When extreme weather disrupts communities, small businesses often wind up being the first responders and first casualties. Investing in small business resilience can translate into fewer closures, less unemployment, faster recovery, and stronger local spending after disasters strike.
Two trends are colliding in state finance offices: Emergency, or “rainy day,” funds are shrinking at the exact moment climate-related revenue losses are mounting.
States are seeing their emergency reserves shrink for the first time since the Great Recession. The path forward is a new, two-pronged pro-growth, pro-resilience model that expands the state’s economic base while simultaneously modernizing the financial tools used to protect it.
States are seeing their emergency reserves shrink for the first time since the Great Recession. The path forward is a new, two-pronged pro-growth, pro-resilience model that expands the state’s economic base while simultaneously modernizing the financial tools used to protect it.
By Alexis M. Pelosi, Former Senior Advisor for Climate at HUD, Principal at AP Strategies, LLC
Just as climate disasters are intensifying, states are watching their emergency reserves shrink for the first time since the Great Recession.
The Pew Charitable Trusts' recent report showing the first post-recession decline in state rainy-day funds is a structural warning. Balances are falling just as risks are rising. This internal squeeze is colliding with a dangerous external one: the steady, quiet withdrawal of the federal government as a reliable disaster backstop. The Trump Administration has begun to cut FEMA reimbursements to disaster-hit areas, shifting the financial burden to states to finance their own recovery after a disaster.
States now face a perfect fiscal storm. They are being told to take on more financial responsibility for disasters at the exact moment their emergency funds are shrinking.
The economic impact is staggering. We know climate disasters are becoming more frequent and more severe, but the financial cost—from lost tax revenue to insurance retreats and supply chain disruptions—has climbed too high for states to absorb on their own. Historically, they haven't had to. But with a federal government pulling back and creating bureaucratic delays, states are shouldering a growing uncertainty that they will be left in the lurch.
Relying on the traditional models of austerity—cutting staff, delaying projects, and shrinking services—or simply trying to save more is no longer enough. The problem is one of double exposure: fiscal strain on one side and unmitigated climate risk on the other.
Hurricanes destroy property tax bases. Wildfires wipe out tourism revenue. Storms delay capital projects and accelerate insurance retreat. These are not one-off "rainy days"; they are recurring, compounding shocks that erode the very revenue streams governments depend on. Fiscal exposure and physical exposure are now inextricable.
In this new reality, decisions to cut or delay capital improvements or development services—planning and public works, for example—create a loop of stop-gap savings and short-term fixes. This reactive posture not only limits future growth but also puts the very assets that underpin local economies at greater risk.
The only viable path forward is a new, two-pronged pro-growth, pro-resilience model that expands the state’s economic base while simultaneously modernizing the financial tools used to protect it.
State and local governments draw most of their revenue from property and sales taxes. The primary engine for growing this revenue is new construction and development. New homes, multi-family apartments, and commercial centers are more than projects; they are multi-decade annuities for the general fund.
To be a true fiscal asset, though, this new growth must be physically resilient. Building vulnerable infrastructure in high-risk areas doesn't create a stable tax base; it creates a future liability. Therefore, this economic engine must run on a resilience-first standard—hardening new developments against extreme weather to ensure these tax-generating assets remain on the tax rolls, rather than becoming disaster recovery line items.
States and localities already have the key to these resilient annuities under their feet, tied up in underutilized public land—parking lots, aging facilities, and surplus parcels. Unlocking these properties through redevelopment can transform government cost centers into revenue generators, creating new housing, modernizing facilities, and uncovering recurring income streams.
For example, Washington D.C. transformed a stretch of underutilized public waterfront land into The Wharf, a major mixed-use district built with resilience in mind. All new buildings were elevated three feet above the 100-year flood level, and a 600,000-gallon stormwater-capture cistern was installed. Designed to withstand increasing climate and flood risks, the project has become one of the city’s most successful resilient redevelopments. Its strong tax performance repaid the city’s $198 million in TIF bonds 15 years early, and the site now generates over $50 million per year for the District’s general fund.
A pro-growth strategy is only as good as its ability to endure a shock. This new economic engine requires modern financial architecture to protect it.
This means moving beyond static savings accounts to embrace dynamic RiskReserves. This new class of financial tool actively integrates physical risk into fiscal management, allowing finance officers to not only save money but to understand how, where, and when that money becomes most vulnerable.
Since all risk is ultimately local, this analysis must begin at the municipal level. Local governments should conduct a risk-informed assessment of their own reserve funds to truly understand their on-the-ground exposure. The nation's largest membership organization for public finance officers already provides a framework for this, helping leaders think thoughtfully about what risk means to their community. This process allows a government to determine if its reserves are adequate, or if excess reserves could be more productively invested in direct risk-reduction projects. To ensure this happens systematically, state governments should encourage and incentivize their local counterparts to undertake these vital assessments.
Building on this foundational local analysis, the modernization strategy can take several concrete forms. First, it means embedding climate-adjusted stress tests into official revenue projections, allowing leaders to see how a wildfire or flood could directly impact future tax receipts. Second, it involves creating new funding mechanisms, such as dedicating a small percentage of all capital bond proceeds to a RiskReserve account. This ensures that as a state builds new physical infrastructure, it is also proportionally building its fiscal infrastructure to protect that investment.
Finally, this strategy opens the door to new public-private partnerships. States can leverage private market expertise from insurers and reinsurers to design contingent liquidity facilities or other catastrophe-linked enhancements. One example of this is the Texas Windstorm Insurance Association (TWIA), which contributes to the Catastrophe Reserve Trust Fund (CRTF) every year out of its operational net gain. By aligning fiscal management with physical risk, these tools ensure that the new, durable revenue streams generated from development are protected and can be rapidly deployed to build a solvent, stable future.
This two-pronged model is the antidote to the fiscal storm gathering on the horizon. The economic prong—building resiliently and unlocking dormant public assets—is the engine that creates new, durable revenue. The fiscal prong—with its modern RiskReserves—is the essential architecture that protects that revenue.
One without the other is a failed strategy. Growth without resilience is reckless gambling with the public purse. But resilience without growth simply means managing a slower decline—creating a physically fortified community that’s fiscally hollow, slowly draining its reserves to protect a stagnant tax base without generating the new wealth needed to pay for the rising cost of safety.
Ultimately, adopting this model requires a fundamental shift in governance. We can no longer afford twentieth-century silos where economic development teams pursue growth in one room while finance teams model risk in another. The mandate for state and local leaders is to integrate these functions, ensuring that every decision to build is matched by a strategy to protect.
Solving the double exposure problem is the central challenge of our new reality. It demands a new definition of fiscal responsibility where balancing risk is as important as balancing the books. By uniting the engines of growth with the tools of resilience, states can move beyond the reactive cycle of disaster and debt, building an economy that doesn't just survive the next storm, but thrives in spite of it.
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