DROUGHTSDrought Is Quietly Pushing American Cities Toward a Fiscal Cliff
Municipal bond defaults of any kind are extraordinarily rare, let alone those linked to a changing climate. But drought is set to pose a greater risk to the $4 trillion municipal bond market than floods, hurricanes, and wildfires combined.
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.
“There’s more to a drought than just the cost of water,” said Rodger Brown, who was mayor at the time and is now interim city manager. “It tanks your credibility.”
Drought, of course, isn’t the only climate-driven disaster hitting places like Clyde. Hurricanes, floods, and fires are bankrupting cities across America. After flames ripped through Paradise, California, in 2018, the town’s redevelopment agency defaulted on some of its obligations. Naples, Florida, resorted to selling $11 million in bonds to rebuild its pier after Hurricane Ian in 2022. Earlier this year, the Los Angeles Department of Water and Power had a harder time raising money after massive fires swept the city. Kerr County, Texas, is in the midst of raising taxes after devastating floods in July.
