Why climate risk may rival pensions as a muni market headache
While New York observed the seventh anniversary of Hurricane Sandy on Tuesday, an analytics firm warned that climate change could pose the biggest threat to municipal credit for the next decade.
"Climate change risks and preparedness may become the pension issue for the 2020s," Municipal Market Analytics said in a commentary. Assessment tools and analytic outcomes, MMA said, will propel negative rating actions and, eventually, wider spreads.
Credits in areas most vulnerable to water, wind, and fire-related events are most at risk, according to MMA. Recent extreme weather cases have ranged from the raging wildfires in California to tornadoes, hurricanes and tropical storms in the Midwest and Southeast.
"An industry pivot could be hastened if FEMA [the Federal Emergency Management Agency] changes its criteria and raises more hurdles between disaster and federal aid, undermining traditional views of FEMA as a credit stabilizer," MMA added.
Hurricane Sandy struck the East Coast on Oct. 29, 2012. At least 44 New Yorkers died in the storm, which inflicted roughly $20 billion in damages and lost economic activity.
The City Council's committees on environmental protection and resiliency and waterfronts discussed three bills during an oversight hearing on Tuesday. The bills would require a special flood hazard area notification; create a marine debris disposal office; and create a five-borough resiliency plan.
"Another superstorm could happen tomorrow and I don't believe we'd be ready," said environmental protection committee chairman Costa Constantinides.
New York has roughly 500 miles of shoreline.
Flexible planning can help better protect low-lying areas, William Sweet, an oceanographer with the National Oceanic and Atmospheric Administration, told council members.
"It's probably best to position for a future that's largely uncertain, so don't box yourself into any particular solution but leave an adaptive capacity to whatever decisions you make today because you may revisit them tomorrow," he said.
The city has allocated $20 billion for resilience citywide.
In addition, Mayor Bill de Blasio in March called for an additional $10 billion to fortify Lower Manhattan, though funding it would hinge on the availability of large-scale federal money. The mayor called for extending the Manhattan shoreline into the East River by 50 to 500 feet, depending upon financing and engineering variables.
According to MMA, credit-risk triggers include frequency and severity of climate-related events; efforts by climate change groups to compel a more "proactive and explicit" assessment in investment decisions and ratings; and growth in related technology firms.
MMA also cited more focus on climate risk disclosures by market regulators; a spiraling federal deficit that will constrict aid disbursements; and the signing of the Disaster Recovery Reform Act of 2018, which has FEMA working to update the factors for disaster declarations to better gauge jurisdictional capacity.
Unlike pension credit negatives, MMA added, climate-related disasters could trigger "a sustained, nonreversible, erosion of the tax base, or devastate it immediately." It referenced Paradise, California. One year after the Camp Fire, its population is only about 10% of its pre-disaster size and building permits exist for only a portion of what was destroyed.
In Brooklyn, the Metropolitan Transportation Authority announced that its New York City Transit’s Coney Island yard complex, which it called the largest rapid-transit yard in the world, has reached a resiliency milestone with construction of a state-of-the-art elevated cable bridge that will supply traction power to the entire 74-acre facility, which stores and services 881 subway cars and deploys 71 trains into daily service across six lines.
Sandy flooded the complex with 27 million gallons of saltwater and debris.
Record storm surge flooded nine NYC Transit subway tubes with corrosive salt water, submerged two Long Island Rail Road tubes linking Manhattan with Queens and two MTA vehicular tunnels, and damaged a subway bridge, three subway yards and six bus depots in low-lying areas. Damage was particularly severe in downtown Manhattan near New York Harbor, with the South Ferry subway terminal station filling track to ceiling with salt water.
“We came back from devastation seven years ago and the work to adapt every part of our system has yielded a stronger, smarter, and greener system for millions of New Yorkers,” MTA Chairman Patrick Foye said.
The authority, one of the largest municipal issuers with about $44 billion of debt, is reconstructing its Canarsie tunnel, which carries the L train between Brooklyn and Manhattan.