As wildfires continue in Southern California, we extend our heartfelt sympathy to clients, friends and the communities that are struggling.

Invariably, we have been asked about the fires’ financial impact on municipal bond issuers in the region.

The situation is ongoing and fluid, so it’s impossible to accurately predict the fallout. However, history has shown that issuers are resilient.

Aid to localities

We can expect state and federal authorities to aid local communities in the form of grants, subsidies and disaster relief funds, which will boost recovery efforts as well as investor confidence.

For example, on Jan. 9, President Bident announced the federal government will cover 100% of the disaster relief costs for six months. The assistance will cover payments to first responders, setting up temporary shelters, removing debris and other measures.

Also, the state secured a grant from the Federal Emergency Management Agency that enables local, state and tribal agencies responding to the fire to apply for 75% reimbursement of eligible fire suppression costs.

Additionally, the California FAIR Plan Association is available to residents and business owners in areas prone to wildfires who can’t obtain coverage from private insurers. The program is comprised of insurers licensed to conduct property and casualty business in California.

State’s GO rating ‘strong’

“At times like this, it is difficult to see past the immediate suffering, but investors in California municipal bonds should be reassured that we expect very few municipal credits in Los Angeles and Ventura Counties to face any long-term negative credit impact from the disaster,” Lord Abbett analysts said in a report earlier this month.

The report noted that California’s general obligation credit standing “remains strong.”

Should shortfalls occur from claims related to the wildfire damage, the state isn’t required to make up any shortfalls in the Fair Plan, which isn’t funded by taxpayers.

“The burden will be spread across ratepayers all over the state in the form of insurance surcharges and thus will not directly affect the state’s finances,” according to the report.

Munis: Boring, reliable, helpful

Municipal bonds have a well-deserved reputation for being boring – and reliable. Investors appreciate the fact that issuers can raise funds if needed in a variety of ways, and bonds have built-in protections.

Issuers such as local governments, states and related agencies often have the power to tax and control local economic policies. Historically, municipal bonds have an exceedingly low default rate, and states, generally, are in good shape (“Improving Fiscal Prospects of Illinois, Other States”).

These are just some of the reasons why muni investors tend to sleep well at night.

Municipal bonds have played an integral role in building – and rebuilding – the country for more than 200 years.

They help fund a variety of public works projects, including disaster-related services such as firefighting equipment, fire stations, fire prevention and mitigation programs and disaster preparedness and evacuation plans.

Municipal bonds are part of the solution.

Unfortunately, the Southern California fires are not contained. Damage and heartbreak continue, so no one can say for certain how issuers will be impacted in the longer term.

Although conditions are challenging, we believe municipal issuers in the area are currently well-positioned to manage through this difficult time.

We’ll be watching.