Author’s Note: Patty Healy, Cumberland’s Senior Vice President of Research, assisted with this commentary.
Nearly everybody who follows the news now knows that Jackson, Mississippi, has had a water problem. All 150,000 residents remained without water for more than six weeks, following flooding that overwhelmed the city’s antiquated and vulnerable water system. You have seen the photographs and video clips on nightly news. The stories are well known.
What does the water problem in Jackson, Mississippi, have to do with ESG — environmental, social, and governance considerations? Let's take that question apart. But first, a disclosure — Cumberland Advisors does own Jackson related bonds issued through the Mississippi Development Corporation that are insured by Assured Guaranty Mutual and are rated AA. We haven’t bought any unenhanced debt of Jackson, Mississippi, for any of our managed clients as it does not fit our investment requirements, one of which is an A or better rating.
Now let me get to the case study of Jackson. When the governance and political power describes this plight of "running out of water," they use words like immediate emergency. That's how the 11th and 12th cranial nerves that we talked about in our ESG Part 1 come into the application. (For those who missed the discussion of the 12 cranial nerves, here's the link to ESG-Part 1.
But was the Jackson water problem immediate? No. It's been around for a long time, and nothing was done about it by governance except in the hospitals.
Is it an emergency? You bet. A hundred and fifty thousand people had no water. Think about what you would do if you had no potable water in your town, your community, your city, your county, your condominium complex, your apartment complex. How would you live your life without potable water? What would you do? And how would you respond to the governance that put you in that position?
Let's examine some history. We looked at the ratings on the debt of Jackson. The major rating agencies have been warning about this water system problem for years. The creditworthiness of the issuers has been downgraded. This problem is not immediate. It has existed for a long time. Anybody who examines data will see it. Boil water alerts are familiar to residents of Jackson, though those alerts are usually more limited in scope.
What about the activity of institutions besides city, county, and state institutions? Is there any evidence that they observed the problem and acted accordingly? Let's look at a report about the hospitals in the region. Hospitals saw this coming 10 years ago. They installed their own water sources. They knew they could not depend on the municipal sources of water to deliver health care reliably and without interruption, so they took the issue into their own hands. Hospitals in the region found themselves treating victims from the 150,000 population that was denied potable water. Those hospitals are equipped with water. Why? Because they made governance decisions to act to protect their institutions.
How do we rate the E in Jackson, Mississippi, in the surrounding region, and in the state of Mississippi itself. Not having water has environmental implications. There are many of them, and you can quickly see how the broad the list would be. On the other hand, this is not a problem that is attributable to worldwide climate change. We're not talking about an E that entails a rising sea level, but we are talking about an environmental structure in a region with a population in six figures, and a lot of people are impacted. And climate change does play a role, as warmer air holds more water and then dumps it in record rainfall events.
Let's move to the S, for social. Does a disruption that denies 150,000 residents of a community drinkable water also create social dynamics which should be discussed, which impact businesses and community services and interrupt commerce of all types. I think the answer obviously is yes. It's easy to imagine the broadness of social disruption, which is what the S in ESG is all about.
And lastly, let’s consider governance (G). How would we evaluate the governance at the city level? That's an interesting question, isn't it? We can look at the history. It is now written about and examined, and G comes into play. How would we rate the governance in the hospitals? We'd say that the governance in the hospitals reflected foresight. Decision makers undertook responsibility. They saw the need for action, and they knew that a blame game pointed at somebody else would not fix the problem they faced.
How would we rate governance at the state level? In the reading list below, there are discussions about the controversy between the culture war going on in Mississippi in the political arena. We have a city with 150,000 population. We have a mayor of that city affiliated with one political party. We have the governor of the state affiliated with another political party. They call the water issue immediate and emergent, which is not true. Chronic would be a better word. Then one holds a press conference and doesn't invite the other. Politics and culture wars are at work in Mississippi over problems that fall under ESG. They fix nothing. Who's to blame? Jackson’s antiquated water system and understaffed treatment plant, it is estimated, will now cost more than $600 million to fix. Only when that has been done will high lead levels and brown tap water and boil-water advisories be a thing of the past in Mississippi’s capitol city.
We're going to leave it to readers to sort through all the references below on Jackson, Mississippi. You can spend the time or not, or you can surmise by the headlines or a one-sentence extraction. You will note differing perspectives on the problem and who is responsible. The bottom line is this: 150,000 people went for more than six weeks without potable water; business interruption was rampant; the commercial impact on enterprises was clearly negative; and governance has failed at the city, county, and state levels. If governance, the G in ESG, had succeeded, 150,000 people not have struggled without potable water.
There is a final credit market impact. Think about, for a moment, what has to be done now to correct the process and fix the water system in Jackson. A solution will entail business investment and debt financing so that new facilities get constructed. At the same time, it takes time to develop them, construct them, implement them, go through rate hearings, and set the prices of water once this project is completed. It takes engineering and studies. Now think about those who have to provide the capital to finance either the entrepreneurial, risk-taking investment, or the debt investment through state, county, city municipal bonds. Both depend on capital to be provided by others and supported by raising fees or taxation.
If you are a provider of that capital and you are being asked to buy a bond or to buy shares in a development company or do a joint venture partnership or some other form of investment required to lead Jackson and Mississippi to a better place when it comes to water, how would you evaluate E, S, and G? We're going to ask that question again in different states, under different circumstances, as this ESG series continues.
Here's a reading list for the Jackson water system crisis. We encourage readers to delve into articles and other texts, but we’ve excerpted a brief snippet from each:
“The Democratic mayor and the Republican governor rarely speak to each other. And when Reeves held a news conference Monday to announce a state of emergency, Lumumba was nowhere to be seen. Reeves said he did not invite the mayor.”
“Mississippi capital’s water disaster developed over decades,”
MEGNA CHAKRABARTI: “However, Mississippi state government also has a direct impact on Jackson's long-term ability to fix its infrastructure. In 2021, the city sought to increase its sales tax by 1% in order to fund infrastructure improvements. That proposal had to go through the state legislature where it was killed. House Speaker Republican Philip Gunn explained to TV station WAPT, why.”
PHILIP GUNN: “It creates a precedent, if you will, that that may be a dangerous area to go to, as far as other cities around the state wanting to do the same thing. And we may get into a situation where the tax burden just gets too great.”
“The Jackson, Mississippi water crisis and America's crumbling water system,” https://www.wbur.org/onpoint/2022/09/16/jackson-mississippi-water-crisis-and-americas-crumbling-water-system-america
“Ensuring safe and reliable drinking water is fundamentally a local responsibility under the U.S. federalist system, with the state and federal government providing some oversight. But many cities like Jackson are struggling to perform this core government responsibility.
“Jackson’s water woes aren’t new. In 2014, 90% of city voters approved a one percentage-point increase in the sales tax in part to fund water and sewer repairs. In the past nine years, the city has allocated nearly $490 million from its capital budget to water and sewers—about $3,200 per resident. But much of the money hasn’t been well spent, and the city’s water problems have worsened.”
“The Water Woes of Jackson, Miss., Explained,”
“As a plumber, Ivey knows the city’s crumbling water infrastructure well. ‘There’s always water lines breaking and sewer lines breaking,’ he said. ‘I’ve had situations where I have my guys replace a sewer line from the house to the road and you get to the road and find out the city’s line is messed up and the city makes the homeowner bust the road up, fix the line in the road and then asphalt the road. What kind of place does that?’”
“Living in a city with no water: ‘This is unbearable,’”
“‘This is due to decades, decades and decades, of possibly 30 years or more of deferred maintenance, a lack of capital improvements made to the system, a lack of a human capital, a workforce plan that accounted for the challenges that our water treatment facility suffers from,’ Lumumba told ‘ABC News Prime’ last month.
“Over the last 40 years, Jackson's population has shrunk as more of the city's white residents left and moved to the suburbs, a practice known as ‘white flight, resulting in not as many taxes coming into the city, policy experts told ABC News.”
“Water problems in Jackson, Mississippi, go deeper than pipes, experts say,”
“Historic flooding and record droughts are already stressing water systems across the country, but as the threats to infrastructure posed by climate change intensify, experts warn that what happened in Jackson may be just the beginning.”
“The crisis in Jackson shows how climate change is threatening water supplies,”
In the September 1, 2022 rating action news release, when S&P downgraded the Jackson MS water and sewer system supported bonds to BB-, the final paragraph noted:
“We incorporate negative considerations for environmental and governance risks into our credit rating analysis for Jackson's water and sewer system. Prior to the recent flooding event (considered an acute physical risk, in our view), the water system experienced significant deficiencies in asset adequacy that we believe reflects poor risk management, culture, and oversight given the substantial deferred maintenance associated with the system. This was also evident in the sewer system's consent decree that the city is working to renegotiate, which is related to sanitary sewer overflows. The flooding event led to the utility's inability to meet its core mission of providing clean water to the service area, which raises health and safety social risks for the utility. In addition, health and safety is compounded by elevated social capital risks as the service area demographics have led to difficulty in raising rates to support the utility's infrastructure requirements. We will monitor these credit risks and they may become more material in our credit rating analysis in connection with the resolution of the CreditWatch.”
Let’s close with a video that’s worth a thousand words, uploaded on September 9 by resident and reporter, Molly Minta (Mississippi Today) of Jackson, Mississippi :
(Video at this link: https://twitter.com/mintamolly/status/1568310606440300544)
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.