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Weekly Preliminary OS Climate Risk Review (9/30/21)

By October 7, 2021 No Comments

Raise your hand if you’ve heard this one before: Houston, we have a problem. This particular problem, however, is terrestrial, immediate, and doesn’t occur in a vacuum. It also extends past Houston and into other cities and towns in Harris County.  This week, we focus our attention on Harris County’s mass transportation infrastructure, giving more nuance than a blurb tucked inside the issuer’s POS.

This week’s climate non-disclosure offender is: 

  • Metropolitan Transit Authority of Harris County, Texas Sales and Use Tax Refunding Bonds, Taxable Series 2021A, $38,475,000

Background on Bonds

The Bonds, dated out to 2029, are primarily secured with a pledge of 75% of the sales and use tax revenues generated by the Authority’s mass transit system, with use of proceeds going towards refunding outstanding sales and use tax debt. Given the fact that the Authority has not historically earned net revenue from the fare revenue generated from the System, operating revenue is not being pledged as a source of repayment for the Bonds. The Metropolitan Transit Authority of Harris County (henceforth, METRO) provides transit services and collects sales and use taxes on transactions within a ~1,300 square mile area comprising just over 7 million people (POS pg. iv).

METRO’s lowest non-discounted fare is $1.25 per ride (MBTA is $1.70), ranking the System 24th most affordable across transit systems operating in 73 cities.

Mass Transit Availability

The Houston Metropolitan Area is one of the most auto-dependent major cities on the planet. Nearly 91% of commuters in the area travel alone by car. As a consequence, Table 1 shows that, relative to transit authorities serving major metros, METRO’s service area’s transportation and on-road auto emissions are significantly higher. For example, on-road auto emissions are ~70% higher than within the boundaries of the Chicago Transit Authority. When Harvey landed, the storm destroyed nearly one million vehicles along the Texas Gulf Coast; that’s 1 in 7 cars in the Houston area alone! This, of course, made all kinds of socioeconomic ‘waves’ in the forms of rising insurance premiums, fuel prices, and increased dependence on public transportation options. Low income communities — majority Black and Latino (Nonwhite/Minority Population Score 84.5) — rely primarily on public transit for employment and access to health care. In the METRO’s Sales Tax District of 4.2 million, these populations are most affected by climate disasters, infamously including 2017’s Hurricane Harvey. To be clear, that is 62% of the area’s population. The storm flooded multiple roads and connecting freeways and left major airports and oil refineries shut down. Despite METRO’s best efforts, the transit system remained inert in the aftermath.

Table 1: Transit Authority tCO2 Emissions for Comparable Major Metro Service Areas

We’ve already made more of an effort to disclose METRO’s climate risk than the issuer… and, can you believe it, we didn’t even need 168 pages. A handful of boilerplate sentences about ‘weather-related events having impacts on infrastructure’ (pg. 41) isn’t going to cut it when one of these events—yeah, Harvey—can leave you with over $13.6 million in damages. And that’s all the disclosure you get in 168 pages of the METRO POS: METRO is working with the Federal Emergency Management Assistance (FEMA) and METRO’s private insurance company to determine what money, if any, can be recovered from the approximate $13.6 million in damages incurred when Hurricane Harvey impacted the local area in August of 2017. Any related recovery will be recorded in the year received (Appendix B pg. 66).

Figure 1: Road closures/incidents due to high water (source: Houston TranStar)

METRO has a Total risQ Score of 3.2 with GDP Impairment from physical climate perils ranking 92nd percentile, nationally, and ranks 94th and 93rd percentile for inland and hurricane-induced flood losses, respectively. A Category 4 hurricane event (the same magnitude as Harvey, at its height) is expected to drive over 12% property losses from flooding, storm surge and wind impacts. Harvey is tied for first place along with Hurricane Katrina as the costliest tropical storm on record, at a mind-blowing $125 billion in total losses. A large majority of those affected had no choice beyond trying to survive the storm. 107 didn’t make it. Historically, the United States has always been mired in the external banalities of race and segregation…why would Texas be any different? Sprawling metropolitan areas often have segregated communities that are prone to flooding, and in many cases likely the last to get rescued or funded after a catastrophic event. The events usually leave these communities with more damage, and byproducts like pollution and unattended health issues leave lasting scars.

FEMA uses the National Flood Insurance Program (NFIP) classifications of floodplains nationally. FEMA concluded that the land vulnerable to a 100-year flood event may increase by 45% inland and 55% for coastal floodplains. The floodplain may increase by 100% for portions of the Gulf of Mexico and the Atlantic. Harris County ranks 99th percentile nationally for per capita NFIP claims, almost $2 billion coming from severe weather events such as rainfall. Since 2000, Harris County residents have filed over $10 billion worth of NFIP claims, with ~$6.5 billion coming from Hurricane Harvey alone.

In the grand scope of things, METRO would be a better ESG investment than say the stretch of road featured in last week’s Climate Risk Review. Public transportation provides a chance at upward mobility and a better livelihood for many. It reduces the need for personal vehicles, cutting down on the number of carbon-emitting machines on the road. The POS mentions hardening of infrastructure, but that type of vagueness won’t fly when another storm hits. METRO needs to be clear about what they need in order to combat another climate event. Taking the fiscal numbers from the COVID-19 pandemic, total transportation fares dropped from $75.3 million in 2019 to $42.8 million in 2020 (pg. 13) — METRO just doesn’t have the luxury of withholding climate disclosure.

Key Takeaways

  • Investment in public transportation is generally a positive from a climate and ESG point of view — promoting reduced dependence on automobiles, which is a net positive from a carbon reliance perspective but also a social equity and access perspective. In other words, investors — ESG or not — should certainly prefer this type of municipal investment over (for example) the bonds refinancing an 8-mile wildfire-prone expressway in California we covered earlier this month.
  • In a climate scientist’s *ideal* world, though, Harris County would be seeking funding to expand its public transit system and options to promote equitable metropolitan access and start preparing for the inevitable transition away from fossil fuels — all of which would ultimately yield multiple economic benefits for Houston over the long term.
  • In that same ideal world, some of that financing would revolve around infrastructure hardening/resilience of existing and new components of the METRO, especially in light of Harris County’s obvious exposure to high hurricane and flood risk.  
  • This bond is not doing either of the two above. In addition, there is no serious climate risk disclosure, even though it was easy for us to find some material dirt.

Honorable Mentions

Fargo-Moorhead Metropolitan Area,   (risQ Score 1.9, Flood risQ Score 4.2) $268,955,000

On the border of North Dakota and Minnesota, the Fargo-Moorhead Metropolitan Area is sliced by the Red River. The Red River flood of 1997 was, at the time, the worst in US history. The Area ranks in the 97th percentile nationally for property losses from inland flooding. Fortunately, cities in the area are addressing the risk head on — the proposed use of proceeds from this green bond are for a comprehensive flood diversion project to protect Fargo, Moorhead, and Red River Valley residents (Social Impact Score of 17.1). The purpose of the proposed project is to regulate the amount of water that passes through the metro area during extreme flooding events, and divert excess water around Fargo through a 20-mile embankment and 30-mile diversion channel (pg. 11 Green Financing Framework). The Project is designed to withstand a 100-year flood with the ability to safeguard against a 500-year flooding event in conjunction with additional protections (pg. 3 Green Financing Framework). 100-year and 500-year flood events are projected to drive 12% and 24% property loss, respectively. The POS notes that between 2009-2011, the Metro Area experienced three of the six largest flood events in over 100-years, (pg. 5 Green Financing Framework), and goes on to cite a vulnerability assessment prepared by the US Army Corps of Engineers indicating that climate change would impact flood frequencies in the Red River Valley (pg. 6 Green Financing Framework). 

While the Fargo-Moorhead Metro Area is on top of climate adaptation, CO2 reduction efforts are sub par. Neither Fargo nor Moorhead has established a climate action plan or greenhouse reduction targets. Disheartening, considering the Metro Area’s Carbon Transition Risk — per capita emissions rank in the 90th, 92nd, and 86th percentile nationally across the electricity production, industry, and residential/commercial real estate sectors, respectively. This inaction prompted recent demonstrations in both cities. Hopefully, Fargo and Moorhead can match their dedication to climate adaptation and prepare for emissions reductions  in the future.

Crowley, LA (risQ Score 3.4, Hurricane risQ Score 2.8) $2,570,000

Crowley is pledging all lawfully available funds to secure these proceeds which will be used to refinance previously issued debt. The City catches our attention first for its lack of disclosure about the area’s susceptibility to climate-related events, and then additionally for being a community in need of economic resources. The City of roughly 10,000 has a high Social Impact Score (92), a Poverty Concentration Score of 91, a Low Affluence Score of 95, and just 80% of population has health insurance (which ranks in the 8th percentile, nationally). The majority of the community’s jobs come from Health Care and Social Services (18%) and the Retail Trade sectors (16%), with the latter industry typically being  low-wage earning jobs. As indicated, Crowley is an impoverished area with limited opportunities for high-earning employment.

With all the lingering social and economic considerations, we almost forget to mention the other predominant features of this area, namely its hurricane risk. Despite being approximately 50 miles from the coast, the area is exposed to hurricane storm surge from Category 3, 4, and 5 events—any of which would have devastating impacts—leading to property losses ranging from 46-58% depending on hurricane severity. The City also ranks 81st and 78th percentiles statewide for property losses driven by hurricane-induced wind and precipitation, respectively. The only mention of natural disaster risk in the POS comes when the issuer mentions that the City incurred $300K in cleanup costs following Hurricane Delta in 2020. However, the issuer fails to mention Hurricane Laura which hit the same year — an eyebrow-raising omission given the City’s resulting evacuation order and post-storm debris cleanup effort. Given that the area has seen multiple hurricane events in recent years, we’d expected them to do a more thorough job of disclosing their exposure to physical risks. 

Harmony Public Schools, TX  (risQ Score 2.2, Hurricane risQ Score 2.1) $21,525,000

Harmony enrolls ~36,000 students at 50+ campuses spread throughout Texas. Given Harmony’s vast expanse, we took a closer look at the location-specific risk in the charter school’s portfolio. Harmony has a large presence in the Houston area with almost 20 campuses. We need no reminder of the hurricane risk in the Houston area — just this month we saw Hurricane Nicholas bring 6-8” of precipitation to the area. Some of Harmony’s facilities have been previously damaged by hurricanes, including Harvey in 2017 which led to one facility flooding and others campuses developing roof leaks (pg. 17). Outside of Houston there are other campuses, such as Brownsville and Laredo, that are worthy of attention. Both sit near the Rio Grande and as a result have major Flood risQ (we discussed the area’s susceptibility to flooding in our post about Pharr City, TX on 9/23). Finally, Beaumont is the riskiest of the campuses and comes in with a Total risQ Score of 3.8. Facility risk isn’t the whole picture though — events within the surrounding area will have an impact on enrollment. Looking at the 20-minute drivetime in the portfolio, 20+ schools rank >80th percentile nationally for property losses and GDP impairment from combined perils; these type of disruptions have the potential to drive families out of the area, which would have a downstream effect on Harmony because its funding hinges on student enrollment (pg. 10). Overall, there are 13 campuses in Harmony’s portfolio greater than or equal to a 2.9 Total risQ Score—which is largely driven by Hurricane and Flood risQ, although you won’t find much information about these risks in this POS.

Beyond the physical risks that this constellation of charter schools must avoid, Carbon Transition Risk also presents material challengers for Harmony. Consider the Harmony School of Excellence in Houston, for example, as a proxy for the other Houston-area schools. We see that the 30-minute drivetime radius ranks 88th percentile for per capita emissions from the electricity sector and 86th percentile for industry emissions. If carbon emissions are taxed in the future this would mean that people living here are carrying relatively-high carbon liability. This area also ranks 88th percentile for Heat Index days above 100o F and 87th percentile for severe and extreme Drought under 2030 conditions. Looking at Harmony Science Academy as a proxy for the Dallas-area schools, the Total risQ Score is low (just 0.8), but per capita electricity emissions still clocks in at 90th percentile.

While on one hand Harmony’s diverse geographic locations insulate it from any single climate event disrupting their entire school system, there’s still enough spatially-specific pockets of high risk that it’s worth taking a closer look at how many bad eggs are in the basket despite the issuer’s lackluster climate risk disclosure effort.

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