Despite the size and frequency of major storms in recent years, the damage has had limited impact on U.S. local governments' credit quality to date. However, with projections for another record-breaking Atlantic hurricane season in 2024, a dwindling federal Disaster Relief Fund (DRF), which is the Federal Emergency Management Agency's (FEMA's) primary funding source, could compound fiscal risks for the places most vulnerable to storms and push up their costs to rebuild.
What's Happening
The National Oceanic and Atmospheric Administration calls for an 85% chance of an above-normal 2024 Atlantic hurricane season. FEMA projects the DRF will be spent down by September absent additional funding from Congress. This creates a higher chance for credit implications, given rising property insurance premiums following an increase in natural disasters.
Why It Matters
Despite the destruction from these storms, the financial cost of rebuilding is often distributed across a broad tax base, and partially offset by federal disaster aid and insurance. However, even if an issuer's finances--or ratings--are not directly affected by storms, rising costs for property owners could generate pressure on tax base growth. Meanwhile, the costs to harden infrastructure may increase debt burdens over time, pressuring the tax base and reducing affordability for essential services.
Based on FEMA's projections, S&P Global Ratings believes that if 2024's storm season is as damaging as expected, lawmakers may need to pass additional funding for DRF to meet immediate and long-term recovery needs. Without additional authorization, FEMA could be forced to curtail funding to state and local governments, leaving them to shoulder more of the burden of disaster recovery.
What Comes Next
As the 2024 storm season begins and governments are forced to respond to storm damage, the amount and availability of FEMA and state rebuilding grants remains essential to the ability of governments to address increasingly costly rebuilding demands. The situation is exacerbated by the rising cost of insurance for property owners, particularly in coastal states, as it threatens to push housing affordability further out of reach for both current owners and prospective buyers. In our view, a prolonged period of this trend could begin to affect the affordability, desirability, and rebuilding prospects of real estate in the most impacted areas. A major decrease in FEMA funding would only worsen the potential challenges to credit quality.
According to the Congressional Budget Office, between 1992 and 2005 federal disaster spending averaged about $5 billion annually; since then, annual spending has averaged $16.5 billion. If rising costs cause the DRF to fall into deficit and Congress does not appropriate additional funds, FEMA could revert to "immediate needs" funding, deprioritizing all but the most critical disaster recovery efforts. This happened in 2023, resulting in deferred funding for disaster recovery. Given the cost of disasters appears poised to rise—with no guarantee of federal assistance keeping pace—state and local governments could come under greater pressure to respond to the higher costs from their own budgets. In places where tax base growth has slowed due to rising cost of property ownership, the likelihood of an impact to credit quality increases exponentially.
This report does not constitute a rating action.
| Primary Credit Analyst: | Jane H Ridley, Englewood + 1 (303) 721 4487; jane.ridley@spglobal.com |
| Secondary Contact: | Sarah Sullivant, Austin + 1 (415) 371 5051; sarah.sullivant@spglobal.com |
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