Climate change and preparing for its impact will have costs, according to a panel at The Bond Buyer's National Outlook Conference, which addressed infrastructure challenges resulting from climate disasters and what role the market will play in creating resilience.
The country has around $7.4 trillion of infrastructure needs over the next 30 years, said Michael Wertz, vice president and senior analyst at Moody's Ratings. The Environmental Protection Agency in its most recent National Water Assessment Survey identified about $1.2 trillion of necessary infrastructure investment just for water and sewer projects.
"It's an immense cost, an immense toll," Wertz said. And the cost "will fall where it always has, essentially, since the '60s, which is to the state and local governments."
Last year, there were 27 weather and climate-related disaster events with losses exceeding a billion dollars— three times the level we've seen annually dating back to 1980, Neene Jenkins, head of municipal research at JP Morgan Asset Management said.
Some progress has been made in recent years, Wertz said, thanks to increased knowledge of the needs and federal spending. Still, significant work remains.
Some issuers have more resources than others, said Pamela Frederick, CFO of the Battery Park City Authority. Even in places with resources, like Frederick's Battery Park City Authority, prioritizing resilience can be a difficult task.
"It's very hard to set aside resources for something that might happen," Frederick said.
If municipalities can manage to invest in resilience, the market's demand can absorb the necessary debt, Christopher Jumper, director at Assured Guaranty said. However, issuers might have to incur so much debt that they get downgraded.
Last year's record issuance was fairly easily absorbed, noted Sarah Snyder, managing director at Ramirez & Co.
"This past year was a net negative supply, from a reinvestment versus new-issue, and this year we're actually seeing, potentially, net positive supply," Snyder said. "But we still, as a firm, believe that there is still enough demand to meet that."
"Will there still be an appetite to absorb that type of debt? I think there probably will be, but the question is at what price? And is that a price that issuers can stomach?" Wertz said. "Especially if it manifests as additional and potentially burdensome disclosure."
Jenkins said her biggest question when considering demand is what the market will look like: will the tax exemption will still be in place?
"Obviously, some of that comes with additional issuance costs, but I can tell you right now, it's a completely different buyer base," Jenkins said.
Frederick said if the tax exemption is eliminated, issuers should prepare to appeal to international markets and investors. However, those investors may have higher standards for disclosure.
The investor community also wants to see more disclosure from issuers after a climate-related event occurs, Jenkins said.
"Often, the investor community is re-underwriting risk very quickly," Jenkins said, "without very much information from those issuers."
The National Federation of Municipal Analysts, of which she is chair, is very focused on creating best practices, Jenkins said, noting that a large New York issuer still hasn't provided Superstorm Sandy damage assessments.
In the years since Superstorm Sandy struck in 2012, climate disasters have become more routine, Jenkins noted, and bonds have started trading much faster, making a standard post-event disclosure procedure more important.
