Local Public Finance Dynamics and Hurricane Shocks

Since 1980, over 2,000 local governments in US Atlantic and Gulf states have been hit by a hurricane. Such natural disasters can exert severe budgetary pressure on local governments’ ability to provide critical infrastructure, goods, and services. We study local government revenue, expenditure, and borrowing dynamics in the aftermath of hurricanes. These shocks impact, both, current local public resources through reducing tax revenues and expenditures, as well as future local public resources through increasing the cost of debt. Major hurricanes have much larger effects than minor hurricanes: major storms cause local revenues to fall by 6 to 7%. These losses persist at least ten years after a hurricane strike, leading to a 6% decline in expenditures on important public goods and services and a significant increase in the risk of default on municipal debt. Our results reveal how hurricanes can create a “vicious cycle” for local governments by increasing the cost of debt at critical moments after a hurricane strike, when localities are in greatest need of funding sources. Cities deemed riskier by ratings agencies face higher borrowing costs and thereby face constraints to invest in climate change adaptation. Municipalities with a racial minority composition 1 standard deviation above the sample mean suffer expenditure losses more than 2 times larger and debt default risk 8 times larger than municipalities with average racial composition in the decade following a hurricane strike. These results suggest that climate change can exacerbate environmental justice challenges.