(Bloomberg) — The devastating wildfires in Los Angeles are unlikely to have an impact on the bonds of local governments as US officials promise financial support from the Federal Emergency Management Agency, according to a report from FHN Financial.
“While the personal losses and community impacts are unimaginable, so far we expect municipal bondholders will be spared from the same magnitude of damages,” FHN’s Abigail Urtz said in a report.
The influx of aid and insurance payments has historically prevented natural disasters from driving local governments to default on their debt even in cases where the damage has been significant. That appears to be likely again, with the Biden administration issuing a disaster declaration that will allow for FEMA funding to be disbursed.
Typically governments have to dip into their own resources to immediately respond to disasters, but they can expect to receive FEMA money to recoup those costs.
Separately, Moody’s Ratings analyst Denise Rappmund said in a statement that the fires highlight the “intensifying risk that wildfires pose to significant areas” of California. “It is too early to evaluate potential impacts to property valuations or other credit implications for individual local governments,” she said.
Still, the longer-term risk is that people leave the area, the FHN report noted. “When communities don’t rebuild back to the same level because of fear of future risks — leading to fewer people and businesses returning and/or at a concession to prior values — the tax base can suffer,” the report said.
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