Studying Financial Fallout of COVID and Climate Change

Christine Chung

THE FINANCIAL FALLOUT OF THE COVID-19 PANDEMIC is almost certainly a preview of what municipalities can expect in the future, absent a coherent, coordinated national response to climate change and other threats to public health and welfare, Professor Christine Sgarlata Chung, an expert in municipal markets, ominously predicts.

In her recent article “Rising Tides and Rearranging Deckchairs: How Climate Change is Reshaping Infrastructure Finance and Threatening to Sink Municipal Budgets” in the Georgetown Environmental Law Review, Chung argues that climate change poses an existential threat to infrastructure, and thus to state and local government budgets, across the nation, largely because state and local governments are responsible for the bulk of spending on public infrastructure in the United States and routinely turn to municipal securities to raise the capital.

As costs associated with climate change and impacts such as storms, wildfires, and floods continue to mount, and Wall Street begins to take climate risk into account in credit-rating determinations and municipal-bond pricing, some state and local governments are finding it harder or more expensive to raise capital to meet infrastructure needs. The COVID-19 pandemic is more of the same, according to Chung.

“As is true of climate change, there is a lack of leadership at the federal level with respect to the COVID-19 pandemic,” Chung said. “The lack of a national strategy for addressing the pandemic means—once again—that the burden of responding to the pandemic is falling to the state and local level. I suspect we will see budgetary gaps and shortfalls at the state and local level across the country as the pandemic continues to spread.”

Read on SSRN: Rising Tides and Rearranging Deckchairs

Chung said that as the first wave lingers, and if we see a second wave pop up after the return to school this fall, we could see state and local governments struggling once again to find the resources needed both to respond to the pandemic and to pay for other essential services and infrastructure.

“If/when this happens, will state and local governments seek to access public markets to raise capital to meet public health and welfare needs, or even operating expenses?” she asked. “Will they be able to access markets on reasonable terms? We will have to see.” The municipal market has already experienced unprecedented volatility this year in response to the pandemic, Chung noted, and the continued spread of COVID-19 in communities across the country suggests that municipal issuers are not out of the woods.

Chung has been carefully tracking the impact of the pandemic on the municipal bond market.

She said the muni market “nearly came to standstill in mid-March,” especially for issuers in tourism, travel, entertainment, hospitality, and other sectors vulnerable to COVID-19 economic disruption. Chung said that although intervention by the Federal Reserve stabilized markets during the April–June timeframe, experts predict it will take at least 18 months for state and local government revenues to catch up, assuming the pandemic is under control sooner rather than later.

In Chung’s view, however, the situation at the federal level remains concerning.

“There is no national testing strategy; there is no leadership around public health best practices [e.g., mask- wearing]; experts are being ignored, sidelined, and even smeared; and officials are downplaying both the severity of the pandemic and public health advice in the name of reopening the economy as soon as possible. I suspect we will see continued financial strain at the state and local level going forward,” she said.

Chung, director of the Institute for Financial Market Regulation, said the remedy is a recognition that both COVID-19 and climate change are national and international problems, rather than largely state and local problems.

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