As we write this, we don't know what's going to become of Hurricane Irma, which is currently churning through the Caribbean. But we do know that Hurricane Harvey inundated Houston and its environs with record rains for days last month, and now the fourth largest city in the U.S. is left to clean up and rebuild. The associated flooding appears to be one of the most devastating urban disasters the country has seen for some time, and is on track to be the most costly.
Before Hurricane Harvey, the most costly Atlantic storms in recent years were Hurricanes Katrina and Ike, and Superstorm Sandy, with damage estimates ranging from $30 billion (Ike) to over $108 billion (Katrina). At of this writing, damage estimates from Hurricane Harvey range up to $180 billion, well beyond these previous storm figures.
For any region, recovering from a disaster--natural, economic or other--is a challenging task. It can take years, or even decades, to get back to pre-storm economic conditions. And while it is generally only the most devastating natural disasters that have a long-term impact on credit quality, the ability to manage through without seeing a major deterioration in credit quality can have a lot to do with an issuer's financial position at the start of the crisis.
Houston: How Bad Is It?
Due to the damage done by floodwaters, the most common post-storm comparison to Houston's Harvey is New Orleans' Katrina. While this is not an unlikely comparison, from a credit perspective it is akin to comparing apples and oranges as Houston starts the rebuilding process from a much stronger position both economically and financially.
When the storm hit, S&P Global Ratings rated Houston's GO debt 'AA'/Negative, with the negative outlook largely based on concerns over pension pressures, not the city's economic situation. Meanwhile, when Katrina hit New Orleans in 2005, its 'BBB+'/Stable rating was attributable to both economic and financial concerns, and the state of Louisiana was rated 'A+'/Stable.
Thus Houston appears to have greater credit capacity to handle the situation, and even more so when factoring in the ability and apparent willingness of the state of Texas (AAA/Stable) to support efforts. However, when storm recovery focuses on replacing existing infrastructure rather than adding new growth, the potential for a longer-term impression on the economy arises. In focusing on rebuilding, money is invested to bring back infrastructure to a state of good repair and not in what otherwise would have been done to spur organic growth. The impact of this type of opportunity loss will only be discernable over time, and may be distributed unevenly across the region.
Unlike some areas of the country, the majority of Houston's true tax value is not the land itself, but rather "improvements" (i.e., development) on that land, so rebuilding becomes even more important to maintain tax base stability. Given estimates that 75% of Houston-area residents did not have flood insurance—prior storms show that grants pay only a portion of the cost of rebuilding—the challenge of just getting back to pre-storm levels could be significant.
Some current estimates put Houston's losses at 25% of the tax base, and a loss like that could have a major impact on a city that derives about half of its general fund revenue from property taxes. Given the city's solid tax base growth (averaging 6.5% annually the past 10 years), the prospect of working hard just to recover to pre-storm levels appears daunting.
Other Recoveries: The Starting Point Matters
When big storms hit, the rebuilding of severely affected areas isn't measured in weeks or months, but rather years and potentially decades, and this has to be accounted for in the credit rating. With building in coastal areas common throughout the U.S., damage from devastating storms will continue.
As the Harvey waters recede, the question on many people's minds is, "how long until it's back to normal?" The destruction left in the wake of both Katrina and Ike was so extensive that it not only delayed the recovery, but it also changed the economic structure of many local governments in those areas. To gauge what Houston's recovery could look like, we looked at the impact of some of the most costly recent storms to see changes in credit quality and financial strength as time progressed.
Top 3 Costliest Atlantic Storms, Pre-Harvey
|Storm||MSA concentration||Year||Damage||Taxable value then||Years to tax base recovery||2016 taxable value||Rating then||Years to rating recovery||Rating now|
|Hurricane Katrina||New Orleans||2005||108||2.50||4||3.54||BBB+||8||AA-|
|Superstorm Sandy||New York-New Jersey||2012||71||157.12||--||196.71||AA||--||AA|
Amounts in $ bils. *Market value
New Orleans: A natural disaster strikes a struggling city
When hurricane Katrina struck New Orleans in August 2005, the city was devastated. The magnitude of the event and its aftermath was unprecedented, and the toll on humanity and culture was unthinkable to a city with a world-renowned reputation. In the end, the price tag put on Katrina was $108 billion, making it the costliest Atlantic storm in U.S. history before Harvey hit.
But before the first drop of Katrina's rain fell, New Orleans had been struggling, and the storm devastation sunk the city's general obligation rating to non-investment grade status. However, following a massive rebuilding effort, by 2009 the city had regained an investment grade rating, and since 2016, we have rated its general obligation debt AA-/Stable.
After losing a third of its taxable value following Katrina, it took New Orleans only three years to recover to pre-storm levels. Financial improvement, however, took longer, with nine years elapsing before the city regained structural balance and general fund reserves were consistently positive. But rebuilding population has taken the longest: when Katrina hit, New Orleans had a population of 462,000. Its current population stands at 395,500, and while that is still lower than pre-storm levels, it is nearly double the post-storm low point of 209,000 in 2006.
New York City: Superstorm Sandy strikes, but the city shows its resiliency
Until recently, Superstorm Sandy was the second most costly Atlantic storm. While smaller cities along the coastline—such as on the New Jersey shore—suffered more devastating impacts as a result of Sandy, New York City--the primary economic engine of the area--remained stable, operating with minor interruption for many.
Despite the devastating impact to much of the area—and the breadth of damage— New York responded more like what we see in most storm-damaged areas: there can be a temporary negative impact, but little long-term downward pressure to the strength and dynamism of the city as a whole. Given these attributes, the rating of New York never changed during this time.
Hurricane Ike: Galveston takes another hit
Given its location along Texas' Gulf Coast, Galveston sees more than its share of floods and tropical systems, including the Great Galveston Hurricane in 1900, which was not only the deadliest hurricane in U.S. history, but also changed the face of the city forever. When Hurricane Ike hit in 2008 it wreaked more than $30 billion in damage, making it the third costliest Atlantic storm in history.
Following the storm, the rating on Galveston's GO bonds went down to BBB/Stable from A+/Stable, reflecting the loss of taxable property and the impact to the industrial, shipping, and tourism-driven economy. However, within a few years the rating started climbing up again as reserves grew and the economy recovered; it is currently AA/Stable.
After the sun came out, the economic and financial damage to Galveston was severe enough to change our long-term view of the local economy. And while Galveston's tax base took three years to regain the losses related to Ike, its financial reserves took twice as long--six years--to rebound to pre-storm levels. Post-Ike population loss was not as severe as Katrina, but it did drop to 47,800 in 2010 from 58,200 before the storm. However, steady growth since that time puts Galveston's current population at 50,600.