Weekly Preliminary OS Climate Risk Review (10/28/21)

By November 4, 2021 No Comments

Change is coming. This week we’re looking at St. Bernard Parish, LA which is improving waterway infrastructure by pledging anticipated revenues from the Gulf of Mexico Energy Security Act (GOMESA). GOMESA payments made to eligible states and local governments stem from offshore oil-and-gas operations in the Gulf of Mexico and, as we discuss, are increasingly volatile. We also look closer at GOMESA payments between 2003 – 2020 and find that the O&G industry’s payments to frontline communities are virtually negligible from a balance sheet perspective. The funds that are dispersed to coastal counties fortunately do tend to correlate to their climate risk, but at the same receipts are generally lower for economically-distressed communities. The funds here are being put to generally reasonable use from a climate risk mitigation perspective, though they are tilted away from communities experiencing outsized economic stress. But the bigger, underlying story is one that continues a pattern of enabling an extractive industry that’s paying orders of magnitude less than a reasonable share for the environmental and social externalities it creates.   

Louisiana Local Government Environmental Facilities And Community Development Authority Revenue Bonds (St. Bernard Parish GOMESA Project), Series 2021 ($8,465,000)


The Gulf of Mexico Energy Security Act (“GOMESA“) provides for the sharing of certain revenues received by the United States government from oil and gas leasing and production in the Gulf of Mexico with the States of Louisiana, Alabama, Mississippi, and Texas. In 2020, the Office of Natural Resources Revenue dispersed $250 million in GOMESA revenue to four states (Alabama, Louisiana, Mississippi, and Texas) generated from oil and gas production offshore in the Gulf of Mexico. 

The Series 2021 Bonds

The Bonds are being secured by GOMESA payments made to St. Bernard. The Gulf of Mexico Energy Security Act of 2006 stipulates that revenues from the program must be used for (a) coastal protection, coastal restoration, hurricane protection, or infrastructure affected by wetland losses; (b) mitigate damage to fish or natural resources; (c) coastal conservation management plans; (d) mitigate impact of outer Continental Shelf activities (pg. A-37). St. Bernard Parish intends to use these payments for projects that fall into category D — the Project primarily consists of upgrading drainage and catchment basins and canals to provide coastal protection and mitigate the effects of Outer Continental Shelf (OCS) activities (pg. 4). This issuance is less than $10 million, but fits into the larger oil-and-gas ecosystem which involves multiple states and hundreds of millions in revenue.

The Breakdown

For revenue meant for “hurricane protection,” the issuer says almost nil about them in the 150+ page POS. In fact, you will only find the word hurricane twice — first, in a most boilerplate sentence on environmental factors potentially affecting offshore drilling (pg. 38), and again in the Appendix, buried in legalese (pg, A-37). That’s all, folks. 

For a Louisiana issuer to skimp on addressing the importance of hurricanes and tropical storms seems suspicious. This year, Hurricane Ida decimated coastal Louisiana and many communities along the East Coast with winds of 150 mph or more in some areas. The Category 4 hurricane made landfall on August 29, exactly 16 years after Hurricane Katrina ravaged the state. At the end of last month, the Ida-related death total in Louisiana jumped to 28. Gulf Coast storms have also been attributed to numerous oil spills that pollute coastal communities. Offshore drilling — as an archaic extraction method — requires the use of aging facilities that can give way to stronger storms, leaving their remnants scattered, destroying ecosystems and contaminating water infrastructure. By contrast, an analysis by the nonprofit ocean conservation group Oceana found that permanent offshore drilling protections in unleashed federal waters could prevent over 19 billion tons of greenhouse gas emissions as well as more than $720 billion in damages to people, property and the environment. Speaking for St. Bernard Parish, which ranks 97th percentile for per capita Scope 1 CO2 emissions, these protections would potentially ease inevitable Carbon Transition Risk and improve the health of its taxpayers.

Last year’s GOMESA disbursements were the second-highest since the Department began disbursing revenues in 2009. Let’s take a look at the top GOMESA revenue recipients in each state below, along with St. Bernard Parish, and see if these funds reflect healthy socioeconomic demographics and climate resiliency —

Plaquemines Parish, LA : $2,149, 993 ($92 per capita) in 2020

Plaquemines Parish (Total risQ Score 4.2) received the highest GOMESA disbursement in Louisiana, which statewide received $88 million. The Parish ranks 99th percentile nationally for property losses from combined physical hazards along with 100% impairment to GDP, giving the Parish a Flood risQ Score of 4.2. Carbon Transition Risk is also concerningly high at 97th percentile for per capita emissions, potentially leading to higher costs of living in the future for a Parish where median monthly housing costs are already ranking 84th percentile within the State.

Mobile County, AL: $3,815,979 ($9 per capita) in 2020

Mobile County (Total risQ Score 3.1) was the top recipient in Alabama, which state-wide received $35 million. Unfortunately, in Mobile the taxpayers aren’t faring much better from the influx of revenue-sharing payments (Social Impact Score of 83). Almost 20% of the 415,000 taxpayers lack health insurance (77th percentile, nationally), a shame considering the population’s Persistent Health Obstacles Score of 93.

St. Bernard Parish, LA:  $1,035,622 ($29 per capita) in 2020 

Amongst LA Parish recipients, St. Bernard Parish received a middle-of-the-pack revenue-sharing payment, which is based on population (pg. 35). St. Bernard ranks 97th percentile nationally for property losses from combined physical hazards. It has a Flood risQ Score of 4.0, with a 500-year inland flood event driving ~45% of property losses. Category 4 hurricane wind and hurricane flood are expected to drive another 14% in property losses. St. Bernard Parish carries a high Social Impact Score of 82, with 20% of its 45,000 population (Nonwhite/Minority Population Score 79) living below the poverty line (Poverty Concentration Score 77). Health problems affect a majority of residents (Persistent Obstacles Score 73) and few attain higher education opportunities (Low Educational Attainment Score 87).

On one hand, at least the money is flowing to vulnerable communities, and the funds are aimed to mitigate physical disaster risks. One has to wonder how effective these projects have been? It’s true that projects have had a positive impact on communities, such as a water & sewer system improvement project in Gautier, MS. Unfortunately, at the same time, given that these mitigation projects are reliant on the royalties from oil-and-gas operations, disruptions to expected revenues can delay or even cancel proposed GOMESA projects

A bigger picture: how is GOMESA funding distributed? And is there enough of it? 

We pulled all data on GOMESA disbursements during 2003-2020 over coastal counties in Alabama, Louisiana, Mississippi, and Texas to explore the relationships between physical climate risk, social need, and funds received. We found that on average communities with higher risQ Scores do indeed tend to get more GOMESA dollars per capita. On the other hand, communities with more economic stress, measured through the Percent Income Spent on Housing Score, tend to receive less GOMESA revenue per capita, on average — even after controlling for climate risk through a regression model. (The Percent Income Spent on Housing Score is a useful proxy for economic stress, income levels relative to living costs, and community resources/safety nets.)

We also then examine this data at an aggregate level. To make the point with some back of the napkin math:

GOMESA payments to frontline coastal counties in the 4 states covered only totals about $159M over an 18-year period. Meanwhile, oil production from US federal waters in the Gulf of Mexico reached an all-time annual high of ~1.65 million barrels per day in 2017. Assume this is a bit lower on average, 120 million, and multiply that $60 per barrel of crude oil (we’re at ~$80/barrel as of writing) by say, even just 300 days, per year and you get a rough estimate of ~$22B *per year*. Take that out over 18 years and you’ve got $400B dollars just in oil production. This might all be conservative. This means the 18-year (2003 to 2020)  total revenues for the coastal counties have received amounts to at most a ~0.05% fee paid to communities on the frontlines of both carbon transition risk and physical climate risk. To make it clear just how little this is, the O&G pays orders of magnitude less (~30-70x) less than a small restaurant owner typically pays for letting her customers pay with a credit card (where convenience fees are typically 1.5-3.5%) — all while wreaking havoc on ecosystems and frontline communities.  

In Conclusion

For this bond series St. Bernard is pledging its future GOMESA disbursements payments to implement various canals and waterways improvement to mitigate offshore activities. At some level, one could think of this as a climate bond serving a good purpose. But the underlying premise is still troubling from a climate perspective: it amounts to the continued enabling of a system that perpetuates dependence on fossil fuels in exchange for what is, in reality, negligible convenience fees for the O&G industry. 

The payment volatility that stems from relying on fossil fuel extraction and business-as-usual practices should also be acknowledged given the history of regulatory changes and climate change’s ever-more urgent call to action.

Honorable Mentions

Miami-Dade County School District, FL (risQ Score 4.6, Hurricane risQ Score 3.8) $169,080,000

Pasco County School District, FL (risQ Score 3.5, Flood risQ Score 3.1) $68,550,000

This week we’re comparing two coastal school districts in Florida that have bond offerings maturing beyond 2040. For starters, Miami-Dade County has numerous initiatives to mitigate and adapt to climate change. As such we’d expect Miami-Dade County School District (MDCSD) to discuss these action plans in its POS; however, the District underperforms remarkably in this regard. The only discussion of climate change risk comes on page 47 with a boilerplate statement: Florida is at risk of natural disasters and climate change can make extreme weather events worse. Where is all the in-depth discussion about the County’s research regarding sea level rise adaptation? The School District didn’t apply itself on its homework assignment and is turning in work reflecting bare-minimum effort.

Miami-Dade County’s Climate Action Plan covers a gauntlet of risks: sea level rise, saltwater intrusion into freshwater supplies, precipitation flooding, and the complex relationship between warming oceans and tropical storms. These myriad climate risks lead the County to develop adaptation strategies including but not limited to: developing sea level rise projections for different climate change scenarios, stormwater management plans, evaluating climate change’s impact on public health, developing tools to analyze floodplains for capital investment decision-making, as well as implementing strategies to cut greenhouse gas emissions.

The School District didn’t even try to scratch the surface on any of these initiatives, frankly missing a softball opportunity to discuss how the County is responding to climate change. MDCSD ranks 99th percentile nationally for projected property losses and 100th for GDP impairment from all combined perils. We’re projecting a ~7% annual probability of a hurricane event, with a Category 1 storm driving losses to 9% of properties as a result of a combination of extreme rain, wind, and storm surge. To this end, the POS mentions that Hurricane Irma cost the District $21 million during recovery despite causing relatively minor property damage to its facilities (pg. B-90). Beyond hurricane risk, MDCSD also has Heat Stress concerns— in 2040 (around the final maturity of this series), the region is projected to see an average of 175-200 days per year with temperatures surpassing 100℉; historically, this annual total hovered around 100-125 days. Miami-Dade’s Carbon Transition Risk is also noteworthy, with the County ranking in the 90th percentile for emissions within its electricity production sector, implying that residents of the County are holding relatively high transition liability if carbon emissions are taxed in the future.

MDCSD’s physical climate and transition risk paired with its lack of disclosure stand in stark contrast to Pasco County School District, which is on the other side of Florida’s peninsula and is also on this week’s POS slate. Similar to MDCSD, Pasco ranks 96th percentile nationally for expected property losses and GDP impairment from all combined perils. However, instead of a boilerplate approach to disclosing risk, Pasco digs into detail on how climate could impact the District, stating that sea levels are rising due to ‘melting ice caps and geothermal expansion caused by warming oceans’ (looks like someone is aiming for an A in physics!). Pasco also explains how flooding could impair roads, utilities, and development within the District which in turn could lead to tax revenue losses that adversely impact the District’s balance sheet (The School Board of Pasco County, pg. 73). The County School Districts of Pasco and Miami-Dade are similar in that they both are coastal issuers in the upper-90th percentiles for risk, and both have bond series this week with maturities beyond 2040; where they differ is in the way they discuss climate change risk. 

Miami-Dade County School District could learn a thing from Pasco about how to discuss climate change risk with the weight it merits, and MDCSD needs to read up on what the County is doing so it can come to class—ah, we mean market—prepared to talk about the various initiatives the County has in place to drive climate adaptation.

Guthrie Health (risQ Score 1.2, Flood risQ Score 3.3) $41,570,000

Guthrie Health is a 5-hospital system with facilities located in Pennsylvania and New York; two of their facilities—Robert Packer Hospital and Guthrie Towanda Memorial Hospital—have Flood risQ Scores above 3.6, but no mention of flood risk make it into their POS. The primary service area for the System is southern NY and northern PA (Appendix A). 

Bradford County (Flood risQ Score 3.8) in northern PA is home to the two flood-prone facilities and ranks 93rd percentile statewide for GDP impairment and 97th percentile for expected property losses from the combination of all climate perils. Earlier this year, that risk actualized when Bradford County experienced flash-flooding that closed roads and flooded neighborhoods. Within the 30-minute radius of Robert Packer—the System’s flagship hospital—a 100-year flood event drives 8% property losses and impairs nearly 29% of GDP. A 500-year flood event pushes property losses to 15% and GDP impairment to 44%. If the area experiences these rarer events, it could result in impaired revenue for hospitals if would-be patients are forced to divert discretionary income away from elective procedures and instead deal with home repairs or weather-related disruptions to the local economy.

This System’s local patient population is spread across 12 counties and therefore is insulated from a single climate event impairing the entire service area. At the same time, Guthrie Health could’ve been more forthcoming about its service area’s flood risk and how that risk may disrupt revenues — especially since two of the hospitals exist in a county with a history of repeat flooding.  

Town of Westerly, RI (risQ Score 2.3, Flood risQ Score 4.4) $9,830,000

Westerly perches on the southern tip of Rhode Island which makes it a popular summer destination but also vulnerable to coastal flooding and hurricanes. The Town sits in the 94th percentile nationally for expected property losses from combined climate perils and is no stranger to the wrath of flood events. Through its Municipal Resilience Program, the Town has invested $4 million resiliency enhancement projects, including protection of wastewater facilities, stormwater management, and removal of a derelict dam (pg. 12). Additionally, the population of Westerly is subject to a high Percent of Income Spent on Housing Score of 78.5, leading to concerns of eroding property values if insurance costs increase and drive the rate of vacation-homeownership off the water and further inland; the POS notes that many of the vacation residences hug the coastline (pg. ii). Repeated loss to coastal properties may adversely affect property tax revenue and drive away “above average” income summer residents. Fortunately, Westerly’s Economic Department Commission — in partnership with Northeastern University (go Huskies) — is currently seeking to quantify the value of all property and tax revenue that would be impacted by floods, sea level rise, and storm events, in an effort to inform future investments in climate adaptation (pg. 12).
Flood risk isn’t the only hazard on the horizon. The Town sits in the 95th and 96th percentile nationally for per capita emissions from industry and residential and commercial real estate, respectively. However, the Town is already taking strides to reduce its fossil fuel dependence: at least four industrial ground mounted solar energy systems and two commercial roof mounted solar energy systems have recently been approved.

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