The effects of climate change and rising sea levels pose credit quality risks for Florida issuers, according to S&P Global Ratings.
Florida's long coastline, low elevation and susceptibility to severe weather events increases its environmental risks when compared to most other states, S&P said when it analyzed the environmental, social and governance credit factors for Florida issuers in its Sept. 9 report ESG U.S. Public Finance Report Card: Florida Governments and Not-For-Profit Enterprises and assigned various grades to each of the three features.
The state received an elevated risk ranking for environmental factors while it got neutral grades for social and governance issues.
“Our goals with the report cards are to highlight the most prevalent risks and opportunities within the ESG umbrella that can affect credit quality not only for governments but also not-for profit enterprises in a state,” Nora Wittstruck, director and ESG lead, told The Bond Buyer.
“With this report card we’ve identified the fact that physical risks and those associated with hurricanes, storm surges and flooding and coastal flooding are really the primary environmental risks we see that can acutely affect credit quality within the state,” Wittstruck said.
She said that long-term sea level rise associated with climate change is a risk to the state.
Florida's state government is rated triple-A by S&P, Moody's Investors Service and Fitch Ratings.
“Given the vast coastline in Florida, there’s obviously a lot of the population and a lot of the economy that is based in counties that have a coastal component so we see elevated environmental risks more prominently in those areas,” Kimberly Barrett, associate director at S&P and co-author of the report, told The Bond Buyer.
From an environmental standpoint, the state's 35 coastal counties contain 76% of the state’s population and represent 79% of the state’s economic output, according to the Florida Department of Environmental Protection. S&P said this exposes a large amount of the state's land and property to risk of impact from severe weather events.
“We believe an entity's level of reserves and liquidity can help prevent credit quality deterioration when an entity is faced with an acute physical risk,” the report said.
About 20% of Florida's property currently faces a substantial
“This is compared with a baseline for the entire U.S. of 10% of properties currently at risk, increasing to 11% in 30 years,” S&P said. “A growing amount of research contemplates the long-term effects of climate change on Florida's economy, particularly its real estate market.”
S&P cited a study done by McKinsey Global Institute in 2020 that evaluated the potential for changes in real estate prices as homebuyers reassess long-term value of properties that may be affected by climate change and possible
“Lower real estate prices may translate to a reduction in property tax collections, which is a material portion of revenue for Florida local governments,” S&P said. “Over the long term, the revenue and demand profiles for public power and water utilities, higher education institutions, charter schools, tax-supported hospital districts, and toll roads may be challenged if climate change leads to fewer housing starts, less home buying activity, and lower economic growth.”
Additionally, sea-level rise is one of the most evident long-term impacts of climate change for Florida, resulting from its low elevation and porous geology.
“The effects of sea-level rise are already occurring through beach erosion and more frequent tidal flooding, and compound the impact from storm surges,” S&P said. “Furthermore, water and sewer utilities in Florida may face saltwater intrusion into the water supply, especially if groundwater levels rise over time, precipitating the need for subsidence planning.”
The Southeast Florida Regional Climate Change Compact's
"These projections assume current greenhouse gas emission trajectories, a reduction in which could change the rate of impact and why proactive planning and coordination is such a material component in our credit rating analysis for issuers in Florida," S&P said.
Looking at social issues, S&P said the risks and opportunities were pretty well balanced between population, demographics and economic sectors.
“We view the sustained population growth — generally outpacing that of the nation — as a social opportunity for Florida, driving economic and job growth,” S&P said. “However, the state's relatively high age-dependent population and potentially outsized exposure to disruptive macroeconomic health and safety events, given its large leisure and hospitality sector, are viewed as offsetting factors resulting in our overall neutral assessment.”
S&P said population growth was generally viewed favorably because it leads to higher demand for transportation infrastructure, steady enrollment growth for higher education institutions. It may also help keep utility bills lower because costs are spread across a larger ratepayer base.
“Typically within our credit rating analysis — because so many issuers either rely on property taxes to support their operations and pay debt service — population growth can often lead to revenue-raising ability for utilities because they have a growing number of accounts,” Wittstruck said.
She added a growing population also provides greater state support through the way state aid is provided for school funding based on rising enrollment. Also Florida’s large base of charter schools receive more funding as well based on rising enrollments.
“While infrastructure investment will remain a key requirement for governments and not-for-profit enterprises to adapt to climate change risks, organic revenue growth may help issuers maintain budgetary balance while increasing reserves and liquidity that are instrumental to absorbing unexpected events related to the state's environmental physical risks,” S&P said.
Turning to governance issues, S&P said there were positive factors that kept the state generally level with its peers.
“While we view risk management, culture, and oversight positively due to the presence of state-level programs designed to help mitigate elevated environmental risks, we view the state's governance structure that provides consistency and transparency as neutral, as it's generally comparable with that of highly rated U.S. states,” S&P said.
“One of the main things that we tried to point out in the report is that we know environmental risk in inevitable in Florida, however, to us it’s really important to see that the counties, cities school districts are aware of their risks and are planning for it and are mitigating that risk where possible,” Barrett said.
She said this was a positive factor because there’s been a lot of state level and regional collaboration to help mitigate some of those risks to the extent possible.
In May, Gov. Ron DeSantis signed into law a bill that ensures a coordinated approach to Florida’s coastal and inland resiliency. The new program is supposed to enhance efforts to protect inland waterways, coastlines, shores and coral reefs, which serve as invaluable natural defenses against sea level rise.
The law along with the state’s 2021-2022 budget are part of a $640 million investment to support efforts to ensure state and local communities are prepared to deal with the impacts of sea level rise, intensified storms and flooding.
Some cities and municipalities are also taking action.
On Monday, Orlando Mayor Buddy Dyer announced the release of the city’s first Voluntary Local Review of the Sustainable Development Goals (SDG).
Speaking at an event held by the United Nations Foundation and Brookings Institution, Dyer said the review is a local government assessment effort that aims to align the city’s Green Works Orlando sustainability goals to those of the SDGs.
The SDGs were agreed to by all 192 countries at the United Nations in 2015 and outline 17 goals to achieve by 2030 to protect the planet, end poverty and improve people’s quality of life.
“In Orlando, sustainability and resiliency are a top priority, but real climate action doesn’t happen with one city working alone,” Dyer said. “This is why we are excited to share our Voluntary Local Review, and to join cities and countries worldwide to better assess our collective progress toward preserving our planet for generations to come.”
Barrett said when S&P looks at Florida credits they ratings agency takes into account “reserve levels, liquidity, and do they have the resources to respond to a storm temporarily while they wait for reimbursement and also are they building things like drainage and capital planning into their long-term plans to help with the variety of things that they may encounter.”
On Monday, the Big Cypress Basin’s board broke ground on a new water control structure in the city of Naples. The new structure will help protect local communities from flooding and manage water flow.
“We are continuing our commitment to ensuring the resiliency of the region's water resources and ecosystems,” said Charlette Roman, BCB chair and board member of the South Florida Water Management District. “Once complete, the structure will provide added flood protection for our community."
The project is part of the Big Cypress Basin’s five-year capital improvement plan. The BCB is one of two major watershed basins within the SFWMD's 16-county region, which include over 140 miles of canals and 35 water control structures, while providing flood protection in Collier County.
“I don’t think it’s earth-shattering to point out that the environmental risks for Florida are more elevated than most states,” Wittstruck said. “But what we wanted to point out is that there is a lot of supportive governance within the state to help local governments, regional entities with planning for sea level rise and acute physical events overall.”
