The monster at the end of this fire

Politico

26-02-2025

Presented by
With help from Alex Nieves and Sam Ogozalek
MONEY PROBLEMS: The Los Angeles fires are even more expensive than they look.
Bond ratings firms are dinging not only Los Angeles' public utility and others for their increased exposure to climate risks. They're also worried about the creditworthiness of all local California governments.
'It is a tipping point in the marketplace,' Thomas Doe, founder of Municipal Market Analytics, said of S&P Global Rating's Jan. 14 downgrade of the Los Angeles Department of Water and Power two notches, from a near-perfect AA- rating to an A. 'They're doing a negative action on a well-known credit issuer and are looking at long-term risks to a utility around climate.'
What followed the downgrade of the nation's largest municipal utility is this: Bond values fell, default risk rose and some bondholders sold at a loss. The new rating means that if LADWP issues new bonds soon, it will have to pay higher interest rates to compensate buyers for the heightened risk.
Shortly after that downgrade, S&P issued warnings about other local utilities and the city of Los Angeles itself, along with a library district in Altadena, where the Eaton Fire killed 17 people and destroyed 9,400 buildings.
Then, last week, in an indication of expanded concern, S&P said it was assessing the threat of wildfire on the creditworthiness of all bond sellers in California. And it doesn't stop there.
'Beyond rated entities in the Los Angeles area, we believe the heightened exposure to wildfires could have longer-term credit implications for rated issuers across all of U.S. public finance,' S&P analysts wrote.
It's not the first time ratings firms have penalized municipal bond issuers in areas struck by disasters. After Hurricane Helene in September, S&P took action against more than a dozen entities in North Carolina and Tennessee.
But the warnings and downgrades there were based on property damage and the potential loss of tax revenue and cost of rebuilding — not on risks tied to climate change. S&P cited climate change directly in its analysis of LADWP, saying 'wildfires are becoming more severe and expansive' and that the risks are caused 'at least in part by climate change.'
The $4 trillion municipal bond market has largely been unaffected by climate risk up until now, enabling states, publicly owned utilities and local taxing districts to maintain strong credit ratings and minimize borrowing costs even as climate change intensifies disaster damage.
Municipal bonds have also been a safe investment for ordinary people seeking income that's exempt from federal taxes.
'I think we're seeing the beginning of a crack,' said Alice Hill, who was National Security Council senior director for resilience policy in the Obama administration. 'We know that with climate change, there'll be bigger and worse disasters that will affect communities' abilities to repay those bonds.' — TF, CvK
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RIC AND RICARDO: State Farm is getting in trouble with both California and federal officials.
Insurance Commissioner Ricardo Lara is set to meet with State Farm executives Wednesday after earlier this month denying the company's initial request for an emergency 22 percent rate hike following the Los Angeles fires, which it estimates will be its most expensive disaster at $7.6 billion in claims. Also joining the meeting will be consumer advocate group Consumer Watchdog, which has intervened in the request.
In a letter to Lara on Tuesday, State Farm describes its financial trouble, which started well before the fires and includes failing last year to meet minimum capital requirements set by the national association of insurance regulators. Further ratings downgrades could mean that banks will choose to no longer count State Farm insurance as collateral for mortgages, the company said.
Lara told the company earlier this month it had to provide more information, including whether its parent company can help out more and whether an emergency rate increase would affect its underwriting decisions, to justify its rate request.
State Farm has the largest share in the California market at 9 percent but stopped writing new policies in California in May 2023 and declined to renew 30,000 homeowner policies, including many high-risk Southern California communities, in March 2024. In its Tuesday letter, it said that it would need an even higher rate increase than 22 percent before it would consider writing new policies in California.
Meanwhile, presidential envoy Richard Grenell said in a social media post Tuesday that he had requested a meeting with State Farm board Chair Michael Tipsord to 'discuss the SoCal fires.' 'We have much to discuss,' Grenell added.
The federal government does not directly regulate the insurance market, which it leaves to the states. Grenell didn't immediately respond to a request for comment, nor did State Farm. — CvK
RAIL REINFORCEMENTS: National rail advocates are getting into California's cap-and-trade debate.
Rod Diridon, the public transit legend and a co-chair of the U.S. High Speed Rail Coalition, wrote in a December email to Ian Choudri, CEO of the California High-Speed Rail Authority, that the coalition is 'going to war to protect the Calif project.'
'The first target will be to support the cap and trade extension. Let us know how we might be most effective. Good luck!' reads the email, which POLITICO obtained via a public records request.
It's the latest sign that high-speed rail backers are more concerned about cap and trade — which gives a quarter of its auction proceeds to the project — than President Donald Trump's threat to claw back $4.1 billion in grants awarded under the Biden administration.
Credit prices are expected to remain low in the quarterly auction results coming out Wednesday. — AN, SO
35 PERCENT: That's how much water both the state and feds are saying farmers should plan on getting from the State Water Project and Central Valley Project this year.
The agencies' allocations won't be final until April, but Tuesday's forecast is important because farmers use it to help guide crop planting decisions and secure loans. It's also the Bureau of Reclamation's first allocation under Trump and his order to federal agencies to 'maximize' water deliveries.
Westlands Water District, which had been pushing Reclamation to incorporate data from February's storms in order to produce a bigger initial allocation, said it was 'encouraged.'
State water officials, meanwhile, increased their projected allocation from 20 percent to 35 percent. The forecast is more than double the estimate at this time last year, which also started out as a dry winter. — CvK
ON FIRE: The uncertainty around whether, when and how much the Trump administration will allow federal funds to flow again is leaving rural and conservative-leaning communities waiting on wildfire preparedness projects and sending Western states scrambling to find contingency plans.
Job cuts and funding freezes at the Agriculture Department, which oversees the Forest Service, have stalled active forest management projects and delayed wildfire training, POLITICO's Natalie Fertig and Jordan Wolman report — even as the department now appears ready to unfreeze some wildfire mitigation funding.
And even though direct firefighters are exempt from the Forest Service job cuts, many of the 3,400 workers fired at the agency supported in trail maintenance, fuels reduction and other forestry projects just as summer hirings would start in preparation for wildfire season.
'The fire funding is a bipartisan issue that is mostly being spent in conservative rural districts,' said Sophia Lemmo, the forestry program director for the California Association of Resource Conservation Districts.
She tallied around $100 million in federal funding to California's resource conservation districts in limbo, such as USDA grants funded by the Inflation Reduction Act to help small private landowners manage their forests. She said she's exploring private or state funding, like the $10 billion climate bond passed in November, as a contingency plan, but doesn't have anything lined up — and the window before fire season starts in earnest is rapidly closing.
The clawbacks have hit hard in the small Northern California coastal community of Shelter Cove, which issued a stop-work order on a $6.2 million Community Wildfire Defense Grant it was awarded in 2023. The city was denied reimbursement for $120,000 from the Forest Service earlier this month, Fire Chief Nick Pape told Jordan in an interview.
Pape said the town was set to clear hazardous vegetation near 650 homes to bolster its ability to withstand wildfires but is now at risk of delaying that timeline. — CvK
— Watch what you say about your illegal hunting activities — California Department of Fish and Wildlife officers might be sitting in front of you on the plane.
— Urban forestry offsets may have yet to take off, but urban trees themselves sequester a surprisingly large amount of CO2, a new University of Southern California study finds.
— Lake County is considering asking both Newsom and Trump to block Pacific Gas & Electric's planned dam removal on the Eel River.