Though Santa Rosa, California, avoided fire damage in this year's Kincade Fire, power outages and mass evacuations will bring significant financial impacts to a city still recovering from a deadly 2017 wildfire that leveled one of the city's neighborhoods.
Those secondary impacts underscore the new reality California's governments face even in a year in which wildfires have, so far, not been as damaging as those in 2017 and 2018.
This year, fires have burned more than 198,000 acres, scorched 732 buildings and taken three lives in California,
Rating analysts say they are monitoring local credits, but have yet to formally weigh in on any bonds issued by cities, counties or schools in fire-ravaged areas.
Generally, though, all of the rating agencies are giving greater weight to climate change — and that includes what Moody’s Investors Service analyst Eric Hoffmann called a clear trend with regard to wildfires.
“They are increasing in their frequency, severity, and cost; and that is projected to continue,” Hoffmann said.
One of the factors that Moody’s considers is a local government’s resilience to adverse conditions and Santa Rosa, a city of 186,000 55 miles north of San Francisco, is indicative.
Flames have not touched Santa Rosa this year, but its financial officers are still tallying wildfire-related costs that include activating its emergency response center for nine days and the impacts of power outages by Pacific Gas & Electric implemented to reduce the risk of starting fires in dry, windy conditions.
The Kincade Fire that started Oct. 23 in Sonoma County burned 77,758 acres in northern California’s wine country and destroyed 374 structures. Between 60,000 and 70,000 people were evacuated from Santa Rosa — and that comes at a cost, said Adriane Mertens, a Santa Rosa spokeswoman.
The Kincade Fire
Santa Rosa residents are still trying to rebuild from the 2017 Tubbs Fire that burned for 20 days, killed 24 people and destroyed 5,300 homes, including 3,062 in Santa Rosa representing 5% of the city’s housing stock, according to its 2017-18 comprehensive annual financial report.
This year, residents have endured multiple planned power outages by PG&E over the past few weeks leaving some residents without power for five days in a row, Mertens said.
“We had 39 intersections where the traffic signals were out and some of our facilities that provide critical services had to run on generators,” Mertens said. “That entailed fuel costs for the city and personnel costs.”
The estimated cost to the city for the power shutoff earlier in October was $500,000 and there was no fire evacuation during that event, Mertens said.
“We had a fire station burn down during the Tubbs Fire and we aren’t even close to breaking ground on a new one,” she said. The city has been working through the Federal Emergency Management Agency process to build a more resilient fire station equipped with today’s technology.
“It takes a lot of time to rebuild houses, government facilities and infrastructure,” Mertens said. “It takes a long time and reimbursement takes time. To say we were made whole following the fires by FEMA and the state would not be an accurate statement.”
In Southern California, Malibu, which lost 400 homes worth $1.6 billion to the 2018 Woolsey Fire, has yet to rebuild any, according
In Santa Rosa, the Tubbs fire damaged parks, street trees, two fire stations, sewer lift and pump stations, and caused significant damage to the road, sidewalk, and water and sewer systems in the Coffey Park and Fountaingrove communities, according to city officials' letter of transmittal that accompanied its 2017-18
Property tax losses totaled $4.7 million for fiscal year 2017-18 and $4.9 million for fiscal year 2018-19 for homes that were reassessed to their land value, according to the CAFR. The state was expected to backfill $2.3 million for those two years, but what happens beyond fiscal year 2019 is uncertain, the report said.
The city was forced to pay for much of the response to the fire out of reserves, in both the general fund and the water and wastewater funds.
“While it is expected that a significant portion of those response costs will be reimbursed, it is a long process and the city will not be fully reimbursed,” City Manager Sean McGlynn and Chief Financial Officer Chuck McBride wrote in the transmittal letter. “Furthermore, projects addressing destroyed infrastructure will require budget in advance of the revenue provided by FEMA and the California Governor’s Office of Emergency Services, putting further strain on reserves.”
FEMA agreed to reimburse 75% of the costs and the state agreed to pay 75% of the remaining cost, making the city responsible for 6.25% of the cost to rebuild large sections of the city, according to the CAFR.
According to the CAFR, the city approved a fiscal year 2017-18 budget with a $5.9 million deficit eating into reserves. The long range financial forecast also projects a widening structural deficit, largely driven by rising personnel expenditures in a trend predating the Tubbs Fire.
Voters approved a six-year, quarter-cent sales tax hike in November 2018 estimated to raise $9 million to help pay for fire recovery efforts, maintain emergency positions and rebuild infrastructure.
Moody’s and Fitch Ratings analysts say they are monitoring this year's fires.
“So far, the 2019 fires, with limited exceptions, haven’t been significant drivers of revenue or economic loss,” Hoffmann said.
“There is no question, there is an increasing frequency and severity of forest fires,” Hoffmann said. “We have given that thought when evaluating credits that are exposed at the urban-wildland interface.”
The primary challenge is that local governments must front funding for fire prevention and firefighting, he said.
“So, there can be a liquidity challenge, but most local governments have fairly healthy balance sheets and can withstand the reduction in their liquidity,” Hoffmann said. “It’s temporary, because a lot of the firefighting costs can be reimbursed through the fire management assistance grants program. It’s also possible to get a FEMA declaration of major disaster.”
Hoffmann noted that Santa Rosa’ property taxes only fell by 0.1% in fiscal 2019 after losing 5% of its housing stock in the Tubbs Fire, Hoffmann said.
“That is a significant loss to the city considering it had been on a 6% growth trend for the five years prior,” Hoffmann said. “But the city entered post recovery from the natural disaster in strong financial shape. It had a strong fund balance, strong liquidity, and the revenue losses, while significant, were manageable.”
Fitch Ratings analyst Karen Ribble said Kincade ultimately was less damaging than the major California fires of 2017 and 2018. She expects the state will hold schools that were forced to close harmless for lower attendance resulting from closures due to evacuations.
"As far as Sonoma County goes, it should have a much smaller impact than the previous fire, given only 194 structures were damaged," Ribble said.
Hoffmann said the exception among California credits Moody’s follows is the town of Paradise, where the town’s tax base was almost completely destroyed by the November 2018 Camp Fire.
Figures released by the state in June showed the town
Moody’s rates at Caa2 $19.3 million in 2007 A-2 pension obligations sold by the California Statewide Communities Development Authority with a high concentration of Paradise debt.
All of the rating agencies are giving increasing consideration to climate change in their ratings, but Hoffmann said that Moody’s has always implicitly considered local government’s ability to manage in the face of natural disasters.
“Fundamentally our approach isn’t going to change,” Hoffmann said. “We will continue to look at local government’s financial strength and flexibility, and the effectiveness of management.”
Analysts are, however, overlaying those considerations with maps of the jurisdictions Moody's rates and having conversations with credits where its sees wildfire exposure and discussing mitigation and preparedness plans, he said.
Unless FEMA changes its framework, natural disasters are not expected to impact credits generally, Hoffmann said. That could change if the scale becomes unmanageable or disaster response becomes politicized, he said.
Prior to Trump’s latest tweet threatening to yank federal FEMA funds, Hoffmann noted that Gov. Gavin Newsom had said that the Trump administration had been helpful in providing funds for emergency management.
The signing of the Disaster Recovery Reform Act of 2018 could change the FEMA backstop that has given municipal bond ratings some of the resiliency rating analysts look for, according to a recent Municipal Markets Analytics
The changes could make it harder for local governments to get disaster relief funding and it may take longer, according to MMA.
