LOS ANGELES — Though California has now faced devastating fires near major metro areas in northern and southern California within a few months, the damage is not expected to extend to bond ratings, according to S&P Global Ratings.
“We don’t see any immediate credit impact with respect to municipalities or special districts,” said S&P analyst Jenny Poree.
The extent of the damage wrought by the fires is raising concerns regarding potential economic effect, S&P analysts said in a report released Tuesday.
“Despite considerable damage in Northern California in October, we have not lowered our ratings on bonds issued by local governments with service areas in or near damaged areas – and for Southern California, we expect a similar effect,” according to the S&P report.
Fire agencies have spent upwards of $48 million battling the Thomas fire, the biggest Southern California conflagration in what is being called one of the most destructive fire seasons on record for the state.
Gov. Jerry Brown declared a state of emergency last week for five fires that have wreaked havoc in Ventura, Los Angeles and San Diego counties. Santa Ana winds and dried brush fueled fires that created a path of devastation across hundreds of thousands of acres in Southern California.
Smoke that covered the Los Angeles area could be seen from space.
All but the Thomas Fire raging through Ventura County and parts of Santa Barbara County have been nearly contained. The Thomas Fire has burned 234,200 acres and was only 20% contained as of 7 a.m. Tuesday.
The fires that struck California wine country in October were the deadliest in the state’s history laying waste to entire neighborhoods and taking the lives of dozens of people.
As S&P did when the Napa Valley fires struck, the rating agency is evaluating the 35 local government issuers in Southern California it rates.
“While natural disasters such as floods, fires and earthquakes can exert some short-term pressure on municipal finances, the arrival of state and federal aid, insurance proceeds, access to short-term financing, and the use of the locality’s own reserves typically alleviate the strain,” Poree said.
S&P anticipates that state support will help fill the gaps for both local governments and school districts. For school districts, through a state funding formula, if assessed values drop during rebuilding, the state has typically backfilled revenues lost through decreased assessed values on properties destroyed.
It is too soon to determine how the fires might impact state finances, because the state would not make the decision on how much it would backfill losses in assessed values for localities and school districts until it begins the budget process, Poree said.
The state is not required to backfill losses in assessed value that result in lost revenue for local governments, but it has previously done so when catastrophic fires have struck, Poree said.
The state’s Board of Equalization released a report that said state legislators have typically made a decision to backfill lost property taxes in fires that have occurred since 2000.
In counties that have a Teeter plan, it could alleviate pressure for cities and special districts, but do the opposite to counties.
“Under the plan, underlying entities receive 100% of the levied taxes as opposed to the actual amount of taxes collected at the county level. As a result, delinquent collection risk is transferred from cities to the county’s liquidity position,” according to S&P’s report on the Napa fires.
San Diego and Ventura counties, both have a Teeter Plan, but Los Angeles does not, Poree said.
Though S&P does not see any immediate credit impact, given that California is coming off its wettest winter on record and hottest and most prolonged summer and the prior significant drought, “we are working with the water group on how communities should be incorporating climate change into their planning,” Poree said.
The larger question, according to the rating agency, is how such local government entities will fare in the longer term, if the disaster and subsequent rebuilding, or lack thereof, affects tax bases and local economies. Though the devastation impacts assessed value during the two-to-four years it typically takes to rebuild, homes and businesses are usually rebuilt at a higher assessed value.
S&P had raised concerns in its report on Napa Valley that a shortage of both labor and construction materials could impact the speed of rebuilding, and the extent of the southern California fires only compounds those concerns.
“Prior to the fires at national and state level there was already a shortage of labor and now with fires in two regions of this magnitude, it will be more impactful than anything we have seen,” Poree said. “Having sufficient resources and quick permitting was instrumental in rebuilding Oakland after that fire and other fires in the past. Cities need to be nimble and make sure they are taking advantage of resources when available.”
S&P analysts have been keeping in close contact with northern California officials in Sonoma and Napa counties regarding damage from the fires there in October.
“Having the right processes and reserves are important to insure those on the front line are getting help in an expedited fashion,” Poree said. “It has gone as expected, but we are still reviewing the municipalities. We have reviewed the impact on the larger municipalities and school district, but some of the smaller municipalities don’t have their arms around all the damage.”