Hurricanes Irma and Harvey

The Impact on the Municipal Markets in Florida and Texas

As we all witnessed, two Category 4 hurricanes hit the U.S. coast within the span of a couple of weeks, the first time two such powerful storms landed on U.S. soil in such a short time frame.  On August 25th, Hurricane Harvey hit the Gulf Coast of Texas and brought with it record rainfall and flooding in and around the Houston area.  On September 10, Hurricane Irma reached the Florida Keys and moved up and along the western coast of the state, bringing with it hurricane-force winds and flooding from heavy rain and the storm surge.  The damaged communities in both states are still in the early stages of cleanup and damage assessment, and many lives have been greatly impacted by these significant storms.

We are watching and analyzing developments very closely to see how specific municipalities were affected by the hurricane-related damages, but some broad perspective may be helpful at this early stage in the process.  While we understand the impact on those individuals and families touched by the storms is heart-wrenching and a significant financial strain, from a municipal credit perspective we do not expect that there will be payment delays or defaults on any of the municipal debt held in the Baird Advisor portfolios and funds.

While the two storms were quite different in many respects, there are important similarities between the two states most directly impacted.  Both Texas and Florida have been among the fastest-growing from an economic and population perspective since the end of the Great Recession.  Both states are highly rated, with Texas at AAA by all three of the major rating agencies and Florida at AAA by S&P and Fitch and Aa1 by Moody’s.  While there is never a good time for a natural disaster to occur, the fact that the storms hit when each state is in a strong fiscal position will help facilitate the recovery effort and provide available resources for local municipal needs.

Texas and Florida also share a similarity in that neither assesses an income tax on its residents. Instead, each state relies heavily on sales tax revenue.  In Texas, sales taxes provide approximately 75% of total state revenue and more than one-half of all revenues in Florida.  Certainly, there will be a short-term decline in sales tax revenue because of the storms, but now that the cleanup and rebuilding effort has begun we expect that sales tax revenues will rebound quickly.  One difference between the two states is Florida’s heavy dependence upon tourism.  Florida derives 13% of state revenues from tourism, which will certainly decline for a period of time, but already Disney and the surrounding attractions are open after being closed for a couple of days.

In addition to the strength of the two states, the majority of local municipalities in each state were also in strong fiscal shape when the storm hit based on the major ratings agencies mentioned above.  Between their own reserves and available insurance reimbursements, as well as what we expect to be significant help from state and federal funds, we believe the affected local municipal credits will recover and rebound over the next several months without any impact on debt payments. 

The hurricane season is not yet over, so other storms could still emerge in coming weeks.  Yet, in addition to the damage and destruction that has occurred, we have also seen an amazing outpouring of support for those affected.  We are confident that support will continue and that these municipalities will be even stronger in the future because of the broad support of so many.

Past performance is no guarantee of future results. All investments carry some level of risk including loss of principal. Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. This and other information can be found in the prospectus or summary prospectus. A prospectus or summary prospectus may be obtained from your financial advisor and should be read carefully before investing.