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.

Keywords:

• Bond market
• debt financing
• fiscal shock
• local government
• natural disaster

Notes

1 We control for month fixed effects because we assume that the impacts of disasters differ by month. Nevertheless, the main findings are robust with the control of year fixed effects.

2 To remove the influences of outliers, the variable of bond yield is winsorized, i.e., the values below 1st percentile and above 99th percentile are replaced with the values at these two cutoffs.

3 For instance, Moldogaziev et al. (2019) use the type of municipal entity in their model, while we focus on counties only in the present study.

4 Again, all fiscal variables in the selection equation are scaled by total revenues of counties in a year.

5 The results for control variables are not reported because they remain unchanged from that as shown in Table 2.

Additional information

Notes on contributors

Jinhai Yu

Jinhai Yu is an Assistant Professor of Public Budgeting and Finance in the School of Public Policy at the University of Connecticut. His primary field of interest is public budgeting and finance. His research examines how policymakers allocate fiscal resources to improve government performance and accountability, focusing on budgetary politics and policy, debt management, and financial reporting and accountability. His research has been published in the National Tax Journal, Journal of Public Administration Research and Theory, and Public Administration Review, among others.

Zhiwei Zhang

Zhiwei Zhang is an associate professor of political science department at Kansas State University. His research interests focus on public finance and budgeting, public procurement and public private partnership, donors’ philanthropy behavior, and nonprofit finance and management. He has published in Public Performance and Management Review, Public Administration Quarterly, Applied Spatial Analysis and Policy, among others.