“The belief that FEMA is there protects every credit,” said Sarah Sullivant from S&P Global Rankings.
S&P Global Rankings
President Donald Trump signed an executive order Sunday establishing a task force to judge the Federal Emergency Management Agency as he floated the concept of abolishing a department that many within the municipal bond market consider key to stabilizing city and state credit rankings within the wake of natural disasters.
“FEMA goes to be a complete big discussion very shortly, because I’d somewhat see the states deal with their very own problems,” Trump said last week in an interview on Fox News.
Trump later suggested the federal government would proceed to send aid by allocating it on to states. “I feel we’ll recommend that FEMA go away and we pay directly — we pay a percentage to the state,” he said Friday visiting North Carolina, still struggling to get well from Hurricane Helene. “However the state should fix this. If the state did this from the start, it might have been quite a bit higher situation.”
Reimbursement by FEMA is commonly a protracted and arduous process and lots of states either front the cash from their very own reserves, or issue bonds to pay for certain damages. Despite the red tape, federal disaster aid has long been considered a key credit buffer for disaster-struck states and cities which have traditionally relied heavily on federal aid to ease the recovery.
“FEMA and federal disaster relief is a very vital source of funding for states and native governments, not only within the immediate aftermath but in addition years following the disaster,” said Sarah Sullivant of S&P Global Rankings. “The belief and historical track record of federal disaster relief funding supporting local government credit is a component of what keeps local government credit stable after a natural disaster.”
If cities and states must dip deeper into their very own coffers it could pressure liquidity within the short term and potentially “fiscal performance through the years,” Sullivant said.
Sullivant noted that disasters are growing more costly, increasing pressure on cities and states even when federal aid stays flat.
Emergency public assistance to state and native agencies has nearly doubled within the last decade, excluding the pandemic,” S&P noted in a Jan. 8 U.S. local governments outlook report. “As the associated fee related to climate-related disasters climbs, we expect that the balance of risk sharing between federal, state and native agencies will proceed to evolve, particularly around flood risk,” the report said.
Fitch Rankings, in a Jan. 14 report on the California wildfires, highlights that “as in past natural disasters, FEMA support might be crucial to maintaining fiscal stability.”
Trump’s executive order would establish the Federal Emergency Management Agency Review Council which is able to recommend changes and advise the president on next steps. “Despite obligating nearly $30 billion in disaster aid each of the past three years, FEMA has managed to go away vulnerable Americans without the resources or support they need after they need it most,” the order said.
The council might be made up of the heads of Homeland Security and Department of Defense and other “relevant agency heads and distinguished individuals and representatives from sectors outside of the federal government appointed by the President.” The non-federal members may have “diverse perspectives and expertise in disaster relief and assistance, emergency preparedness, natural disasters, federal-state relationships, and budget management.”
Congress would want to approve the elimination of the agency. Last week, Sen. Chuck Schumer, D-N.Y., called the proposal “dangerous.”