LOS ANGELES— As S&P Global Ratings susses out the credit implications for Western states being devastated by wildfires, it looks to California’s 2017 experience.
None of the 33 local government credits it rates in areas of the five states devastated by fires have received downgrades based on fire-related issues, wrote S&P analysts Chris Morgan and Benjamin Geare in a report published Thursday.
“As we monitor the progression of wildfires in the Western U.S. this summer, we are incorporating experience from the California wildfires of late 2017 into our approach to understanding the credit implications of the damage and recovery process,” S&P analysts said. “Initial evidence suggests that despite significant fire damage last year, tax bases have mostly continued to grow.”
Rating agencies have focused on how a hit to assessed values could reduce revenues to cities, school districts and redevelopment agencies in reports published since the West began to burn.
The assessed valuations and unemployment rates generally strengthened in the past year in areas that were affected by last year’s fires, S&P analysts wrote.
S&P analysts said they think active fires are unlikely to progress further into populated areas though several have cut large swaths through mountainous forest areas.
Nine fires overlap with or are near 33 local governments whose debt S&P rates. Some of the fires have been fully contained, while others are expanding, according to the report.
The Perry Fire north of Reno, Nevada, overlaps with Washoe County and Washoe County School District, which have $756.4 million in governmental debt outstanding between them, but was fully contained earlier this month and appears to have caused limited damage to structures within its 51,400 acres.
Firefighters also were able to halt the progress of the Holy Fire in Riverside County, California, before it could damage Lake Elsinore neighborhoods, and the Mendocino Complex fires in northern California before it could damage communities surrounding Clear Lake. Government debt rated by S&P is $544.7 million in Riverside County and $280.8 million in the populated areas near the Mendocino Complex fires.
“The Ferguson Fire near Yosemite Valley has kept visitors away during peak tourism season, but we anticipate that any negative enrollment effects on Mariposa County Unified School District related to families leaving as a result of temporary business closures will be short lived as the tourism economy comes back,” analysts wrote.
For now, S&P analysts said, they “believe that the Carr Fire in Northern California (proximate to local obligors with $269 million in debt outstanding) has the most potential to show material economic effects on local governments based on damage it has already caused.”
This year’s fires appear on track to cause devastation in the Western U.S. comparable to or worse than 2017, S&P wrote.
“In the months since California’s major fires late last year, we have reviewed economic data and spoken with local officials to better understand how these natural disasters have affected local obligors,” analysts wrote. “Although we understand that property owners’ rebuilding efforts have been complicated on account of a tight construction labor market, two common economic indicators we use, assessed value growth and unemployment, have shown strength during the past year, likely aided in part by the state’s buoyant economy.”
As S&P evaluates how credits could be impacted in other states, the potential impact to school finances is similar to California, Geare said.
"The funding in all of the Western states is generally equalized, or backfilled by the state, if there is a one-year drop in enrollment following a natural disaster," Geare said.
For cities, the tax structure is different from state-to-state.
"In Washington, for instance, the tax is not based on an increase of value of properties, it is based on what the properties were worth a year earlier," Geare said.
In California, because assessed values are only allowed to grow 1% to 2% annually unless a property is resold, there is potential upside after a rebuild, he said. If a house burns in California, homeowners are allowed to have the assessed value drop to a lower rate, he said.
In Nevada, "I am not aware that there is ability to reassess the home value immediately following a fire, but it is based on an annual reassessment," he said.
