Since 2018, wildfires have become increasingly common and are a credit risk for municipalities in high fire-risk areas across several western states such as California, Washington, Oregon, and Colorado. The ongoing drought, particularly in California, is a likely contributor to the reoccurrence of wildfires in areas with historically low rainfall. With the effects of climate change likely to stay, we believe wildfires will remain a common occurrence for the foreseeable future.
However, despite the number of wildfires in the western states, S&P Global Ratings has not taken any negative rating actions to date. Although some wildfires are close to municipalities that we rate, most of these municipalities' boundaries and property values have not been materially damaged. We closely monitor wildfire risk across the western states.
Unpredictable Nature Of Wildfires Means Increased Risk
Unlike other natural disasters such as hurricanes, wildfires are highly unpredictable in both magnitude and duration, which directly affect the damage they cause. While the on-shore effects of hurricanes generally last a few days, wildfires can last for several weeks. For example, the recent Camp and Tubbs fires were the most destructive wildfires in California's history, lasting approximately 17 days and 23 days, respectively. The longer a wildfire persists, the more devastation it can cause. However, acres burned does not necessarily correlate to economic damage or credit risk, as many of the previous fires that have occurred in California were in areas without residential or commercial development. The location and size of the municipality are some of the key factors that we consider when accessing wildfire risk.
Municipalities' Size, Location, And Liquidity Are Essential To Evaluating Risk
Most wildfires have occurred in rural areas and remote parts of the states without substantial residential or commercial development. Areas that have frequently sparked new wildfires generally include drought-stricken areas, areas with a large accumulation of dry wood fuel in forests, or areas with strong, dry winds coupled with very dry conditions. Municipalities in these types of areas face higher environmental risk from wildfires compared to more developed, major metropolitan areas.
Smaller municipalities (as measured by acreage) may face higher risk from wildfires given their smaller geographic area and susceptibility to more concentrated damage. For all natural disasters, municipalities with strong liquidity have a greater ability to cover ongoing expenditures, pay outstanding debt obligations, and continue to provide city services until state or federal assistance arrives. Liquidity is one of the most important credit factors to consider when evaluating credit risk for municipalities affected by a natural disaster.
Could Wildfires Have A Lasting Negative Impact On Municipalities?
While most municipalities in areas of high wildfire risk have not been substantially affected to date, we believe there could be long-term credit risk factors for some municipalities. Credits that face reoccurring annual wildfires are also affected by a substantial decline in air quality that could prompt residents to leave those areas. Population declines or a decrease in property development or housing demand could negatively affect credits that we rate and represent a social risk that stems indirectly from wildfires.
The ongoing threat of wildfires may also deter future potential residents from moving into affected areas or dissuade commercial developers or businesses to establish their presence there. We believe this could weaken the economic strength for these municipalities and negatively affect long-term credit quality. While municipalities that have been affected by wildfires have largely been resilient and have rebuilt in certain cases, we will monitor the potential lasting implications of wildfires across the western states.
Value-at-Risk (VaR) From Wildfires
The following maps provide a snapshot of which areas within each state face higher risk from wildfires measured by value-at-risk. The value-at-risk data point is defined as an estimate of expected loss in value as a percentage of total property value within the location for the given year.
This report does not constitute a rating action.
|Primary Credit Analyst:||Li Yang, San Francisco + 1 (415) 371 5024;|
|Secondary Contacts:||Jane H Ridley, Centennial + 1 (303) 721 4487;|
|Amahad K Brown, Dallas + 1 (214) 765 5876;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.