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Wildfires Are Becoming The New Normal In Western States; Their Unpredictable Nature Increases Long-Term Risk

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Wildfires Are Becoming The New Normal In Western States; Their Unpredictable Nature Increases Long-Term Risk

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.

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This report does not constitute a rating action.

Primary Credit Analyst:Li Yang, San Francisco + 1 (415) 371 5024;
li.yang@spglobal.com
Secondary Contacts:Jane H Ridley, Centennial + 1 (303) 721 4487;
jane.ridley@spglobal.com
Amahad K Brown, Dallas + 1 (214) 765 5876;
amahad.brown@spglobal.com

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