of exceptionally robust reserves in light of the persistent issues with drought that California has experienced in recent years. However, if a warming climate continues to exacerbate drought conditions within California, both Eagle Crest and Menifee could feel the adverse impacts both directly and indirectly.
Historical drought metrics for the two districts — constructed using historical (1979 – 2010) United States Geological (USGS) river gauge observations of daily temperature and precipitation — are all relatively low, with both Eagle Crest’s and Menifee’s percentage of months with drought under that ‘historical’ climate ranking in just the 31st percentile nationally, and in the 0th percentile for extreme drought. As we saw with the Anaheim-Corona area we covered last week, extreme drought risk in this western portion of Riverside County has increased dramatically in the past couple decades — both Eagle Crest and Menifee currently rank in the 97th percentile and are expected to reach the 99th percentile by the year 2030 under an RCP 8.5 scenario, equating to a staggering 9 percentage point increase in the percent of months with extreme drought. As worsening drought drives statewide demand for water to new highs and local supply of water below historical levels, communities that are reliant on the Lakes of Diamond Valley and Skinner could see their access to a once-reliable resource gradually erode over years to come.
Last week, we commented on the financial risk and lack of positive social impact for a bond refinancing an expensive 8-mile stretch of highway connecting communities exposed to severe wildfires. This week’s punchline is similar. It points right back to the research we published in the summer, which shows the interconnection between the lack of housing supply in denser areas in California that is pushing more and more single family home development out into high wildfire risk zones and perpetuating dependence.
For investors worried about climate risk, a bond for single family homes maturing in 2051 and exposed to extreme wildfire risk clearly isn’t a good bet. Even if the homes and infrastructure financed with the debt don’t burn down, over here at risQ, we’re hesitant to take bets on the availability of water over the next couple decades. Delivery of critical services — including water — comes at a higher financial and energetic cost for the suburbs than for denser urban areas, purely because of sprawl.
For ESG investors, this certainly isn’t an investment to make either, as it does nothing to encourage sustainability or desperately needed affordability of housing in cities that are highly unlikely to burn down and less like to experience the pinch on water supply from drought as early.
Pharr-Reynosa International Bridge, TX (risQ Score 3.2, Flood risQ Score 4.9) $20,320,000
Pharr City operates a toll on the Pharr-Reynosa International Bridge which stretches 3 miles across the Rio Grande flood plain. The bridge is a gateway for commerce between the US and Latin America and in 2019 over 1.2 million passenger and commercial vehicles and $36.7 billion worth of trade value crossed it (pg. 11, 14). These bonds are being issued for improvements to the bridge system which includes 4 additional lanes to increase traffic flow and reduce wait times (pg. 11). Undoubtedly this is a major economic asset, but is there any discussion in the POS on the area’s susceptibility to natural disasters, or how climate change may affect those physical risks? No.
Using the Drive Time Catchment feature, the 20-minute radius—which covers the main ingress / egress roads to the bridge—has a Flood risQ Score of 4.4. If the surrounding roads are flooded and limit access, commuters may go elsewhere. Indeed there are other international crossings within 10 miles, although the Pharr-Reynosa Bridge is the only point of entry for commercial vehicles in Hidalgo County which certainly gives it some advantage (pg. 17). It’s surprising that the POS does mention the city’s history of chronic flooding which could impair road access. A search online for “flooding in Pharr, TX” yields several results, such as in 2018 when a rain-fall event led to 30 road closures in the City. While the POS points out that the bridge is constructed 4 ft above the Rio Grande’s maximum flood height (pg. 10), the same protections do not extend to the city’s infrastructure or freight handling, warehousing, trucking, and wholesale operations jobs that support the area’s commerce (A-1). Cumulatively, over the next 10 years, the expected GDP impairment within a 20-minute radius of the bridge is equivalent to ~28% of the area’s annual GDP. This is a distressing foresight given because the area is socioeconomically impoverished. Within 20-minutes of the Pharr-Reynosa Bridge, the Social Impact Score is 92.6, the Poverty Concentration Score is 97 and per capita income is less than $13,000.
Beyond inland flooding, hurricane precipitation-induced flooding is also threatening. Pharr is the 98th percentile nationally for GDP impairment from hurricane flooding. One example of this materalizing is in 2010, Hurricane Alex dropped over 50” of rain which led to over $40 million of property damage in Starr and Hidalgo County (home to Pharr). Alex forced water reservoirs nearby to release into the Rio Grande River Basin and the result left cities along the river flooded for over 30 days!
Unfortunately, this lack of disclosure is commonplace for the City of Pharr. Sampling a handful of Pharr’s OSs spanning between 2011-2021 the words flood and hurricane are both absent.
Carona, CA (risQ Score 3.1, Wildfire risQ Score 3.9) $276,500,000
You may remember this city from last week’s blog piece about the Riverside County Transportation Commission (RCTC) 91 Express Lanes which bled into Corona. Unlike last week, Corona does a fair job at climate disclosure. The POS highlights the risk of wildfire, flood, drought, and earthquakes and the impact of climate change. The City ranks in the 99th percentile for property VaR from wildfire with a 500-yr fire driving nearly 45% of property losses and a 100-yr fire driving 25% of losses. Canyon Fire in 2017 burned approximately 2,700 acres and engendered the evacuation of 1,900 homes. Total costs from the fire totaled $11.2 million (pg. 52). Last year, the Blue Ridge fire narrowly missed the city. The lethal combination of wildfire and heavy rain can result in erosion, mudslides, and flash flooding (pg. 51). The City does, however, maintain a Flood Emergency Response Plan (pg. 52). Furthermore, the number of months in extreme drought ranks in the top 1% in 2030, 2040, and 2050 under RCP 8.5 conditions. The one environmental risk the POS failed to mention is carbon transition risk; the per capita emissions from electricity production is in the 89th percentile nationally.
Unfortunately, similar to the RCTC 91 Express Lanes, Corona demonstrates the disproportionate impact of wildfire on housing cost-burdened and minority communities. The City has a Nonwhite/Minority Population Score of 80.5 and a Percent of Income Spent on Housing Score of 92.7. An analysis from risQ highlights communities with the highest wildfire risk in the nation, which tend to be disproportionately Latinx, Native American, and Asian, are among the most stretched from an income-to-housing cost perspective.
Celebration Pointe CDD No. 1, FL (risQ Score 3.0, Hurricane risQ Score 2.5) $23,935,000
Community Development Districts (CDD) rarely make our list of weekly commentary as much as their Californian counterparts, CFDs. This is usually a good sign, however, climate nondisclosure from Celebration Pointe warrants a mention. The 270-page POS mentions the words ‘flood’ and ‘hurricane’ once each, and in the same short paragraph in reference to property damage (pg 93). Unfortunately, this is woefully inadequate for a CDD located in Gainesville, FL.
Celebration Pointe ranks in the 76th percentile statewide for property value-at-risk from inland flooding. A 500-year flood event drives over 7% projected losses. Lake Kanapaha is to the southwest and another large flood-prone body of water—part of the Split Rock Conservation Area—looms over the CDD to its northwest. The POS references these areas only as part of the development area in which the $24 million is funding (public infrastructure, walkways, etc), but neglects to discuss potential hazards that could complicate, pause, or destroy what the proceeds are meant for. Hazards that could potentially ruin developmental efforts for this CDD aren’t theoretical. This summer, Tropical Storm Elsa ripped through Gainesville, collapsing bridges, trapping residents, and flooding homes.
Physical risk from climate aren’t the only blind spots in the POS. 28% of the population lives below the poverty line — 90th percentile nationally, while the residents without health insurance also rank in the 90th percentile nationally. Transparency is crucial to inform investors and other interested parties of potential risks. This particular POS does a lackluster job, and until they make corrections, any developments in Celebration Pointe aren’t worth celebrating.
Miami Beach, FL (risQ Score 4.8, Flood risQ Score 4.9, Hurricane risQ Score 4.0) $30,975,000
Last week, we featured the Miami-Dade County School District and took them to task for climate non-disclosure in an area that is pretty good at disclosure. Today’s Honorable Mention, Miami Beach, does a good job. Miami as a whole has no choice but to address its risk — how many times have you heard “better get down there before the city is under water!” when Miami comes up in casual conversation. The POS lists climate change assessments, infrastructure planning, and a Climate Action Plan (pg 73-74). There are also multiple paragraphs on resiliency inside the City’s comprehensive annual financial report located in Appendix C. Considering that this location is notorious for damages caused by flooding and hurricanes (and 100th percentile nationally for both property value risk and GDP impairment from combined hazards), it is imperative that the POS makes it clear. However, there is a serious blindspot missing from the list: saltwater intrusion and its relation to the Biscayne Aquifer (pg 23-25), the County-owned freshwater supply system. Rate increases are mentioned, but only due to debt issuances to fund improvements.
Sea level rise and drought can affect the aquifer’s freshwater production and its salt levels. Sea level rise makes controlling the flow of freshwater difficult as it gets pushed onto the mainland, leaving the transition zone murky (pun intended) at best. Drought causes a delay in recharging the aquifer, resulting in a salt front moving inland. Considering the $31 million of proceeds for refinancing water and sewer revenue, a more in-depth look at the challenges facing Miami Beach’s population of ~140k and water supply can be found here.