The climate in South Florida is changing, but some municipalities along the coast have taken a proactive approach in adapting to the rise in sea levels.
Additionally, a new report from CreditSights Inc. noted that risks will only increase for coastal issuers of municipal bonds as increased flooding at high tides and during storms may impact these areas.
On Monday, Miami-Dade County released its one-year update on its sea level rise strategy and the progress it has made. The county had been investing in adaptation to reduce flood risks and the report summarized its implementation of the “Sea Level Rise Strategy,” released in February 2021.
“Climate change and sea level rise pose an immediate threat to our communities in Miami-Dade County and many residents are already feeling the effects of sunny day flooding and increased stormwater flooding when we get heavy rainstorms,” said Mayor Daniella Levine Cava. “I released the Thrive305 Action Plan which prioritizes Environment, Engagement, Economy and Equity. The Sea Level Rise Strategy has the same goals as outlined in our guiding principles.”
One of the successes the county pointed to included prioritizing septic to sewer projects that will protect Biscayne Bay and the public health of county residents.
In Ojus, in the northern part of the county along the Olita River, Drexel Hamilton LLC managed a 30-year municipal bond deal last year, the proceeds of which will fund a transition from the use of septic tanks to a sewer hookup.
The Miami-Dade Water and Sewer Department’s capital improvement program has been upgrading, replacing and expanding the water and sewer infrastructure in the county. WASD services about 120,000 systems throughout the county.
Some of the systems have no infrastructure and would need a total buildout to become more environmentally friendly. However, there are almost 12,000 properties that are served by septic systems that have a main sewer line in the street nearby and would only need to make a final connection. This would provide significant environmental benefits in the county.
“The high groundwater table in Miami-Dade County, coupled with a highly hydraulically conductive groundwater, often transports the nutrients and contaminants from septic tanks to nearby surface waters — including Biscayne Bay. The elimination of the septic tanks will correspondingly remove their adverse effects on the environment,” a spokesperson for the WASD said told The Bond Buyer in December.
The program has been called “Connect to Protect,” which shows ratepayers the benefits of connecting to sewer systems, said Debbie Griner, WASD’s resilience manager during a video call held by the County Office of Resilience on Monday.
“We know that connecting helps prevent overflows and impacts to the property and the homeowner doesn’t have to do as much O&M [operations and maintenance] as they would for a septic system and they can use more of their property for a pool or driveway,” she said. “And of course we know it protects our natural systems.”
One result of the successful Ojus bond deal is that local municipal bond issuance could increase over the coming year as some municipalities look to connect to the county’s sewer system as their residents look to change out their septic systems.
“[Ojus] was an example of a community taking on [tax-exempt bonding] to fund sewer expansion to their area,” Griner said in response to a question from The Bond Buyer. “So it is a tool definitely in our tool box.”
She added that the WASD has had a few neighborhoods contact it about possibly doing this type of financing.
Separately, the county announced it could receive $247 million in state and federal grants to support funding resilience projects.
“Rising seas impact everything from our drinking water to our housing market, which is why I am so proud of the progress we’ve made implementing our Sea Level Rise Strategy,” Levine Cava said.
What does all this mean for the municipal bond market?
The U.S. National Oceanic and Atmospheric Administration’s updated its sea level rise projections on Feb. 15, which show that risks will increase for coastal issuers of municipal bonds.
Market research firm CreditSights in a report last week said that risks to municipal governments include increased flood risk at high tides and during storms.
“NOAA’s report on sea level rise contains alarming projections for the coming decades. It should be a wake-up call for municipal investors who thought that risk to sea level rise was in the distant future,” John Ceffalio, senior municipal research analyst at CreditSights, told The Bond Buyer.
Rising sea levels could also cause declining property values, relocation of key employers, changing migration patterns, falling tax revenues, rising insurance costs and damage to key municipal facilities, the report said.
“In many cases, an issuers ‘crown jewels,’ such as downtown areas, major infrastructure, valuable real estate and waterfront tourist attractions are vulnerable,” the report said. “Higher costs to defend the current status quo could crowd out other service and/or reduce bondholder margins of safety.”
Resiliency spending will also take an increasingly large share of capital plans and state and federal aid.
“The report also gives municipal issuers sea level projections specific to their location, which they can use to study their vulnerabilities and to plan mitigation measures. Issuers should fully disclose this information to investors,” Ceffalio said.
NOAA said that sea levels along the U.S. coastline are projected to rise on average 10 to 12 inches in 30 years (from 2020-2050), which would equal the rise measured over the last 100 years.
Sea level rise in the next 30 years will vary regionally along U.S. coasts because of changes in both land and ocean height, NOAA said. The rise is forecast to be on average 10-14 inches for the East Coast; 14-18 inches for the Gulf Coast; 4-8 inches for the West Coast; 8-10 inches for the Caribbean; 6-8 inches for the Hawaiian Islands; and 8-10 inches for northern Alaska.
The report noted that disclosure of climate risk in the municipal market is generally weak, but said issuers should inform investors of the risks and their plans to mitigate these risks and the associated costs.
Because many bond investors buy and hold issues with longer-term maturities, such as 30-years, looking at climate change risks is prudent.
“Given long maturities, a frequent buy-and-hold mentality of municipal investors, and limited liquidity, municipal investors must consider long-term credit risks before purchasing bonds,” the report said.
At The Bond Buyer’s National Outlook Conference on Tuesday, S&P Global Ratings Nora Wittstruck, senior director ESG sector leader, told the audience that the rating agency has integrated an ESG-related paragraph into its issuer-related research.
“That is designed to help investors and market participants to recognize that if we view something as material to an issuers’ credit profile,” she said.
She added that environmental issues such as hurricanes, climate change and rising sea levels were a driver of rating actions in 2021.
“Those actually drove last year about half of our rating actions that were tagged with an ESG factor,” she said, “which means an outlook change, a rating change or a CreditWatch action.”
She said that while coastal regions were usually what people think of moist, other inland areas that are prone to flooding or drought should also disclose their climate risks in any bond offering documents.
Also on Monday, the United Nations’ Intergovernmental Panel on Climate Change released a report on its assessment of climate change.
“Accelerating climate change hazards have adversely affected the wellbeing of North American populations and pose substantial risks to the natural, managed, and human systems on which they depend,” the report warned. “Even if global warming is limited to 1.5°C, human life, safety, and livelihoods across North America, especially in coastal areas will be placed at risk from sea level rise, severe storms, and hurricanes.”
It went on to say that extreme events and climate hazards are already “adversely affecting multiple economic activities across North America and have disrupted supply-chain infrastructure and trade. Under current economic and consumption trends and paradigms, climate change impacts are projected to cause large market and non-market damages across North America.”
The U.N. report said that equitable, inclusive and participatory approach needed to be integrated into climate impact projections for near- and long-term decision making in order to reduce future risks.