Tax-free income from municipal bonds coupled with their rock-bottom default rate has lured investors for decades. In recent years overseas investors have flocked to U.S munis for higher yields and a currency that is rising against theirs. This super-safe market, bonds issued by states, municipalities, and agencies, faces a long-term, unexpected risk directly related to climate change. When scientists issue warnings about climate, some dismiss them as pointy-headed academics, but when the municipal bond industry raises concerns, you should too.
Blackrock, the world’s largest asset manager, noted, absent efforts to reduce emissions, more than 15% of the S&P National Municipal bond index will consist of issuers who could face GDP losses by 2030. Miami, Blackrock predicted, could lose up to 4.5% GDP annually. While all of the Southeast is at higher risk, areas on both coasts face greater danger along with some inland areas.
William Delahunty, Eaton Vance’s director of research, noted climate change was “on the top of our mind.” Offering documents for municipal bonds disclose potential risks. Miami-Dade added warnings related explicitly to climate change for future bond issues. Dave Hammer, municipal bond chief at Pimco, the world’s largest bond investor, said climate change “falls into our ratings window.” Barrons, owned by Fox News chairman Rupert Murdoch, reported (Sept. 23, 2019) climate change could affect the municipal bond risk profile of 80% of U.S counties. Leonard Jones analyzes how climate change affects creditworthiness for credit rating behemoth Moody’s. Five years ago, Jones noted Florida municipalities ignored climate change. In August, he visited 10 issuers; all were concerned and half had plans to address or mitigate climate-related problems.
Imagine if Hurricane Michael had made landfall in Miramar Beach instead of Mexico Beach. Walton County has excellent credit ratings, but small coastal communities, like us, don’t have the economic heft of metropolitan areas. Pimco’s Hammer avoids buying bonds from regions with a non-diverse economy and likely to experience frequent storms. Lower credit ratings mean higher costs for borrowers. Since the issuer’s tax base supports bonds, higher property taxes could result.
In Hurricane Michael’s aftermath, Walton County helped our neighbors with meals, shelter, and clothing. But natural disasters overwhelm the private sector. The Federal Emergency Management Agency (FEMA), along with the Department of Housing and Urban Development (HUD), picks up the lion’s share of clean-up costs. It is plausible, given the soaring federal deficit, future aid may not be available like it has been in the past.
Climate change is not a liberal conspiracy. The lawyers, accountants, and analysts in the municipal bond world are predominately conservative Republicans; it’s not just Greta. Too often, we have our view, and we cherry-pick facts to suit them, but that’s not how the municipal bond world works.
You can’t always get what you want, but Buz Livingston, CFP can help you get what you need. For specific recommendations visit us online at livingstonfinancial.net or come by our office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.