Southeast credit positives seen in climate change-based FEMA flood rule

New climate change rules for Federal Emergency Management Agency flood aid should generally be a credit positive for the Southeast, analysts say.

Though FEMA released the finalized rule July 10 with an effective date of Sept. 9, some of the rule changes are already being applied. 

The new rule will require FEMA to consider climate change's impact on future flood patterns in determining how and sometimes whether to build back after flooding occurs. 

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"The human and economic cost of flooding is devastating and will only grow in the years ahead as the impacts of climate change grow more intense and reach more communities. Taking forward-looking, effective steps to increase resilience before disaster strikes will save lives, property, critical infrastructure and taxpayer money," Secretary of Homeland Security Alejandro Mayorkas said in a news release.

"Climate change has exacerbated flood risk across the country, especially when it comes to sea-level rise," said FEMA Administrator Deanne Criswell. The new flood risk standard "will allow us to enhance resilience in flood-prone communities by taking future flood risk into consideration when we rebuild structures post disaster."

Municipal analysts believe the rule change will likely have neither a purely positive nor purely negative financial impact on communities.

"The rule change is really a long-term credit positive for all but the most flood-prone local areas," said Municipal Market Analytics Partner Matt Fabian. "Not only are damaged properties rebuilt to be more flood resilient in the future, but FEMA will typically cover 75% of the cost of the resilience improvements."

Nicholas Samuels, Moody's senior vice president, had a similar take.

"The new FEMA policy is a credit positive, especially for local governments, because over time properties with high flood risks will be rebuilt to more resilient standards and the ones in the riskiest areas won't be rebuilt at all. That ultimately will lead to a more robust tax base," he said.

"However, it poses challenges for certain locations with the most at-risk property, potentially leading to higher costs to meet the new standards and could also negatively impact smaller coastal communities that could see their tax bases shrink," Samuels said.

The Southeast is more exposed to flooding and particularly coastal flooding than any other region.  

First Street, a climate risk data provider, estimates that 99.7% of New Orleans will be susceptible to flooding in 2054. Louisiana is expected to have the greatest exposure to coastal flooding in the United States, S&P Global Ratings said in April. By 2050 flooding due to sea level rise is expected to increase in frequency by four times in the Gulf States and about three times on the East Coast, both excluding Florida, the report said. This assumes no adaptation measures are taken.

According to a March article in the journal Nature, by 2050 Miami, with an average elevation of less than six feet above sea level, is expected to account for 38%-44% of East Coast city flood exposed land.

The new FEMA rule could be "fiscally beneficial over time if it reduces future disaster recovery costs," but for the time being it "is unlikely to have direct, near-term implications for state and local governments in the U.S.," said Eric Kim, Fitch Ratings' head of state government ratings.

"Importantly, the rule does not affect what state and local governments, and the private sector, do in terms of construction activity that does not involve FEMA disaster relief aid," Kim said. "That construction activity, which is much larger than disaster relief, is largely controlled by state and local statutes and regulations." 

Prior to FEMA's adoption of last week's rule, it required projects receiving its aid to be built back so as to withstand either a one-in--100 year flood or a one-in-500 year flood, depending on the building type. However, FEMA now believes because of climate change, local 100-year and 500-year floodplain maps are frequently wrong. 

"Just this last week the situation in Houston [where Hurricane Beryl knocked out most of the city's electricity on July 8 and where more than 200,000 customer accounts had no electricity as of Tuesday] has been pretty severe so this is becoming almost a regular occurrence there," said Muni Credit News Publisher Joseph Krist in the July 15 edition. 

"There was already a realization that planning maps needed to be adjusted in Harris County, Texas," which includes Houston, Krist wrote. "The same is true in rural Vermont where it's two years [flooding] in a row for one town."

As Kim said, in addition to FEMA policies there are other regulatory and financial factors affecting the building in flood-prone areas.

"Eventually, the insurance market will tighten and pressure against building back will increase," Krist said.  

Several insurers have pulled out of Florida, Louisiana, and other southern states and in the West, California has also seen insurers leaving due to wildfire risk.

FEMA's new rule applies to FEMA-funded actions for new construction, substantial improvement, or repairs to damage. The rule also applies to Hazard Mitigation Assistance, which the agency grants for projects to reduce long-term risk from future disasters.

The new rule and an accompanying new standard will increase the flood elevation and width of the floodplain to account for the risks from future flood risk. 

While FEMA acknowledges that the new rules will require more expensive construction approaches, "this minimal cost increase is expected to result in far greater savings over time due to avoided flood damage," FEMA said.

The new rules will also encourage less reliance on sea walls and the like and more on building absorptive natural areas with greater distances between buildings and shores and rivers.

FEMA says one way of addressing climate change's increased flooding risks might be to add two feet of elevation into buildings. It said that this would, on average, only add 2% to the total cost of a project. Since FEMA usually covers 75% of the building costs, this would mean the building owner would have to pay 0.5% more for a building with an additional two feet elevation than for one without it. 

Ben Watkins, director of Florida's Division of Bond Finance, was skeptical.

"I have 0% confidence that FEMA will get it right… We've been doing mitigation at the state level for 30 years," he said.

"We agree with the concept of the need to build resilient infrastructure. We don't quibble with the goal," Watkins said.

"A one-size fits all approach is rarely effective or efficient," Watkins said. "This is just mission creep." State and local governments are adequately addressing the issue of preparing for flood conditions, he said. 

It is not certain the new rule is going to survive for the long term. Court challenges and politics could ultimately undermine it.

The rule "could be challenged in court, particularly following the Supreme Court's decision overturning the Chevron doctrine," Kim said. In that June ruling, the court ruled United States courts need not defer to federal agency policies in deciding how federal laws should be interpreted and implemented. The Supreme Court promulgated the Chevron doctrine in its 1984 decision for Chevron U.S.A. v. Natural Resources Defense Council. 

If Donald Trump is elected president this fall it is possible he and his administration would undo the FEMA rule. He has a long record of climate-change denial, and the barebones Republican platform contains numerous promises to abolish regulations.