Climate threats put cities at financial risk

Excerpt: ‘Anatomy of a death spiral’

In the financial death spiral feared by many experts, a local risk to overwhelmed homeowners can scale up to threaten the survival of entire cities. The spiral begins with a disaster, after which, un- or under-covered homeowners — unable to pay for the damage to their totaled homes, or unable to get the insurance coverage required to keep their mortgage — face foreclosure. Each foreclosure reduces property value and city tax revenue. Sales taxes decline as people leave or spend less — or as businesses themselves lose insurance or are destroyed.

At a certain point, this trend begins to undermine the tools that cities would ordinarily use to fight it. To rebuild infrastructure, cities can ordinarily raise money from investors by issuing municipal bonds, backed by city revenues like property and sales taxes. However, as investors begin to doubt a city’s ability to repay over the typical 30-year bond term, it can lead to higher interest rates and potential ratings downgrades from agencies like Moody’s or S&P Global.

Such a downgrade represents a life-and-death risk, particularly as a warming world brings future disasters — and the need for expensive infrastructure improvements to head them off. As mortgage and property tax rates fall, a natural response is for investors to charge more in interest to cities looking to repair damage or invest in adaptation —  raising loan costs as cities need money most.

Once a ratings downgrade happens, it becomes much harder for cities to raise money for infrastructure, accelerating the spiral. For example, in 2016, Moody’s downgraded Jackson, Miss., to junk bond status due to its failing water and sewer infrastructure — a move that worsened the underlying crisis. The Moody’s downgrade meant it cost the city more to borrow money, which added $2 million to $4 million to its debt-servicing costs. That drained even more of the funds needed for infrastructure investment, contributing to the 2022 drinking water crisis.

So far, such a downgrade has yet to happen for climate-related reasons. But experts say that’s coming.

“We’ve yet to see a major ratings agency downgrade of municipal bonds issued by Miami, but we know that’s the shoe that’s going to drop at some point,” said Dave Jones.