Cities like Houston face huge climate risksIf the credit rating of cities like Houston is threatened by climate change, how will they pay for the mitigation needed to survive? Photo credit: Win McNamee/Getty Images

By Bobby Magill

Moody’s warned states and city governments in a report published last week that they may see their credit ratings tumble if they fail to begin adapting to rising seas, climbing temperatures and other effects of climate change. With both their coastlines and credit ratings threatened, the report may inspire more local governments to consider who or what might be liable for their exposure to the ravages of global warming.

Already, the California cities of San Francisco, Oakland and Imperial Beach, and San Mateo and Marin counties have sued ExxonMobil, BP and other major fossil fuel companies for their responsibility for climate impacts already damaging their communities, including rising seas and more damaging extreme weather.

“Moody’s now appears to confirm what others have long suspected: state and local governments will suffer if their residents and taxpayers have to pay the full costs of protecting roads, homes, businesses and other infrastructure from the impacts of climate change,” said Vic Sher, a partner in the law firm involved in three of those communities’ lawsuits. “The lawsuits filed by Marin and San Mateo Counties, the City of Imperial Beach, and others, are about making sure that these communities have the resources to meet these challenges, and assuring that the companies that caused the problem pay their fair share of those costs.”

“Climate shocks,” or catastrophic extreme weather events such as a hurricane intensified by climate change that immediately wipes out infrastructure and washes away a city’s tax base, may factor into its credit rating, Moody’s said.

“While we anticipate states and municipalities will adopt mitigation strategies for these events, costs to employ them could also become an ongoing credit challenge,” Moody’s Vice President Michael Wertz said in a statement.

The goal of liability lawsuits is for the courts to require major oil companies to pay some portion of the cost of protecting infrastructure and private property from global warming’s impacts.

Oakland and San Francisco by themselves have $49 billion in public and private property sitting within 6 feet of today’s sea level. Research shows that seas may rise about 10 feet by the end of the century, causing catastrophic damage as the ocean inundates the coastline.

If communities have the resources to meet the challenge, credit rating companies may look more favorably upon vulnerable cities, said John Miller, a water resources engineer researching the connection between credit ratings and climate change at the Wharton Risk Center at the University of Pennsylvania.

“The big metric here is revenue,” he said. “Will anything going on with climate change affect that revenue stream?”

Cities generate revenue primarily through property taxes. Coastal cities are especially at risk because properties washed away in a hurricane or submerged by higher tides can no longer generate tax revenue for the city. That will reduce the local government’s ability to pay down its debt, increasing investor risk on municipal bonds and raising the city’s cost of borrowing money.

Moody’s cited Hurricane Katrina, which hit New Orleans and the Gulf Coast in 2005, as an example of a climate shock that could affect a local government’s credit rating.

Miller said a more recent shock was Hurricane Sandy, which devastated the New Jersey and New York coastlines and inundated low-lying areas of New York City in 2012.

What happened in Sandy, a lot of homes were destroyed, those properties were reassessed, and the assessment was lower because somebody couldn’t live in that home for a period of time,” Miller said. “The municipality is revenue deficient for a period of time.”

Local governments in New Jersey saw their tax revenues take a hit because of Sandy’s devastation, he said. Sandy damaged or destroyed 346,000 homes and cost the state $29.5 billion to repair damage to buildings, according to the U.S. Department of Commerce.

“You lost a good chunk of building stock along the New Jersey coast,” and even with state and federal government assistance, the towns could be required to pay more if they issued new bonds, he said.

If communities were to take legal action against oil companies to obtain the money needed to protect themselves against climate shock, that may be reflected in their credit ratings, Miller said.

“The idea here is that this is being proactive and that would be favorable to a rating company,” he said. “The opposite would be true where a municipality is like, ‘We don’t believe in climate change,’  or ‘We know it’s happening and we can’t do anything about it.’”

Andrew Gage, a staff lawyer for West Coast Environmental Law (WCEL)in Vancouver, B.C., said the Moody’s report is a wakeup call for Canadian cities that haven’t yet begun to grapple with climate adaptation.

“My initial reaction to reading this is, wow, this brings home just exactly how urgent it is that we act,” Gage said.

WCEL is spearheading an effort to get British Columbia communities thinking about the climate liability of the fossil fuel industry. So far, four cities have sent letters to leading fossil fuel companies asking for them to pay for climate impacts, a potential first step to considering a class action lawsuit.

Gage said that Moody’s seems to be asking the public to pay for adaptation through higher taxes, ignoring the question of how to hold fossil fuel companies accountable.

In British Columbia alone, municipalities may have to spend $9.5 billion to protect themselves from rising seas, Gage said.

“Taxpayers can’t afford this alone,” he said. “I think that the moment that Moody’s actually decreases somebody’s credit rating or a government’s credit rating because they do not do adaptation, that’s when it will actually bite.”