Severe Weather Poses Array of Fiscal Risks to States and Localities
New research examines budget pressures from climate change-related utility infrastructure needs and insurance market shifts
As natural disasters such as hurricanes, floods, droughts, and wildfires become more frequent, severe, and expensive, they are significantly increasing state and local response and recovery costs and causing economic disruption that can lead to lost tax revenue. But the practical and fiscal effects of disasters are also felt in less obvious ways, including costly disruptions to utility services and the private insurance market.
Utilities, including water, wastewater, and power systems, face mounting maintenance and resilience demands amid changing climate conditions. Meanwhile private insurance companies, which pay a large share of recovery costs and are integral to the health of real estate markets, have begun to withdraw from some high-risk areas. And at the same time, growing uncertainty around the future of federal disaster and infrastructure funding that has historically helped offset some state and local recovery and rebuilding costs is exacerbating the pressure on state and local budgets.
Now, a new report, “The Dynamics of State and Local Government Budgets: Increased Financial Risks From the Nexus of Climate, Utilities, Insurance, and Changing Federal Policies,” commissioned by The Pew Charitable Trusts and authored by Dr. Jay Golden, director of the Dynamic Sustainability Lab at Syracuse University, examines how these trends interact and what they mean for states and localities. The study finds that these pressures, each significant on their own, are increasingly overlapping, creating fiscal risks that many state budgets were not designed to manage.
The report’s key findings are:
Growing needs and uncertain federal support increase demands for state funding
Public water and wastewater systems will face more than $1 trillion in capital investment needs over the next 20 years, according to federal estimates, mainly for aging systems and deferred maintenance. These maintenance backlogs only increase the likelihood of costly service disruptions and emergency repairs—pressures that can intensify after extreme weather events, especially when disasters leave customers unable to pay their bills or depress economic activity, reducing utility revenue.
The Clean Water and Drinking Water State Revolving Funds—which provide grants and low-cost financing for water infrastructure—remain a key funding source for water utilities. However, proposed reductions to the federal appropriations that support these programs could limit their capacity over time, increasing the pressure on state and local governments to help pay for water system maintenance and upgrades.
Further, these federal changes are coming at a time when states are already playing a larger role in supporting water utilities, including through direct financial intervention. For example, in 2018, Pennsylvania provided a $50 million funding package to help the Pittsburgh Water and Sewer Authority replace service lines as part of a settlement to address high lead levels in the city’s drinking water. Similarly in 2023, Michigan furnished the city of Highland Park with $20.3 million to help pay down the municipal water system’s debt.
States are also increasingly helping to finance or backstop significant water system capital and recovery costs tied to climate risks. In Massachusetts, the Deer Island wastewater facility near Boston underwent a multibillion-dollar upgrade to address sea-level rise. And after Hurricane Sandy caused billions of gallons of sewage overflows in New York and New Jersey, wastewater systems required significant public investment for repairs and improvements.
Reduced federal support may accelerate this trend. In Hillsborough, North Carolina, for example, the withdrawal of more than $7 million in federal resilience money has delayed progress on a sewer pump station project and left state and local officials exploring alternative funding sources.
Wildfire liability linked to power utilities creates fiscal exposure for states
As the number of wildfires ignited by power utility equipment has increased, so have states’ financial exposure and policy challenges. At the same time, more homes are being built in wildland-urban interface zones, increasing the risk of damage. As of 2020, about 44 million U.S. homes, roughly a third of the nation’s housing stock, were located in these areas.
These trends are prompting states to reevaluate who pays for which wildfire costs. Several states have passed or are considering legislation to limit utilities’ wildfire liability, while others are weighing the trade-offs of state-backed utility restructuring. In some cases, states have chosen to absorb significant financial exposure, such as when Hawaii committed $807 million of a $4 billion settlement after the 2024 Maui wildfire.
Insurance market shifts increase pressure on state “residual insurance” programs
As major home insurance providers reduce their presence in high-risk markets, states have increasingly turned to residual, or “insurer of last resort,” programs—government-created entities that offer insurance to residents who cannot find coverage in the private market. Residual insurance programs, which now operate in most states, have grown dramatically in size and exposure in recent years. For example, in just the four years from 2018 to 2022, enrollment in California’s FAIR plan more than doubled from 123,000 policies to 261,000 policies, with insured value increasing fourfold from $50 billion to $210 billion.
This scale of growth creates additional risk for states. Although residual plans such as private insurance are designed to be self-sustaining, paying out losses from the premiums they collect, when losses exceed plan reserves, states must find a way to make up the difference. In California, when the FAIR plan fell $1 billion short after the 2025 Los Angeles wildfires, the state did what many states do in these situations to raise the needed revenue: It imposed an assessment on private insurers, putting further strain on the private market. With a large share of disaster losses going uninsured and premiums rising in many markets, pressure is likely to grow on residual and private insurance plans.
States should assess their exposure and plan across disaster risks
Previous Pew research has urged states to estimate and plan for future disaster costs and to assess the condition of utility infrastructure and prioritize deferred maintenance. “The Dynamics of State and Local Budgets” report provides additional recommendations for how states can address these overlapping challenges, including:
- “Identify, connect, and prioritize insurance programs and utility systems’ climate-related fiscal risks across, including for water and power.”
- “Engage thought leaders, stakeholders, and communities in assessing and addressing these risks.”
- “Leverage data, modeling, and emerging tools, such as artificial intelligence and machine learning, to improve analysis and decision-making.”
- “Develop comprehensive resiliency plans to support better management of long-term fiscal and infrastructure risks.”
Fatima Yousofi is a senior officer with Pew’s state fiscal policy project and Peter Muller is a senior officer with Pew’s managing fiscal risks project.
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