The series of rain storms that pummeled California through January caused major damage, but initially appear to have limited credit impact, according to S&P Global Ratings analysts.
The storms caused $533 million in governmental infrastructure damage to local jurisdictions and $113 million to state infrastructure, according to S&P.
"From our initial review, it appears that no issuers suffered damage to a degree that resulted in weakening of overall credit quality," S&P analysts wrote in the Jan. 30 report. "Many communities will still be determining the level of damage in the weeks and months to come."
While the report opines the storm had limited credit impact to date, S&P analyst Tim Tung noted in an interview that FEMA reimbursements only cover infrastructure and replacement costs, not related disruptions to property tax revenue streams if storm-damaged houses are assessed at a lower level, for instance.
Given the state could be paying roughly a quarter of the $646 million in estimated infrastructure damages, about $160 million, it's not considered monumental in a state that has a $200 billion-plus general fund budget, Tung said.
The report focused on state and local infrastructure damage, not damage to private businesses or homes.
"There were a couple of factors as to why we believe, it wasn't more impactful to jurisdictions," Tung said. "Most of the agencies have been able to build and enhance reserves. When you look at the liquidity of the local jurisdictions, they are very strong right now."
The local jurisdictions and state also benefit from President Joe Biden's emergency disaster declaration, because that means the Federal Emergency and Management Agency will reimburse the state and local governments for some infrastructure repair and replacement.
For the first 60 days, federal government covers 100% of emergency repairs, which includes debris removal, Tung said. FEMA will pay 75% of the cost for more permanent repairs, with the state picking up 18.75% and local governments paying 6.75%, he said.
"That's the typical reimbursement," Tung said. "The federal share of the costs can't be less than 75%."
What aids the favorable credit implications is the combination of it being a period when reserve levels for the state and local governments are stronger than they have been historically and the federal aid coming as a result of the disaster declaration, Tung said.
The damage, also largely hit coastal areas like Santa Barbara, San Luis Obispo, Santa Cruz and Ventura County, counties that have diverse economies and are more resilient in the ability to rebuild, Tung said.
Though the storms brought needed water, the state is not out of the woods when it comes to the multi-year drought, according to the California Department of Water Resources.
DWR officials cautioned against reading too much about the long-term effects of the series of storms on the state's water problems, or the multi-year drought.
DWR did have some good news for the 27 million people who depend on water from the State Water Project, a complex system of reservoirs, canals and dams that provides water to San Francisco, Los Angeles and farms in the Central Valley.
It announced during a Jan. 27 press conference that it would be upping the amount of water it allocates from the system to 30% from 5%, an amount state water districts that serve 27 million users in the state haven't seen since 2019. The SWP hasn't provided a 100% allocation since 2006, according to DWR.
"We are pleased that we can increase the allocation now and provide more water to local water agencies," DWR Director Karla Nemeth said. "These storms made clear the importance of our efforts to modernize our existing water infrastructure for an era of intensified drought and flood. Given these dramatic swings, these storm flows are badly needed to refill groundwater basins and support recycled water plants."
Tung echoed Nemeth in emphasizing that the storms have not solved the state's water problems, though they do provide some immediate relief.
The storms increased the snowpack to above 200% above average in the mountains; and that is a critical source of water storage, but this is unlikely to alleviate the persistent drought conditions, experienced over the course of several years, Tung said.
"We are definitely in a long-term drought on the Colorado River," Tung said. "This is something water district managers will be working on for quite some time."
