The Sunshine Economy: Climate Risk and Credit
Ask any consumer — good credit goes a long way.
It works the same for local governments. Increasingly investors in the bonds of local governments want to know more about the risks those cities and counties face from climate change, and how those risks could affect the governments’ ability to repay their debts.
"Investors and issuers are all very interested in the topic of climate and climate resilience among state and local governments at a level that seems to just be growing by the day," said Michael Wertz, senior analyst of infrastructure finance at Moody's Investors Service, one of the major bond credit rating agencies.
Credit is important for companies and local governments. Just like a consumer with good credit, when a city or county has good credit, they can borrow money more cheaply to build facilities like ports and airports, repair infrastructure like sewers, and invest in stuff like transportation or affordable housing.
These are all projects that can be paid for with borrowed money. And backing up the borrowed money are fees and taxes, and most importantly, the ability of the local governments to charge future fees and taxes to pay back the loans. If those future fees and taxes are threatened by climate change, then it means more risk. More risk means a higher cost to borrow the money.
For South Florida, good credit includes judging the threat of climate risk.
"There is undoubtedly an increased focus on climate change and weather related risks," said Mike Rinaldi, managing director at Fitch Ratings. "Governments are investing in resilience training and infrastructure investment. There is no doubt an increased attention level to ESG (environmental, social and governance) and risk associated with that and how governments operate on a day-to-day basis."
The (bond) market's recognition and expectations around this vulnerability aren't going away. - Michael Wertz, Moody's Investors Service
ESG is the credit ratings industry lingo for environmental, social and governance risks — stuff like sea level rise, hurricanes or flooding, social issues like labor relations, and privacy, and governance — history of corruption, or executive behavior.
"I think the risk is certainly increasing," said Mike Ferguson, director with S&P Global Rating's infrastructure finance practice. "The challenge we have is that these are low probability, high impact events. Embedding those in credit quality becomes an increasing challenge."
The risks are showing up in credit reports of South Florida local government bonds.
In 2017, Fitch Ratings upgraded Miami-Dade County government bonds backed by tolls from the Rickenbacker Causeway. Fitch said it was because the amount of traffic using the Rickenbacker was stable and the county had the ability to raise tolls.
The county borrowed about $30 million a few years earlier to pay for repairs to the causeway.
In August of this year, Fitch revisited its credit rating on those Rickenbacker bonds. It still had a positive view of the borrowing, but added a risk factor — environmental risks.
Specifically, the bond rating mentioned the causeway’s "heightened exposure to extreme weather events in relation to rising sea levels."
The mention of climate risk was unmistakable even though the bond rating didn’t change, the outlook was called stable, and the rating — like all other government credit ratings — didn’t pass judgment on what could be done to help make the causeway more resilient to the climate risks it faces. Instead, the rating acknowledged the climate risk.
That recognition may become more commonplace as local governments look to the bond market to raise money necessary for environmental resilience and climate adaptation projects.
In 2017, just two months after Hurricane Irma’s storm surge flooded areas of Miami, voters in the city okayed borrowing $400 million with about half of the money going to environmental resiliency efforts — storm drain upgrades and flood pumps. This spring, Hollywood voters okayed a package of new bonds, including $23 million to build new seawalls. Miami Beach voters okayed their own tranche of new borrowing a year ago with some of the money going toward seawalls.
The borrowed money will be paid back using property taxes. The cities are counting on using their good credit standings to borrow the money at low interest rates.
"What we're seeing is an increased movement on the part of local governments to put environmental options out in front of their voters," said Rinaldi.
Some consider new sales tax referenda aimed at transit projects, such as those okayed in recent years in Palm Beach and Broward counties, to be part of local government's response to climate risk. In these cases, the agencies aim to borrow money now and pay it back over the course of future sales tax collections.
Rinadli calls it a "sea change in terms of the recognition of environmental risk. Putting your head in the sand is just not going to work going forward."
Wertz with Moody's agreed. "The (bond) market's recognition and expectations around this vulnerability aren't going away," he said. "There is an expectation that the city is thinking about that vulnerability and actively trying to come up with ways to plan and address that risk."