Municipal bond issuers are often linked to tangible, physical assets directly exposed to the effects of climate change. Over the long term, we believe municipalities will increasingly have to contend with the effects of this exposure, such as preparing for rising sea levels, managing constraints on local water supply or rebuilding infrastructure after a hurricane or wildfire. This series explores how various climate-related risks and policy responses could impact municipal issuers and describes our approach to assessing those risks.
Hurricane Ian made landfall in southwest Florida with devastating effects on the region and its people. It is impossible to measure the human cost, but insured property damages are currently estimated at $63 billion.[i] As municipal analysts, we have been keenly aware of the risks of a storm like this and the potential impact on Florida. You might be surprised to learn that despite the devastation, we do not expect material credit impact in the municipalities affected by the storm. Below, we share why we believe the state and its municipal issuers are well positioned to rebound from Ian.
A history of resilience
Florida has been through hurricanes before, and we believe past examples illustrate the state’s economic resilience. Though you might expect property values to take a hit after a hurricane, our research has shown that property values typically recover within a few years. Hurricane Michael was a category five storm that made landfall on Florida’s Bay County in October 2018, causing an estimated $25 billion in damage.[ii] After an initial decline in 2019, assessed property values in Bay County recovered and by 2021 had reached 119% of 2018 (pre-hurricane) levels.[iii] Similarly, Monroe County, which covers a good portion of the Florida Keys, was directly impacted by Hurricane Irma in 2017. The category four hurricane was the strongest to strike the County in decades, and yet the county saw no impact to assessed property values and its tax base continued growing in the subsequent years.[iv]
Regions impacted by hurricanes also often see a flurry of new economic activity spurred by rebuilding and recovery. In the 18 months following Hurricane Andrew, a category five hurricane that hit Florida’s southwest coast in 1992, recovery-related activity drove a $3.8 billion increase in regional spending.[v] Later, in a two-year span from 2004-2005, Florida experienced eight hurricanes rated category three or higher. Despite extensive damage, a 2006 study found that local economies affected by the storms generally rebounded quickly, benefiting from reconstruction efforts, federal assistance and private insurance payouts.[vi]
Florida is the third most populous state in the country. Its population has grown rapidly over the last decade, and we do not expect Hurricane Ian to significantly dampen this growth trend.
Florida also benefits from a resilient tourism economy that demonstrated rapid recovery after prior storms. Despite major hurricanes in 2017 (Irma) and 2018 (Michael), Florida’s tourism economy grew in 2019, with a 5.8% increase in tourism-based tax revenues and a 3.7% increase in out-of-state visitors. Tourism was also quick to recover following COVID-19-related shutdowns. In the fourth quarter of 2021, Florida saw 29 million domestic visitors—a 57% increase from 2020 and a 7% increase from 2019.[vii] The state’s hotel revenue also reached a new peak in 2021 at $17.3 billion—a 2% increase over 2019.[viii] We believe state-wide tourism will remain strong.[ix]
That said, we expect tourism to recover more slowly in the hardest-hit coastal regions, notably barrier island communities in Fort Myers Beach, Sanibel Island and Captiva, all of which saw significant infrastructure damage from Hurricane Ian.
A strong financial position
In our view, Florida is financially well positioned to deal with the impact of Hurricane Ian, with the following funds and capacity in place:
- More than $14 billion in its unreserved general fund at the end of fiscal 2021;[x]
- Capacity to statutorily issue up to $810 million in additional debt;
- Ability to add additional legislatively-approved emergency issuance as needed to support state-wide recovery;
- The Florida Hurricane Catastrophe Fund (FHCF), which can reimburse residential property insurers up to $17 billion, plus a $2 billion hurricane reinsurance fund. FHCF is financed by municipal bonds and repaid with home insurance premiums and emergency assessments, with $3.5 billion of bonds currently outstanding.[xi]
Florida has also received a federal major disaster declaration, which would provide federal assistance to individuals and support for emergency and permanent infrastructure revitalization. The most sizable assistance would likely come through the Federal Emergency Management Agency’s (FEMA’s) Public Assistance Program. Through the program, FEMA would fund at least 75% and up to 90% of eligible reconstruction costs.
We expect an increase in municipal issuance over the next six to twelve months to support Florida’s recovery. In addition to FHCF bonds, we anticipate local issuers will access the municipal market to finance repairs and fund new construction.
Potential for longer-term credit pressure
We believe economic recovery and further growth in Florida is likely over the next few years. However, the state’s exposure to ongoing climate events may create credit pressure over the longer term if individuals and businesses experience higher property taxes and insurance rates. Given these inherent and ongoing risks, we believe careful credit research is critical for investors considering investing in Florida.
Allison Bretz, Senior Research Analyst
Mike Grygo, Senior Research Analyst
Joe Prestamer. Research Associate
[i] Source: Risk Modeler Karen Clark & Co, as of 4 October, 2022.
[ii] Source: nlhic.org
[iii] Source: Bay County FL 2021 CAFR/Audited Financials
[iv] Source: Monroe County FL CAFR/Audited Financials.
[v] Source: Atlanta Fed
[vi] Source: National Association of Realtors Research Division, April 2006, “The Impact of Hurricanes on Housing and Economic Activity: A Case Study for Florida.”
[viii] Source: flgov.com
[ix] Source: DK Shifflet & Associates, STR, Visit Florida, FL Department of Revenue.
[x] Source: State of FL 2021 ACFR/Audited financials
[xi] Source: Bloomberg, Eric Kazatsky, “Hurricane Ian Puts Spotlight on Florida Muni Program."
This blog post is provided only as a sample of Loomis, Sayles & Company, L.P. research and analysis. Some or all of the information contained in this report may be dated and, therefore, this report should not be the basis to purchase or sell any securities. We make no representation about whether any research led to any particular transaction or any profitable investment decision.
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