The Biggest Long-Term Climate Threat To Municipal Finances Isn't Hurricanes Or Floods - It's Drought
The city of Clyde sits about two hours west of Fort Worth on the plains of north Texas. It gets its water from a lake by the same name a few miles away. Starting in 2022, scorching weather caused its levels to drop further and further. Within a year, officials had declared a water conservation emergency and, on August 1 of last year, they raised the warning level again. That meant residents rationing their spigot use even more tightly, especially lawn irrigation. The restrictions weren’t, however, the worst news that day: The city also missed two debt payments. Municipal bond defaults of any kind are extraordinarily rare, let alone those linked to a changing climate. But, with about 4,000 residents and an annual budget of under $10 million, Clyde has never had room to absorb surprises. So when poor financial planning collided with the prolonged dry spell, the city found itself stretched beyond its limits.
The drought meant that Clyde sold millions of gallons less water, even as it imported more of it from neighboring Abilene, at about $1,200 per day. Worse, as the ground dried, it cracked, destroying a sewer main and bursting another, quarter-million dollar, hole in the town budget. Within days of Clyde missing its payments, rating agency Standard & Poor’s slashed the city’s bond ratings, which limited its ability to borrow more money. Within weeks, officials had hiked taxes and water rates to help staunch the financial bleeding.
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Each episode underscores how climate shocks once seen as exceptional are now straining local budgets. But drought may be the most insidious of these threats. Compared to other types of disasters, it often hits everyone in a community, affects large areas, and can last months, if not years. There are also fewer defenses and relatively limited government assistance. Experts worry that drought could ultimately prove an enormous risk to the $4 trillion municipal bond market that underwrites everything from roads and schools to the water running through millions of taps. “I personally think this is a dark horse in the conversation right now,” said Evan Kodra, the head of climate research for the financial data company Intercontinental Exchange, or ICE. “It should be a bigger deal.”
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As the planet warms, the dry conditions that sent Clyde into the financial abyss are only set to become more frequent and more intense. Intercontinental Exchange researchers found that even in a “best-case” climate scenario, drought, heat stress, and water stress will place billions of dollars of municipal bonds at risk by 2040. Under a worst-case situation, that number could reach hundreds of billions. While Clyde’s default was relatively tiny, municipal debt is the bedrock of everything from hedge funds to retirement accounts, making a string of such events potentially catastrophic for the economy. But well before dramatic rolling defaults, the financial pressures of drought will likely alter daily life in many regions. That’s already the reality for one community in Arizona, where the rush for water has turned into a years-long financial and political standoff.
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https://grist.org/cities/drought-is-quietly-pushing-american-cities-toward-a-fiscal-cliff/
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