How Can Disasters Damage Local Budgets?, with Yanjun (Penny) Liao

Notable Quotes

• Fiscal health of local governments affects the well-being of communities: “If revenues fall short to cover expenditures, the local government might have to raise additional taxes or cut down on services they provide … [T]his change could cause some residents to leave, or it might make it harder to attract new people to move in. The local government’s fiscal health is closely associated with the long-term prospects of the community.” (2:44)
• Floods and hurricanes hurt the fiscal health of local governments: “Spending increases in the five years following a disaster … On the other hand, we see that tax revenues decreased in the long run on average. This could reflect broader adjustment in the local economy or housing market.” (14:25)
• Negative effects of weather disasters are more pronounced in low-income counties: “Lower-income or socially vulnerable counties [may be] less able to absorb the disaster damage, because they don’t have as many financial resources to act as a buffer. They might not have the same ability to raise additional funds, because the underlying economy or the local housing markets might not be as robust.” (19:01)

Top of the Stack

• “The Fiscal Impacts of Wildfires on California Municipalities” by Yanjun (Penny) Liao and Carolyn Kousky
• “Extreme Weather Events and Local Fiscal Responses: Evidence from U.S. Counties” by Qing Miao, Michael Abrigo, Yilin Hou, and Yanjun (Penny) Liao
• “The Economic Incidence of Wildfire Suppression in the United States” by Patrick Baylis and Judd Boomhower
• “Social Vulnerability to Environmental Hazards” by Susan L. Cutter, Bryan J. Boruff, and W. Lynn Shirley
• Devotions by Mary Oliver
• Silent Spring Revolution: John F. Kennedy, Rachel Carson, Lyndon Johnson, Richard Nixon, and the Great Environmental Awakening by Douglas Brinkley

The Full Transcript

Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I’m your host, Daniel Raimi. Today we talk with RFF Fellow Penny Liao.

Along with several coauthors, Penny recently published two fascinating journal articles on how disasters such as wildfires, hurricanes, and floods affect local government finances. In today’s episode, Penny will help us understand how these disasters affect local tax revenues and service provisions, why that matters, and what role states and the federal government play in supporting local communities affected by these disasters. As climate change increases the risks of damaging weather events, we’ll also talk about how the effects of risk can vary across different types of communities, potentially exacerbating existing inequalities. Stay with us.

Penny Liao, our colleague here at Resources for the Future. Welcome back to Resources Radio.

Penny Liao: Thank you.

Daniel Raimi: We’re going to dive right in today and talk about two papers that you’ve recently coauthored that look at how certain disasters, including wildfires and other extreme weather events, affect local fiscal conditions. First, can you help us understand the term “local fiscal issues” and why it matters for communities?

Penny Liao: Local fiscal issues are issues related to local government budgets. There are two sides to local government budgets: revenues and expenditures. Revenues come from taxes that people are familiar with—property tax, sales tax, and a number of charges and fees for specific functions.

In return for collecting this revenue, local governments deliver a range of essential services to local residents, including education, policing, building and maintaining infrastructure, et cetera. When we think about local fiscal issues, a key question we often consider is whether the budget is balanced or revenues are sufficient to cover expenditures.

The fiscal health of the local government is important for residents’ well-being. If revenues fall short to cover expenditures, the local government might have to raise additional taxes or cut down on services they provide. For example, the city of Fairfield in Alabama had to stop bus services in 2016 when it was in serious financial trouble. You can imagine that stopping important services like this or raising taxes could have a negative impact on residents’ lives.

In addition, if the local government starts raising taxes or cutting back on services, this change could cause residents to leave or make it harder to attract new people to move in. The local government’s fiscal health is closely associated with the long-term prospects of the community.

Daniel Raimi: I think about this all the time, because I live near Detroit, Michigan. Detroit is a place that has struggled with fiscal issues for some time and continues to do so in a way that has significant effects on residents, especially when it comes to education, crime, and infrastructure.

Hopefully that gives people a bit of a flavor of these issues and why they matter. Let’s talk first about a paper that you published jointly with Carolyn Kousky, another RFF affiliate, that focuses on wildfires in California. Can you tell us a little about what you studied in that paper and what you found about how wildfires affect local public finances in that state?

Penny Liao: In this study, we examined the budgets of municipalities in California after they were hit by wildfires between 2000 and 2015. In particular, we looked at the different components of the budget to see how they changed in the five years following a major wildfire event, which we defined as an event where at least 10 percent of the population was exposed to the wildfire.

Overall, we find that the impact of wildfires on the budget balance is negative. We looked at this measure called excess revenues, which is total revenues minus total expenditures. We find that excess revenues decreased by an amount that is about 10 percent of the budget. That means that it becomes harder for municipalities to balance their budgets.

We also looked at whether the municipalities run a deficit and find that the probability of having a deficit goes up by 25 percentage points. That’s a sizable effect. Then we tried to break down this overall effect on the budget balance by looking at individual components in the budget. We find that this effect is mainly driven by a large increase in expenditures.

The largest increase is in the category of community development, where there’s a 40 percent increase in spending. We also see substantial increases in public safety and transportation, and these are likely associated with the need to recover infrastructure. We also find large increases in fire and disaster preparedness.

When we look at the revenue side, we did not find a negative impact, which is what we might expect if wildfires destroy part of the housing stock that never gets rebuilt, or if people expect that there will be more wildfires and start moving away.

We see evidence of an increase in functional revenues starting from the year following the fire. This type of increase in functional revenues typically requires voter approval, which is why we think there is a delay. This could mean that the local government is trying to collect additional revenues to fund the higher spending.

In general, we find that revenue impacts are not negative. Part of that could be that a lot of the wildfire damages are covered by insurance and that the fires during our sample period of 2000–2015 were milder than some of the more recent fires that we’ve seen since the 2017 wildfire season.

Daniel Raimi: You mentioned functional revenues at one point. Can you define that term for us?

Penny Liao: Functional revenues are revenues that are specifically associated with specific functions.

Daniel Raimi: So, revenue that’s dedicated for roads, public transportation, or something like that?

Penny Liao: Yes.

Daniel Raimi: Okay, great. I’m interested to hear about how these findings might vary across communities that have different socioeconomic characteristics—higher-income or lower-income communities, or communities with different racial demographics. Can you speak to that?

Penny Liao: In this particular paper, we did not explicitly look at how these effects differ based on socioeconomic characteristics. We did look at whether different demographic groups moved in following a major wildfire event, and we found that there’s an increase in Hispanic home buyers.

This could mean that Hispanic populations might disproportionately bear the consequences of local fiscal adjustments following the fire, and they could potentially face additional future wildfire risk. But, we need a more in-depth analysis to understand the cause of these demographic changes.

Daniel Raimi: Do you know if there tends to be lower property values in places that experience wildfire after a wildfire event? Could that explain some of what’s going on?

Penny Liao: A study in Colorado examined whether housing prices are affected after a wildfire, and the study found that wildfires do affect housing prices. There is a negative impact on housing prices for a few years after the fire, especially if you can see the scarring effect of the fire, but those effects tend to be short lived.

Daniel Raimi: Can you talk about how local government costs associated with wildfire compare to the funds that state and federal governments spend on these types of issues with regard to wildfire prevention, suppression, and then response to a fire after it occurs?

Penny Liao: This is a great question. The vast majority of wildfires start in wildlands that are either federal land, controlled by the state, or they fall under federal or state jurisdiction. The federal and state governments bear most of the costs of forest management for fire prevention or fire suppression. Local governments are responsible for firefighting if the fire comes to their jurisdiction, but a lot of times, federal and state efforts can prevent that from happening in the first place.

The big picture is that, while local jurisdictions experience negative fiscal impacts from wildfires and incur some firefighting costs when wildfires come to their jurisdiction, they do not bear most of the costs associated with fighting wildfires.

There is an interesting paper by Judson Boomhower and Patrick Baylis on the economic incidence of wildfire suppression in the United States. That’s my go-to source if people are interested to learn more.

Daniel Raimi: That’s great. We’ll have a link to that paper in the show notes, and we had Judd Boomhower on the show a couple years ago to talk about public-safety power shutoffs in California and their connection with wildfire.

One other question that pops to mind is the role of federal or state disaster aid for local communities that experience wildfire. When the federal government or the state government comes in and provides financial support to these communities, do they help pay for things like wildfire preparedness at the local level to offset some of those local government costs?

Penny Liao: For a long time, federal government transfers in disaster aid have been more focused on post-disaster repairs. So, yes, they do support some post-disaster rebuilding activities. But for wildfires, this kind of federal support has become more prominent in recent years. In the years that we studied, the fires were relatively more mild, and at least in our study, we did not see a remarkable increase in intergovernmental transfers.

Daniel Raimi: We’re going to move on in just a second and talk about another paper that you coauthored on extreme weather, such as floods and hurricanes. Is there anything else on this wildfire paper that you’d like to mention before we move on?

Penny Liao: It would be interesting to examine the effect of more recent fire seasons, given that there is a whole regime switch in terms of the severity of the fire. The increased severity of wildfires could also have different effects on the general fiscal health of governments. For example, during the years we study, there was no case where government bonds had been downgraded in ratings, but it has happened since then, with the 2017 fires. There are a lot of interesting, new dynamics to study in future research.

Daniel Raimi: That’s especially true as climate change exacerbates these extreme wildfire risks.

Speaking of climate change and exacerbating risk, let’s talk about extreme weather. We have another paper by you and several coauthors called “Extreme Weather Events and Local Fiscal Responses: Evidence from US Counties.”

In this paper, you and your coauthors examine how floods and hurricanes affect local fiscal conditions. Can you give us a bit of an introduction to that paper and then talk about the key results?

Penny Liao: This is joint work with Qing Miao at the Rochester Institute of Technology and two other coauthors. In this paper, we conducted a similar analysis, but we looked at county government budgets across the United States and how they responded to hurricanes and floods.

We find similar results on the spending side as we do in the previous paper—that spending increases in the five years following a disaster. We also see an increase in intergovernmental transfer in this case, which suggests that at least part of the increase in spending is being funded through transfers from higher levels of government.

On the other hand, we see that tax revenues decreased in the long run on average. This could reflect broader adjustment in the local economy or housing market. Our results also suggest that hurricanes have larger impacts than floods, which could be because hurricanes cause more extensive damages. We see that counties take on significantly more debt following a hurricane but not following a flood.

Daniel Raimi: What types of services do counties need to provide that requires them to take on that debt after such an event?

Penny Liao: The increase in spending is of a similar nature as what we see in the wildfire paper: there’s damage to local infrastructure, or they might need to support local rebuilding. There’s a lot of additional expenditure in those regards.

Daniel Raimi: Similar to the wildfire paper, this paper runs through 2015. Is it reasonable to think that this analysis might also be missing more recent events that could have been exacerbated by climate change?

Penny Liao: Yes. It does not include Hurricane Harvey in 2017, for example, or the hurricanes after that.

Daniel Raimi: Did you and your coauthors find any effects or important issues that varied across counties that had different socioeconomic characteristics, in terms of income or any other variables? If that’s the case, do you have any hypotheses as to why these effects might be present?

Penny Liao: The results I just described are the average effect across all the counties, but it actually masks a lot of heterogeneity. In this study, we looked at a broad enough set of counties for us to try to unpack the heterogeneity by comparing effects in high- versus low-income counties. We find that there are significant differences.

In higher-income counties, we see a much larger increase in local government spending. In lower-income counties, we see a small change in spending in the same direction, but it’s not statistically significant. This difference in spending could be because high-income counties have a greater ability to raise additional funds to support the increase, while lower-income counties might not have the same capacity. They might have to cut down on other services to keep the spending from increasing too much.

Our other findings are consistent with this idea. For example, we find that tax revenues increase in higher-income counties, while tax revenues decrease in lower-income ones. Higher-income counties also get more intergovernmental transfers, but lower-income counties do not.

As a result, we see that low-income counties end up borrowing more. For higher-income counties, there was actually a moderate drop in debt. We also looked at differences along the dimension of social vulnerability, using the popular composite index of social vulnerability developed by Susan Cutter and her colleagues.

We see a similar divergence when we compare high– versus low–social vulnerability counties, which is not surprising, because social vulnerability is correlated with income. The big picture is that negative effects of natural disasters on local fiscal conditions are more pronounced in low-income or socially vulnerable counties.

While we cannot say definitively what the reason for these differences is, I believe the primary reason for these differences is likely to be that lower-income or socially vulnerable counties are less able to absorb the disaster damage, because they don’t have as many financial resources to act as a buffer. They might not have the same ability to raise additional funds, because the underlying economy or the local housing markets might not be as robust.

We do find a difference in intergovernmental transfers amongst these groups, suggesting that institutional factors might also play a role here. Recent studies found consistent evidence that suggest that disaster-aid programs or even the way that disaster declarations are set up might favor wealthier communities. This could potentially explain why, in higher-income counties, we see a larger increase in intergovernmental transfers. They’re more likely to benefit from these programs.

Daniel Raimi: Can you talk a bit more about why that might be the case? How is the distribution of these intergovernmental transfers that follow, for example, a presidential declaration of a disaster, affected by local incomes?

Penny Liao: A lot more work needs to be done in this area to discover all the mechanisms, but one mechanism is that disaster declarations, for a long time, were based on a per capita damage indicator. The per capita damage indicator doesn’t necessarily reflect how much property value or asset value on the ground gets destroyed. You can imagine that in wealthier communities, there are more valuable assets on the ground that get damaged. If we continue to use that indicator, the criteria might favor these higher-income communities.

The other thing is that a lot of the post-disaster recovery programs or programs that help communities to build resilience require technical capacities from the community so that officials can lay out the plan of what to do. That requires a lot of technical knowledge that lower-capacity communities might not be able to put together.

There is also a cost-share requirement where local governments generally are expected to pay for 25 percent of a project, while the federal government will pay for 75 percent, and that cost-share could also be a heavy burden for lower-capacity communities.

Daniel Raimi: I’d love to point people to Figure 2 of this paper, where there’s a map that identifies the counties that have received different numbers of presidential disaster declarations following floods and hurricanes. You see this interesting concentration around New York City, Long Island, Boston (the northeast population centers), and places like the Gulf Coast and the Carolinas, where we see a lot of hurricane activity. There’s also a surprising concentration of counties in North and South Dakota, Seattle, and even parts of Southern California with disaster activity. Those places have experienced many disasters that I certainly wouldn’t have expected them to.

Penny, one thing that I’m wondering about with these presidential disaster declarations is whether there could be any politics involved. If it is in the hands of a president to make this decision, could they be making decisions to benefit their constituents or the base of their party, for example?

Penny Liao: In general, the first step to making a presidential declaration is that the governor will put together a request, and then the Federal Emergency Management Agency (FEMA) will recommend whether to make the declaration and in which program. Then, the president will make a decision. This process involves the state government, FEMA, and the president.

There is a paper looking at factors influencing presidential declarations. It turns out that, yes, several factors are at play, including whether it’s a presidential election year and what the party alignment is between the governor and the president.

In earlier years, FEMA was under the oversight of several congressional committees. The party affiliation of congressional committee members and which state they’re from also mattered in approving the emergency declaration. There are a few political-economy factors at play, according to this paper.

Daniel Raimi: That’s really interesting and slightly disturbing; thank you for sharing.

I’d love to ask you now about your current stream of work. I’m interested to know whether you’re doing additional work on local fiscal issues, and, if so, what you’re exploring along these lines.

Penny Liao: My most recent work related to fiscal issues is just coming out in Nature Climate Change. This work is led by Jesse Gourevitch at the Environmental Defense Fund and includes folks at several other organizations, such as the Federal Reserve and the First Street Foundation.

We quantified the extent to which flood risk is underevaluated in US housing markets, specifically by how much homes with flood risk are overpriced or overvalued compared to expected damage. For local governments, this is a fiscal risk because property values may adjust in the future to reflect the proper risk level. In the case that they do, their tax base will take a hit.

To figure out which communities are most exposed to this overvaluation risk, we identified the municipalities that not only have high overvaluation, but that are also highly dependent on property taxes for revenues. That’s the paper—we wanted to connect overvaluation to the fiscal health or the potential fiscal risks that different municipalities are facing.

Another piece of work I want to flag is with my RFF colleagues Hannah Druckenmiller, Margaret Walls, Sophie Pesek, and Shan Zhang. We study the Coastal Barrier Resources Act, which removes federal development incentives, disaster aid, and flood insurance in certain designated coastal areas with the intention to curb overdevelopment in risky areas.

We have fascinating findings on the implications of this policy on the local property tax base, which I think is informative for local communities that are grappling with this tension between limiting exposure to disaster risk while keeping the property tax base strong. We will have a working paper out pretty soon.

Daniel Raimi: I look forward to reading it, and I imagine all of our listeners will, as well.

Well, Penny Liao, thank you so much for sharing all this work. You’ve got a lot on your plate, and it’s impressive that you can manage so many research streams at once. I have to take some pointers from you.

Now, let’s go to our last question, which we ask all of our guests. Can you recommend something that you’ve read or watched or heard that you think is really great and you think our listeners would enjoy?

I’m actually going to make a recommendation today, too, which is a new book by the historian Douglas Brinkley. The book is called Silent Spring Revolution: John F. Kennedy, Rachel Carson, Lyndon Johnson, Richard Nixon, and the Great Environmental Awakening. It’s a long book—800 pages or so. I am going to dig into it sometime soon.

The reason I actually learned about this book is because a friend of mine was reading it and came to a passage where they quote me. There’s a long quote from the book that I wrote in 2017 about fracking. The author Douglas Brinkley refers to me as a historian. He says, “Historian Daniel Raimi writes … ” blah, blah, blah, blah. It made me really happy, because I’m definitely not a historian, but a great historian thinks I’m a historian, which makes me happy.

Penny Liao: Good job getting another hat.

Daniel Raimi: Yeah, I know. Thank you. I need to get a plaque for my wall or something like that. But how about you, Penny? What’s at the top of your reading stack?

Penny Liao: I recently finished a collection of Mary Oliver’s poems. The book is called Devotions. It’s not a new book. I think it came out in 2017. She was known for taking long walks in the woods, and a lot of her poetry is about her connection with the natural world, the creatures in it, and her meditations about how this connection influenced her as she went through life. I find it to be a wonderful read, so I want to recommend it.

Daniel Raimi: That sounds wonderful. Thank you so much, Penny, for coming on the show and sharing your work with us. It’s been fascinating, and we appreciate it.

Penny Liao: Thank you so much, Daniel.

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