Drought is quietly pushing American cities toward a fiscal cliff, and is set to pose a greater risk to the $4 trillion municipal bond market than floods, hurricanes, and wildfires combined.Grist Tik Root 25 Oct 2025 The city of Clyde sits about two hours west of Fort Worth on the plains of north Texas. It gets its water from a lake by the same name a few miles away. Starting in 2022, scorching weather caused its levels to drop farther and farther. Within a year, officials had declared a water conservation emergency, and on August 1 of last year, they raised the warning level again. That meant residents rationing their spigot use even more tightly, especially lawn irrigation. The restrictions weren’t, however, the worst news that day: The city also missed two debt payments. Municipal bond defaults of any kind are extraordinarily rare, let alone those linked to a changing climate. But with about 4,000 residents and an annual budget of under $10 million, Clyde has never had room to absorb surprises. So when poor financial planning collided with the prolonged dry spell, the city found itself stretched beyond its limits. The drought meant that Clyde sold millions of gallons less water, even as it imported more of it from neighboring Abilene, at about $1,200 per day. Worse, as the ground dried, it cracked, destroying a sewer main and bursting another quarter-million dollar hole in the town budget. Within days of Clyde missing its payments, rating agency Standard & Poor’s slashed the city’s bond ratings, which limited its ability to borrow more money. Within weeks, officials had hiked taxes and water rates to help staunch the financial bleeding.
“There’s more to a drought than just the cost of water,” said Rodger Brown, who was mayor at the time and is now interim city manager. “It tanks your credibility.” Drought, of course, isn’t the only climate-driven disaster hitting places like Clyde. Hurricanes, floods, and fires are bankrupting cities across America. After flames ripped through Paradise, California, in 2018, the town’s redevelopment agency defaulted on some of its obligations. Naples, Florida, resorted to selling $11 million in bonds to rebuild its pier after Hurricane Ian in 2022. Earlier this year, the Los Angeles Department of Water and Power had a harder time raising money after massive fires swept the city. Kerr County, Texas, is in the midst of raising taxes after devastating floods in July. Each episode underscores how climate shocks once seen as exceptional are now straining local budgets.
But drought may be the most insidious of these threats. Compared to other types of disasters, it often hits everyone in a community, affects large areas, and can last months, if not years. There are also fewer defenses and relatively limited government assistance. Experts worry that drought could ultimately prove an enormous risk to the $4 trillion municipal bond market that underwrites everything from roads and schools to the water running through millions of taps. “I personally think this is a dark horse in the conversation right now,” said Evan Kodra, the head of climate research for the financial data company Intercontinental Exchange, or ICE. “It should be a bigger deal.”
This year alone has seen droughts in at least 43 states, from Vermont to California, affecting 125 million people. And ICE projects that more of the currently outstanding municipal debt will be located in areas prone to drought by 2040 than hurricanes, floods, and wildfires combined. The financial effects of prolonged water woes can mount in ways not seen in one-off events, said Jeremy Porter, the chief economist at First Street Foundation, a nonprofit climate research firm. “Drought is one of those things, if there is an impact, there’s a step-function impact,” he said. “You just don’t have the capacity to cover the risk.” Droughts are particularly difficult for cities to guard against. While building codes and insurance discounts can encourage homeowners to raise their houses, use wind-resistant shingles, or clear brush to slow fires, the options for making sure people have enough water are far more limited without curbing development. Also unlike with its headline-grabbing cousins, drought has a much weaker federal safety net when something does go wrong. The Department of Agriculture offers some aid to farmers, but there’s little funding for individuals or municipalities. The Federal Emergency Management Agency hasn’t issued a drought-related emergency or disaster declarationin the United States since 1993, despite states requesting aid. “There is no adapting to drought,” said Porter. “The federal government is probably not going to come in.”
As the planet warms, the dry conditions that sent Clyde into the financial abyss are only set to become more frequent and more intense. Intercontinental Exchange researchers found that even in a “best-case” climate scenario, drought, heat stress, and water stress will place billions of dollars of municipal bonds at risk by 2040. Under a worst-case situation, that number could reach hundreds of billions. While Clyde’s default was relatively tiny, municipal debt is the bedrock of everything from hedge funds to retirement accounts, making a string of such events potentially catastrophic for the economy. But well before dramatic rolling defaults, the financial pressures of drought will likely alter daily life in many regions. That’s already the reality for one community in Arizona, where the rush for water has turned into a years-long financial and political standoff. Rio Verde Foothills lies on the outskirts of Scottsdale. Residents there have been trucking water in from its larger neighbor ever since the unincorporated, “wildcat” development was founded in the early 2000s. The arrangement worked well until 2021, when a severe drought gripped the area, and Scottsdale decided it could no longer spare the dwindling resource. Cut-off residents of Rio Verde scrambled and eventually signed a $12 million contract with the state’s largest private water company, Epcor Utilities, to build a permanent supply line. Three years later, though, the feud continues. Scottsdale agreed to keep providing water through the end of this year while Epcor Utilities built new infrastructure. But construction is months behind schedule and Scottsdale is sticking to its deadline — leaving the foothills once again facing a cutoff. (Epcor remains confident this won’t happen.)
Even when the new line is connected, Rio Verde Foothills residents could see their water bills double or triple. Hikes like that are going to be a far wider concern across the West than outright disconnection, says Sara Fletcher, an environmental engineer at Stanford University who works on water scarcity issues. “Water prices are going up, and up, and up,” she said. “They are going to go up much faster than inflation for the past decade.”........read on https://grist.org/cities/