California Wildfires Rage, Muni Impacts Limited

Boston - California is currently battling two devastating wildfires in California. The Camp Fire, located in Butte County (north of Sacramento) has so far burned 135,000 acres, destroyed 7,600 residences and caused 71 fatalities, making it the deadliest wildfire in California's history. The Woolsey Fire is burning in Los Angeles County and Ventura County and has burned 97,620 acres, destroyed 435 structures, caused two fatalities and continues to threaten the suburbs west of Los Angeles.

These two fires add to a catastrophic wild fire year, as year to date California has experienced 7,726 fires that have affected 1.78 million acres (source = National Interagency Fire Center).

Extreme weather events are becoming more common, as the number of billion dollar natural disasters has increased from an average of six per year from 1980-2017, to twelve per year over the last five years (source: National Oceanic and Atmospheric Administration, 2018). So far in 2018 the trend is continuing as there have been 11 natural disasters that have each generated over $1 billion in damages.

However, despite the massive economic losses generated by these natural disasters, according to Moody's, there have been no municipal defaults (by Moody's rated credits) directly related to natural disasters. While the economic losses stemming from these disasters can be immense, most of the economic losses are covered by private insurance or governmental aid, which mutes the impact of natural disasters (mainly through FEMA, which often covers 75% or more of all disaster related costs). Over the last year, Congress has enacted $90BN of supplemental disaster aid.

While natural disasters have not resulted in municipal defaults in the past, there is no guarantee that this will be the case in the future. If federal disaster relief, or private insurance is diminished in the future, and natural disasters become more frequent, the risks to municipal credit will increase. In fact, S&P recently put the Paradise, CA Redevelopment Agency and the Paradise, CA Unified School District on CreditWatch with negative implications due to the fact that most of the town of Paradise, CA has been destroyed by the Camp Fire. The situation in Paradise will be a true test as to how resilient municipal credit can be in the face of natural disasters.