S&P, Kozlik warn FEMA changes would pressure some issuers

Bloomberg News

Major cuts to the U.S. Federal Emergency Management Agency could pressure some bond issuers, particularly in areas that have become increasingly prone to natural disasters, S&P Global Ratings and Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities, warned.

Kozlik said he was particularly concerned about issuers in the Southeast on the Gulf Coast and along the Atlantic Ocean, where the majority of disaster declarations have occurred between 2015 and 2024.

"The anticipated policy shift introduces uneven, localized risks for certain municipal bonds, as reduced federal support may increase financial strain on a small but unpredictable number of issuers," Kozlik said in a written commentary released Monday.

"For municipalities and states with more significant exposure to disasters and limited ability to absorb financial and economic costs, we could see material credit weakening in the absence of federal support for disaster recovery," said S&P in its report released earlier this month.

States with frequent hurricanes, wildfires, floods will have much more risk, Kozlik said.

Among the credit impacts S&P projected are liquidity and reserve withdrawals following disasters, the need to increase reserve levels to cover possible capital repairs, unreimbursed destruction of property and associated tax revenue decline, the need for states to fund property insurance programs where alternatives are unavailable and population decline.

While S&P said many states are in reasonable financial situation to handle natural disasters, in the long run the loss of the guarantee of FEMA help leads to an uncertainty that poses financial and managerial challenges.

What will happen to FEMA in general and its Disaster Relief Fund in particular remains unclear. President Donald Trump has spoken of either eliminating FEMA or phasing it out. However, the latest U.S. House of Representatives version of the fiscal 2026 budget would retain FEMA, albeit with less funding.

Kozlik told The Bond Buyer what happens to FEMA remains to be seen, but changes to it could have major significance for its credit impact.

Kozlik expects FEMA will survive, but over time its role will be greatly reduced.

Trump has formed a committee to recommend changes to FEMA by the end of the year, Kozlik said.

S&P said the federal government is looking into setting higher damage thresholds for FEMA assistance and this could lead to credit pressure for some bond issuers.

Federal spending on FEMA disaster relief has generally gone up since 2010, in what some say is a response to climate change.