California fires compound challenges for cities reeling from pandemic

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California wildfires that have scorched 1.5 million acres will compound the challenges for local governments already reeling from the coronavirus pandemic, but Moody’s Investors Service says in most cases they will emerge with their bond ratings intact.

The latest burst of blazes was sparked by a rare, powerful storm that generated lighting strikes throughout northern California without accompanying rain.

Firefighters in California have battled 7,000 fires across the state this past week including this one in Sonoma County.

Firefighters are waging battle against an estimated 7,000 fires of varying sizes throughout the state. The blazes have resulted in seven deaths, the destruction of 1,600 structures and the evacuation of 136,000 people by Thursday, according to the California Department of Forestry and Fire Protection.

The evacuations come at a time when California Gov. Gavin Newsom and some mayors have ordered that all residents wear masks and continue to social distance in efforts to slow the spread of the pandemic.

In prior years, wildfire evacuees would have filled schools or recreation buildings, but this year people evacuated from their homes are filling hotels. The latter could result in reduced revenues for cities that benefit from bed taxes, according to Moody's report.

In most cases the cities' strong liquidity, large tax bases and the history of aid from Federal Emergency Management Agency and state government will protect credit quality and ratings, Moody’s analysts said.

Funding from the federal government may not be enough to protect smaller cities like Paradise, which was decimated by the 2018 Camp Fire.

That inferno destroyed 6,522 homes and 260 commercial buildings and resulted in 85 deaths in a fire that burned nearly 90% of the town of 27,000.

Moody's analysts also noted that California wine country areas like the Napa Valley or Sonoma County that are heavily dependent on tourism could also face an additional hurdle to achieving full economic recovery.

“Communities already struggling with high unemployment, slow tourism-related sales and seasonally low occupancy taxes will likely suffer an even more sluggish recovery in the event of prolonged wildfire disruptions,” Moody’s analysts wrote.

Moody’s analysts wrote that Santa Cruz County requested out-of-town tourists vacate occupied hotel rooms to allow for evacuees as the CZU fire expanded and San Mateo County has set up evacuation centers to serve as coordination centers rather than overnight facilities because of the risk of further spreading COVID-19.The use of hotels to shelter people evacuated as a result of the fires could also mean potentially higher costs for local governments and lost hotel bed tax revenue, Moody’s wrote.

Moody’s noted, however, that California local governments generally maintain healthy cash positions and benefit from large assessed values, which have historically been a bedrock of credit strength across the state.

The strong liquidity positions have enabled most issuers to meet near-term emergency expenditures as they await federal and state funding, Moody’s said. The California Legislature has historically approved funding to backfill lost revenues for cities decimated by fire, in the budget year following the fire.

Cities with larger tax bases can more readily sustain themselves financially until federal and state money becomes available, Moody's wrote.

In fall 2017, wildfires in Santa Rosa destroyed over 2,600 properties and the local county assessor estimated a 5.0% and 6.2% year-over-year reduction in 2018 assessed value for Santa Rosa Elementary School District and Santa Rosa High School District, respectively.

“These declines were easily absorbed into the ESD and HSD's large $9.7 billion and $31.4 billion tax bases,” Moody’s analysts wrote. “The ultimate impact on AV was negligible as fire-damaged properties were repaired and newly built improvements were added to the districts' taxable rolls.”

Local governments with smaller tax bases and weaker finances are more vulnerable and are not as well placed to absorb wildfire destruction, Moody’s wrote.

Paradise’s modest $2.1 billion assessed value was almost entirely eliminated by the 2018 Camp Fire. The unusual extent of the damage to the town, which also devastated its financial position, brought into question the town's short-term ability to pay debt service, Moody’s wrote.

But Moody's upgraded the underlying rating on the Paradise bonds it rates to a higher level of junk and assigned a positive outlook in August. Moody’s upgraded the underlying rating on the $19.3 million 2007 A-2 POBs sold as capital appreciation bonds by the California Statewide Communities Development Authority to Caa2 from Caa3.

Money deposited by Paradise Aug. 1 for the bond payment due June 1, 2020 was cited by the ratings agency in the ratings boost and revised outlook. The rating agency also noted that the bonds are insured by Ambac.

Moody’s considers the availability of FEMA funds for emergency and disaster relief an important credit strength for local governments.

Ten counties in northern California — Santa Clara, Stanislaus, Santa Cruz, San Mateo, Napa, Nevada, Lake, Solano, Yolo and Monterey — will benefit from a federal decree that makes them eligible for Fire Management Assistance Grants, which reimburses 75% of eligible costs for emergency and disaster response, according to Moody’s.

Moody’s analysts expect that state disaster assistance for local governments will likely fund a substantial portion of the remaining 25% of associated costs.

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