Green Fog: The Coming Climate Change Bond Crisis
The Narrative vs. The Numbers A GAI Investigation
From Government Accountability Institute, October, 2019
Politicians in many American coastal cities pull no punches about the threats posed by rising sea levels due to climate change. At times they even seem to read from the same script, repeating the phrase “existential threat” to describe the rising sea levels that menace their ports and coastlines.
But when they authorize selling municipal bonds to pay for local development, do they mention any of these risks to investors? Bonds are rated and their coupon interest rates are determined by financial officials in these cities who must disclose all significant risks to the value of the bonds, by law. Do bonds floated by cities at the greatest risks from climate change pay higher interest than bonds from cities at no risk?
Often, the answer is no.
For example, the City of Oakland, the City of San Francisco, and San Mateo County, in filing individual lawsuits against ExxonMobil, Chevron, and other major oil companies, made specified claims of damages to their cities due to the impacts of climate change caused, they claim, by the knowing actions of these companies. The statements made by Oakland in its official lawsuit are so definitive as to claim that “global warming has caused and continues to cause accelerated sea level rise in San Francisco Bay and the adjacent ocean with severe, and potentially catastrophic, consequences for Oakland.” The city claimed the threats were so real that “by 2050, a ‘100-year flood’ in the Oakland vicinity is expected to occur… once every 2.3 years … and by 2100 … once per week.” Further, the lawsuit filing said, “Oakland is projected to have up to ‘66 inches of sea level rise by 2100,’ which, along with flooding, will imminently threaten Oakland’s sewer system and threaten property, costing the city as much as $38 billion.1
However, language used to disclose risks to investors in a 2017 bonds document states, “The City is unable to predict when seismic events, fires or other natural events, such as sea rise or other impacts of climate change or flooding from a major storm, could occur, when they may occur, and, if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the City or the local economy.”
San Mateo County made similar claims of certain environmental destruction, including the likelihood of “a 93% chance that the County experiences a devastating three-foot flood before the year 2050, and a 50% chance that such a flood occurs before 2030.” Yet, a bond disclosure from 2016 issued in San Mateo County expressed almost identical sentiments as Oakland did. “The County is unable to predict whether sea-level rise or other impacts of climate change or flooding from a major storm will occur, when they may occur, and if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the County and the local economy.”2
This disconnect between describing dire climate-related consequences to a city in great detail when a payout is on the table, versus downplaying the same issues when these cities’ own funding is on the line holds true for not just these two counties but for six other California cities or counties seeking legal payouts. San Francisco, the County and City of Santa Cruz, Marin County, and the City of Imperial Beach all used very similar language in their own statements.3
The disconnect applies to bond rates as well.
Bonds are rated and their interest rates are determined by financial officials in these cities who must, by law, disclose all significant risks the bonds entail. Are the bonds floated by cities with the greatest risks from climate change paying a better interest rate than bonds from cities on higher ground?
To answer these questions, the Government Accountability Institute (GAI) reviewed bond disclosures from 40 cities. Twenty of these were cities in areas at high risk from rising sea levels or flooding, while the other 20 were mostly inland and freshwater cities not considered at such risk. We wanted to explore whether these threats affected the investment offerings of the cities claiming the highest risks.
There was no statistical difference between the interest rates and bond maturity terms for high-risk cities versus low-risk cities overall.
▪ New York City and its own Port Authority barely mentioned climate change or rising sea levels in any of their bond disclosures, despite Mayor Bill de Blasio’s dire warnings that it is an “existential threat” and a “dagger aimed straight at the heart” of the city.
▪ Boston Mayor Marty Walsh has repeatedly railed against the dangers of Executive Summary (Continued) climate change, yet has presided over the permitting of multiple buildings that would flood if his own predictions about climate change were correct, while the City of Boston mentioned “climate change” just once in its disclosure statements.
▪ Three California coastal cities— San Francisco, Los Angeles, and San Diego—failed to mention “climate change” or “sea level rise” even once in the disclosure statements for their bonds.
▪ The city of Oakland said in its 2017 bond disclosure statement that it could not predict when (or even whether) sea level rise or other natural events “will have a material adverse effect on the business operations or financial condition of the City or the local economy.” At the same time, Oakland joined a lawsuit against several major oil companies in which it claimed a projection of up to “66 inches of sea level rise by 2100” that “will imminently threaten” the city’s sewer system and property with a “total replacement cost of between $22 and $38 billion.”4
▪ Low-lying Miami and Miami Beach paid lip service to sea level rise, but did not let it get in the way of lucrative building in flood-prone areas, especially where the mayor owns property. Miami Beach Mayor Philip Levine specifically built his campaign for Florida’s governor on fighting sea level rise, yet has presided over recent permitting of numerous buildings that would be threatened by it.
▪ Miami and Boston invoke the threat of “climate change” to their cities when they seek “climate change” grant funds from the federal government that can be used for other purposes.
▪ New Orleans continues to face nature’s severest hurricanes with flood prevention technology that is obsolete and woefully inadequate. Yet the city fails to budget sufficiently to fix its problems.
▪ The City of Honolulu and King County (Seattle) provided the most complete statements disclosing the risk of rising sea levels or climate change to their bond issues. But it did not affect their bond coupon rates in any way.
Case Study: Honolulu
Various projections show Honolulu, Hawaii in the crosshairs of sea level rise.151 A coastal city situated on a small island, this is not surprising. As a result, climate issues are a significant part of the Honolulu political landscape.
Mayor of Honolulu since 2013, Kirk Caldwell has required “departments and agencies under his jurisdiction to view climate change as an urgent matter and to take action to protect and prepare the city for the physical and economic effects of it.”152
In some cases, his view of the situation is more pessimistic than other coastal city mayors. Responding to the 2018 National Climate Assessment report cited in the New Orleans section, the mayor stressed that “coastal erosion threatens major roadways and homes and suggests ‘perhaps we retreat.’ … That we give our beaches a chance to live by eroding, and allowing the sand to stay. But we may have to give up homes. We may even have to give up roads.”153
After the local Climate Change Commission presented two earlier reports to the mayor and members of the city council, the mayor said that the information “…confirms that climate change is the defining challenge to humanity —and to O‘ahu—in the 21st century. By issuing this directive, I want to ensure that every policy and project decision dealing with sea level rise going forward is made in the best interest of the public.”154
U.S. Rep. Tulsi Gabbard (D-HI), who represents Honolulu and surrounding areas in Congress and is also a candidate for the Democratic presidential nomination, echoed Caldwell’s themes in 2017, stressing the need to replace fossil fuels in the next 18 years: “The effects of climate change disproportionately devastate coastal and low-lying communities not only in the United States, but also around the world. Pacific Ocean island communities, like Hawai‘i are endangered by rising ocean tides and temperatures and intensifying storms. Together, we must aggressively combat climate change and pass the #OFFAct, to transition the United States off of fossil fuels to a 100% clean energy economy by 2035. We must prioritize the future of people and our planet—and not be swayed by the power of profits or polluters.”155
Honolulu Bond Disclosure Review
Yet again, however, we do not see the same level of concern reflected in official documents associated with a recent bond issuance. In 2018, Honolulu issued some long-term GO bonds, the longest of which mature in the 2040s, when SLR forecasts become dire. We would expect the associated disclosures to detail the risk and that its coupon rates would reflect it.
Honolulu does detail the risk more than other cities, and the city has taken some action. Its 100-page disclosure statement mentions “climate change” and “sea level rise” in a one-page discussion about establishing a new government office created a year earlier:
The City and County and the State have taken a number of steps intended to mitigate the negative impacts of climate change; impacts to which the City and County may be particularly vulnerable.
At the November 2016 election the citizens of the City and County approved, by a significant margin, amendments to the City and County’s charter to establish an Office of Climate Change, Sustainability and Resiliency (the “Resilience Office”). The amended charter, adopted on June 30, 2017, charges the Resilience Office with, among other things, (i) tracking climate change science and its potential impact on the City and County; (ii) coordinating actions and policies within the City and County to increase community preparedness, protect economic activity, protect the coastal areas and beaches and to develop resilient infrastructure; (iii) developing or coordinating City and County policies and programs to improve the environmental performance of City and County operations and advance environmental priorities; (iv) integrating sustainable and environmental values into City and County plans, programs and policies; (v) coordinating with federal and state agencies regarding climate change, sustainability and the environment; (vi) convening a climate change commission (the “City and County Climate Commission”) consisting of five members with expertise in climate change in Hawaii no less than twice a year; and (vii) providing appropriate advice to the mayor, council and executive departments of the City and County. Under the amended charter, the City and County Climate Commission is charged with gathering the latest science and information on climate change effects in the City and County and providing advice as is deemed appropriate to the executive for climate change and sustainability, the Mayor, City Council, and executive departments of the City and County.
On July 17, 2018 Mayor Caldwell issued a formal directive (the “Climate Change Directive”) to all City and County departments and agencies to take action to address, minimize risks from and adapt to the impacts of climate change and sea level rise in response to the Sea Level Rise Guidance and Climate Change Brief, each of which was adopted on June 5, 2018 by the City and County Climate Commission. The City and County Climate Commission compiled the Oahu-specific recommendations based on the State of Hawaii’s 2017 Hawaii Sea Level Rise Vulnerability and Adaptation Report (“State Report”), federal research, and additional scientific literature. The State Report found that there is a growing vulnerability to potential coastal flooding, erosion, land loss, and high wave impacts in Hawaii resulting from a potential sea level rise of 3.2 feet by mid-century. The City and County Climate Commission described the impact on Oahu of such sea level rise without action in response and, through its Sea Level Rise Guidance and Climate Change Brief, provided advice and recommendations to the Mayor, City Council and Executive Departments. The Climate Change Directive requires all departments and agencies under the Mayor’s jurisdiction to take several actions, including: (i) viewing climate change and the need for mitigation and adaptation as an urgent matter, and taking a proactive approach to reducing greenhouse gas emissions and protecting and preparing the City and County for the physical and economic impacts of climate change; (b) use the Sea Level Rise Guidance and State Report in their planning, programing, and capital improvement decisions to mitigate impacts to infrastructure and critical facilities subject to sea level rise, which may include elevation or relocation of infrastructure and critical facilities, the elevating of surfaces, structures, and utilities, and/or other adaptation measures; (c) propose revisions to shoreline rules and regulations to incorporate sea level rise and conserve a natural, unarmored shoreline wherever possible; and (d) work cooperatively to develop and implement land use policies, hazard mitigation actions, and design and construction standards that mitigate and adapt to the impacts of climate change and sea level rise. The Climate Change Directive strongly encourages independent agencies, cityaffiliated entities, and city-related institutions to help advance these efforts and adopt similar initiatives.
On June 7, 2017 Governor Ige signed Act 32 Session Laws of Hawai‘i, 2017 (the “Climate Change Act”) into law, which, among other things, renamed the Interagency Climate Adaptation Committee as the Hawaii Climate Change Mitigation and Adaptation Commission (the “State Climate Commission”), clarified and expanded the duties of the State Climate Commission and made Hawai‘i the first state to enact legislation implementing parts of the Paris climate accord. The Climate Change Act anticipates that the State Climate Commission will provide direction, facilitation, coordination and planning among state and county agencies, federal agencies, and other partners about climate change mitigation (reduction of greenhouse gases) and climate change resiliency strategies, including, but not limited to, sea level rise adaptation, water and agricultural security, and natural resource conservation. The State Climate Commission is placed under the Department of Land and Natural Resources (DLNR) for administrative purposes and is to be headed jointly by the Chairperson of the Board of Land and Natural Resources and the Director of the Office of Planning (OP), or their designees.
The United States Congress has appropriated $345 million for fiscal year 2019 which will be used to fortify the Ala Wai Canal and the watersheds flowing into it to assist with flood risk mitigation for the Waikiki area of the City and County. There is a local match requirement of approximately $115 million which will be paid by the City and County and/ or the State. The specifics regarding the match have not been determined at this time.
In addition to the efforts described above, the Department of Environmental Services is including climate change and sea level rise issues in its planning for new, upgraded, and rehabilitated facilities. At this time the City and County is able to determine if, or to what extent, the Resilience Office, the Climate Commission and the other activities being undertaken will affect the City and County.
At this time the City and County is unable to predict whether, or to what extent, the foregoing measures will insulate it from the adverse impacts of climate change, which could be material.156
Compared with most other cities in our study, this is an impressive amount of disclosure. While the disclosure statements do not actually project the anticipated risks to the city, they do detail for potential investors the city’s actions thus far. Consistent with this careful disclosure, we could reasonably expect the interest rates offered on Honolulu’s long-term bonds to reflect these disclosed risks. Yet, that is where the consistency seems to fail.
Our study found that Honolulu offers its 22- and 25-year general obligation bonds for 5 percent or less, which is roughly the same interest rate as several no-risk inland cities in our sample.
For example, Chicago, considered a low risk from climate change, offered 20- to 22-year general obligation bonds for 5 percent in a recent issuance. So did Kansas City, Missouri on its 12-year general obligation bonds. Birmingham, Alabama offered the same rate on that city’s 30-year bonds.
There are many factors that influence an interest rate, but a general obligation bond is priced taking the city’s future ability to repay into account. As we noted earlier, if Honolulu’s future ability to repay is jeopardized by sea level rise and its effects on the value of city real estate, or if it would have to divert significant city funds from income-producing activities to mitigate the impact of rising sea levels, that should be clearly reflected in the interest rate, which is the clearest and most objective measure of risk. Yet city leaders, investment experts and the investing public do not seem overly concerned about the risk of sea level rise or its potential long-term effects on Honolulu…..
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