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As Hurricane Harvey Hammers Houston, Its Final Impact on Texas Municipalities' Credit Quality Remains Unclear

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As Hurricane Harvey Hammers Houston, Its Final Impact on Texas Municipalities' Credit Quality Remains Unclear

While Hurricane Harvey's assault has had a quick and brutal impact on Houston (AA/Negative) and its environs, the storm's long-term impact on the area's credit picture is unclear.

S&P Global Ratings rates 25 of the 54 counties included in Texas' emergency declaration. This declaration area saw wide ranging effects from the storm: all-told, it includes nearly 1,000 credits in our rated universe, primarily cities, towns, school districts, and municipal utility districts (MUDs). There's no question the hurricane's devastation of the fourth-largest city in the U.S. could have a negative effect on the credit quality of various local government issuers, but it's too soon to tell.

In the event of a natural disaster, we generally view the available federal, state, and insurance reimbursements as a credit positive because the total cost of expenditures related to the disaster will likely be fully mitigated. However, Harvey is the type of storm we see less frequently and it has quickly put itself on the same level as high-impact storms such as hurricanes Katrina, Rita and Ike. This means that, although some lesser-affected areas in Texas might fare reasonably well, the hardest hit will take years--potentially decades--to recover.

Similar to what we have seen in other natural disasters, it's likely to be some time before the state or we can determine and understand the extent of Harvey's damage. And while federal, state, and insurance dollars will start flowing at some point, delays in collecting these funds could spill across several fiscal years and affect near-term budgetary performance and reserve levels. To the extent that local governments have enough liquidity to cover tax-base declines or financial losses, their credit quality will likely not deteriorate. But for those issuers with fewer reserves and lower liquidity, the impact could be more direct.

Texas Takes Action Right Away

On Aug. 25, 2017, Gov. Greg Abbott pre-emptively requested a presidential disaster declaration for areas affected by Hurricane Harvey in anticipation of the storm making landfall along the Texas coast. The declaration was approved the same day, allowing for requests to be made to the Federal Emergency Management Agency for individual assistance, public assistance, and hazard mitigation to those counties located in the affected areas.

Fortunately, the state has the framework and infrastructure in place through the Texas Division of Emergency Management (a division of the Department of Public Safety) to coordinate the state's emergency management programs. Furthermore, Texas has sufficient liquidity and reserves available (with $10.3 billion in its economic stabilization fund as of July 31, 2017) to finance initial storm-related expenditures, including activating the entire Texas National Guard with 12,000 guardsmen to assist with the ongoing search and rescue effort, as well as be heavily involved in extensive recovery efforts in the aftermath of the hurricane.

With such resources at hand, and the state's experience managing catastrophic situations, in our view Texas is well positioned to handle the demands of the disaster. However, as storm waters recede there are several areas we are watching, either the most vulnerable, or those with the potential for the greatest impact to operations or credit stability. As always, we will evaluate each issuer individually to determine the extent of the damage and the impact on credit quality.

Municipal Utility Districts

S&P Global Ratings maintains ratings on 564 municipal utility districts (MUDs) in the Houston area, including those counties the governor declared on the disaster list. Designed to provide basic utility service to new housing developments, MUDs primarily collect property taxes and use them to pay debt service on bonds sold to build the infrastructure. With little overhead, day-to-day responsibilities or staff following project completion, MUDs also have limited cash flow beyond property tax receipts. As such, if a MUD experiences significant devastation, property and tax base loss, or makes late property tax payments, this could affect its financial operations. Although MUDs generally have segregated debt service funds, most MUDs do not have debt service reserves, potentially increasing challenges associated with making debt service payments in extraordinary situations.

City of Rockport, Texas

The eye of the hurricane hit the City of Rockport (AA/Stable) as the storm came ashore, bringing devastation to this city of roughly 10,000 residents. In an emergency situation, the first pressure often affecting financial operations is cash flow. As of the last audit in 2016, Rockport had total available cash at 30.5% of total government fund expenditures (which is equal to about $5.0 million) and about $7 million in restricted cash.

Implications for Long-Term Economic Impact

As Houston and its environs recover from flooding, the demands of rebuilding will present serious challenges. Although most natural disasters have a limited impact on our local government ratings and overall credit quality, an event such as Hurricane Harvey is more likely to have long-term ramifications. We have lowered ratings because of long-lasting economic and financial damage severe enough to revise our view of the long-term viability and composition of the local economies and tax and employment bases. Given the extent of Hurricane Harvey's damage so far, it's likely that some areas will experience this level of impact, but only time will tell. S&P Global Ratings will continue to monitor the effects of Hurricane Harvey as they unfold.