The Week in Public Finance: Predicting Harvey’s Fiscal Impact and More

Sept. 01--The Fiscal Impact of Hurricane Harvey

It will take several months to work out the financial impacts of the storm on localities in the Gulf Coast region, but a look at past major storms can give us a few ideas of what to expect.

One of the obvious impacts will be on sales and property taxes. Hurricanes cause temporary and sometimes permanent population shifts. This was certainly true of Hurricane Ike in 2008. It hit southeastern Texas in September, ultimately causing more than $30 billion in damages. Galveston, the coastal tourism community where Ike made landfall, saw a huge population drop afterwards. The county's 2009 financial report notes that the population loss lowered demand for goods and services and left fewer homeowners to pay property taxes, the county's major source of revenue. The county's property tax revenue growth slowed in the years following Ike. In Galveston, sales tax collections dropped by roughly 16 percent to $15.2 million the year following Ike.

Other areas saw similar losses in tax receipts. Sales tax revenue in metro areas like Houston, Corpus Christie and Longview all experienced double-digit drops in 2009, according to a Governing analysis. The Great Recession played a role, but these losses are far greater than the single-digit drops that year in most of the state's other metro areas.

Another impact will be on the tourism industry. Following Hurricane Katrina in 2005, travel to New Orleans was practically nonexistent for months. Roughly 450 conventions were canceled in the wake of the storm, representing nearly 2.25 million room nights for the lodging industry. The impact had legs: even two years later, the city's convention business had only reached 70 percent of its pre-Katrina level.

The Takeaway: Past storms have also shown us that, in the short-term, liquidity is a big issue. Municipalities need to have enough of a financial cushion to begin paying for recovery costs before federal reimbursements kick in and to absorb any losses in tax revenue over the coming year. There's good news on that front as the municipalities ravaged by the storm, such as Houston, Harris County, Galveston city and county, and Rockport, all have between 11 and 30 percent of their budget in reserves, acccording to their latest financial reports.

Looking back at Ike's physical impact, many places reported robust rebuilding efforts soon after the storm. "Despite the devastation and seemingly slow pace of initial recovery, the region has, indeed, recovered significantly in the intervening one and one-half years than many would have predicted immediately after the storm," according to Galveston County's 2009 report.

Assessing the long-term impact is more difficult, given Harvey's unprecedented nature. Ike seemed to have a longer-lasting effect only in smaller, coastal communities. But that was also in part because it caused more damage in those cities. This time around could be very different as Houston, the nation's fourth largest city, experienced so much flooding. Harvey could be the most expensive natural disaster in U.S. history, at about $160 billion, according to one estimate by Accuweather. Others are more conservative, putting the cost of the hurricane at $75 billion.

Will Harvey Lead to Rating Downgrades?

Credit rating agencies are weighing in this week on the potential impact of the hurricane on local finance credit quality. They all are taking a wait-and-see approach, noting that no place will be downgraded solely because of the hurricane. It's all about how they deal with the aftermath, says S&P Global Ratings.

The agency noted that the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey "showed great resilience" following 2012's Superstorm Sandy, resuming the majority of service within two weeks. On the other hand, the New Orleans International Airport saw extensive damage following 2005's Hurricane Katrina. Its business was affected for years.

The Takeaway: The preliminary analyses from the agencies this week were loaded with caution, all saying the "unprecedented magnitude" of Harvey made it tough to predict anything. "There's no question the hurricane's devastation of the fourth-largest city in the U.S. could have a negative effect on the credit quality of various local government issuers," wrote S&P, "but it's too soon to tell."

Fitch Ratings said Houston's large and diverse regional economy "should begin to recover promptly once the floodwaters recede." But both agencies cautioned that smaller local governments with less cash-on-hand could see significant stress.

And Now For Something Completely Different

A new ruling in California could make it easier for tax increases to pass on a ballot. The state's Supreme Court found that the same restrictive laws that apply to tax increases proposed by a local government's legislative body does not apply to citizen-led initiatives.

Since 1996, Proposition 216 has restricted local governments' tax-raising abilities by requiring any new tax measures be approved by voters in the next general election. In a Southern California case regarding a citizen's initiative that proposed a marijuana dispensary fee, the high court found that such initiatives should be subject to a special election rather than waiting for the next general election.

The Takeaway: Special elections tend to draw low voter turnout, which would likely favor the backers of whatever initiative is up for a vote. That has many saying that this week's ruling could make it easier to raise taxes in California localities. Other states with similarly restrictive tax measures, such as Colorado and Missouri, may also see copycat suits.

But taxes are an extremely divisive issue, so its important not to underestimate the ability of powerful lobbying forces to turn a mild-mannered special election into a political fight of epic proportions. We saw that to some extent this summer, when Georgia's 6th district special election to fill the House seat vacated by Republican Tom Price became a proxy referendum on President Trump. The special election ended up being the most expensive House race in history.

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Liz Farmer -- [email protected] -- @LizFarmerTweets

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