The increasing frequency and severity of weather events caused by climate change is affecting municipal bond markets and state and local finances. Four papers presented at the 14th Annual Municipal Finance Conference, co-hosted by the Hutchins Center on Fiscal and Monetary Policy in July 2025, detailed the consequences of wildfires, floods, and the transition away from coal. We summarize those four papers below.

Pricing Climate Risks: Evidence from Wildfires and Municipal Bonds

Woongchan Jeon, Lint Barrage, and Kieran James Walsh

With wildfire property damage reaching record levels, and the risk associated with such events projected to grow over time, quantifying the economic impact of wildfires is increasingly important. Woongchan Jeon, Lint Barrage, and Kieran James Walsh analyze the effect of rising wildfire risk on U.S. bond markets. They find that a one standard deviation increase in future wildfire risk leads to a 14 basis point increase in school district bond spreads, reflecting higher borrowing costs for local governments as a result of climate change. These effects are larger in districts with a higher minority population, as well as in districts that are relatively more dependent on local revenue for funding public services. The authors suggest that increased wildfire risk and the resulting rise in borrowing costs could reduce municipalities’ future fiscal space, which in turn could further increase borrowing costs in the most vulnerable communities.

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Up in Smoke: The Impact of Wildfire Pollution on Healthcare Municipal Finance

Luis A. Lopez, Dermot Murphy, Nitzan Tzur-Ilan, and Sean Wilkoff

Wildfires release large amounts of toxic particulate matter into the atmosphere, leading to increased emergency room visits for vulnerable populations, higher demand on health providers, and potential solvency issues for cash-strapped hospitals. Luis A. Lopez, Dermot Murphy, Nitzan Tzur-Ilan, and Sean Wilkoff analyze the effect of wildfire smoke on credit risk for healthcare providers, using the yield on municipal bonds issued by healthcare providers as a proxy for future insolvency risk. They find that wildfire pollution drives up borrowing costs for hospitals, estimating that healthcare municipal bond issuers will have to pay $270 million in additional interest expenses in counties with above-average levels of wildfire smoke. The effect of wildfire smoke on municipal bond yields is approximately 70% larger in counties with a high level of uninsured residents. Younger and privately insured patients, furthermore, are more likely to move from counties with high levels of wildfire smoke, which leaves a higher concentration of Medicare- and Medicaid-insured patients and further reduces hospitals’ profit margins. The authors also find that smoke from both in-state and out-of-state wildfires increases borrowing costs for healthcare providers, suggesting that inter-state cooperation is necessary to address the financial risks associated with these events.

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Rising Waters, Falling Taxes: The Impact of Hurricane Sandy on Property Tax Assessments in New York City

Wei Guo, Qing Miao, Yusun Kim, and Yilin Hou

Climate-related disasters pose a challenge to local governments, as floods, fires, and droughts can shrink the local tax base, lower property tax revenues, and ultimately limit local governments’ ability to fund public services. Using Hurricane Sandy as a case study, Wei Guo, Qing Miao, Yusun Kim, and Yilin Hou analyze local tax administrators’ response to climate disasters and the resulting distribution of the tax burden. They find that homes directly affected by Hurricane Sandy experienced a larger drop in property values than in assessed values, leading to a higher tax burden (i.e., tax payment relative to house price) compared to homes not directly affected by the hurricane. Homes located within flood zones that were not directly affected by the hurricane similarly experienced significant declines in property values without a proportional reduction in assessed values, also resulting in a higher tax burden. Finally, the authors estimate that relatively higher-value properties that were directly affected by Hurricane Sandy experienced a smaller decrease in assessed values—and therefore a larger increase in tax burden—than higher-value properties that were not directly affected by the hurricane, further suggesting that the property tax burdens following climate disasters disproportionately affect homes that suffered the most damage.

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Navigating Structural Change: Evidence from Municipal Finances and Bond Market Pricing During the Coal Transition

Marcelo Ochoa and Andreas C. Rapp

Structural economic changes—such as the replacement of coal-fired electricity generation with natural gas—affect local productivity, industrial composition, and job opportunities. Marcelo Ochoa and Andreas Rapp find that these structural transformations also affect municipal fiscal health and borrowing costs. They estimate that a decline in coal mining activity increases local government debt by 14% annually and drives up borrowing costs in coal-producing counties. The authors further show that the effect on borrowing costs is three times larger for long-term bonds, suggesting that investors view coal’s decline as a permanent, rather than temporary, transformation to the local economy. Counties with a greater potential for fracking or renewable energy production and a more diverse labor market were less severely affected by this large-scale change.

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For more on the Municipal Finance Conference, visit the event page.