This week’s featured non-disclosure takes us down to the southern tip of Texas where 5 charter schools that serve a socioeconomically vulnerable population are exposed to a symphony of climate-related risks, including inland flood, hurricane, drought, heat stress, and carbon transition.
This week’s climate risk non-disclosure schooling:
$37,715,000* Clifton Higher Education Finance Corporation Education Revenue Bonds (Vanguard Academy, Inc.) Series 2021
The Bonds
State charter schools such as Vanguard Academy are not allowed to charge tuition, so the Academy presents a no-cost primary education option for those in the area. The Bonds are payable from and secured by revenues that are generated from funds appropriated by the State of Texas and that are based on student enrollment levels. The 5 Vanguard Academy elementary and secondary schools are all named after famous artists — Rembrandt, Mozart, Beethoven, Van Gogh and Picasso — and the proceeds from the issuance are committed to construction and renovation projects with half of the balance committed to the Vanguard Beethoven school’s secondary school building and elementary gymnasium (throughout this piece we refer to the Beethoven campus as a representative proxy for the entire 5-school Academy, given how consistent the climate risk and social impact profiles are across the 5 schools). The bonds are currently dated out to 2051.
Portfolio risQ Score 3.2; Hurricane risQ Score 2.6; Flood risQ Score 2.6 (20-min drive time)
The 5 schools are all located in Hidalgo County TX and within a 25-minute drive of the southern border and about 50 miles west of the coastline, in a pocket of the Rio Grande Valley that straddles the South Texas Plain and Gulf Coast. The issuer’s POS provides a laundry list of RISK FACTORS spanning nearly 15 pages and covering various political factors, potential non-renewal of the Academy’s charter, construction risks, COVID-19 and cybersecurity — but sadly, no mention of climate risk. There are sections covering “Damage, Destruction or Condemnation” (pg. 22) as well as “Environmental Regulation” (pg. 23) but the language is mere boilerplate.
There is no mention or disclosure of hurricane risk and the only mentions of flood are within the context of a force majeure clause, insurance procurement and general statement on adjustments to school attendance in the event of a calamity.
On the other hand, mentions of Hidalgo County’s flood risk on the web are prevalent —
April 15th 2021: As hurricane season nears, Hidalgo County officials warn of potential flooding due to levee breaches (source)
- At a press conference Wednesday, Hidalgo County officials said they are concerned four breaches in the dirt levee along the Rio Grande would cause flooding in portions of southwest Hidalgo County in the event a hurricane comes to the Rio Grande Valley.
- “With these openings here, it would spread,” said Hidalgo County Drainage District 1 Manager Raul Sesin. “It could run through the communities here locally.”
May 17 2021: Hidalgo County officials respond to weekend floods, prepare for upcoming storm (source)
- Hidalgo County residents reported flooding that almost reached the inside of their homes after the weekend’s storms. Hidalgo County officials said that there are multiple reasons contributing to flooding.
July 12 2021: Hidalgo County residents continue seeking flood relief after heavy rain (source)
- Families across the Rio Grande Valley continue looking for flood relief following last week’s heavy rain. Residents in Hidalgo County Precinct 4 are among those waiting to hear back from officials after their neighborhood on North 10th Street near Rodgers Road took a hard hit.
There’s material risk within the various drive time proximities surrounding the five Vanguard schools, as evidenced by the above anecdotes. Focusing our attention on Vanguard Beethoven as a representation of the entire 5-school Academy, the hazard risk — specifically, as it relates to hurricane and inland flood perils — increases materially as a function of climate change over the duration of the proposed debt schedule. While Beethoven’s current risQ Score is a moderate 2.9 (Hurricane 2.5, Flood 2.6), it increases almost an entire point to 3.8 (Hurricane 3.2, Flood 2.6) in the year 2051, equating to an approximate doubling of financial risk.
Hurricane activity in the Gulf is the critical driver of catastrophe risk for the Academy. A Category 1 event has a high likelihood of occurrence — 18.6% by 2026 — and while property losses from a Cat 1 event are immaterial, the resulting losses from ensuing flood are enough to cause concern at 8% losses and nearly 29% GDP impairment. Hurricane flood-induced property end economic losses within the 20-minute drive time band remain constant across the scale of hurricane severities (remember, category magnitude is dependent on *wind speed*, not rainfall amounts); however, prospective losses from wind damage explode as we look at the higher severity events. A Category 5 event would impose nearly 28% GDP impairment and property losses of 15% — the risk of such an event may be immaterially low in any given year, however the table above shows that the various time horizons of debt maturities in Vanguard’s schedule carry with them noteworthy aggregate Cat 4 and 5 hurricane probabilities.
Most of the losses may in fact not come from the headline-grabbing events, but rather the unnamed storms that come-and-go on a regular basis. In Hidalgo County where the schools are located there have been ~$110 million in FEMA NFIP claims since 2000. Most of the claims — ~$104 million — are from unnamed severe weather events such as rainfall induced flooding. Minimal losses have resulted from Hurricanes *so far* — Hurricane Dolly in 2008 led to ~$4 million in claims, with Alex (2010) and Bill (2015) leading to ~$1 million each. A 100-year inland flood event is expected to drive almost 7% property losses and 16% GDP impairment within the 20-minute drive time band around Beethoven.
So: Despite the issuer’s non-disclosure, there is material catastrophe risk in the area. The less catastrophic but just as impactful climate events could also pose challenges to the proximate community as well. Digging into projections for Beethoven’s 20-minute drive time band, both heat stress and drought are apparent. The area surrounding Beethoven currently ranks in the 99th percentile for number of days with a heat index above 100°F, and 98th percentile for days with a max temperature above 95°F. Heat stress percentile rankings for the area surrounding the Academy remain relatively constant as we slide the time horizon out to 2030, 2040 and 2050 — the same is not the case for projections of drought risk, which increases substantially over the coming years. Historical drought metrics — constructed using historical (1979 – 2010) United States Geological (USGS) river gauge observations of daily temperature and precipitation — are all negligibly low, with the historical percentile for percentage of months during that 30 year period with drought of any severity ranking in just the 3rd percentile nationally. Those numbers pop higher when we look at current drought risk (see below) and then projections of drought risk as we slide out to longer dated time horizons. The area surrounding Beethoven currently ranks 97th percentile for moderate drought risk and 90th percentile for extreme drought risk. Interestingly, looking at the 2050 time horizon, although moderate drought risk drops all the way to the 5th percentile, extreme drought risk increases to the 93rd percentile, highlighting that both the frequency and severity of drought events in the area are increasing. In the Rio Grande Valley: when it rains, it pours … but there is generally a longer time between rainfall events. {As an aside, this is a fundamental water cycle response to climate change: warmer air can hold more water vapor, in many cases leading to the duality of increasing severity of rainfall risk and drought risk}.
Carbon Transition Risk — 92nd percentile for per capita electricity production sector emissions
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 communities surrounding Vanguard campuses. 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 and obligors operating within the electricity production sector. Carbon-intensive electricity production locations could see job loss and slowing economic activity, which could spell trouble for a county like Hidalgo which ranks 93rd percentile for per capita electricity production sector emissions, nationally. The most recent official statements published by Hidalgo County and the City of Pharr (home to 3 of the 5 Vanguard schools) state that American Electric Power Texas Central (AEP) is the #1 and #2 taxpayer by assessed value within each issuer’s jurisdiction, respectively. According to the most recent EPA Greenhouse Gas Reporting Program (GHGRP), AEP owns and operates 8 of the top 100 highest greenhouse gas emitting power plants in the country — the power company has its work cut out for it on the carbon transition front. The combination of heat and drought risk as well as imminent carbon transition mandates could add additional stress on AEP and its customers which have already fallen victim to a series of AEP power outages in the Rio Grande Valley in recent years (Source: Googling “aep rio grande valley”).
Socioeconomic Profile
All of these climate related risks could pose a direct threat to the Academy’s physical assets as well as the encompassing County’s (and, State’s) balance sheet. The real impacts however are the ones that will be felt by the surrounding communities and the student population enrolled in the 5 schools. The POS notes on page 18 that there are myriad public and private schooling options in the Rio Grande Valley, many of which may be closer to the homes of students that are either currently or prospectively enrolled at one of the Academy locations.
The Social Impact Scores for the Academy hover around ~84 across the 5 schools, driven by high rates of poverty, low affluence, low educational attainment and persistent health obstacles. The vast majority (90%) of the population is Latino. The numbers below are provided for the 20-minute drive time band surrounding the Beethoven campus:
- Persistent Health Obstacles Score (92) — higher scores are seen in areas where the populations have high rates of underlying health conditions/risks and less access to health insurance. 38% of the population currently lacks health insurance, ranking 92nd percentile nationally.
- Poverty Concentration Score (89) — higher scores are seen in areas where the populations have higher rates of poverty. 31% of the population lives below the poverty line, ranking 92nd percentile nationally.
- Low Affluence Score (82) — higher scores are seen in areas where the populations have lower household incomes, per capita incomes, and higher income inequality. Median household income is just a tick under $40,000, ranking 14th percentile nationally.
- Low Educational Attainment Score (56) — the education attainment profile of the population in the charter schools’ catchment is average for the nation. But digging deeper, in the 10-minute catchment area surrounding Vanguard Mozart, for example, 23% of the working population does not have a high school diploma, which is 92nd percentile in the nation.
Key Takeaways
The Vanguard Academy schools face a litany of physical climate risks, including flood, hurricane, heat stress, and drought that are among the highest in the country — as well as acute carbon transition risk from fossil fuel intensive electricity production. But none of these issues are mentioned in the disclosure. From an ESG point of view, the schools serve a population that is vulnerable across several dimensions and indeed does need financial support in terms of equitable educational opportunity. Investors will need to balance multiple terrifying possibilities, though, and just to name a couple: by 2051, will it be too dry and hot for humans to even live in Hidalgo County TX (or for that matter, many areas like it)? And, at what point will the area’s luck run out in terms of hurricane seasons with relatively minimal impact?
Honorable Mentions
North Oaks Health System, LA (risQ Score 3.3, Flood risQ Score 3.7, Hurricane risQ Score 2.7 ) $129,795,000
North Oaks Health System is right on the money. In contrast to health care centers we’ve looked at in previous weeks, such as Altru Health System and Infirmary Health System, North Oaks does a superb job at disclosing climate risk. The POS concedes that the System is threatened by flood, drought, and hurricanes and notes that recent and past hurricane events have adversely affected the System’s operation and caused widespread damage (pg. 23). The POS also dedicates a whopping four paragraphs to Hurricane Ida which battered Louisiana just over a week ago. Around 65,000 residents of Tangipahoa Parish, where the System is located, lost power in Hurricane Ida and many are still in the dark (pg. 4). The System temporarily reduced its services in anticipation of the storm and functionned on generator power for 4 days until power was restored (pg. 4). Rising rivers and additional flooding still pose a threat to the Parish (pg. 4). The System’s main facility, North Oaks Medical Center, sits in the 88th percentile for property losses from hurricane flood. Loss of power due to Hurricane Ida has engendered dangerous heat conditions due to the lack of air conditioning (pg. 4). The danger of heat stress only stands to increase: an additional 75 – 100 days are anticipated to be above 90°F by 2050 in RCP 8.5 conditions. The POS briefly notes the area’s drought risk. The percent of months with drought is expected to increase by about 10% by 2050 under RCP 8.5 conditions, ranking in the 97th percentile nationally. Carbon Transition Risk is also worth noting, although the POS did not. Per capita emissions from electricity production and industry are in the 81st and 87th percentile respectively nationally.
Extreme weather events threaten to disrupt the Hospital’s normal operations. The area does have a slightly higher Persistent Health Obstacles Score of 61 and is currently swamped with COVID cases. Fortunately, North Oaks Hospital System is taking steps to boost its climate resilience (pg. 37). The System conducted a hazard vulnerability analysis, acquired additional generators, installed storm shutters, and established a dual water supply. The POS notes that these enhancements enabled the System to sustain necessary patient care services throughout Ida, the severe winter weather event in February 2021, and for the duration of the pandemic. Overall the System has exemplified cognizance of the present and future climate risks (save carbon transition risk, but there’s always room for improvement) and adequately attempted to address them—which, as we’ve seen previously, is a rarity for hospitals.
Humangood Inc, CA (risQ Score 2.5, Wildfire risQ Score 3.1) $120,000,000
According to the National Interagency Fire Center, last year was California’s worst wildfire season on record, with over 4 million acres burned. This year already has over 7,000 fires recorded, burning an estimated 2 million acres across the state. Knowing this, which Humangood should — they have 15 facilities in this obligated group throughout the state — would warrant more than a blurb smaller than this writeup (pg 56). The Issuer doesn’t have the luxury of nondisclosure with the Caldor Fire forcing them to evacuate two of their affordable housing communities and Dixie fire threatening more. Two facilities in this array have a Wildfire risQ Score of 5.0 within a 6-minute drive time: Royal Oaks in Los Angeles and Westminster Gardens located in Duarte.
Unfortunately, wildfire is not the only problem for Humangood Inc. Poverty is above the national average in a few locations where wildfire risk is negligible. Take the Rosewood facility (Wildfire risQ Score of 0.0), located in Bakersfield. The area within a 6-minute radius has a Poverty Concentration Score of 74 that contributes to its overall Social Impact Score of 81. 19.2% of the Bakersfield population lives below the poverty line. This facility isn’t an anomaly. The Terraces at San Joaquin Gardens has a similar profile within Fresno, a city with 24.1% of its population below the poverty line.
These metrics uncover the foundational problems affecting the properties and those invested here in real time. With $120 million in bonds going towards “remodeling, renovating, and furnishing” the facilities (pg 1), it would be imperative for the Issuer to address and disclose these issues immediately.
Black Belt Gas District, AL, FL, LA, MS (risQ Score 3.0, Flood risQ Score 2.9, Hurricane risQ Score 2.5 ) $805,325,000
Black Belt Gas District is serving as the wholesale gas purchaser for 5 project participants and there’s ample spatial nuance that can be explored here. Pensacola Energy (risQ Score 3.0) accounts for the largest share of the gas purchase agreement with 26.8% and the rest of the Participants account for 17-19% each (pg. 55). Pensacola, FL – despite its coastal location – is well insulated from coastal flood risk. Its topography is elevated enough to avoid sea level rise risk and Cat 1 and 2 strength hurricane storm surge, however it’s worth noting that its elevation can’t protect it from exposure to hurricanes wind and precipitation-induced flooding. Florida Gas Utility (risQ Score 3.5) is another Participant which is buying gas for end-use in Lakeland City, FL (risQ Score 3.2) but is guaranteeing payments from its general revenues (pg. 5-6, 56). Some Participants have in turn set up gas supply contracts with individual industrial manufacturers (pg. 5-6) whose risk profiles can also be explored in the UI for another spatially-nuanced perspective. Clarke-Mobile Counties Gas District (CMC) has entered an agreement with St. Francisville, LA who is reselling gas to Hood Container of Louisiana (an industrial manufacturer in St. Francisville’s territory); neither utility is pledging their general revenues, but instead payment obligations are “limited to amounts received from Hood Container” (pg. 7). Hood Container’s facility is located near the Mississippi River and has a Flood risQ Score of 3.6 at a 9-minute radius which indicates that flooding in the area may impair road access to the relatively rural location.
Aside from the physical risk that these gas purchasers face, there’s also Carbon Transition Risk: 4 of the 5 Participants are >92nd percentile nationally for per capita emissions from the electricity sector, while 3 of the 5 are >95th percentile for emissions from the industrial sector.
Unfortunately, Black Belt leaves the risk investigation to the hands of the reader: the POS fails to mention hurricane, flood, or climate risk. This is surprising considering that all the Project Participants have some exposure to hurricanes. CMC and Pensacola are good examples as Hurricane Ida’s path went through both of these areas and brought significant precipitation-induced flooding. While the geographic range of the Project Participants is diverse, one consistent feature is the potential for severe weather events to affect utility services and GDP activities in their service areas. Black Belt seeks to insulate itself from these disruptions with the ability to settle financial disrupts through the legal system if necessary (pg. 58-59).
Long Island Power Authority, NY (risQ Score 2.0, Flood risQ Score 3.7) $737,740,000
The Long Island Power Authority (LIPA) is withholding a big secret from those with an invested interest in its service area. A big part of that secret is flood risk. Now, to anyone paying attention or affected by Henri, Ida, or any other event that brought enough storm surge, wind, and rain to cause record rainfall and thousands of power outages throughout the service area, this is no secret. However for LIPA, there’s not a single mention of flooding within the 108 pages of their POS. LIPA’s service area ranks 89th percentile nationally for property value losses driven by physical risk, and Cat 4 storm surge predictions sees 16% of property losses. With this much at stake, LIPA needs to speak up.
Transition risk is also a major problem the service area must address. Ranked in the 92nd percentile nationally for per capita CO2 emissions from electricity production, there’s so much to get done. Fortunately, they’ve been taking steps to address it. The POS states that LIPA “anticipates that Long Island will have approximately 800 MW of solar generation in service by 2022, 2,300 MW of offshore wind connected by 2026 (including projects awarded by the State that interconnect to the electric grid in LIPA’s Service Area), and 375 MW of energy storage by 2030” (pg 3). While the service area is affluent (Low Affluence Score 7.6), rebuilding time and time again after a storm isn’t cheap (Percent Spent on Housing Score 87). Addressing transition risk is great, but keeping mum on physical risk seems negligent for an area consistently pounded by torrential rainfall and storm surge, not to mention rising sea levels. It’s as if they have one shoe on and laced tight while the other shoe orbits Mars.
