You can make a difference to the hurt being caused by climate chaos and the great extinction event, in your town or your city! How? Reuse, repurpose, and recycle this information.
This is the letter for week 19 of a weekly climate strike that went on for 4 years in front of San Francisco City Hall, beginning early March 2019. For more context, see this story. For an annotated table of contents to see topics for all the strike letters, see this story.
STRIKE FOR THE PLANET
because cities run on municipal bonds, bonds run on investor belief,
and SF’s ability to repay is being attacked by climate chaos.
This week’s topic is MUNICIPAL BONDS.
Should San Francisco think about climate change when issuing municipal bonds?
- Richard Epstein wrote in Forbes (22 Jan 2018) that “the massive discrepancy between the relatively bland predictions on the consequences of global warming found in [city] bond offerings and the dire predictions of adverse events found in […] complaints against five major oil companies” will lead to actions against local governments for security fraud.
- As of 2016, credit rating agencies added “resiliency” to their rating criteria.
- In the 2018 white paper “Credit Downgrade Threat as a Non-regulatory Driver for Flood Risk Mitigation and Sea Level Rise Adaptation,” author John Miller says that the absence of market and government warnings about impending climate catastrophe leads communities to squander what could be their last chance at affordable credit to fund resilient infrastructure projects.
- Climate change driven events devastate the municipal tax bases. From Hurricane Katrina:
So what do the credit rating agencies say about this?
- Standard and Poor’s stated in 2016 that they include the implications of environmental and climate-related risks, as well as social and governance risks, in their ratings methodology.
- In Sept of 2016, Fitch said that California’s legislative initiatives requiring renewable energy and a reduction in greenhouse gas emissions not only did not hurt CA utilities’ credit ratings, but that pursuing these goals should lead to continued good credit scores.
- 29 November 2017 Bloomberg reported that Moody’s was warning coastal communities to address climate risks or face downgrades.
- In 2018, Kurt Forsgren, Managing Director of Standard and Poor’s said that their agency is looking at municipalities having long-term management plans with adequate emergency funding, proper insurance coverage, and deeper and more diverse economies.
- This year, Moody’s purchased a climate data firm.
What do the groups who insure municipal bonds say about this?
- As of 5 November 2018, 1 year and two catastrophic storms (remember Florence and Michael?) after Moody’s threat about downgrading municipal credit ratings, no city had been downgraded because of climate change policies. Though Lenny Jones, a managing director at Moody’s, states that cities are taking resilience seriously, a large number of investors and people who work in risk mitigation strongly disagree.
- The largest municipal bond insurers are Assured, National Public Finance Guarantee, and AMBAC. None of these companies have an AAA rating. Two of these companies insured $26 billion in bonds to Puerto Rico; it is questionable whether they have sufficient financial resources to make good on the policies they insured.
- As of 1 Feb 2019, credit underwriting submissions to Assured must include a consideration of environmental factors.
What about investors?
- This year’s BlackRock Report states that “rising sea levels, droughts, wildfires, and storms” already affect the U.S. economy and that “climate-related risks [are] underappreciated in the U.S. municipal bond market.”
- Marcus Painterab’s “An Inconvenient cost: The effects of climate change on municipal bonds” observes that counties more likely to be affected by climate change pay more in underwriting fees and initial yields to issue long-term municipal bonds.
- In 2019, investors managing $34 trillion in assets wrote an open letter to the G20 leaders demanding governments take action to stop the impending global climate crisis.
So what’s the takeaway from all of this as it relates to SF?
- The price of long-term bonds will go up.
- The ability to pay back on long-term bonds will go down.
- There is significant and increasing legal liability in issuing long-term bonds due to climate chaos.
- Municipal credit ratings for coastal cities like SF are likely to tumble rapidly.
- Insurance for municipal bonds is likely to be inadequate to protect against losses.
What do we need to do now?
- Our last and best chance to sell bonds for needed major infrastructure projects is right now.
- The ability to issue bonds will decrease as climate chaos increases.
- Bond monies cannot be frittered away on small, sea level, business-as-usual projects; the money needs to be invested in making SF as self-reliant as possible (producing our own energy, recycling our water, etc.)
- Expenditure of bond money must be absolutely waste-free. We are no longer in a world that has anything to waste.
As Miami’s assistant city manager and CFO said, “The longer you wait to fix your problem the more expensive it gets.” We need to fix this now.