Local Fiscal Effects of Disasters

Local Fiscal Effects of Disasters

December 21, 2023
Local Fiscal Effects of Disasters
In addition to potential loss of life and property, natural
One reason that disasters impact some local government
disasters and other emergencies can cause negative fiscal
finances is local governments’ reliance on property tax
consequences for local governments. This can occur for a
revenue. According to U.S. Census Bureau data, in 2021
number of reasons. For example, damages may reduce
(the most recent year for which data is available) property
property assessments, thereby lowering property tax
tax revenue accounted for 30% of local governments’
revenue, or business closures may reduce employment,
collective general revenue. In contrast, that same year,
possibly reducing income tax revenue.
property tax revenue accounted for 0.8% of state
governments’ collective general revenue. (States generally
Given the localized nature of some disasters, such fiscal
rely more heavily on sales and/or income tax revenue than
effects can be felt acutely at the local government level.
do local governments.) Disasters, which often entail
Local governments are often responsible for providing
physical damage to homes and other structures, often
certain day-to-day services that play direct roles in citizens’
diminish property tax revenue.
lives. This may include duties such as providing public
safety and sanitation services in addition to responsibilities
Not all research concludes that natural disasters are entirely
such as operating a school system. When disasters threaten
harmful to local government finances, at least in the long
local government tax revenue, critical local government
term. A 2023 working paper from the Federal Reserve Bank
activities can face reductions, potentially causing further
of San Francisco found that while certain disasters caused a
fiscal problems, particularly as many local governments are
small immediate decline in employment and personal
required to balance their budgets.
income in an affected area, those declines turned into
growth over time as the area transitioned to recovery
The federal government primarily addresses local
activities. Similarly, the paper found that housing prices in
governments’ post-disaster fiscal needs through the
affected areas saw long-term increases beginning about five
Community Disaster Loan (CDL) program, which is
years after the disasters. The paper also noted that not all
administered by the Federal Emergency Management
localities reacted the same way to disasters. For example, it
Agency (FEMA). The CDL program provides forgivable
found that counties with more experience with disasters had
loans of up to $5 million to local governments to help them
larger increases in personal income than did those with less
operate essential municipal functions after presidentially
experience.
declared disasters under the Robert T. Stafford Disaster
Relief and Emergency Assistance Act (Stafford Act; 42
Recent Examples
U.S.C. §§5121 et seq.).
Several disasters in the United States in recent years have
led to shifts in local government finances. For example,
Potential Fiscal Impacts
some have forecasted that the August 2023 wildfires on the
Disasters can have broad impacts on local governments’
Hawaiian island of Maui will have significant impacts on
finances. A 2021 working paper from the National Bureau
Maui County’s tax revenue. Thus far, Maui County officials
of Economic Research found that, in the decade following a
have revised their FY2024 estimates for the county’s
hurricane, local government tax revenues and expenditures
property tax revenue—the county’s largest source of
decreased and costs related to debt increased. While the
revenue—from $535 million to $515 million and revised
paper found that the revenue and expenditure declines were
estimated total revenue collection downward by 3%. To
initially offset by various intergovernmental fund transfers,
make up the anticipated shortfall, Maui County’s mayor
major hurricanes ultimately reduced local government
proposed a series of budget cuts, including to the Maui Fire
revenues by 7% over the ensuing 10 years. Expenditures on
and Public Safety Department. Other observers projected
public services—including water, sewer, trash, and public
that Maui County’s Transient Accommodations Tax—the
transit—declined by 13% over the same period.
county’s second-largest revenue source, for which it
projected collecting $60 million for FY2024—would be
Some of the effects of disasters on local government
down about $5 million from projections each month
finances may vary by the type of disaster and geography.
through the end of FY2024.
For example, a 2022 study found that wildfires in California
actually increased both revenues and expenditures for local
Hurricane Ian made landfall in Florida in late September
governments, in part because the fires resulted in long-term
2022 and caused $112 billion worth of damage, making it
increases in local spending on recovery efforts and because
the costliest hurricane in state history. Some local
of a California law limiting property reassessments until
governments in Ian’s path continue to deal with the fiscal
time of sale. Nevertheless, the study noted that the “overall
repercussions of the storm. The City of Sanibel, which
impact of wildfires on municipal budgets is negative and
experienced significant damage, reported property value
substantial.”
declines of 31% year on year, resulting in a potential tax
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Local Fiscal Effects of Disasters
revenue decrease of $3.8 million for FY2023. (Sanibel’s
Congress has historically demonstrated an interest in
general revenue for FY2022 was $14.9 million, although it
examining modifications to CDLs’ statutory $5 million cap.
also received $25.0 million in fees and grants.) Florida’s
Congress has enacted legislation on four occasions to
state government has provided financial assistance to
suspend the $5 million cap in response to specific disasters.
Sanibel for recovery efforts, including $28 million in
The most recent such provision was in P.L. 116-260 in the
September 2023 to help the city cope with revenue loss.
116th Congress following Typhoon Yutu in the
Commonwealth of the Northern Mariana Islands. Large and
After Hurricane Harvey struck the Texas Gulf Coast in late
mid-size cities may have operating budgets many times
August 2017, Harris County—which includes Houston—
larger than $5 million, which could influence how
saw its property tax revenue growth slow. Before the storm,
effectively a CDL can support maintenance of even basic
Harris County’s property tax revenue—which comprises
government functions. The $5 million cap has not been
approximately 80% of county general fund revenue—had
adjusted (other than temporarily in the four specific
been steadily increasing (see Figure 1). But Harvey’s
instances noted) since it was established by the Disaster
impact on property tax revenue raised the possibility of
Mitigation Act of 2000 (P.L. 106-390). Given the sizeable
budget cuts, as Harris County officials estimated total
losses local governments may face following significant
FY2018 tax revenue to be less than FY2017 collections, the
disasters, Congress could consider whether to adjust the cap
first time total revenue had been forecasted below prior
on a nominal basis or to account for inflation. Conversely,
fiscal year levels since at least FY2014. (The budget cuts
given some findings that disasters can lead to economic
appear to have been mostly avoided as total tax revenue did
growth, Congress may find action unnecessary.
ultimately increase in FY2018.)
A number of bills have attempted to remove the cap on
Figure 1. Harris County, TX, Property Tax Revenue
CDLs. In the 107th Congress, introduced versions of the
and Growth Rate
Community Disaster Loan Equity Act of 2002 in both the
Tax Revenue Slowed After Hurricane Harvey Struck Midway
House and the Senate (H.R. 5523 and S. 3055, respectively)
Through FY2018
would have eliminated CDLs’ $5 million cap. In the 110th
Congress, the Whatever It Takes to Rebuild Act (H.R.
6750) would have also repealed the $5 million cap.
Congress may be interested in further analyzing local
governments’ fiscal recovery from disasters and to what
degree, if any, federal assistance plays a role. As noted,
some research has found that, due to factors including jobs
from increased construction activity and tax revenue from
rebuilt properties, some local governments do not
experience negative long-term fiscal outcomes after
disasters. Congress could mandate further study of this
phenomenon and the extent to which federal assistance
meets its intended policy goals.
Source: Harris County Annual Comprehensive Financial Reports,
https://auditor.harriscountytx.gov/Reports/Annual-Comprehensive-
Congress could also explore CDLs’ general efficacy. There
Financial-Report-Harris-County.
does not appear to have been a comprehensive evaluation
Note: Dollars in bil ions.
done for the CDL program, and the Government
Accountability Office has not published a report on the
Federal Programs and Considerations
program since 1996. In the 112th Congress, the Disaster
for Congress
Recovery Reform Act of 2012 (H.R. 6728) would have
FEMA’s CDL program is the primary federal tool for
required a newly formed Hurricane Sandy Rebuilding Task
Force to submit to Congress a report that included a
aiding local government finances following a presidentially
discussion of “the ability of the Community Disaster Loan
declared disaster under the Stafford Act. By statute (42
program … to effectively and expeditiously address
U.S.C. §5184(b)(1)), CDLs may be as large as 25% of a
budgetary impacts of Hurricane Sandy and other disasters
local government’s operating budget for the fiscal year in
upon local governments.” The bill was referred to the
which the disaster occurs, up to a maximum amount of $5
House Committee on Transportation and Infrastructure but
million. Regulations (206 C.F.R. §361(f)) state that CDLs
did not advance.
may be used only to “carry on existing local government
functions of a municipal operation character or to expand
Further Reading
such functions to meet disaster-related needs.” These
functions include financing police and fire protection,
• CRS In Focus IF11600, FEMA’s Community Disaster
revenue collection, hazard insurance, trash collection, and
Loan (CDL) Program: A Primer.
public facilities maintenance. CDLs may not be used for
capital expenses. (For more information on CDLs, see CRS
• CRS In Focus IF12128, FEMA’s Community Disaster
Report R47342, FEMA’s Community Disaster Loan
Loan Program: Loan Forgiveness.
Program: History, Data, and Issues for Congress.)
Adam G. Levin, Analyst in Economic Development Policy
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Local Fiscal Effects of Disasters

IF12557

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