Local Debt Financing in the Shadow of Storms: Disrupted and Destructed?

Abstract

Natural disasters often pose sudden and drastic organizational environmental shocks for local governments, leading to administrative disruptions and public finance risks. In the short term, disasters may disrupt debt financing. The disaster shocks may increase the costs of debt if they hurt revenue bases or decrease the costs of debt if generating “constructive destruction” to the local economy. Using a panel of U.S. County governments between 1999 and 2019, we find that weather-related disasters decrease the likelihood of issuing general obligation bonds and increase the probability of issuing revenue bonds and short-term bonds in the subsequent 6 months. Conditional on borrowing, disasters increase the bond yields for short-term bonds. Thus, natural disasters may disrupt the timing of local government long-term borrowing but do not necessarily destroy public finances.