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ESG U.S. Public Finance Report Card: California Governments And Not-For-Profit Enterprises

Root and Branch - July 2021: ELFA Survey, Greenium and KPIs

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U.S. Public Finance Mid-Year Outlook: Beyond COVID?

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U.S. Higher Education Rating Actions, Second-Quarter 2021

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U.S. Highway User Tax Bonds Prove Resilient


ESG U.S. Public Finance Report Card: California Governments And Not-For-Profit Enterprises

In this report, we analyze the environmental, social, and governance (ESG) credit factors for select U.S. public finance (USPF) government and not-for-profit enterprise issuers in California, which has the most USPF issuers of all the states. Our ESG report cards explore the relative exposures of USPF issuers to ESG credit factors, including how and why they may have a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of ESG credit factors are qualitative and established by analysts during analytic discussions and described in issuer-level credit reports, with the goal of providing more insight and transparency. Select ESG paragraphs from California issuer-level research are reproduced in the Appendix.

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ESG In Credit Ratings

ESG risks and opportunities can affect an entity's capacity to meet its financial commitments, including debt service. S&P Global Ratings incorporates ESG considerations into its ratings methodologies and analytics, which enables analysts to integrate the qualitative and quantitative impacts throughout our credit analysis. Chart 1 shows an example of how we incorporate the most prevalent ESG risks and opportunities into our criteria frameworks. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "Through the ESG Lens 2.0: A Deeper Dive into U.S. Public Finance Credit Factors," published April 28, 2020, on RatingsDirect, and "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," Sept. 12, 2019).

Chart 1

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Environmental - Elevated

California is the world's fifth-biggest economy and geographically larger than more than 130 countries. While it is primarily known for its mild Mediterranean climate, it has a wide variety of climate types ranging from rainforest along its northern border to arid desert. Importantly, it also has one of the most variable climates of any U.S. state, often experiencing extremely wet years followed by very dry ones. Variability in hydrology patterns makes demand management difficult as well as exacerbates other physical risks. Environmental risks tend to be location-specific. For example, the state's different regions can exhibit considerably disparate exposures to fire and flooding risks. Municipalities across all regions of the state will need to adapt to increasing drought intensity, fire and flooding risks, hydrological volatility (periods of extreme precipitation followed by extreme drought), and related climate challenges. Drought effects include increases in wildfire risk, reduced hydroelectricity generation, stressed fish populations, depleted groundwater aquifers, and stresses human and agricultural demand. Flood risk can raise community health and safety risks and negatively affect natural floodplain resources and functions. In addition to water-related difficulties, transitioning the state's energy supply to low-carbon and carbon-free resources could pose challenges given the statutory requirement for 60% of the state's power to come from renewable sources by 2030 and 100% emissions-free power by 2045.

Wildfires.  Eight of the 10 biggest fires in California's history have happened in the past 10 years, half of which came in 2020, destroying 10,000 structures at a cost of $12.1 billion. The prevalence of wildfires across the state has increased even in recent wet years. Moreover, other issues compound California's wildfire risk and create the potential for significant value at risk including the state's strict liability doctrine of "inverse condemnation." The doctrine provides that if a state actor or a company providing services to the public, like an electric utility, is the substantial cause of property destruction, through negligence or not, it can be held liable for damages to affected property owners. This law is significantly stricter in California and typically favors property owners (and insurers). Other factors that compound wildfire risk include drought, invasive insects that have killed millions of trees in recent years, forestry management practices, and new development that continues encroaching on risk-prone areas. These issues lead to our view that there is no longer a "wildfire season," but instead it's a year-round phenomenon.

Sea level rise.  The National Oceanic and Atmospheric Administration's Office for Coastal Management notes that 26.5 million, or about two-thirds, of California's 40 million residents live in a county located on the coast--significantly higher than 40% for the U.S. as a whole. Three of the 17 largest metropolitan statistical areas in the U.S. are located along the California coast. This puts a sizeable percentage of the state's population at risk to rising sea levels (see chart 2) including various areas that show greater than 10% of the population living below 7 feet in elevation.

Chart 2

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Hydrological volatility and water scarcity.  Because California is semi-arid, the state's vast network of reservoirs, canals, and aqueducts help fuel the economy as major urban centers, in general, lack sufficient local resources to support their large populations. As a result, water must be imported from other portions of the state or transported across the southwest from the Colorado River. Imported water supply is historically expensive (on a cost per acre-foot basis) and supplies face increasing risks related to rising temperatures and evolving precipitation patterns. For example, allocations from the State Water Project (SWP) that provides water to 27 million Californians have averaged just 44% of entitlements over the last 10 years, down from 67% over the prior decade. In addition, weather patterns are becoming more unpredictable: both 2017 and 2019 were extremely wet years (with SWP allocations over 75%) while 2020 and 2021 were both extremely dry (at less than 20%). To mitigate these risks, many cities and water agencies are increasingly reserving and storing surface water in wet years to bridge the gap to drier periods, particularly in Southern California and the southern San Joaquin Valley. A record number of urban recycled water projects (i.e., treating wastewater to either drinking water or irrigation standards) are also under development to help bolster local supplies, which are expected to provide greater stability in demand management but also may pressure affordability as the cost of the water is often higher than traditional surface and groundwater sources.

Chart 3

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Energy transition.   California has been a leader in energy transition as evident by the Renewables Portfolio Standard, a key program for advancing renewable energy. The program sets continuously escalating renewable energy procurement requirements for the state's load-serving entities, which better positions the state to meet federal carbon reduction targets. However, rolling blackouts in August 2020 demonstrated the intermittency issues associated with a greater reliance on renewable energy--especially during periods of extreme heat--which may increase in frequency due to climate change. For example, the North American Electric Reliability Corp. recently released its summer reliability assessment, citing California as most at risk for energy emergencies during periods of peak summer demand. While intermittency issues have not affected the state's utility credit profiles nor disrupted the revenue streams of the state's public power utilities, we believe longer term credit pressure may stem from reliability concerns or result in higher procurement costs for firming assets that could contribute to affordability risks.

Other hazards. 

  • Seismic events and drought can damage the roughly 12,000 miles of earthen levies that might otherwise protect against catastrophic flooding. A 2011 study by the state department of water resources noted that half the levees were at elevated risk of failure during a flood. In addition, with the prevalence of wildfires that destroy trees and brush, mountainous areas are highly susceptible to mudslides and rock avalanches in the event of intense rainfall, which can damage assets. For example, in 2017 the Nevada Irrigation District lost a major canal due to mudslides.
  • Cities and water agencies have historically relied more heavily on local groundwater during periods of drought to mitigate hydrological risk and cost pressures related to imported water supplies. However, over-pumping can stress the local aquifer system and require pumping from deeper soils. In some instances, arsenic buried in the soil contaminates water supply and local crops. Industrial pollution can also adversely affect groundwater. For example, the Orange County Water District proactively took 40 of its wells offline after it discovered widespread contamination from perfluoroalkyl and polyfluoroalkyl substances (PFAS). The effects of over-pumping can result in treatment requirements or supply procurement from imported sources for recharge or demand, which can pressure affordability and credit quality.
Social - Elevated

California is disproportionately exposed to affordability concerns driven by median home prices that have increased at a rate outpacing other states compared to the nation. Table 1 shows California's home prices relative to some rapidly growing states and Washington, D.C., compareing median effective buying income and median home prices, which we believe illustrates an aspect of California's out-migration issues.

Table 1

Home Ownership Affordability
Selected locations
Median household income (MHI) ($) Existing home average sale price, 2020 (2019 $) Percent of MHI needed for mortgage payment*
United States 65,712 403,900 26.5
California 80,440 702,753 37.7
Washington, D.C. 92,266 620,397 29.0
Colorado 77,127 463,906 25.9
Nevada 63,276 367,940 25.1
Florida 59,227 336,683 24.5
Idaho 60,999 347,054 24.5
Arizona 62,055 331,018 23.0
Utah 75,780 381,767 21.7
Texas 64,034 242,690 16.3
*Assumes simple 3.5% fixed-rate, level principal & interest payment over 30 years with 20% equity Source: U.S. Census Bureau; IHS Markit; S&P Global Ratings

Affordability and revenue generating capability for governments and not-for-profit enterprises may be compounded by slowing population trends as illustrated in chart 4. After growing by double digits in prior decades, the state's growth was 6% following the 2020 census. Slowing growth could limit revenue raising flexibility, challenging operations including funding deferred maintenance and capital projects, or pension and other postemployment benefit contributions.

Chart 4

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Governance - Neutral

The state's constitutional or legislative framework provides challenges and opportunities for California issuers, which we believe are credit relevant with the potential to alter policy making decisions. California's overall risk management policies associated with climate transition risk and social infrastructure are generally ahead of peers, but the institutional framework introduces some uncertainty and can hinder flexibility and revenue generation. For example, policies associated with wildfire mitigation provide support for credit quality of governments and not-for-profit enterprises. Furthermore, the state-established wildfire fund provides significant liquidity for investor-owned utilities to cushion potential financial liabilities associated an event. However, the state's voter initiative process has, in many respects, limited the revenue raising ability for municipalities which has resulted in an underinvestment in infrastructure as well as reduced operating flexibility.

The state has implemented comprehensive policies to protect critical resources and reduce the state's carbon footprint. In addition to aggressive renewable energy standards, the state's water conservation requirements for retail water suppliers will be effective in the near-term. Monthly Urban Water Conservation Reporting by large water utilities was mandated by the State Water Board on April 21, 2020. In addition, utilities are required to produce and Urban Water Management Plan every five years that assesses the reliability of water sources over a 20-year planning horizon, describes demand management measures, and water shortage contingency plans. Similarly for groundwater supply, the Sustainable Groundwater Management Act, passed in 2014, requires the adoption of Groundwater Sustainability Plans for crucial groundwater basins in California to ensure better local and regional management of groundwater that aims to identify sustainable groundwater management in California by 2042. We view these provisions as positive governance factors. Finally, the majority of cities in California with populations over 50,000 have adopted climate action plans, according to a report submitted to the California Air Resources Board in 2019.

The state's lack of extraordinary support for its local governments under extreme fiscal or unusual distress is captured in the system support aspect of our Institutional Framework. We review these scores annually and the score is 'good' for California municipalities. More information on Institutional Framework scores is available in our "2020 Update Of Institutional Framework For U.S. Local Governments" (Nov. 10, 2020).

Appendix

Table 2

California ESG Risks And Opportunities
Selected Paragraphs From The Most Recently Published Issuer-Level Reports
Obligor Sector Rating ESG paragraph
Environmental

Anaheim Public Utilities (electric)

Public power AA-/Stable Environmental risks are slightly elevated relative to national peers due to state mandates that require rapid renewable acquisition and have resulted in some intermittency risks associated with compliance. That said, APU is well positioned, given its supply portfolio and plans for a battery project that will somewhat mitigate intermittency. Management has also been proactive in exiting coal-fired facilities and is expected to reach renewable targets by the deadlines. In addition, APU is better positioned with respect to wildfire risk, given that most its assets are underground within the high fire threat zones. From a social perspective, APU has elevated risk associated with rate affordability, given that rates are elevated relative to the state average. However, this is offset by what we view as enhanced reliability associated with the power supply portfolio. If affordability risks created political headwinds toward increasing rates or utilizing cost recovery levers, that would be a credit risk. The pandemic has had an outsized influence on the service area and another wave of related shutdowns could have a greater effect on the customer base and utility, which is a social risk. We view governance factors as in line with its peers.

Foster City

Local government AA+/Stable We analyzed the city's ESG risks relative to its economy, management, financial measures, and debt-and-liability profile and view social and governance risks as in line with the sector standard. We consider the city to be exposed to environmental risks related to sea level rise and flooding. Essentially at waterline, the city relies on its levee for protection against flooding that would otherwise occur with greater frequency and severity from storm surges, wave run up, and rising sea levels. Of the city's 19.8-square-mile service area, 81% is comprised of water. In addition, the city is located in what the U.S. Geological Survey and Association of Bay Area Governments deems as having a high- to very-high potential of experiencing earthquake-induced liquefaction. Though the city indicates the site of the levee itself faces lower risk of liquefaction, such an event could have dire consequences for the city, if the levee were to be significantly damaged. We view positively the city's actions to mitigate this risk by improving the levee through the project funded with the series 2020 bonds, though we note that substantially mitigating does not equate to eliminating this risk, which we expect to rise over the long-term due to sea level rise driven by global climate change. The project will add protection against 24 inches in additional sea level rise. The city notes that this addition will bring the levee to its maximum protective vertical elevation, given underlying soil conditions at the base of the existing levee. Though this does not meet the state of California's most recent guidance that infrastructure should provide resilience to 42 inches of sea level rise by 2050 (the state's updated guidance was announced after the city began planning for this project), the city estimates with 99.7% confidence that the project will protect against sea level rise under a high emissions, or worst-case emissions scenario through 2050. Aside from the implications of COVID-19 and the environmental risks discussed here, we consider the city's social and governance risks in line with our view of the sector standard.

Los Angeles County Metropolitan Transportation Authority

Transit AAA/Stable Our rating considers the ESG risks relative to LACMTA's sales tax revenue bonds' economic fundamentals, revenue volatility, coverage and liquidity, and obligor's creditworthiness. We consider LACMTA's revenue bonds and general creditworthiness exposed to social risks related to the social distancing measures implemented to protect the populations' health and safety in light of the COVID-19 pandemic. However, we do not expect these risks to lead to a material weakening of credit quality, given the relatively resilient sales tax revenue performance that supports both coverage metrics on the bonds we rate in addition to LACMTA's general creditworthiness. Though we note parts of the county are exposed to heightened environmental risks, such as wildfires and drought, we consider the credit's environmental risks generally in line with the sector standard. We consider governance factors for this credit in line with the sector.

Orange County Water District

Water and sewer AAA/Stable The district has above-average exposure to environmental risks given that several wells within the service area have been identified as exposed to PFAS. The district expects these wells will require significant treatment enhancement. We believe the district has positioned itself favorably to address these regulatory changes. Based on the assumed capital and operating costs associated with the proposed plan to address PFAS changes, we do not believe this will influence the rating, given the significant rate flexibility and healthy financial margins. The district also has exposure to sea water intrusion at Bolsa and Sunset gaps. Management has a prudent plan in place to mitigate these risks through infrastructure hardening. Social and governance risks are commensurate with its peers.

San Antonio Regional Hospital

Not-for-profit health care BBB/Stable Further incorporated into the lower rating is SARH's elevated social risk, compared with that of industry peers, as it pertains to the impact of COVID-19 and the related health and safety issues. We view SARH's exposure to these additional risks as greater than that of its peers, as despite federal funds made available to negate losses, COVID-19-driven operating losses have in part contributed to the weakening of the hospital's consistently negative operating performance. The core mission of health care facilities is to protect the health and safety of communities, which is further evidenced by their responsibilities in serving the surge in patient demand with COVID-19. We believe the pandemic exposes the sector to additional social risks that could present financial pressure in the short term, particularly if federal and state support are insufficient to cover the decreased revenue resulting from sharp admission and surgical volume declines required to preserve capacity, supplies, and equipment, and to maintain appropriate levels of staffing. We also view the hospital's social risk as elevated compared with that of sector peers, because of its reliance on governmental payers, which has negatively affected operating performance. Although the hospital is located in an area susceptible to earthquakes, elevating the environmental risk above that of sector peers, we believe the potential disruption in operations is offset by the hospital's low average age of plant resulting from modernization and investment in the new tower, which meets seismic guidelines, as well as solid unrestricted reserves to help stabilize the hospital should the facility temporarily close or require major rehabilitation following an episodic event. We believe the governance risks are in line with our views of the industry as a whole.

San Diego

Local government AA/Stable We analyzed the city's ESG risks relative to its economy, management, financial measures, and debt-and-liability profile. Our ratings incorporate our view of the health and safety risks posed by the COVID-19 pandemic and the related economic recession. In addition, we believe the city's tax base is somewhat exposed to environmental risks posed by the threat of wildfires and, over the longer term, sea level rise. We note the city is assessing its exposure to sea level rise and has begun identifying adaptation strategies to mitigate longer term risk to its tax base and other assets. We consider the city's governance risks to be in line with our view of the sector standard.

Southern California Metropolitan Water District

Water and sewer AAA/Stable Given its location in Southern California, we believe MWD faces elevated environmental risk due to the region's inherent water supply scarcity and seismic exposure. In particular, its imported water supply--both the state water project and the Colorado River--remains susceptible to environmental scrutiny and risks related to climate change, rising temperatures, and shifting precipitation patterns. Notably, the district currently maintains record dry-year storage balances (3.2 million acre-feet, or over two years of demand, as of Dec. 31, 2020) which we consider a stabilizing credit factor over the near term. We expect MWD will continue to play a key role regarding Delta water conveyance and resource management in the Colorado River basin over the next decade. Over the near term, management will face many other critical water supply decisions, which could require massive capital investments, such as whether to proceed with its Regional Recycled Water Project, which, while costly, would be favorable from an environmental stewardship perspective, in our view. Metropolitan's general manager will be stepping down in mid-2021, after an accomplished 15-year tenure at the helm of the organization. Given the complexities of the organization, having a leader with commensurate skill and experience in the water industry will be important to ongoing credit quality. The district is sensitive to affordability concerns, given that retail water rates in its service area may not be affordable for all customers served (particularly those living in census tracts below 80% of median household income, which we estimate accounts for about 50% of the population). MWD oversees targeted programs for increasing water conservation in disadvantaged communities, such as by providing incentives for multifamily housing and grant funding support for the local agencies. We believe COVID-19 presents added social risk, as MWD's member agencies could seek further rate deferrals or reductions as the pandemic spreads and the effects of the recent recession deepen. The pandemic, to date, has not resulted in material member delinquencies. Finally, while not currently a credit risk, in our view, persistent negative public sentiment or rising political pressure--especially should decision-makers' willingness and ability to raise rates in a rising cost of service environment--would adversely affect our view of its governance practices.

Trinity Public Utilities District

Public power BBB+/Stable We view the utility as having greater environmental risk than that of peers because of the substantial amount of service area and customer meters in elevated fire threat areas, driving the downgrade. In addition, periodic droughts in California can exacerbate wildfire risk. We view TPUD's governance factors as being in line with those of peers, highlighted by a generally supportive set of policies and procedures including a cost pass-through mechanism on its electric rates and long-term capital planning. We believe the district's social factors (including the health and safety issues relating to COVID-19) do not present elevated risk--management reported very few cases within its service territory, and that overall energy sales have increased relative to the same time last year. However, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the pandemic. Reports that at least two experimental vaccines are highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Westlands Water District

Water and sewer A+/Stable Westlands is faced with a number of ongoing ESG risk factors that affect our analysis of the bond rating. In particular, Westlands' primary imported water supply is susceptible to environmental scrutiny and elevated environmental risk related to climate change and natural cycles of drought. Westlands' current water supply is insufficient, and we believe there are water contamination concerns, both owing largely to the intense water usage associated with agricultural production. Nevertheless, we currently believe that Westlands is relatively well insulated, at least in the short term, from significant financial strain as a result of these factors. However, Westlands' financial risk could become more significant especially as the cost of meeting environmental mandates become more known. Although there has not been any limitation on farming in Westlands' fields to date or noted COVID-19 outbreaks at this time, we believe there are increased public health and safety risks due to the pandemic. Moreover, persistent negative public sentiment (e.g. from growers) or rising political pressure would affect our view of Westlands' future credit quality.

Ojai Unified School district

School district AA-/Stable We analyzed the district's ESG risks relative to its economy, management, financial measures, and debt and liability profile. We view the district as facing elevated environmental risk posed by the region's exposure to drought, flooding, and earthquakes. However, we believe seismic risks are largely mitigated through the state's strong building codes. Although the district was not affected by wildfire events in 2020, it was significantly affected by the Thomas Fire in 2017, which led to management instituting several safeguards to protect critical infrastructure against future natural disasters. Furthermore, our rating incorporates our view regarding the social risks posed by the COVID-19 pandemic. Finally, we consider the district's governance risks to be in line with our view of the sector standard.
Social

Los Angeles

Local government AA/Stable We analyzed ESG risks associated with the city in coming to a credit opinion on the bonds. Our ratings incorporate our view regarding the health and safety risks posed by the COVID-19 pandemic. We believe social risks for Los Angeles are currently elevated resulting from recent and past protests and demonstrations. In our view, police confrontations and unrest have public safety cost implications that could lead to both reputational and property damage, as well as unplanned expenditures. Additional unbudgeted public safety costs, such as for public safety overtime, would further pressure the city's budget in a year when health and safety social risks have already created revenue losses due to stay-at-home orders related to COVID-19 containment. We also believe that the city has elevated exposure to environmental risk--specifically seismic risk and wildfire risk--however, we believe that strong state building codes have substantially managed the seismic risk and we do not consider wildfire within the city to be an immediate risk given its large geographic area and primarily urban nature. We consider the city's governance risk to be in line with our view of the sector standard.

Mountain View - Los Altos Union High School District

School district AAA/Stable We analyzed the district's ESG risks relative to its economy, management, financial measures, and debt and liability profile and determined that all are in line with our view of the sector standard. Despite Silicon Valley's prosperity, it remains one of the most expensive metro regions in the nation in terms of housing costs. According to the Joint Venture Silicon Valley report, more than 80% of new Silicon Valley homes are unaffordable for first-time buyers and renters. Although income inequality has worsened in recent years as a result of the housing shortage and could weigh on the district's economic growth in the near term, we believe that state and local governments' commitment to build affordable housing in partnership with private employers has mitigated risks. Recently the city council approved a 463-unit affordable housing project within the district's boundaries, and in January 2019 The Partnership for the Bay's Future announced a $500 million investment in affordable housing that would increase the availability of housing to individuals and families, regardless of socioeconomic status.

Oroville Hospital

Not-for-profit health care BB/Negative Incorporated into the rating action is Oroville's elevated social risk, compared to that of industry peers, as it pertains to the impact of COVID-19 and the related health and safety issues. We view Oroville's exposure to these additional risks as greater than that of its peers, as COVID-19-driven operating losses could weaken Oroville's financial profile from its already vulnerable position. Of note, Oroville's days' cash on hand pre-pandemic was only very slightly above its covenant requirement. The core mission of health care facilities is to protect the health and safety of communities, which is further evidenced by responsibilities to serve the surge or potential surge in patient demand with COVID-19. We believe the pandemic exposes the sector to additional social risks that could present financial pressure in the short term, particularly should federal and state support be insufficient to cover the decreased revenue resulting from sharp admission and surgical volume declines required to preserve capacity, supplies, and equipment; and maintain appropriate levels of staffing. Also incorporated into the rating is our view of Oroville's elevated social risk related to the hospital's reliance on governmental payers relative to that of peers, as Oroville serves a relatively small population that is insured mostly by Medicare and Medi-Cal. We also view Oroville's overall environmental risks as elevated relative to those of industry peers given its location in an area prone to earthquakes and wildfires. In 2019, the nearby town of Paradise (approximately 20 miles north of Oroville) was severely affected by the Camp Fire. With respect to the earthquake risk, Oroville is in the midst of a facility replacement project that is expected to fully comply with 2030 seismic standards. Flooding is another relevant environmental consideration. In 2017, the Oroville Dam was damaged during heavy rainfall, resulting in a significant flood affecting the primary service area, though the hospital itself was not damaged. We analyzed Oroville's governance risks and the corresponding effects on its financial profile and determined that all are in line with our view of the sector standard.

San Francisco Public Utilities Commission

Water and sewer AA/Stable We think the SFPUC wastewater system's direct environmental risks are moderate, with an aggressive plan to modernize and rehabilitate the system offsetting significant aging infrastructure. San Francisco received early publicity for its quick reaction to the pandemic with one of the first shelter-in-place orders issued, and was an early adopter of social distancing rules that quickly wound down large gatherings, cut business and tourism travel, and forced restaurants to close or convert to takeout operations. According to discussions with management, the SFPUC is taking precautions to minimize the spread and impact of the virus on staff and the city. Nevertheless, we believe the system faces social risk related to COVID-19, as efforts to protect the health and safety of the community may affect the system's financial metrics. It also faces social risk related to its sizable capital plan, which we expect will pressure rates that are already relatively high compared with those of its peer utilities. In our view, the service area's above-average income levels partly mitigate this risk. Finally, we view the utility's governance factors as credit supportive, as they include full rate-setting autonomy, strong policies and planning, and robust interaction between management and PUC governance.

Santa Clara County

Local government AAA/Stable We analyzed the county's ESG risks relative to its economy, management, financial measures, and debt-and-liability profile. Our ratings incorporate our view regarding the health and safety risks posed by the COVID-19 pandemic. In our view, the county's high cost of living and shortage of affordable housing, which is common for the state, pose an elevated social risk relative to our sector standard; however, we note that the county continues to work to address these concerns over the long term with affordable housing measures and other social programs. We also view the region as having heightened environmental risks due to the susceptibility of climate-related events such as drought and earthquakes, which pose risk of additional spending. We consider the county's governance factors in line with the sector standard.

State of California

State AA-/Stable We consider California's social risks elevated compared with those of other states in the sector due to a shortage of affordable housing and high social service costs given the income disparity within the state. California is addressing this through increased funding for various social programs to rectify income disparity in the long term. We also view the state as having elevated environmental risk because parts of California are susceptible to various climate-related events such as fires, drought, and earthquakes. We view potential increased spending in response to climate-related risks as incorporated into our long-term view of the state rating. We expect that California would continue to manage these risks using its long-term financial and capital planning. Finally, we view the state's governance risks as in line with the sector.

Stockton Parking Authority

Parking System BBB-/Negative The downgrade incorporates our opinion regarding the health and safety risks posed by the COVID-19 pandemic, which we view as a social risk under our ESG factors, causing significant operating and financial pressures for the parking system. Furthermore, we believe social risks associated with income disparities and affordability of parking rates could present operational challenges and constrain the parking system's financial performance resulting from parking-meter vandalism and theft. We believe environmental and governance risks are in line with the sector.

Val Verde Unified School district

School district A+/Stable We analyzed the district's ESG risks relative to its economy, management, financial measures, and debt and liability profile, and determined that all are in line with our view of the sector standard. Though wildfires have affected California, we do not consider fire within the district an immediate risk. Although the district is subject to demographic changes and population trends affecting its student enrollment, its current favorable treatment under the state funding formula has provided benefit the district's operating revenues as it strives to provide equitable education to its student population.
Governance

The Master's University and Seminary

Not-for-profit higher education BB+/Positive The outlook revision further reflects the university's full compliance with all WSCUC standards, including those related to board independence, personnel and management practices, operational integrity, and leadership. With this event, we believe TMUS' organizational structure and governance risks are consistent with those of the sector. Despite alignment of governance risks with the sector, higher education entities continue facing elevated health and safety social risks stemming from the pandemic and the uncertainty around its total effect on the university's operations. However, in conjunction with a more coordinated and effective rollout of the vaccine, we believe management has taken prudent actions regarding the health and safety of students, faculty, and staff, through its hybrid work and instruction options. TMUS has faced no material environmental effects, and we consider The Master's University's environmental risks to be in line with our view of the sector.

California Department of Water Resources

Water and sewer AAA/Stable We believe the department faces elevated environmental risk due to the region's inherent water supply scarcity and seismic exposure. In our view, the State Water Project remains susceptible to environmental scrutiny and risks related to climate change, rising temperatures, and shifting precipitation patterns. DWR's identified capital needs total $3.0 billion and are largely intended for facilities reconstruction and improvements. This figure excludes the re-conceptualized Delta Conveyance project which, per a report released by the state of California in August 2020, could exceed $15.9 billion, though, we note, no decision has been made on how to finance this project, including whether to finance with water system revenue bonds or otherwise.. While significant hurdles remain before the Delta Conveyance project becomes reality, SWP contractors may become increasingly sensitive to rising water costs and affordability risks, depending on if and how the project is ultimately financed. We believe DWR also faces significant social and governance risk with the highly politicized and evolving nature of the Delta Conveyance project and DWR's exposure to various state laws that could result in significant financial liabilities, including inverse condemnation. The department has adequate governance, in our view, characterized by its autonomous rating setting practices and strong contracting provisions. However, given the size and scope of the SWP, we consider its asset management practices to not be commensurate with those of its peers at the 'AAA' rating level. We also consider DWR's delayed release of its 2020 audit to be a credit weakness.

University of Southern California

Not-for-profit higher education AA/Negative In our view, higher education entities face elevated social risk due to the uncertainty on the duration of the COVID-19 pandemic. We view the risks posed by COVID-19 to public health and safety as a social risk under our ESG factors. Despite the elevated social risk, we believe environment and governance risk at USC are in line with our view of the sector.

Sacramento Municipal Utility District

Public power AA/Stable We believe the district's direct environmental risks are low, based on its power supply consisting of slightly more than 50% non-carbon-emitting hydroelectric and renewable energy resources, with the remainder largely natural gas. The district faces social risk related to COVID-19, as efforts to protect the health and safety of the community may affect the utility's financial metrics, albeit likely modestly. Finally, we view the utility's governance factors as credit supportive as they include a strong wildfire risk mitigation toolkit, full rate-setting autonomy, strong policies and planning, and a proactive and experienced management team.

Los Angeles Department of Water and Power

Water and sewer AA+/Negative We analyzed LADWP's ESG risks, and we believe the department has exposures relative to the sector standard in terms of social and governance risks. While we believe the department's senior leaders are experienced and the department has prudent financial policies in place, we nonetheless see exposures with regard to management and governance. We base this view on uncertainties and fallout with regard to the department's billing system. The FBI investigation that resulted in an executed search warrant on the department and office of the city attorney in July 2019 continues. The department has disclosed that the search warrant relates to issues that have arisen over the class action litigation and settlement with regard to the department's billing system and the department's lawsuit against PricewaterhouseCoopers. While the department says it is fully cooperating, this is a source of uncertainty and we believe this could negatively affect public perception of the department's governance and hence the department's rate-setting ability. S&P Global Ratings cannot yet incorporate into our rating analysis the impact, if any, that the FBI search warrant and any associated claims may have on our assessment of creditworthiness. LADWP is also exposed to health and safety social risks related to social distancing that will continue to present financial and operational challenges in the short term, particularly if the pandemic worsens or persists, receivables grow considerably, or revenue effects result. We will evaluate these risks as the situation evolves. Los Angeles County enacted a stay-at-home requirement on Monday, Nov. 30, after more than 5,000 new COVID-19 cases the day prior. The new "safer-at-home order" places stricter limits on gatherings and business occupancy, in addition to playground and other closures; this is in addition to restaurants' being forced to close the prior week, including to outdoor dining. The order extends to at least Dec. 20. The county has reported more than 400,000 cases and more than 7,700 deaths since the onset of the pandemic, making it the most severely affected county in the U.S., according to Johns Hopkins University. During April through September 2020, water sales declined about 11% (but rose 2% versus the prior year) but revenue increased 7% given the benefit of rate pass-throughs. Delinquencies for the first quarter of fiscal 2021 were $52 million, or 13% of sales, compared with 13% for first-quarter fiscal 2019 and 19% for first-quarter fiscal 2018. Delinquencies are higher given that the utility has provided customer relief in the form of deferred disconnection of services as a result of nonpayment during the pandemic. We believe LADWP's environmental risks are manageable with prudent drought management practices, including efforts to reduce water usage and diversity water supplies. Environmental risks resulting from LADWP's geographic footprint also include wildfire risks, with a sizable portion of its service territory and customer base located in elevated or high wildfire threat zones, but wildfire risks pose a higher threat to the department's power system (AA-/Negative).

Montebello Unified School District

School district A-/Stable We analyzed the district's ESG risks relative to its economy, management, financial measures, and debt and liability profile and determined that all are in line with our view of the sector standard. Although the district has had a history of a lack of internal controls and operational transparency, we believe that the risks are currently being managed through efforts by the current district management that include stricter internal controls put in place and increased transparency with oversight from the Los Angeles County Office of Education.

MPM Sherman Way LLC for Magnolia Science Academy 1 

Charter school BB/Stable We view the risks posed by COVID-19 to public health and safety as an elevated social risk for the sector under our ESG factors, given potential decreases in state funding that could occur as a result of economic pressures and the fact Magnolia is highly dependent on state revenues. We believe governance risk is also elevated compared with sector norms, due to the cumulative effects of management turnover, a history of charter non-renewals, project cost overruns, and an IRS filing error. We believe the school's environmental risk is in line with our view of the sector as a whole.

This report does not constitute a rating action.

Primary Credit Analysts:Jenny Poree, San Francisco + 1 (415) 371 5044;
jenny.poree@spglobal.com
Nora G Wittstruck, New York + (212) 438-8589;
nora.wittstruck@spglobal.com
Secondary Contacts:Chloe S Weil, San Francisco + 1 (415) 371 5026;
chloe.weil@spglobal.com
Paul J Dyson, San Francisco + 1 (415) 371 5079;
paul.dyson@spglobal.com
David N Bodek, New York + 1 (212) 438 7969;
david.bodek@spglobal.com
Tim Tung, San Francisco + 1 (415) 371 5041;
tim.tung@spglobal.com
Theodore A Chapman, Farmers Branch + 1 (214) 871 1401;
theodore.chapman@spglobal.com

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