Why this matters.  Less than two weeks after Hurricane Helene made landfall along Florida's Big Bend as a Category 4 storm, Hurricane Milton came ashore near Sarasota, Fla., on Oct. 9, 2024, as a Category 3. While coastal residents in the Southeastern U.S. are accustomed to major storms during hurricane season, Helene in particular resulted in inland devastation that was significantly different. In some parts of Western North Carolina and Eastern Tennessee the effects of Helene from damaging winds and flooding are still being assessed weeks after the storm, and some local governments remain unable to quantify both the damage and repairs necessary. Hurricane Milton continued across Florida, leading to flooding and nearly 120 tornadoes that destroyed properties along the state's east coast.

What we think and why.  In S&P Global Ratings' view, a shift to inland damage from where the storms make landfall could require greater storm preparedness in such areas, adding to the region's need for storm hardening. Although federal and state disaster relief funds may partly offset the expenditures, costs for infrastructure investments could require additional debt and pressure issuers' fixed costs. Furthermore, where damage to infrastructure and core services is catastrophic, or where property insurance becomes unaffordable or unavailable, some entities could see lasting declines in population and economic activity that impact revenue generation.

Assessing Credit In The Immediate Aftermath Of The Storm

When big storms hit, the rebuilding efforts of severely affected areas aren't measured in weeks or months but rather in years and potentially decades, and we account for this in our credit analysis. And while generally only the most devastating natural disasters may have a long-term influence on credit quality, the ability of management teams to sustain credit quality through this potentially prolonged period of recovery can be related to an issuer's financial position and disaster preparedness at the start of the crisis.

Planning is another critical component to prepare for and recover from major storms. Generally experienced management teams operating in communities along the Atlantic and Gulf coastlines, where extreme weather is prevalent, are usually adept at maintaining documentation and working with FEMA for reimbursements, have well-tested emergency response plans, and operate infrastructure that could be more adaptable and resilient to hazards. However, the wind and flooding damage from Hurricane Helene set a new bar for inland destruction and raises questions regarding the resilience of smaller, more vulnerable issuers, particularly if extreme weather becomes more frequent and severe.

Smaller issuers may be the most vulnerable following a major storm, primarily because of their inability to spread costs over a larger tax or customer base. Regardless of an issuer's size, we review them individually following destructive storms to determine potential rating influences. However, factors that can help support credit quality include:

• Generally strong liquidity and/or reserves to cushion the disruptions in revenue collections and cover the costs of the emergency response. Proceeds from insurance claim payments may also provide an important source of liquidity.
• Availability of federal and state emergency assistance. Natural disasters typically pose immediate dilemmas for local governments, which bear the initial responsibility for responding to the event, but state and federal aid is also generally available.
• FEMA funding for the majority (historically 75% to 90%) of disaster-related costs. However, the federal government's ability to provide this level of assistance in the future is unclear because of its ongoing budget issues and the escalating costs of disaster relief.

Storm recovery costs could exacerbate cost of living and reduced insurance availability

We believe residential premium cost increases in storm-prone states could, in part, reflect insurers' seeking to recover losses stemming from more frequent and severe events. In addition, after the unprecedented devastation from Hurricane Helene in eastern Tennessee and western North Carolina, the definition of a storm-prone state may be evolving. In the long term, this could influence where and how storm damage is addressed and exacerbate already-rising insurance premiums across the U.S.

The availability of federal flood insurance also plays a role in rebuilding, and less than 1% of households in the path of Helene had flood insurance through the National Flood Insurance Program. FEMA manages the program, which, in addition to providing insurance, develops maps to determine high-risk flood zones. Most homeowners are not required to purchase flood insurance, and high premiums for coverage could reflect the lack of policies in force. This creates additional vulnerabilities for residents and businesses, particularly in high-risk, disaster-prone areas.

Over time, cost increases could lead to shifts in the social and economic composition of communities. Robust economic growth and demographic trends have bolstered credit quality across the Southeastern U.S., but with sustained increases in housing costs from higher insurance premiums and property tax increases required to support infrastructure investments, governments may face revenue challenges if an electorate is unwilling or unable to raise taxes. (See "Navigating Uncertainty: Physical Climate Risks And U.S. Governments,"published April 23, 2024, on RatingsDirect.)

FEMA support is essential to rebuilding, but grows increasingly political

U.S. governments have typically relied on federal and state reimbursements for cleanup, rebuilding, and disaster recovery, but most will use cash on hand to cover initial cleanup costs.

So far, 2024 has brought fewer major storms than forecast. While this is positive for many reasons, it could mean that Congress might not appropriate additional disaster recovery funding to cover shortfalls from Hurricanes Helene and Milton before the November 2024 general election.

Over the longer term, increasingly costly and damaging storms could require more federal funding for communities still recovering from prior disasters, increasing the risk of political brinksmanship. (See "Your Three Minutes In The 2024 Atlantic Hurricane Season: U.S. Federal Disaster Relief Funding Will Be Stressed To Withstand An Intense Season," published June 11, 2024.)

Because FEMA reimbursements tend to lag storm events by several months to years, we assess issuers' ability to secure bridge loans to fund repairs without depleting their liquidity cushions. Historically, we have observed that the high likelihood of FEMA and state relief has contributed to lenders' willingness to provide bridge loans for some issuers. However, even with the potential for receipt, some issuers might lack access to bridge financing, and this could erode liquidity and pressure ratings.

U.S. Local Governments

Disaster declarations covered approximately 196 counties in the path of Helene and Milton across Florida, Georgia, Alabama, South Carolina, North Carolina, Virginia, and Tennessee. As stormwaters recede and operations are restored, we reach out to the local governments most damaged and determine each issuer's damage and credit characteristics. Our questions focus on both short-term financial stability and long-term credit quality, and may include (but are not limited to):

• Extent of the damage, including the projected influence on the property tax base, if known;
• Liquidity on hand to start funding cleanup, meet upcoming debt service requirements, and fund regular operations as well as emergency repairs to critical infrastructure;
• Likelihood of requiring short-term borrowing to fund recovery and restoration costs;
• Expectation for delays or reductions in major revenue sources, and sources of revenue flexibility to mitigate budget pressure;
• Medium-term influence on financial operations, including projected cost of cleanup and repairs, and the anticipated sources of funding, such as insurance and federal or state sources;
• The likelihood and timing of FEMA support; and
• Initial response and pace of payouts from property and casualty insurers.

In our view, extensive damage to transportation and utility infrastructure from Hurricane Helene could complicate local government's recovery efforts in some of the hardest-hit areas, potentially delaying the restoration of services and recovery of economic activity. This creates uncertainty about the storm's impact on long-term credit quality for some local governments.

Planning remains essential to an issuer's ability to address storm damage and get operations back on track. We believe that local governments that have contingency plans for major storms are better able to respond in a crisis, in terms of liquidity as well as deployment of resources. We also believe planning for infrastructure and capital needs arising from climate risk exposure signals stronger risk management and can help entities avoid high costs from emergency .

Water And Sewer Utilities

While Hurricane Milton brings its own set of challenges, we believe that Hurricane Helene's significant infrastructure damage could result in extended operating challenges, population displacement, and corresponding negative influences on the underlying service areas. Considerable state and federal support will soften but not eliminate the financial effect of this catastrophe. Helene entails a particularly challenging rebuild given above-average winds, storm surge, and rain across a mountainous terrain that led to extreme flooding and exacerbated the damage.

Given this, many systems may remain inoperable and the nature of the damage to transmission, treatment, and contamination within the reservoirs themselves increases financial and operational uncertainty. We believe significant portions of affected populations may be displaced, resulting in reduced revenue collection for an extended period. If systems are not fully operational for several months, citizens may be unable to return and, in some cases, homeowners may permanently relocate. This can influence collections, reducing revenue available to repair systems, particularly in service areas with smaller and more limited economies.

(See "Three U.S. Public Finance Utility Ratings Placed On CreditWatch Negative On Infrastructure Damage From Hurricane Helene," published Oct. 15, 2024.)

Municipal And Cooperative Public Power

Although millions were left without power or gas service, and although repairing critical infrastructure in the hardest-hit areas of Florida, North Carolina, and Tennessee, could take months, research indicates that investor-owned utilities serve most of the affected territory with the worst storm effects. (See tear sheets for Duke Energy Florida LLC, published Oct. 10, 2024, Tampa Electric Co., published Oct. 9, 2024, and Duke Energy Corp., published Oct. 3, 2024.) Power restoration from Hurricane Milton continues for municipal electric utilities in the greater Orlando area, but the storm-hardened infrastructure, cash reserves and large percentage of underground power lines lead us to anticipate that the pace of recovery will be in line with that of past storms.

Nonetheless, for the municipal and cooperative power sector, we are monitoring several of our rated wholesale and cooperative power utilities that may have some retail distribution-utility members that sustained significant property damage. Restoration of service will likely be formidable given significant numbers of downed power lines, destroyed roads, pre-existing supply chain issues, and damage to residential and commercial properties that could delay service restoration and assessments of repair costs and lost revenue. However, in general, we expect the impact to total revenue for our wholesale and electric cooperative credits to be limited based on these credits' broad service territories, but we will take any rating actions that we deem appropriate to the extent that we believe that revenue could be materially affected for a prolonged period or if liquidity significantly deteriorates. Credit risks could also increase for some small municipal utilities should liquidity cushions or bridge loans be insufficient to float recovery costs prior to FEMA reimbursement.

U.S. States

North Carolina faces the largest cleanup effort from Helene

North Carolina (AAA/Stable) is responding to significant damage in its western region from Helene. The state's credit profile has historically benefited from strong economic growth, well-defined financial management policies, and a commitment to maintaining balanced biennial budgets and very strong reserves. The state's "rainy day" fund, prior to this hurricane, was projected to increase to $4.88 billion for fiscal 2025--a strong 15.8% of enacted general fund expenditures. In recent years, North Carolina used reserves to address significant weather events, including hurricanes Florence, Isaias, Matthew, and Michael as well as a 2020 earthquake in the western area of the state. We believe the state has a consistent record of replenishing reserves after one-time use, and we expect its prudent fiscal management will support long-term reserve stability.

In response to the damage caused by Hurricane Helene and Potential Tropical Cyclone No. 8 (PTC8) the North Carolina general assembly on Wednesday, Oct. 9, passed the Disaster Recovery Act of 2024 (HB 149), which allocates $273 million from the state's rainy day fund for initial disaster relief efforts. The bill:

• Establishes two new recovery funds--the Hurricane Helene Disaster Recovery Fund (Helene Fund) and the PTC8 Disaster Recovery Fund (PTC8 Fund);
• Extends the statewide declaration of emergency through March 1, 2025, and
• Makes election modifications and provides public school flexibility.

The general assembly is set to reconvene on Oct. 24, when we expect a second round of disaster relief funding will be considered.

Money in the Helene Fund will support disaster relief and recovery efforts in only the 25 counties in North Carolina that the U.S. President declared major disaster areas on Sept. 28, 2024, , and in Nash County. The $273 million transferred from the rainy day fund to the Helene Fund for the 2024-2025 fiscal year will be allocated as follows:

• $250 million to the Department of Public Safety, Division of Emergency Management, to provide the state match for federal disaster assistance programs for state agencies and units of local governments, and to establish a revolving loan program to assist units of local government and state agencies with managing cash flow while awaiting federal reimbursement
• $16 million to the Department of Public Instruction to supplement or replace school nutrition employees' compensation lost on account of school closures resulting from Hurricane Helene
• $5 million to the State Board of Elections
• $2 million for the Office of State Budget and Management to provide grants to the North Carolina League of Municipalities, the North Carolina Association of County Commissioners, and the North Carolina Assn. of Regional Councils of Governments to provide technical assistance with local recovery funds

The financial resources in the PTC8 Fund will support disaster relief and recovery efforts in only Brunswick and New Hanover counties. The general assembly intends to appropriate funds to fund the PTC8 Fund and to support disaster relief and recovery efforts in Nash County following completion of appropriate damage assessments for those affected areas.

Florida's credit quality remains stable despite immense storm damage

The State of Florida (AAA/Stable) is well positioned financially to respond to the short-order effects of hurricanes Helene and Milton. We will nevertheless monitor the state's storm recovery and the effect on its finances. The state's very strong financial management and revenue performance provide stability to the rating, in our view. Supported by strong revenue growth, general fund reserve balances remain very strong, estimated to total $16.2 billion (unallocated general revenue and the state's budget stabilization account) or about 33% of general revenue to end fiscal 2024. The state can also use various unrestricted trust fund balances, raising estimated total reserves to $19.4 billion, or nearly 41% of general revenue. Total reserves have grown nearly 205% since fiscal 2019. This level of reserves, in our view, provides the state with sizable cushion for recovery efforts should they arise and offset temporary revenue losses resulting from stalled economic activity.

The state has adopted statutory changes to stabilize the property insurance market over time, with the Florida Hurricane Catastrophe Fund (AA/Stable), the Florida Citizens Property Insurance Corp. (not rated) and the Florida Insurance Guarantee Assn. (A/Stable). For further information on these insurance programs, see "Florida State Finances And Insurance Mechanisms Help Absorb The Blow Of Another Major Storm," published Oct. 10, 2024

Not-For-Profit Health Care

Additional challenges beyond physical damage could affect health care systems

Although it is too early to assess any long-term effects on the entities we rate in the path of both storms, some providers may report property damage and flooding, which could delay the receiving of patients, especially in areas that took the brunt of the storm or if structural damage is identified. Furthermore, the growing ambulatory network that many providers have--medical office buildings, ambulatory surgery centers, urgent care facilities, imaging centers, and other outpatient facilities--could also be damaged and suffer business disruption. Although the sector's staff pressures have somewhat improved, these events could lead to other challenges as clinicians, staff, and their families may be displaced depending on property damage and water and power availability. Finally, the potential displacement of residents affected by the storm may also pressure hospital volumes. We will continue contacting rated not-for-profit health care issuers throughout the affected region to assess the impact from recent storms as well as the potential for any short-term credit pressures.

Supply chain disruption and a rising number of disruptive events add to management challenges

Two other relevant areas that could affect health care providers are supplier disruption and managing the increasing number of disruptive events. Hurricane Helene has affected one of Baxter International's plants that supplies certain intravenous and peritoneal dialysis solutions. Given that the facility is the country's largest manufacturer of these supplies, this could affect a broader group of providers outside this region, depending on how long the facility takes to get fully back on line and/or the sector's ability to source those supplies from other areas. In addition, this event comes at a time when the sector continues experiencing weather and cyber security event risks, which we believe require further balance sheet cushion and ongoing management attention and planning.

Transportation

Airport, port, parking, and toll road operators in the affected regions saw operation interruptions from the two hurricanes but mostly experienced minor or no significant storm-related effects. Three major Florida airports--Tampa International, Southwest Florida International, and Orlando International--have reopened and resumed flight schedules. Several port operators in the state are still closed while power issues are being resolved, and in some instances this is delaying fuel deliveries and leading to shortages. The Federal Highway Administration has released $134 million in emergency funds for road repair in North Carolina, South Carolina, and Tennessee, and mobility across the affected regions remains hampered.

In general, transportation classes have credit characteristics and operating profiles that can withstand temporary interruptions and revenue losses (e.g., suspension of tolls on roads is typical). However, extreme weather events themselves and any associated credit effects can be highly localized if revenue-producing facilities are damaged and inoperable. Beyond the capital costs of rebuilding, well-managed enterprises exposed to demand risk often adjust rates, if necessary, to compensate for operating revenue shortfalls. To the extent that rates are not adjusted to maintain financial margins, credit quality can be diminished. While measuring the longer-term effects of extreme weather events on demand--in the form of passengers, vehicle traffic, cargo volumes, or cruise ship calls, for instance--is more difficult to gauge, experience has demonstrated that longer-term activity tracks regional economic growth, albeit sometimes with weaker financial performance in the interim years.

K-12 Schools And Charter Schools

In our view, there are several key components to understanding the potential effects of natural disasters on school districts and charter schools, including operational risks, population changes, and potential long-term implications for the tax base. Liquidity, which can vary greatly among school districts and charter schools, plays an important role in the immediate aftermath, but for schools funded per pupil the implications for the longer term can be even bigger.

Major storms damage property as well as disrupt instruction, and the upfront costs can lead to a spike in expenditures after a disaster. These expenditures are often necessary to get the schools back up and running, but they can deplete reserves. This may be problematic if financial support from a combination of FEMA funding, insurance, and state sources is unavailable, particularly because charter schools generally carry lower reserves than do their school district counterparts. Although recent federal emergency funds from the pandemic may still be available to bolster liquidity, remaining funds will be designated or committed for approved projects.

Higher Education

Colleges and universities have increasingly grappled with event risk both manmade (such as management and governance controversies) and natural (such as hurricanes Helene and Milton). Schools located in the affected regions may temporarily close but don't typically see an interruption in operations, as classes can now (post-peak pandemic) be easily moved online. When extreme weather damages facilities, rebuilding can be costly, but most colleges and universities benefit from ample financial resources and liquidity that provide financial flexibility to manage crisis events. In addition, institutions with a sound enterprise risk management program that is promptly followed; strong management and governance controls; solid resources, which may include insurance coverage for the specific risk; and the ready availability of and access to external support such as disaster aid programs can help support short- and long-term credit quality.

Public Finance Housing

As with other issuers within the wide swath of Helene and Milton's path, available liquidity to sustain financial performance for properties with off-line damaged units or those requiring substantial repairs is key. Although some balance sheets may still reflect strength from COVID-19 aid, we believe most owners and operators depleted this funding over the past few years as expenses for utilities, personnel, insurance premiums, and general inflation costs squeezed operating margins. Furthermore, Helene's damage from high wind speeds and flooding mostly affected inland communities, where owners and operators of stand-alone rental housing projects may not have regularly tested emergency response plans, potentially resulting in delays in restoring occupancy of these units. As a result, a prolonged period of vacancy, reduced insurance claim payments, and latency in FEMA reimbursements could result in credit pressures.