How climate challenges cast a glare on issuers
Ellicott City, Maryland, provides a stark example of the difficulties public issuers face in coping with extreme climate change.
Floodwaters ravaged the unincorporated community 12 miles west of Baltimore twice in the past three years — in the same part of town. The second disaster, in May 2018, wiped out a rebuilding project funded in part with Federal Emergency Management Agency money, which had arrived late.
“The flood hit them before the completion date because the money was siphoned off to go to another storm which was happening,” said Alan Rubin, a principal at Blank Rome Government Relations LLC.
Cities, said Rubin, must use funding mechanisms, including green bonds, to get out front of disaster situations.
“You don’t want to run into the same scenario that they had in Maryland,” Rubin said.
Amid weather extremes from California wildfires last summer to this week's cold snap through much of the country, issuers are developing resiliency initiatives.
In the Northeast, New York City is planning a $1.4 billion East Side coastal resiliency project while in Massachusetts, Gov. Charlie Baker has called for raising the real estate property tax to fund climate-related infrastructure projects.
Investors and rating agencies are scrutinizing effects on capital and operating budgets, and reserve levels.
S&P Global Ratings incorporates Environmental Sustainable Governance, or ESGm, guidelines and Moody’s Investors Service has added climate factors to credit risks and has warned municipal issuers to grasp climate exposure or face downgrades.
Moody's on Thursday forecast a 20% jump in overall green bond issuance to $200 billion this year. It cited continued issuer diversification and greater clarity surrounding standards.
“They’re socially conscious and everyone likes to use them — at least they say they do at this particular point,” Rubin said of green bonds. “The problem is, as climate change gets worse and worse, can you use them effectively for the kinds of projects that you’re trying to undertake?”
Resilience funding has resonated beyond Wall Street as well.
“Activists and community groups are now paying attention to rating agencies, using agencies as a whip,” Rubin said. “It used to be just the banking community, the financial community. But ratings are being used as a facility for what I call a ‘new green deal,’ to finance needs.”
Speaking before the New York City Council’s oversight hearing on city changes to the East Side project, Catherine McVay Hughes of the Financial District Neighborhood Association, home to roughly 50,000 residents and the country’s fourth-largest business district, cited the hammer of rating agencies post-Sandy.
“Cities that suffer downgrades will not be able to make the investments they need, including the investments required to adapt to climate change and to recover from future storms,” said Hughes, a former chairwoman of Community Board 1.
Accurate disclosure about the effects of climate change on public-agency finances is difficult because risks are uncertain and involve “nuanced scientific analysis,” said Arto Becker of law firm Hawkins Delafield & Wood LLP.
Still, “a public agency could have significant needs for liquidity while it waits for FEMA reimbursement and other outside sources, so its reserves or other immediate liquidity resources are important,” Becker said at The Bond Buyer’s National Outlook conference Tuesday in New York.
Communicating openly is also vital, according to Rubin.
Last-minute changes to the East Side project with little community input rankled lower Manhattan community groups and City Council members in affected districts.
Council member Carlina Rivera, whose district covers the affected neighborhoods, said at the City Hall hearing that the project will “set the tone for the city’s future responses to climate change.”
Rivera chided city officials for “a period of radio silence and then a surprise announcement." She compared the switch to Gov. Andrew Cuomo’s 11th-hour design changes to the Metropolitan Transportation Authority’s L-train tunnel project shutdown plans.
Mayor Bill de Blasio’s administration on Sept. 28 announced a new design for the resilience project, which would run along the East River from Montgomery Street to 25th Street. It would raise East River Park and move the floodwall and barriers to the water’s edge instead of on the border between the park and the Franklin D. Roosevelt East River Drive.
Raising the entire park, officials said, would extend toward the waterline and reduce the likelihood of flooding the park.
Having to close the park for three years during construction, however, triggered emotional responses that paralleled Brooklyn residents’ objections to a proposed promenade closure, announced as part of the Brooklyn-Queens Expressway reconstruction project.
While the “all in” new cost is about $1.45 billion, with the U.S. Department of Housing and Urban Development to contribute $335 million under its Community Development Block Grant disaster recovery funding program, Lorraine Grillo, commissioner of the city’s Department of Design and Construction, said costs were rising anyway under the old plan, to nearly $1.2 billion from $800 million.
In addition, she said, the previous method would have involved closing a lane on FDR Drive, pile driving near several New York City Housing Authority developments and fully excavating a major Consolidated Edison gas transmission line.
“I regret that we did not share more information sooner,” Grillo told council members. “Did we communicate the change properly? No, and that’s on me.”
Council parks and recreation chairman Barry Grodenchik of Queens found Grillo’s response encouraging.
“I’m glad the city owned up to this,” he said in an interview. “I’ve known Lorraine Grillo for many years and she’s a standup person.”
In Massachusetts, Baker is asking for a “modest increase” in the deeds excise tax as part of his $42.7 billion budget proposal for fiscal 2020. While short on particulars, Baker said the move could generate $75 million for climate-related projects in the first year and $137 million annually thereafter.
“It’s a very creative way to offset some of the damage from the climate change. It makes sense,” Rubin said. “They need a funding source and people don’t feel it as much.”
Boston Mayor Martin Walsh, who previously advocated an $11 billion north-south seawall along Boston Harbor, changed plans last fall and instead proposed a waterfront-park system that would elevate some flood-prone areas.
Walsh has given no cost estimates, saying the city would seek funds from the state and federal governments, private companies and philanthropies.
The city intends to add 67 acres of green space along the water and restore 122 tidal acres.