LOS ANGELES — The impact on muni credits from the two most monstrous of California's many current wildfires has been minor so far.
Some 14,000 firefighters from as far away as Florida and New Zealand are struggling to curb 18 fires raging throughout the state.
The Mendocino Complex is the name given to two fires that began near Clear Lake, roughly 110 miles north of San Francisco, on July 27 and are being managed together. The California Department of Forestry and Fire Protection reported Thursday that the twin fires were 51% contained and that it hopes to fully contain the fires by Sept. 1.
The fire has consumed 475 square miles in mostly remote areas destroying 119 homes and injuring two firefighters.
Further north, the Carr Fire has killed seven people and destroyed more than 1,000 homes in and around the city of Redding. It is 48% contained, with no estimate for full containment.
Other significant fires are burning near Yosemite National Park and in Southern California.
Between them, Fitch Ratings and S&P Global Ratings rate about a dozen redevelopment agencies and school districts that could be affected by the state’s fires.
"As with most natural disasters, Fitch believes the fiscal impact of the fires on rated entities in Shasta, Lake and Mendocino counties will be largely mitigated by their financial flexibility and support from federal and state governments and private insurance policies," Fitch analysts wrote Aug. 3.
In a July Fitch report, the rating agency said as long as the federal government continues to make emergency declarations after natural disasters with resultant federal funding, the credit impact will be ameliorated. If the federal government moves away from providing funding to states in the wake of natural disasters that view could change, said Karen Ribble, a Fitch senior director.
In previous natural disasters, federal funding has meant from a credit standpoint, there "may be a little hiccup, but nothing long term,” Ribble said.
President Donald Trump has approved federal funding to aid California’s firefighting efforts. But he also took a shot at the state’s environmental laws in a baffling tweet in which he blamed the state for "diverting" water to the Pacific Ocean that could be used for firefighting and other uses.
Cal Fire officials said there is plenty of water for wildland firefighting, which relies to a large extent on bulldozing protective fire lines and dropping fire retardant, in addition to making water drops from helicopters.
So far, the number of homes in the Mendocino area that have been damaged does not have credit implications, Ribble said.
Fitch examined the Carr Fire's impact on Redding and Shasta County and the Mendocino Complex fires' impact on Lakeport in Lake County as well as adjacent areas of Mendocino County.
Fitch rates three tax allocation bonds with project areas in the city of Redding. The Redding Redevelopment Agency's Canby/Hilltop/Cypress Project, 2003 series A is rated A-plus with a stable outlook; the Market Street Redevelopment Project Series 2003 is rated A with a stable outlook; and the SHASTEC Redevelopment Project, series 2006 bonds are rated BBB-plus with a stable outlook.
Those redevelopment areas are not in the Carr Fire evacuation area, Fitch analysts wrote.
"In addition, the fire is reportedly moving to the north and west of the city while the project areas are in the urban core of the city, which is to the south and east of the evacuation area," Fitch analysts wrote. "Given TABs are payable only from tax increment derived from the project areas, damage to property in the project areas would negatively affect revenues available to pay debt service."
S&P identified nearly a dozen bond issuers with roughly $268 million in debt outstanding whose facilities could be damaged or destroyed by the Carr Fire. The Mendocino Complex fires have since outpaced the Carr Fire in territory, though not in property destruction.
“The Carr Fire has not led us to take rating actions on debt associated with Redding-area communities so far," said Chris Morgan, an S&P director. "Partially this is because it’s too early for local authorities to get a good sense of the scale of the damage before the fire is contained."
Based on S&P's experience from last year's California fires, Morgan said, "we think that data on how the fire has affected credit quality will take longer to emerge."
Considerations S&P is tracking include "how fast rebuilding occurs in the context of a tight construction labor market, the potential for disruptions in local revenues of different types and new capital needs that local governments may need to confront," Morgan said.
The federal emergency declaration is likely to give local governments additional certainty, he said.
Moody's hasn't issued a report on specific credits, but issued a general statement regarding the credit and financial impact of the California wildfires on all affected municipalities in the state.
”While FEMA assistance and private insurance will significantly mitigate the negative credit effect of the California wildfires on communities in Shasta and Mendocino Counties, rebuilding could be slower and more challenging than last year due to these rural counties’ smaller economies and tax bases compared to the suburban counties affected by 2017’s wildfires," said Eric Hoffmann, a senior vice president.
"The increase in frequency, intensity, and duration of California’s wildfire season over the last several years is a rising credit challenge for California and its municipalities," Hoffman said.
The local governments affected by the fires are likely to use a combination of federal relief funds, state support and insurance claims to pay for most fire-related damage, Fitch analysts wrote.
"Economic damage, such as lost tourism income and crop damage, if any, is likely to be temporary and followed by significant increases in economic activity as communities rebuild after fires," according to the Fitch report.
The state of California's fiscal 2019 budget includes $2.3 billion in the state's fund for economic uncertainty which can be tapped for unexpected events such as natural disasters.
Fitch does not expect the City of Redding's AA-minus rated electric utility to be materially impacted by the fire. Utilities prepare to handle natural disasters from both operational and financial standpoints, and Redding, supported by financial flexibility and strong liquidity, is no exception, according to Fitch.
Cottonwood Union School District, rated A-plus, is about 15 miles south of Redding and does not appear to be impacted by the fire, according to Fitch. The school year has not yet started so any impact on enrollment will be determined once school begins, according to the report.
State law holds school districts harmless for impacts to attendance, on which state funding is based, due to natural disasters, including air quality, Ribble said.
Mendocino County is a largely rural county with a population of just 87,000. Fitch analysts said they “expect any near-term budgetary fire-related impacts due to assessed valuation (AV) declines and the added cost of fire-fighting and clean-up to be relatively modest," because most of the fire to date is in neighboring Lake County.
“Overall, we expect most damaged property in affected communities to be rebuilt, which will maintain tax bases, rather than residents and businesses leaving the areas. While we expect recovery efforts to follow historical patterns of disaster recovery, we will analyze any significant developments that might affect credit quality,” Fitch analysts wrote.
Fitch also rates Lake and Upper Lake School Districts, Ribble said, but the communities are small and primarily tourist areas.
"There is some vulnerability to those districts if enrollment permanently declines, but as far as we can tell there hasn't been an impact on homes," Ribble said.
Upper Lake Unified School District, rated A by Fitch, also includes part of the area affected by the Mendocino Complex Fire. The fire is currently outside the town of Upper Lake, where the district's elementary, middle, and high schools are located. Impacts on both the district's assessed values and enrollment are anticipated during recovery, Fitch analyst wrote, but overall state funding should be unaffected.
Lakeport Unified School District, rated A-plus by Fitch, in impacted by the Mendocino Complex Fire, though none of its facilities appear to have been impacted to date. As in Cottonwood and Upper Lake, Fitch expects state school funding to be unaffected.
"We only rate one school district near Yosemite – and it’s quite a ways from the Ferguson fire," Ribble said.
There are not many credits that would issue bonds near Yosemite National Park, she said.