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Weekly Preliminary OS Climate Risk Review (11/4/21)

By November 11, 2021 No Comments

The Gulf Coast has been stressed by climate events that have driven billions of dollars in losses, forcing business-as-usual practices to falter and inevitably fail. Like the 12 steps program, the path to getting things on the right track begins with disclosure and the admission of a problem. This week we’re looking at Sheldon Independent School District (Sheldon ISD) located northeast of Houston in Harris County, TX. The District fails to address its climate risk and omits any discussion of the economic implications of its exposure to the fossil fuel industry. 

This week’s non-disclosure target:

Sheldon Independent School District (Harris County, Texas) Unlimited Tax Refunding Bonds, Series 2021 ($11,770,000)

The Series 2021 Bonds

Proceeds of the issuance will be primarily used to refund outstanding debt, and are payable from ad valorem taxes collected on all taxable property within the District (pg. vi). This issuance is just under $12 million and currently dated out to 2043. Sheldon ISD is a regular at the muni market, having issued debt ranging from $7 million to nearly $100 million in principal each year since 2014. The ISD’s student enrollment has increased each year since 2018, though is projected to decrease slightly in 2022.

The Breakdown

Reading through boilerplate preliminary official statements (POS) that fail to disclose climate risk can feel disheartening, especially when they’re from localities that have a history of severe weather events. Those boilerplate POS are usually bloated (this POS is relatively short, but still the length of a novel at 194 pages), repetitive, and usually lacking the ingredients necessary for investors to make nuanced decisions based on a district’s circumstances. When it’s a school district doing a poor job of disclosure the sting is stronger, with the future of children and families caught in the literal storm. Considering the current socioeconomic stressors on Sheldon ISD (Social Impact Score 73) and its demographics (Nonwhite/Minority Population Score 81), one would assume that local government officials would feel a moral obligation to consider and disclose all potential risks and mitigation plans in depth.

Sheldon ISD (risQ Score 3.1) is no stranger to hurricanes and extreme flooding. The POS mentions Hurricane Harvey in a brief paragraph — the damages were approximately $20 million (pg. 42), with $16 million covered by insurance and another $1.1 million covered by state-funded grant programs. The remaining $2.9 million is supposed to be covered by FEMA grants, however, reimbursement have yet to materialize. In 2017, Harvey dropped more than 40 inches on Sheldon ISD, flooding several homes and learning facilities. The District serves ~9,000 students, about 2,300 attending C.E. King High School. Several feet of water entered the school and forced students to be split between a childhood academy and an elementary school for classes. An estimated 25-40% of homes in the District were flooded by Harvey. For perspective, Sheldon ISD ranks 93rd percentile nationally for property losses driven by a combination of climate hazards. Inland flood risk (Flood risQ Score 2.9) ranks 88th percentile, and hurricane flood and hurricane wind (Hurricane risQ Score 2.6) risks ranking 99th and 98th percentiles, respectively. Hurricane-induced flooding resulting from an event of any magnitude (20% probability over a 10-year period) is projected to drive approximately 10% property losses. If we consider ISD’s 2021 Taxable Assessed Valuation of $5.5 billion (pg. vii), this loss estimate equates to $550 million in projected value resulting from any hurricane event as a result of catastrophic flooding — even losses amounting  to 5% of this figure would equate to an impact on assessed value of over double the value of this ISD issuance. Let’s get this straight: a hurricane event is likely to hit the District directly during this debt schedule, and could single handedly shellack more than a half-billion in property value (not to mention the economic impairment), yet all it gets relegated to a quarter page blurb. Got it.

Carbon Transition Risk

Just as startling as the lack of disclosure on hurricane and flooding perils is the lack of disclosure around the District’s exposure to Carbon Transition Risk. The Houston area is heavily dependent on the oil and gas industry — according to the Greater Houston Partnership, oil and gas services account for ~10% of the region’s GDP in 2015 and have since trended downward. In the future if global economies shift away from fossil fuels and production wanes, the District’s tax base could be adversely affected. Akin to this dilemma is the decline of coal production in the U.S. — which fell by one-third during the period of 2007-2017 — and the effect that this once-dominant industry had on local economies where coal production was a large contributor to economic activity and taxable value. Campbell County in Wyoming is one prime 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. Coal still accounts for more than 50% of Campbell’s assessed value, but the County is beginning to transition to more sustainable industries, such as through investment in sports complexes to draw in visitors and generate sales and lodging tax revenues. Campbell County faces significant challenges given its outsized exposure to one industry, especially one that is on its way out. In Sheldon ISD’s POS, several of the District’s 10 Largest Taxpayers are companies that are involved with the oil and gas industry (pg. A-2). The District has high per capita CO2 emissions: Sheldon ISD ranks 95th percentile for total per capita emissions and in the 97th percentile for emissions from the electricity and industry sectors. If regulations emerge that tax carbon emissions, those living, working, employing and operating in the District are holding liability. 
When the employment landscape shifts from the status-quo, the transition is easier for individuals with education credentials, skills and competencies that make them employable in other sectors. Research we recently conducted found that communities with high Carbon Transition Risk often have high Low Education Attainment Scores, which indicates the lack of post-secondary schooling that make career transitions easier. While the population within the encompassing Harris County is moderately well-educated (Low Education Attainment Score of 28), the population within Sheldon ISD struggles with educational attainment (Score of 63), ranking 13th percentile nationally for % jobs for workers with at least a Bachelor’s degree, and 96th for % jobs for workers with less than a high school degree.

The Contrast

Contrasting Sheldon’s lack of disclosure of physical climate and transition risks with a nearby issuer that also appears on this week’s POS Calendar — Deer Park Independent School District (risQ Score 3.1, Flood risQ Score 2.8) borders Sheldon to the south and is issuing a $23 million Series maturing in 2030. While the two district’s close proximity to each other lead to nearly identical risk profiles, the School Districts diverge substantially in how they characterize climate risk. Deer Park’s POS states “..this area is susceptible to high winds, heavy rain and flooding caused by hurricanes and tropical storms… The greater Houston has experienced multiple 500-year floods since 2015… If future weather events damage properties comprising the tax base within the District, the assessed value of property with the District could be substantially reduced” (Deer Park Independent School District, pg. 3). Where is this acknowledgement in Sheldon’s disclosure?? It’s sitting less than 15 miles away from Deer Park, afterall…

Like Sheldon, many of Deer Park’s largest taxpayers are in the oil and gas industry (pg. A-4). Where Deer Park separates itself from its peer is by acknowledging the region’s close economic ties to oil and gas production, “The District is located in the heart of the Houston Ship Channel, and the majority of the labor force is employed at nearby chemical plants and oil refineries.” (Deer Park ISD 2020 CAFR, pg. V). 

Given this fact, Deer Park may need to spur economic development in alternative industries to keep its workforce employed if the demand for oil and gas production shifts dramatically in the future; at least Deer Park, unlike the Sheldon ISD, is making investors aware of these emerging risks.

Conclusion

Despite its location near the Gulf Coast, Sheldon ISD forgoes any meaningful disclosure in regards to climate change and Carbon Transition Risk. They mention the costs resulting from Hurricane Harvey, but fail to put any meaningful perspective behind it as climate events intensify and oil and gas dependence shifts. For Sheldon ISD, another Harvey could cripple their economy and leave thousands unable to recover (Poverty Concentration Score 65). At the same time, Deer Park Independent School District (less than 15 miles from Sheldon ISD) does a much better job of disclosing the risks that the area faces. Sheldon Independent School District needs to get in the habit of disclosing risk or risk losing investors.

Honorable Mentions

South Broward Hospital District Obligated Group, FL (risQ Score 4.2, Hurricane risQ Score 3.6, Flood risQ Score 3.6) $245,890,000

South Broward Hospital District is a five hospital system just north of Miami. The hospitals are clustered together which means that they have a high correlation for flood and hurricane risk — all five boast a risQ Score above 4.0 at a 30-minute drive time. The System’s largest facility—Memorial Regional Hospital—sits in the 99th percentile nationally for expected property losses from combined risks. The POS notes that the hospitals’ collective service area is subject to climate-charged extreme weather events, listing major hurricanes that impacted the service area in recent years (pg. 39). Additionally, hurricane seasons can reduce the capacity of the insurance industry which engenders higher premiums and reduced coverage (pg. 39).  The service area is also at risk of Heat Stress and Drought. The risk of severe drought by 2050 ranks in the 99th percentile under RCP 8.5 conditions. Similarly, the number of days above 90˚ F by 2040 is expected to increase by 75-100 days under RCP 8.5 conditions. (Heat stress has gotten so bad in south Florida, it has prompted the mayor of nearby Miami-Dade to create awareness about heat campaigns in the same way the County has with ‘hurricane season’). The combined climate risks facing the hospitals could spell trouble for the service area, which is already vulnerable — four of the five hospitals have a Social Impact Score above 70 and a Persistent Health Obstacles Score above 80.  

The System has been fairly proactive in fortifying its property, having received a $7+ million grant from FEMA for wind retrofits and issued debt for hurricane preparedness in 2015 (pg. 22). However, the longevity of the System also depends on building resilience in the service population. To that end, Broward County (which is home to all 5 hospitals) has recently released a Climate Change Action Plan

Latitude33 Apartments, CA (risQ Score 2.6, Wildfire risQ Score 3.6) $121,230,000

The Latitude33 project is a housing project aimed at preserving middle-income rental housing in Escondido, CA. This goal aligns with the community’s needs – within 6-minute radius of the facility the Social Impact Score is 79 which is largely driven by the Percent of Income Spent on Housing Score of 96. The Borrower has a noble mission, but it falls short in regard to disclosing the area’s wildfire risk. Escondido has a Wildfire risQ Score of 4.3 and the wildland-urban interface surrounding the city has a long-running history of wildfires. The Latitude33 facility itself is exposed too: at the 6-minute radius, a proxy for facility risk, the Wildfire risQ Score is 3.6. This risk could further be exacerbated by Drought for which the area currently ranks 98th percentile for extreme drought risk. Beside the property damage, smoke and ash from wildfires can lead to unsafe air quality. Unfortunately, no mentions of wildfire risks make it into the pages of this POS.

The lack of disclosure stands in contrast to another issuer on this week’s POS calendar. San Diego County (Wildfire risQ Score 3.5) is issuing $50 million in bonds and takes a much different approach in its wildfire disclosure which is surprising given that Latitude33 is in San Diego County. San Diego County cites the County’s hazard mitigation plan which covers fire, flooding, sea level rise, and drought perils. It seems that San Diego is well-aware of the risk’s the County faces and is actively working to reduce those risks where possible. Given the development’s climate exposure, how is it that not a single mention of wildfire risk makes it into the 700+ page POS for Latitude33?

City of Burbank (Water and Power), CA (risQ Score 2.6, Wildfire risQ Score 3.6) $23,415,000

Next, we look at Burbank which is approximately 100 miles north of Latitude33. Burbank (Social Impact Score 13) can’t escape the wildfire risk, but does an excellent job of acknowledging the impacts resulting from past and potential climate perils. Burbank’s POS provides a robust discussion of climate risk, including 4 paragraphs outlining historical periods of drought over the last 50 years, as well as legislative actions in response to CA’s current drought conditions that have led to the implementation of water conservation measures (pg. 22-23, 40). As Burbank points out, water conservation measures stemming from worsening drought have the potential to negatively impact water revenues, which is particularly relevant given that this bond series is secured by water system revenues. Burbank ranks 91st percentile for moderate drought risk and in the 97th percentile for extreme drought under expected 2030 conditions. The Water System is largely dependent on The Metropolitan Water District of Southern California (MWD) which it buys its wholesale water from, so any impacts on MWD’s water supply will trickle down to the Burbank utility. Climate change poses a risk to the water supply by driving changes in precipitation and snow accumulation (pg. 41), which MWD also discusses in their July 2021 issuance (pg. 25). MWD “integrates climate change science into its long-term water supply planning efforts”, has a drought management plan, and is a member of the Water Utility Climate Alliance — a 12 member group of large water utilities collaborating to advance water utility adaptation stemming from threats from climate change risks. We just hope that all these preparations are enough to continue to deliver water affordability and access to the residents of Burbank as the impacts of drought worsen in future years.

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