Preparedness

Wildfire Areas Have High Poverty and Small Tax Bases. Will That Affect Future Construction?

Some credit rating agencies say the frequency of unpredictable wildfires is increasingly a concern that could undercut cities’ creditworthiness.

by Kellen Browning and Michael Finch Ii, The Sacramento Bee / August 16, 2018

(TNS) - The wildfires that reduced sections of Northern California to rubble this summer have created an immediate and potentially lingering crisis for local governments’ ability to borrow for public projects.

Some credit rating agencies say the frequency of unpredictable wildfires is increasingly a concern that could undercut cities’ creditworthiness. Smaller rural counties may be particularly vulnerable due to their size, analysts say.

While much of California has been barraged by a series of deadly and costly blazes in recent years, state and federal governments have been willing to pick up the tab for recovery and make up for reduced tax revenues. As climate change poses an enduring threat, analysts say they are looking for evidence that local governments are mitigating the risk.

More than one-third of the most destructive fires in state history occurred in the last three years, according to the California Department of Forestry and Fire Protection. This new reality threatens places dependent on property taxes and school attendance as primary sources of revenue. Because of that, bond rating authorities are watching warily over California.

Analysts from Moody’s Investors Service, Fitch Ratings and S&P Global Ratings each said it’s too early to know how the current wave of wildfires will affect local governments, since the record-breaking Mendocino Complex Fire and others are still active.

They said it will be less of a concern if government support and private insurance continue to offset losses in tax revenue.

But Eric Hoffmann, a Moody’s analyst, said places like Shasta and Trinity counties could still be at more of a disadvantage than places affected a year ago.

“Rebuilding could be slower and more challenging than last year due to these rural counties’ smaller economies and tax bases compared to the suburban counties affected by 2017’s wildfires,” Hoffmann said.

Sonoma County, which includes Santa Rosa, has a poverty rate of 11 percent, lower than the state average of 14 percent.

But Shasta County, where Redding is located, has a rate of 19 percent. It’s even higher in nearby Trinity County, at 19.7 percent. In Mendocino and Lake counties, where the Mendocino Complex Fire still rages, about one in five households live in poverty.

Money used to fund some infrastructure projects rely heavily on selling bonds to banks and investors to finance new construction, with the promise that their loans will eventually be repaid. But when wildfires roar through cities and towns, economies are impaired and communities may struggle to refinance their bonds.

After a fire, credit rating agencies examine the state of city and county finances and determine the ability of municipalities to pay back their lenders. If the report is unflattering, those areas might have a hard time finding investors willing to buy their bonds in the future - at least at a low interest rate.

Areas in Southern California and the state’s wine country, which were severely damaged by fire in 2017, had stronger economies than the rural northern counties affected this year, Hoffmann said. Santa Rosa, for instance, is part of the greater San Francisco Bay Area economy, he said.

“The demand for housing and the rebuilding pace in that community is just likely to be faster than a more limited and isolated community in Mendocino County or the city of Redding,” Hoffmann said.

Some electric utilities, such as PG&E, have already seen rating downgrades as lawmakers try to expand their potential liability when found at fault for causing a wildfire. Could local municipalities be next?

“At least for the fires we’re seeing now, it’s too early for authorities to get a good sense, as we don’t know the scale of the damage and partially because it’s not contained,” said Chris Morgan, a local government credit analyst with S&P Global Ratings. “What we’ve found is that the data that would give us a good sense of how it’s affecting credit quality is going to take time to emerge.”

Dennice Maxwell, Redding’s finance director, hopes the city will be buoyed by a number of projects already in the pipeline, including the construction of a new courthouse, affordable housing and retail developments. The projects will be paid from a mix of public and private money.

The Carr Fire tore through several neighborhoods in the western part of town, prompting the evacuations of thousands, but stopped short of Redding’s downtown.

Maxwell said the city of about 92,000 residents could see a drop in property tax revenue but believes emergency funding from the Federal Emergency Management Agency and state will help cancel out the shortfall, as will rebuilding and retail activity.

“I’m going to assume our sales taxes from people purchasing lost things due to the fire, building materials and all of those things, hopefully, that will be an offset,” Maxwell said. “It’s really hard to know.”

Statewide, more than two million homes are at risk for wildfires, according to a recent study by insurance data provider Verisk Analytics.

In Lake County, where nearly 20,000 homes are in danger of fire damage, County Supervisor Jim Steele said finances are so dire that the county can’t risk selling bonds or finance projects through state grants, which require a local match to receive any aid.

“We don’t borrow,” he said. “We keep a very tight budget and we try to stay in the black.” As a result, infrastructure projects have stalled, he said.

The massive Mendocino Complex Fire has destroyed more than 100 homes in Lake County so far this year, Steele said. He said about 1,700 homes have been destroyed by five major fires in the region over the last four years, as well as motels and businesses, all of which contribute to a loss in property, transient occupancy and sales tax revenues.

“All of those taxes come into the general fund, and that general fund has gone down by several percent,” he said, adding that the county is losing about $1 million each year. “We’re all struggling for income and trying to make things work.”

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