With two hurricanes recently making landfall in southern states, only eleven days apart and inflicting what may be as much as $230 billion in damages, the potential impact to municipal credits is on investors’ minds. While both hurricanes made landfall in areas with booming economies and population growth, history tells us that the fiscal strength of the affected municipalities and the rapid relief efforts are likely to limit negative impacts on municipal bonds.
Hurricane Harvey hit Houston as a category 4 storm on August 25th and stayed over the area for several days dropping as much as 50 inches of rain in Harris County, which includes the city of Houston, and surrounding areas. Houston is the nation’s fifth largest municipal economy and Harris County is home to over four million people. The area’s rapid population growth, fueled by development in the energy sector, has created urban sprawl that reduced wetlands and open green space which historically absorbed rain and acted to mitigate the impact of major storms. Approximately 70% of Harris County was flooded to some extent, with a maximum storm surge of just below 7 feet. Preliminary estimates have Harvey ranked as the costliest hurricane in US history, at $180 billion in damages.
The following week, Florida was preparing for a similar situation, with Irma potentially making landfall as a Category 5 storm in the densely populated metropolitan area of Miami; the nearly sea level city known for its luxury high-rise housing and homes in low lying areas. Thanks to a shift in the storm’s direction, the state was spared a tremendous amount of catastrophic damage, although the Keys were hit hard along with Marco Island and parts of Naples, and Jacksonville saw historical storm surge flooding. Early estimates had Florida’s damage as high as $200 billion, but that has been revised to around $50 billion. The same cannot be said for some of our Island territories. The US Virgin Islands and Puerto Rico both took hits from Irma and the recovery will be slower, particularly for USVI, which was already struggling economically when it was almost decimated by Irma at Category 5 strength.
How are these storms expected to affect the economy and the municipal bond market?
Texas holds the highest credit rating across all rating agencies, and Florida holds AAA with Fitch and S&P and Aa1 with Moody’s. In addition to strong credit ratings, both states maintain a healthy rainy day fund. In a May 2017 PEW report on the status of rainy day funds, a spokesman for Moody’s was cited saying “When recessions, natural disasters, and other shocks threaten these [AAA] states’ ability to balance budgets, their superior management quickly acts to restore financial strength, a response that includes tapping reserves.”
In the absence of income tax, Texas and Florida rely heavily on sales tax revenue. We expect that as recovery continues, both states will experience an economic lift related to sales tax as areas rebuild. Florida relies more heavily on tourism, which is expected to decline in the near-term, but rebound quickly to normal levels in most resort areas.
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