Assessing the Potential Impact of California’s Wildfires on Municipal Bonds

Devastating wildfires continue to rage in the Los Angeles area, and our hearts go out to the families and communities that are suffering. Investors are also understandably concerned about the financial health of municipal bond issuers undergoing such environmental crises. But municipalities have historically shown resilience in the face of major natural disasters, and we believe they will demonstrate the same strength this time.

State and Federal Support Does the Heavy Lifting

Collaboration between state, federal and local agencies is crucial in addressing and mitigating the financial impact of natural disasters. Through grants, subsidies and disaster relief funds, state and federal support can alleviate much of municipalities’ financial burdens—aiding not only in recovery efforts but also in maintaining investor confidence.

For example, the Federal Emergency Management Agency (FEMA) reimburses at least 75% of emergency costs for local governments, as well as for uninsured or underinsured households and businesses. Additionally, on January 9, President Biden announced that the federal government will cover the costs of wildfire response efforts, including debris removal, shelter and salaries for first responders, for 180 days.

Further support comes from the California FAIR Plan Association, a syndicate of insurers licensed to conduct property and casualty business in California, and which is neither a state agency nor funded by taxpayers. The FAIR Plan provides basic fire coverage to California residents when traditional carriers are unavailable.

Case Study: The 2018 Camp Fire in Paradise

In California, wildfires are a recurring issue, and recent examples can provide valuable lessons for investors. In November 2018, the Camp Fire devastated Paradise, California. It was the deadliest and most destructive wildfire in California’s history, causing 85 fatalities, destroying nearly 19,000 structures, and burning over 153,000 acres. The town of Paradise was approximately 90% destroyed, displacing thousands of residents and causing significant economic and environmental damage.

In the aftermath, however, only bonds issued by the redevelopment agency of Paradise defaulted. These bonds were backed solely by tax revenue from a specific commercial district and had no claim on the town’s general reserves.