Rising Sea Levels Pose Increasing Credit Risks For Many U.S. Coastal States And Investors In Their Bonds

As if COVID-19 had not affected states’ and municipalities’ finances adversely enough, numerous states and municipalities and investors in their bonds, also need to worry about the economic impact of rising sea levels. According to a Moody’s
MCO
Investors Services report released yesterday afternoon, “More frequent and severe flooding from high tides and storm surges from major weather events threaten coastal economies, property values and critical infrastructure.” According to the National Oceanic and Atmospheric Administration (NOAA), in the last two decades, the Atlantic and Gulf coasts experiences anywhere from 100-150% increase in annual days of high-tide flooding.

Four Twenty Seven, a Moody’s affiliate that provides data and market intelligence related to physical climate and environmental, risks estimates that by 2040, increased sea level rise will significantly affect every coastal state, the majority of coastal counties, and over 110 cities with a population of greater than 50,000.

Rising sea levels are particularly disruptive to many states where local coast economies contribute a significant amount to the state’s economy. According to Blake Cullimore, Assistant Vice President at Moody’s Investors Services and lead analyst on this report, “The states most dependent on coastal economic activity include Hawaii (Aa1 negative), Delaware (Aaa stable), Rhode Island (Aa2 stable), Massachusetts (Aa1 stable), New York (Aa1 negative), Florida (Aaa stable), New Jersey (A3 negative), California (Aa2 stable) and Washington (Aaa stable). Each of these states depends on coastal counties for 70% or more of their GDP.”  Florida is particularly vulnerable because 24% of its GDP is within the 100-year flood zone while other states in the aforementioned generate from 3% to 9% of their GDP in the 100-year flood zone. “Areas in the 100-year flood zone have a 26% chance of flooding over the next 30 years, meaning a high probability of a flood impacting economic activity in flood prone areas.

Financial pressure on states due to climate change has led a number of states to bring legal action against energy companies arguing that they knew that their exploration, production, and refining, as well as use of energy products, caused sea level rise and stronger hurricanes and willfully misled the public about those and other dangers related to global warming. Connecticut and Delaware recently joined Massachusetts, Minnesota and Rhode Island in filing legal suits.

According to Moody’s analysis, over the next several decades, states and municipalities will need “increased investment in adaptation and coordinated government responses will become essential for federal, state and local governments to more effectively respond to sea level rise.” 

Rating agencies are like to view adaptation efforts as positive for credit outlooks and ratings. However, such efforts will mean increased expenditures and likely an increase in more leverage for states and municipalities.  According to Cullimore, “State and local governments’ ability to manage debt levels while investing in adaptation efforts will become increasingly crucial to credit quality. Governments will have to balance investments to combat environmental threats with competing spending priorities.”

The scale of the significant climate change challenges makes federal and state government leadership, regulations, and funding critical. According to Moody’s “Many states have improved their regulations in response to high-tide flooding and storm surge; however, there is limited research providing a comprehensive evaluation of state regulations.” 

The above map shows that with the exception of New Jersey, the states that tend to be Republican in the Gulf Coast, have poor to inadequate protection of coastal municipalities. With any luck, the stalemate in an increasingly polarized congress and state legislatures will improve soon. Otherwise, coastal states’ and municipalities’ bonds will pose increasing credit risk to investors if the various authorities cannot cooperate to confront the economic damage from rising sea levels.