As federal disaster aid slows, hundreds of fiscally vulnerable local governments frequently impacted by climate disasters could face higher recovery costs and greater borrowing pressures, said an investor and a researcher.

Between 2016 and year-to-date (YTD) 2025, on average, more than 700 unique designated areas have received climate-related federal disaster declarations each year, peaking in 2024 when over 1,000 unique counties, parishes, and municipalities were designated for assistance, according to an analysis of Federal Emergency Management Agency (FEMA) data by Debtwire Municipals (Figure 1). 

Moreover, there are 770 counties and parishes (or equivalent areas defined as designated areas by FEMA) that have experienced five or more active disaster years requiring federal interventions since 2016, showing that these areas are facing repeated threats and escalating costs of climate-related incidents, from hurricanes along the Gulf and Atlantic coasts to wildfires in the West. (Figure 2).

Figure 1: Number of unique designated areas that received a climate-related federal disaster declaration over the 2016 to YTD 2025 period

This comes at a time when it has become very clear that federal aid is probably not as reliable as it once was under this new administration, and it does pose a risk to localities, especially those that are hard hit by disasters frequently, according to Dora Lee, partner and director of research at Belle Haven Investments.

Qing Miao, an associate professor and disaster policy researcher at the Rochester Institute of Technology, said that the increased denials of disaster aid requests and longer review times, along with the ongoing federal government shutdown, will significantly delay the recovery process for local governments.

According to Miao, the consequences of the slowdown in federal funding extend beyond recovery aid, such as FEMA’s decision earlier this year to suspend one of its major mitigation grant programs, Building Resilient Infrastructure and Communities.

Miao added that the loss of such programs will have huge implications for how communities can access federal resources to support local mitigation or resilience-building activities, widening existing inequities between well-resourced and under-resourced areas.

Changing assumptions

When assessing municipal credits, the climate disaster component has slowly crept up in terms of the importance of what investors look at, Lee said.

“We, as a firm, have largely stayed away from names that have repeatedly been, or are at risk of, climate events,” Lee noted.

However, Lee said, risk assessments are nuanced, as in some cases, local governments’ efforts to harden assets or diversify economies mitigate long-term exposure. But this means the more prone a credit is to weather events, the stronger the other metrics have to be, she added.

Lee said similar divides are visible at the state level, where large states like Florida and Texas may have the resources to inject funding quickly after major storms, smaller Gulf Coast states like Louisiana and Mississippi face greater constraints.

Meanwhile, Miao pointed the federal disaster aid funding mechanism already disadvantages poorer areas, and the recent slowdown of funding could further widen the existing disparities between municipalities. Under FEMA’s Public Assistance (PA) program, the agency’s largest disaster aid mechanism, the federal government typically covers 75% of eligible project costs, leaving state and local governments responsible for the remaining 25%. This cost-share requirement already creates a lot of inequalities, because under-resourced local governments often cannot apply for large grants simply because they cannot afford the required local match, Miao noted. “As a result, much of the funding from FEMA’s PA program ends up flowing to more affluent communities with the fiscal capacity and administrative staff to apply for and manage large projects.”

Now, with federal aid increasingly uncertain, if localities don’t have this funding to fix their infrastructure, then they will probably have to borrow or issue bonds to do self-financing, said Miao.

That shift could exacerbate fiscal differences between municipalities as wealthier counties with higher credit ratings can issue debt at lower cost, while smaller or fiscally weaker localities may face higher borrowing costs or be unable to borrow at all.

Another issue that could directly affect municipal finances is migration, said Miao.

“When areas are repeatedly hit and can’t recover, people may relocate…population mobility then becomes part of disaster dynamics,” she said.

Still, while climate disasters can create financial strain for local issuers, they have not yet resulted in widespread municipal bond defaults, Lee noted. With climate events, the main concern is headline volatility and potential rating risk, as, despite idiosyncratic cases like Paradise Redevelopment District in California, there hasn’t been a general obligation default tied to climate events.

Risk concentration

Lee said the uneven fiscal capacity of states could amplify the impact of reduced federal assistance as “some of the hardest-hit and most disaster-prone areas tend to be in states that may not have the same level of financial robustness.”

As shown in Figure 2, the burden of repeated disasters falls heavily on a handful of regions, with North Carolina recording the highest number of areas with at least five active climate disaster years since 2016, covering all 100 counties in the state as well as the Eastern Band of Cherokee Indians.

Similarly, all 78 municipalities of Puerto Rico, as well as all 67 counties in Florida, received climate disaster declarations in at least five of the last 10 years.

Figure 2: Top states by number of counties/parishes with five or more years of active climate disaster declarations over the last ten years

Limiting the analysis to municipalities in populous areas (≥100,000 residents as of 2024 per US Census data) yields 150 counties and parishes, with Florida (37) and North Carolina (29) accounting for a combined 66. They are followed by 16 such counties in South Carolina, 12 parishes in Louisiana, 11 counties in California, and 10 counties in Texas. These top six states make up 77% of the designated areas with more than 100,000 residents that needed federal disaster assistance in five or more of the last 10 years.

Figure 3: Top states by number of areas with five or more years of active natural disaster declarations since 2016, and with an estimated population of over 100,000

Regardless of the dependability of aid, there is a high correlation between places that frequently experience disasters and weaker economies or slightly weaker financial profiles, Lee noted. That relationship is self-reinforcing.

“If a government is constantly responding to storm damage and rebuilding, that takes time and resources away from growing the economy, investing in schools, and maintaining infrastructure,” said Lee.

This analysis identified 23 counties and parishes nationwide with populations above 300,000 that received at least 15 FEMA disaster declarations across five or more active disaster years since 2016 (Table 1). Among the major population centers, Los Angeles County, CA, stands out with 31 total declarations across eight active years, followed by Riverside County, with 16 declarations over seven active years, even as 17 Florida counties dominate the rest of the list.

Large Florida counties such as Hillsborough, Orange, Duval, Pinellas, Lee, and Pasco counties each recorded between 16 to 19 declarations during the period, while Manatee County logged 20, the highest in the state. Outside the Sunshine State, Louisiana’s East Baton Rouge, Jefferson, and Orleans parishes each received 18 to 19 declarations, highlighting the Gulf Coast’s repeated exposure.

Washoe County, NV, is the only inland county outside the Southeast or California to appear on this list, primarily driven by wildfire and emergency management events.

Table 1: Counties with Population ≥300,000 and High Frequency of FEMA Disaster Declarations (2016–YTD 2025)

Finally, Miao noted that while recovery aid is essential, it has also long raised concerns about what economists refer to as a moral hazard.

“If you only provide aid after people are hit by disasters, it creates expectations for future bailouts and reduces local incentives to invest in mitigation,” she said.

Now with federal support becoming less predictable, Miao added, it will be interesting to see whether localities will shift toward greater investment in mitigation or continue relying on aid that may no longer arrive when it’s needed most.