Projects

Measuring the relative financial vulnerability of municipal governments to tropical natural disaster

End Date: 1/31/15

Abstract

Local governments share a burden in financing both emergency operations and cleanup and debris removal from tropical natural disasters. In recent studies conducted by project investigators, it was shown that while county (parish) governments did not find significant differences in financial health changes based on population of the county, case study analyses from these projects suggested that fiscal health of municipalities varies greatly by size and storm vulnerability. With the likely reduction in future federal government reimbursement levels, local governments will have to become more financially resilient. This research seeks to identify how vulnerable these municipal governments are to future tropical natural disasters and identify financial thresholds needed for them to be financially resilient to increased emergency and debris removal costs from future storms.

The project calculates existing financial health ratios of coastal municipal governments in Gulf Coast counties. These ratios are then adjusted based on projected out-of-pocket costs to local governments from a future tropical natural disaster scenario and compared to existing rules of thumb for fiscally healthy governments. The financial ratios are then applied to a parametric model to test for key factors driving changes in fiscal health and to understand how they differ from existing county government studies.

Finally, two case study municipalities in Alabama and Mississippi are chosen to identify the fiscal reserves needed for them to finance out-of-pocket costs for future tropical natural disasters over short- and long-term planning horizons. The outcome of these case studies will generate support information necessary to communicate the importance of adjusting financial reserves to account for changing government reimbursement policies and likelihood of future tropical disasters. The financial impact of the project will be measured in the improved fiscal health of local governments from adopting policies to maintain sufficient financial reserves to finance tropical natural disaster recovery costs.

Objectives

  1. To estimate selected financial health metrics for selected municipalities including key financial disaster resiliency metrics such as liquidity, performance, and capital structure ratios.
  2. To identify adjusted “rules of thumb” for financially healthy ratio levels for local governments based on local government disaster costs for municipal and county (parish) governments.
  3. To estimate the differential effects that natural disaster emergency operations and debris removal and cleanup have on municipal governments versus county (parish) governments.
  4. Using participatory research techniques from advisory panels in Mississippi and Alabama municipal government, to assess risk tolerance to identify optimal alternative local government decisions to mitigate municipal financial vulnerability from future tropical natural disaster risk and add a chapter to the Financial Disaster Resiliency Extension Manual for local governments.

Methodology

Objective one will be accomplished through the codification of audited financial statements of selected municipal governments in Alabama and Mississippi. These statements will be coded from 2004 forward to compliment parish and municipal statements already coded for the state of Louisiana. Fiscal health metrics including liquidity, capital structure, and profitability measures will be included.

Objective two will be accomplished through taking emergency operations costs and debris removal costs identified for municipal and county governments in Alabama, Louisiana and Mississippi and subtracting these costs (net federal reimbursements) from the current and net assets of these municipal and county governments. These downward adjusted levels would be used to recalculate the selected fiscal health metrics in objective one. Descriptive statistics on the downward adjustment of these metrics would be calculated by population of municipality and county. The median reduction would be used as a proxy for the upward adjustment of traditional “rules of thumb” thresholds for these ratios based on increased financial vulnerability to coastal
hazards from tropical natural disasters and reduced government reimbursement levels.

Objective three will be accomplished based on extending the regression model outlined by Barreca (2010). In that model, the financial ratios are hypothesized to be influenced by the initial starting levels of these ratios, demographic and economic conditions, and disaster costs. This objective expands his approach by modeling municipalities in Alabama, Louisiana and Mississippi.

Objective four will be accomplished through participatory research processes with two case study
municipalities in Alabama and Mississippi. An advisory panel of diverse stakeholders will be assembled and educated on current local government financial health. Risk preferences and preferred policy solutions will be elicited based on expected losses from future tropical natural disasters for these municipalities. Best practices from the advisory panels will be incorporated into a new chapter of the Financial Disaster Extension Manual.

Rationale

Local governments share a burden in financing both the cost of emergency operations and cleanup and debris removal from tropical natural disasters. As was documented in the MS-AL Sea Grant funded project by Fannin and Franze (2009), many local communities in Louisiana were unprepared for the short-term liquidity challenges of paying debris removal contractors in advance of receiving reimbursements by FEMA. As well as covering FEMA’s cost-share (25% under normal Stafford Act statutes) (Colvin 2008; Anderson 2008).

In response, Fannin and Franze (2010) measured the financial health of local governments in SE Louisiana using traditional financial ratios to assess fiscal health of parish governments prior to and after the 2005 hurricane season. Results suggested that while the parish government had sufficient reserves to handle a future Katrina sized hurricane, some municipalities within the parish showed much greater financial vulnerability than the larger parish. As a result, this proposed research extends the analysis to include municipalities.

Further, based on meetings with local government participants who attended a presentation made by Fannin at the 2010 Bays and Bayous Conference (Fannin and Franze 2010), substantial interest was expressed in creating hazard adjusted “rules of thumb” for liquidity and solvency measures above those standard public finance best practices identified in texts like Finkler (2010). Such improved “rules of thumb” would be beneficial to local governments attempting to adjust for their increased financial risk.

In particular, this research would address several of the Coastal Storms priority areas including 1) Improve hazard awareness by engaging citizens via community outreach and education; 3) Determine hazard risk impacts and hazard mitigation techniques through conducting risk and vulnerability assessments; and 8) Determine pre-storm damage estimates.

For More Information Contact: the MASGC Research Coordinator, Loretta Leist (Loretta.leist@usm.edu). Please reference the project number R/MG/CSP-21.

Results

Financial planning for natural disasters: A workbook for local governments and regions

Fannin's final report