As California, Oregon and other western states pile up year after year of record-setting fire seasons, the question looms as to what point it becomes a significant risk for municipal debt.
Oregon and California have both experienced fires so hot and severe this summer that they have produced pyrocumulus clouds, or fire clouds, through the evaporation of water in burning trees and plants that can create thunderstorms.
“By mid-July nearly 450,000 acres have burned across the state,” Oregon Gov. Kate Brown said during a July 20 press call. “We have nine fires burning in Oregon, including Bootleg, the largest burning in the country. It’s the fourth-largest in the state’s history.”
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Heat warnings and fire advisories had been issued across much of the west by late July and dozens of fires had burned though more than 1 million acres.
“It’s shaping up to be another difficult wildfire season,” Brown said. “And unfortunately, we’re responding to new fires as we continue to recover from last year’s devastating fire season.”
Last year, wildfires consumed more than 1.4 million acres in California and 1.2 million acres in Oregon.
That isn't a rating or credit problem for issuers in wildfire country — at least not yet.
Rating agencies and bond analysts have historically pointed to Federal Emergency Management Agency payments, state reimbursements to localities hit by property tax losses, and insurance proceeds as strong enough factors to ameliorate losses associated with wildfires and other natural disasters.
Moody’s Investors Service maintained that stance in a June report on California even as analysts mentioned that environmental conditions suggest the state’s major economic centers are heavily exposed to damage from a potentially devastating 2021 wildfire season. It rates California Aa2 with a stable outlook.
Most of California’s major economic hubs, which collectively account for nearly 80% of state wages, are at “high” physical risk from wildfires, according to Moody’s affiliate Four Twenty Seven.
“Yet economic risks for local governments we rate are minimal considering generally strong liquidity, large tax bases, private insurance, and the levels of federal and state emergency aid following natural disasters,” said Moody’s analysts. “In a sign of municipalities’ ability to withstand damage, no public finance issuer we rate in California or elsewhere in the U.S. has defaulted because of a natural disaster since at least 1970.”
Chris Hartshorn, chief commercial officer for risQ, a company that models the financial risk posed by climate change for the municipal industry
“FEMA payments have been delayed more every year, property values are dropping and insurance payments are going up,” Hartshorn said. “Evaluating climate change risks for natural disasters from a historical perspective no longer works.”
Recent data from ICE Climate Risk, which has partnered with risQ, showed that $240 billion of outstanding municipal debt was exposed to high wildfire risk as of May.
The company employs a Wildfire risQ score that ranks the risk using a 0 to 5 metric that translates the probabilities and severities of wildfire and expected risk into a single number. Between 1990 and 2018 wildfires in high-risk counties, places with risQ scores greater than 3.0, accounted for $46 billion in insured losses.
S&P analysts said in an ESG report card released on California in which it said the state’s risk from fire is “elevated” that the state no longer has a fire season.
“Factors that compound wildfire risk such as drought, invasive insects that have killed millions of trees in recent years, forestry management practices and new development that continues encroaching on risk-prone areas lead to “our view that there is no longer a wildfire season, but instead it’s a year-round phenomenon,” S&P analysts wrote.
In an interview, S&P analyst Jenny Poree called the ESG report card a lens through which S&P views ratings. Though California received an “elevated” risk designation on both the environmental and social categories, it doesn’t change the rating because the ESG factors are already considered in the rating, she said. S&P rates California AA-minus with a stable outlook.
In California, eight of the 10 biggest fires have happened in the past 10 years, half of which came in 2020, destroying 10,000 structures at a cost of $12.1 billion, according to the S&P report.
Fitch Ratings rates California AA with a stable outlook. Oregon holds ratings of AA-plus, Aa1 and AA-plus from Fitch, Moody’s and S&P. All have stable outlooks.
In Oregon, Brown said “the urgent and dangerous climate crisis” has exacerbated conditions.
“Drought conditions are really driving the fire potential,” said Doug Grafe, fire protection chief for the Oregon Department of Forestry. “The majority of the state in is severe or extreme drought conditions. The heat dome 100-plus degrees in June propelled us into August fire conditions a month to a month-and-a-half early. When you add trigger points like lightning and human caused fires the future continues to look above normal dry and above normal temperatures. We are facing a long fire season.”
After last year, Brown said, “what is very clear is that no corner or our state is immune to fire. We must be prepared. Each and every one of us.
“We are seeing extensive drought conditions across the state, with 19 counties in drought emergencies," she said. "Unprecedented heat waves. And fire seasons that are arriving earlier, coming on faster and lasting far longer.”
