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Analysis & News on the Future of Public Finance

CSG: Climate Change is an Issue

The City of Salem, Oregon recently extended a health advisory through June 25 because of the potential presence of cyanotoxins in water distributed to the system’s customers. Cyanotoxins are toxins produced by bacteria called cyanobacteria (also known as blue-green algae). This type of bacteria is found almost everywhere, but particularly in lakes and in the ocean where, under certain conditions, they reproduce exponentially to form blooms. Blooming cyanobacteria can produce cyanotoxins in such concentrations that they poison and even kill animals and humans. Cyanotoxins can also accumulate in other animals, such as fish and shellfish, and cause poisonings including shellfish poisoning in humans.

The cyanotoxins resulted from algae blooms in Detroit Lake, which is part of the city’s watershed. Hot and dry weather, which the city and state attribute to climate change, drove the severity of the algae bloom. 

This is the first time that a water system in Oregon has seen these impacts on its water supply from cyanotoxins. It demonstrates the effects of changing environmental conditions on local governments. In this case, the City will have to fund operating and maintenance expenses increased by up to 5%. It will also have to fund $30 million in additional capital spending. All other things being equal, debt service coverage will decrease by some 17%, according to Moody’s estimates.

The silver lining to this situation is that the capital expenditures are expected to enhance the system’s resiliency to respond to future and long-term water quality risks. The new filtration process that is to be deployed is estimated to cost $2 million per year. In the interim, the expected capital costs will be financed with revenue bonds. While unanticipated, the additional borrowing is not seen as a basis for a rating reduction at this time.

This is one of the first times that a state or local government has acknowledged that climate is directly affecting credit, and more importantly, their environment. We will continue to monitor this and other situations like it.