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Weekly Preliminary OS Climate Risk Review (11/18/21)

By December 2, 2021 No Comments

This week we put on our rubber boots and go tromping through Blackfoot Charter School’s POS to help you make sense of the flood risk here. We explore past flooding events that have impacted the area, value-at-risk projections for Blackfoot’s service area, and changes in FEMA’s flood insurance program and the implications of those changes.

This week’s soaking wet non-disclosure:

Blackfoot Charter Community Learning Center, Idaho Housing and Finance Association Nonprofit Facilities Revenue Bonds ($15,490,000)

Blackfoot and the Bonds

Blackfoot Charter School operates two existing facilities in Blackfoot, Idaho: Blackfoot Charter Community Learning Center functions as a middle school and 3 miles north is Blackfoot Charter School (Elementary-level). The combined enrollment of the two schools is roughly 400 students (pg. B-2). Proceeds of the bonds will be used to construct a new school facility across the Snake River approximately 2 miles from the Learning Center campus which will educate up to 783 K-8th Grade students. Upon the completion of the new facility, Blackfoot will move its operations over to Blackfoot K-8 School beginning in the 2022-23 school year (pg. B-6). As we’ll see, packing up and moving to the other side of the Snake River does little to escape the flood risk that the area faces.

History of Flooding

The POS doesn’t allude to this fact, but Blackfoot has a well-documented history of flooding. The most well-known event is the Teton Dam Failure in 1976 that unleashed more than 1 million cubic feet of water per second and flooded surrounding communities, including Blackfoot. This tragic event—that took the lives of 11 people and caused millions of dollars in damage—was a human-caused disaster resulting from sub-par engineering; however, mother nature can shoulder the blame for catastrophic flooding in the area as well. The Snake River flooded in 1997 and inundated Interstate-15, a critical throughway connecting north and south Idaho that runs through Blackfoot. More recent examples include the 2014 flashing-flood that closed roads in Blackfoot’s downtown and the 2017 snowmelt that threatened levees to fail.

Somewhat ironically, page 1 of the POS mentions that “Prospective investors must read…. the section on Risk Factors for discussion of certain risk factors which should be considered in connection with an investment in the Series 2021 Bonds.” However, it’s hard to weigh the risks when some obvious examples, like the region’s tendency to flood, aren’t included. In fact the word “flood” appears only twice in the 390-page POS. At the same time, it’s hard to imagine that the Borrower isn’t aware of the area’s vulnerabilities given the chronic frequency of flooding-induced disruption. 

Blackfoot Charter School (K-8) Service Area: Value-at-Risk

The POS states that 94% of the School’s students live in Blackfoot City (risQ Score 1.6, Flood risQ Score 3.7) (pg. B-18), with the rest of the students coming from the surrounding area. Using a 20-minute drivetime radius as a proxy for Blackfoot’s student population area, the region has a risQ Score of  1.7 and Flood risQ Score of 3.9 which is primarily driven by the Snake River that winds through the City. 

A 100-year flood event in the region is projected to drive 13% property losses and impair 31% of GDP. Overall, Blackfoot Charter School (K-8) ranks in the 99th percentile nationally for expected property losses and GDP impairment from inland flooding among charter schools. 

According to the American Community Survey, approximately 3% of employment within the 20-minute radius comes from the Agriculture, Forestry, Fishing & Hunting sector, which ranks 78th percentile nationally. At the same time, flooding in farmland can lead to crop loss. A 2006 snowmelt-driven flood cost farmers in Boundary County Idaho an estimated $2.5 million. 

The risk profile for Blackfoot Charter School (K-8) is driven almost entirely by inland flood risk. Cumulatively, over the next 10 years, the expected property value-at-risk from inland flooding is 5.6% within a 20-minute radius. GDP impairment over the next 10 years is ~15%.

Liabilities stemming from FEMA Flood Maps

Ignorance is not always bliss. When it comes to flood risk, many in Bingham County (home to Blackfoot) are left unaware that their property is in danger of flooding. FEMA’s National Flood Insurance Program maps areas of the U.S. that have an at least 1% annual likelihood of flooding (i.e. 100-year flood risk); furthermore, the maps are required to be updated every 5 years because flood risk evolves due to shifting circumstances, such as land-use changes. In its 2017 report, the Department of Homeland Security found that ⅔  of FEMA’s flood maps have not been updated in the last 5 years and that 58% of all FEMA maps are considered inaccurate or out-of-date. Our analysis of this issue finds that in Bingham County only 18% of flood risk falls within a FEMA 100-year flood zone — this means that 1) many residents are left unaware that they are in flood risk areas and 2) many will be left uninsured when a flood disaster strikes.

If things weren’t bad enough, there is also the compounding issue of insurance affordability resulting from FEMA’s Risk Rating 2.0, which was just recently rolled out. One issue under the old FEMA insurance premium model was that less-risky property owners were paying similar rates to those in areas of much higher risk, and in effect were subsidizing people that continue to live in high-risk areas. Risk Rating 2.0 sought to correct that mispricing and insurance contributions asymmetry by having individual premiums more closely reflect individual property risk. While this is a critically positive step forward as it disincentivizes homeowners from living in high-risk areas, it can also be a price shock to people who in turn are having trouble selling their homes due to the unaffordability of insurance rates.

What are the implications of these regulatory changes for Blackfoot? For one, as rates go up and flood mapping is updated and made more accurate, residents may choose to live elsewhere which could erode the population and student enrollment that the Charter School relies on for funding. Blackfoot Charter School may not charge tuition and has no taxing authority (pg. 5), instead the school’s primary source of revenue is state funding which is stipulated based on enrollment (pg. 21-22). Furthermore, if people are living in areas that currently don’t require them to carry insurance (i.e. they aren’t located in a FEMA flood zone) and a major flood event strikes, the cost burden rests on the homeowners and the community would be slow to recover. All the uncertainty driven by flood risk and insurance affordability is likely to rear its head sometime during the bond’s long maturity date set out to 2056 (although they do carry the option of earlier redemption) (pg. 8). 

Conclusion

FEMA flood plains have not historically captured the true nature of flood risk and damage in Blackfoot. Parents of students enrolled in Blackfoot Charter School should expect to see costs rise as flooding increases and FEMA’s Risk Rating 2.0 framework drives premiums higher along Snake River. As FEMA flood maps are updated, we’d expect more disruption to take place and perhaps migration from the unaffordable, high-risk areas. This mitigation could in turn affect the population that Blackfoot relies on for its enrollment. Blackfoot has seen its fair share of flooding; unfortunately, it’s POS doesn’t provide investors their fair share of climate risk disclosure.

Honorable Mentions

Tampa, FL (risQ Score 3.8, Hurricane risQ Score 3.2) $129,560,000

Located on the Gulf Coast and sitting on the north shore of Tampa Bay, the City of Tampa is one of the largest metropolitan areas in Florida. While Tampa has managed to dodge direct hits from hurricane events in recent years, the City is still exposed to climate impacts. Considering that a portion of the ~$130 million in proceeds is going towards government building renovations, it’s good to know the issuer seems aware of its exposure. Nationally, Tampa ranks 94th percentile for property losses from combined physical climate perils, with projected losses primarily driven by hurricanes. Storm surge from a Category 5 event drives ~37% property losses, but it doesn’t take the largest hurricane for Tampe to see significant losses; storm surge from a Cat 3 sees close to a quarter of all property value-at-risk. 

Flooding also plays an important role in Tampa’s future. Sea level rise and high tides are leading to more commonly occurring “sunny day flooding”— flooding on days without rain. Fortunately, the POS mentions the scope of Tampa’s sustainability efforts in Appendix F, which is 31 pages in length. This a great start, especially compared to other high-risk Florida issuers in this week’s lineups. New Springs Charter School (risQ Score 3.2, Hurricane risQ Score 2.7) is located in Tampa and does a lackluster job of climate risk disclosure… sorry, a single paragraph just doesn’t cut it given the risk surrounding New Springs. While the City continues to battle socioeconomic stressors (Persistent Health Obstacles Score 80) and Carbon Transition Risk (~90th percentile for emissions from its electricity production and industry sectors), its overall climate adaptation ideologies seem to be changing with the climate.

Babcock Ranch Community Development District, FL (risQ Score 3.8, Hurricane risQ Score 3.1) $92,070,000

Staying in Florida we turn our attention to Babcock Ranch CDD located in Charlotte County. The District ranks in the 86th percentile nationally for losses from combined hazards, with wildfire risk ranking in the 97th (statewide) and 89th (nationally). The worst of both worlds threaten the CDD — storm surge from a Cat 4 event drives ~27% property losses and a 500-year wildfire event drives ~39%. The addition of Heat Stress and moderate and severe Drought brings the threat level high enough for investors to take note. Considering the $92 million in proceeds for wastewater treatment plant renovations, there should be more than a few sentences dedicated to climate change (pg. 37-38). Let’s take a deeper look.

The Babcock Ranch website has flowery imagery and words about clean energy and the future with people enjoying outdoor activities with smiling faces. “Babcock Ranch is powered by 3 things: solar, nature, and innovation” is the first sentence. These things are appropriate from a marketing perspective, but don’t quite capture the threats facing the future of Babcock Ranch. For example, during peak hurricane season this year, Babcock Ranch began construction of a 40,000 square foot facility designed to shelter approximately 1,300 evacuees. It was originally intended to be 70,000 square feet for 2,500 people, but the pandemic forced partners to exit. There is also the problem of saltwater intrusion, a phenomenon that plagues southwest Florida beginning at Cape Coral and going inland through the Caloosahatchee River. Babcock Ranch might be the “City of Tomorrow” but that’s an uphill climb that began yesterday. 

Los Angeles, CA (risQ Score 1.6, Wildfire risQ Score 2.4) $156,190,000

Los Angeles sits in the 93rd percentile nationally for projected property losses from wildfire. The Bobcat Fire in 2020 was one of the largest in Los Angeles County’s history; the fire not only engendered physical damage but also contributed to poor air quality in the City. The POS notes that climate change may exacerbate wildfire frequency and intensity (pg. A-69) — in that vein, the City’s extreme drought risk ranks in the 96th percentile under expected 2030, 2040, and 2050 climates assuming a RCP 8.5 greenhouse gas (GHG) scenario. Aside from physical climate risk, the City faces considerable Carbon Transition Risk, as per capita emissions from the electricity production and industry sectors rank in the 89th and 80th percentiles, respectively. 

Fortunately, the City has two climate resilience plans: Sustainable City pLAn (aka the City’s Green New Deal) (pg. A-68) and Resilient Los Angeles. The former sets forth several actions to reduce GHG emissions, manage urban heat, and support a green economy. By 2017, the City had reduced GHG emissions by 40% from a 2008 baseline, surpassing their original 2025 goal. The plan places emphasis on environmental justice, proposing equity promoting actions or integrating equity initiatives into many of the goals. These strategies will serve the City’s low-income (Poverty Concentration Score 61) and POC (Nonwhite/minority Population Score 89) populations. The City’s other plan, Resilient Los Angeles, outlines a strategy to foster resilience through climate adaptation and connected communities. On the adaptation front, the plan discusses cool roofs, wildfire management, building codes, and urban tree canopy.

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