© 2019 Public Financial Publications, Inc.

Assessing the Financial Impact of Natural

Disasters on Local Governments
GANG CHEN

In recent decades, the increase in the frequency and the severity of natural
disasters has posed growing challenges to governments’ disaster response
activities. Disasters can have a considerable financial impact on local gov-
ernments, but this impact has not been systematically analyzed. This study
assesses disaster impact using 17 years of panel data (between 1996 and 2012)
from the city and county governments in New York state. The research ex-
amines many aspects of local governments’ financial conditions, including
liquidity, fund balance, and debt. It tests whether governments’ financial
conditions are affected by disasters and whether fiscal institutions moderate
disasters’ impacts. The results show that a local government’s unreserved fund
balance and disaster reserve significantly affect its financial condition, while
financial condition indicators are not significantly impacted by natural dis-
asters when the fiscal institution variables are controlled.

ASSESSING THE FINANCIAL IMPACT OF NATURAL DISASTERS ON LOCAL

GOVERNMENTS

Natural disasters1 create financial challenges for governments. On the revenue side, the
interruption of economic and social activities during disasters erodes the tax base. On the
spending side, governments increase their expenditures on disaster response with the goals of
saving lives, restoring public services, and lessening the damage of disasters. Disaster response
and recovery might require continuous public funding from the federal, state, and local

Gang Chen is at Rockefeller College of Public Affairs and Policy, University at Albany, State University of New
York. He can be reached at gchen3@albany.edu.

1. For the purpose of this research, I focus on disasters that naturally occur; directly result in property damage,
deaths, and/or injuries to a community; and are recognized by public records. I exclude human‐caused disasters,
such as terrorist attacks, from the study. Disasters are limited to those that are recorded by the Spatial Hazard
Events and Losses Database (SHELDUS), which receives data mainly from the National Centers for Environ-
mental Information (NCEI) and the National Weather Service.

CHEN / Assessing the Financial Impact of Natural Disasters 1

levels. Changes in revenues and ex-
penditures because of disasters can create APPLICATIONS FOR PRACTICE
fiscal stress for governments. The financial • This study finds no significant results in-
impact of disasters on governments, as well dicating that local governments’ financial
condition indicators, including cash ratio,
as the fiscal tools to moderate the negative current ratio, fund balance, and debt ratio, are
impact, are not fully understood. This paper impacted by natural disasters when the fiscal
fills this gap by examining how disasters institution variables are controlled.
affect the financial conditions of local gov- • If we only focus on disasters that are feder-
ally‐declared as major disasters, this study
ernments and whether unreserved fund bal- shows that federally‐declared disaster damage
ances, disaster reserves, and disaster aid increases a local government’s debt ratio,
have moderated disasters’ impacts on fi- while the unreserved fund balance moderates
the impact of declared disaster damage on the
nancial conditions. debt ratio.
In the United States, local governments • Disaster aid from federal and state govern-
bear the primary responsibility for re- ments improves liquidity ratios for local
governments. However, when the size of the
sponding to disasters, but they often fail to disaster damage increases, the positive effect
consider the financial aspects of emergency of disaster aid decreases, which might be ex-
management for two reasons. The first plained by the lengthy process of reimburse-
ment for larger disasters.
reason is related to their “misperception”
of their role in emergency management
(Schneider 2008; Somers and Svara 2009). During major disasters, local governments re-
ceive substantial assistance from federal and state governments. Local governments may
ignore the fact that the majority of disasters are actually handled at the local level, and
support from higher levels of government is available only when the size of a disaster is
beyond local management capacities (Somers and Svara 2009; Sylves and Búzás 2007).
Additionally, when federal or state governments agree to fund disaster response, local
governments take action and expend funds on disaster response before they are reimbursed,
which can cause them short‐term fiscal stress. Because of the availability of federal grants
and the vague standards for meeting the criteria for these grants, local governments may
also face a “moral hazard” problem and underprepare for disasters, expecting a federal
government “bail out” once disasters strike (Sylves and Búzás 2007). In this context, this
study tests whether local governments’ financial conditions are negatively affected by
disasters.
The second reason is related to the conflicting goals of emergency management and
financial management. This conflict is similar to what Schneider (1992) called the gap between
bureaucratic norms and emergent norms. This conflict exists because during a disaster
response, saving lives and restoring services are the most important goals (emergent norms) for
governments. The goals of financial management (bureaucratic norms); such as maintaining
liquidity, solvency, and sustainability; become secondary and are often neglected in emergency
situations. When the principles of financial management are sacrificed, the combination of
revenue, expenditure, and liquidity shocks during and after a disaster might create short‐term
and even long‐term fiscal stress for a government. By examining whether fiscal institutions

2 Public Budgeting & Finance / Summer 2019

moderate the impact of disasters, this study establishes a connection between financial
management and emergency management.
Although disasters are unpredicted events, many planning, and managerial tools are
available for governments to use in disaster mitigation and preparedness (Donahue and Joyce
2001; International Monetary Fund [IMF] 2016; Phaup and Kirschner 2010; Somers and Svara
2009). The public financial management (PFM) literature discusses the role of fiscal tools, such
as budget reserve funds or unreserved fund balances, in the management of revenue and
expenditure shocks (Hendrick 2006; Hou and Moynihan 2006; Rodríguez‐Tejedo 2012). Some
studies also show that governments can utilize budgetary tools to prepare for disasters (Phaup
and Kirschner 2010). This study is the first to explore the roles of fiscal tools (including
unreserved fund balance, disaster reserve and disaster aid) in moderating the impact of
disasters.
This study also compares the different impacts of federally‐declared disasters and non‐
declared disasters. Prior studies on emergency management tend to overly focus on major
disasters, such as Hurricane Katrina in 2005 (Hildreth 2009) and the 2011 Missouri River
Flood (Ebdon, O’Neil, and Chen 2012), which were declared by the federal government as
major disasters. Small disasters are not declared (i.e., are “non‐declared disasters”) and are
managed by local governments without federal assistance. This study shows that declared
and nondeclared disasters have slightly different impacts on local governments’ financial
conditions.
The paper is organized into five sections including the introduction. The next section
reviews literature on emergency management with a focus on the roles of federal, state, and
local governments in disaster response. The roles of fiscal tools are also discussed and three
hypotheses are constructed. In the third section, the methods, variables, and data for testing the
hypotheses are explained. The results are presented in the fourth section, and finally, the paper
concludes with the key findings, limitations of the research, and the implications for future
studies.

GOVERNMENTS’ ACTIVITIES AFTER A NATURAL DISASTER OCCURS

The United States government emergency management system is a “bottom‐up” system that
involves all three levels of government (Schneider 2008). Responses to natural disasters are
initiated at the local level, and funding sources from all three levels are available depending on
the size and nature of the disaster.
At the federal level, the Federal Emergency Management Agency (FEMA) provides
multiple sources of grants for all stages of emergency management (FEMA 2018a).2 For

2. In addition to the postdisaster individual assistance (IA) and public assistance (PA) programs, some federal
grants are available for predisaster preparedness and mitigation, such as the Pre‐disaster Mitigation Grant Program
(PDM), as authorized by Section 203 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42
U.S.C. § 5133).

CHEN / Assessing the Financial Impact of Natural Disasters 3

disaster responses and recovery, FEMA provides individual assistance (IA) and public assis-
tance (PA). The IA program provides direct benefits to individuals and families, whereas the
PA program provides funding to state and local governments to fund disaster response ex-
penditures. IA or PA qualification requires that a disaster be declared by the federal govern-
ment as a “major disaster.” When federal assistance is needed, state governments can contact
the FEMA Regional Office to request a Preliminary Damage Assessment (PDA), which de-
termines the extent of the disaster, its impact, and whether federal assistance is needed (FEMA
2018b). Once the PDA is completed, the governor may request a federal declaration of
emergency. A PDA should be completed before the governor’s request, but in severe disasters,
the declaration request can be made before the PDA (FEMA 2018b). The decision to make
federal declarations is based on the assessment that the disaster is beyond the state and local
governments’ capabilities to respond; however, there are no consistent criteria to guide such
decisions (Stafford Disaster Relief and Emergency Assistance Act 1988).3 Some studies find
that declaration decisions and the amount of federal assistance are affected by political factors,
such as whether it is an election year, the importance of a state in an election, the political party
of the governor, congressional representation on FEMA oversight committees, and media
attention (Garrett and Sobel 2003; Husted and Nickerson 2014; Reeves 2011; Sylves and
Búzás 2007).
If the federal government declares a disaster to be a major disaster (i.e., a federally‐
declared disaster), FEMA can fund 75 percent or more of the disaster response and
recovery costs (see the Stafford Disaster Relief and Emergency Assistance Act 1988),4
but these resources are not immediately available to the state and local governments.
Instead, state and local governments finance the costs and apply for reimbursement from
FEMA for eligible expenditures. FEMA then reviews the costs and issues reimburse-
ments. The process of applying for reimbursements can be lengthy. At the end of the
fiscal year in which Hurricane Katrina struck, the City of New Orleans had received only
39 percent of the funding it had requested during the year the hurricane occurred
(Hildreth 2009). Before receiving FEMA reimbursement, local governments must use
“reserves, emergency accounts, budget reallocations, insurance claim advances, or even
borrowing” to pay for disaster expenditures (Hildreth 2009, 404).
At the state level, many states have included disaster‐related costs in their budgeting
process. These disaster‐related costs include the state’s matching of federal assistance
and state aid to localities in the absence of a federal declaration. These costs are funded

3. The Stafford Act grants the President the authority to determine which disasters receive federal assistance.
The President’s decision is informed by FEMA recommendations, which are usually based on “the amount and
type of damage; the impact of damages on affected individuals, the State, and local governments; the available
resources of the State and local governments, and other disaster relief organizations; the extent and type of
insurance in effect to cover losses; assistance available from other Federal programs and other sources; imminent
threats to public health and safety; recent disaster history in the State; hazard mitigation measures taken by the
State or local governments, especially implementation of measures required as a result of previous major disaster
declarations; and other factors pertinent to a given incident” (FEMA 2003, 3‐10‐3‐11).
4. For extreme disasters, the President can extend the FEMA cost share to more than 75 percent.

4 Public Budgeting & Finance / Summer 2019

by general appropriations, emergency appropriations, or other revenue sources, such as
surcharges, user fees, or special sales taxes (Government Accountability Office [GAO]
2015). Some states provide their own disaster assistance programs that are similar to
FEMA’s IA and PA programs (GAO 2015). Many states establish cost‐sharing ar-
rangements with localities for the disaster‐related costs that are not funded by FEMA
(GAO 2015). The mechanisms for sharing these costs vary by state. In New York, the
cost is equally shared, but in Indiana, localities pay for the entire cost that is not funded
by federal grants (GAO 2015). If a disaster is not declared by the federal government to
be a major disaster, local governments can apply for state assistance. In this case, if the
state governor decides that state assistance is needed, the governor can declare a state
emergency and provide assistance to local governments.
In New York State, Executive Law Article 2‐B gives the governor authority to declare
a state disaster emergency on their own initiative or at the request of chief executives. A
state declaration is made when the local resources are not adequate to respond to a
disaster. Upon state declaration, the governor may direct state agencies to provide
assistance to local governments (New York State Executive Law 2018). State govern-
ments also provide direct support to local governments for emergency management. In
New York State, this support includes directing and coordinating response activities,
identifying local emergency needs, gathering and sharing disaster information,
and conducting disaster damage assessment (New York State Emergency Management
Association [NYSEMA] 2018, 12).
The research on how state governments prepare for and react to disasters is limited.
The GAO (2015) reviewed ten states’ approaches to preparing funding for disaster re-
sponses and finds that the majority of these states have established statewide disaster
accounts and included disaster response and recovery expenditures in their agency
budgets. However, none of the ten states “maintained reserves dedicated solely for future
disasters” (GAO 2015, 2). When advance funding is insufficient, states provide supple-
mental appropriations or use fund transfers to finance the remaining costs. Kirschner,
Singla, and Flick (2018) also find that although some states have a Disaster Stabilization
Fund (DSF), in general, they have not utilized DSFs to set aside a meaningful amount for
disaster‐specific expenses.
At the local level, “many, if not most disasters, will be handled entirely by local response
organizations” (Schneider 2008, 717). After disasters strike, local governments pay for over-
time personnel, debris removal, emergency medical services, facility repair and replacement,
and rescue and evacuation actions. Because the amount of intergovernmental financial assis-
tance is uncertain, local governments must operate with an increasing fiscal burden and con-
strained revenues before the aid is determined and available. Local governments utilize several
tools to fund disaster‐related costs. Pre‐disaster tools include contracting with private insurance
companies and establishing budget reserve funds (IMF 2016; Phaup and Kirschner 2010).
Postdisaster tools include applying for grants, raising taxes or drawing funds from other
spending categories.

CHEN / Assessing the Financial Impact of Natural Disasters 5

 Previous studies on the impacts of disasters on local governments mostly focus on major
disaster events. Hildreth (2009) finds that in the post‐Hurricane Katrina years, New Orleans
reduced its budget by ten percent to 30 percent in 2005 and 2006. Additionally, in the
two‐year period following Hurricane Katrina, the share of spending for public safety and
public works increased, while that for culture and recreation, urban development and
housing, and economic development decreased; this reflects the reallocation of financial
resources in response to disasters and fiscal stress. Fannin and Detre (2012) show that after
Hurricane Katrina in 2005, local governments’ financial health was stable due to the federal
government’s unusual 100 percent reimbursement for emergency costs associated with the
hurricane. If FEMA had paid only the normal 75 percent of the costs, local governments’
liquidity ratio would have fallen by 78 percent and their debt ratio would have increased by
115 percent (Fannin and Detre 2012). Ebdon, O’Neil, and Chen (2012) find that the 2011
Missouri River Flood cost the City of Omaha $12.2 million, of which the City’s insurer
funded a total of $5 million, federal and state governments funded $6 million, and the
remaining $1.2 million was the city’s share.
Natural disasters also affect the local tax base. A body of literature examines the short‐
and long‐term impacts of disasters on economic growth. Disasters, especially large ones,
are found to be negatively related to economic growth, although the channels through
which the impact occurs are not yet clear (Cavallo and Noy 2010). Some scholars also
find a positive impact of disasters in terms of their reconstruction stimulus (Loayza et al.
2009). Disasters are found to increase intergovernmental transfers and increase the
fluctuation of general sales, income, and property tax revenues (Miao, Hou, and Abrigo
2018). Spending on capital assets and social welfare also increases immediately fol-
lowing disasters (Miao, Hou, and Abrigo 2018).
On the basis of the above discussion of the impact of natural disasters on local governments,
the first hypothesis of this study explores the general impact of natural disasters on local
governments’ financial conditions.

Hypothesis 1: Natural disasters in a local jurisdiction have a negative impact on a local

government’s financial condition.

This study also explores whether fiscal institutions moderate the impact of disasters on
local governments. Two fiscal institutions are particularly relevant for emergency man-
agement: fiscal reserve and disaster aid. Fiscal reserve, a tool for self‐insurance against
fiscal risk, is a mechanism for local governments to manage fiscal shocks from un-
expected increases in spending or decreases in revenues. Governments expand reserve
funds in good times and withdraw from them when unexpected shocks occur. In addition
to reserve funds, maintaining a certain unreserved fund balance is another way to save for
emergencies. The New York State Comptroller’s Office suggests to local governments
that “combining a reasonable level of undesignated fund balance with specific legally
established reserve funds provides resources for both unanticipated events and other
identified or planned needs” (Office of the New York State Comptroller [OSC] 2010, 5).

6 Public Budgeting & Finance / Summer 2019

Establishing a fiscal reserve is a common practice in state and local governments (Do-
nahue and Joyce 2001; Sylves 2007, 310).
The second hypothesis is to test the role of a fiscal reserve in moderating the impact of disasters.

Hypothesis 2: The level of a local government’s fiscal reserve in the previous year (including
unreserved fund balance and disaster reserve, compared to the total expenditure) moderates the
impact of disasters on the local government’s financial condition in the current year.

The other disaster‐related fiscal institution is disaster aid. It is argued that grants
from higher levels of government should be directed to lower levels of government for disaster
response because natural disasters usually extend beyond one local government’s boundary and
because there are fiscal disparities across localities in response to disasters (Donahue and Joyce
2001). Local governments have less motivation to pay for disasters because of the “common pool”
problem,5 which LaFeder and Lind (2008) cite as a reason for “a low priority for disaster man-
agement on the local level” (554). Emergency management from higher levels of government also
facilitates cooperation, coordination, and communication among local governments, which increases
the efficiency and effectiveness of emergency management (LaFeber and Lind 2008; McEntire and
Dawson 2007). For this reason, it is reasonable to expect that fiscal assistance from federal and state
governments reduces the negative impact of disasters on local governments.
The third hypothesis tests the role of disaster aid in moderating the impact of disasters.

Hypothesis 3: The amount of disaster aid a local government receives in the current year
from federal and state governments moderates the impact of disasters on the local
government’s financial condition in the current year.

METHODS, VARIABLES, AND DATA

To test the three hypotheses, I construct a sample of 57 counties and 61 cities (excluding
the New York City metropolitan area6) during 17 years (between 1996 and 2012) in New
York State. New York State is chosen because it is the site of frequent disasters, but

5. The “common‐pool” problem refers to the situation in a shared‐resource system where no one can be
excluded, which results in the depletion of shared resources for all users (Hardin 1968). Depoorter (2006)
discusses the “common pool” problem in disaster management. Investments in disaster management by one
government have positive externalities on the other governments. When the positive externalities extend beyond
boundaries, governments do not have enough incentives to invest in disaster management.
6. It is common in studies of New York State local governments to exclude the New York City metropolitan
area. The New York State Local Government Handbook (New York State Department of State 2011) states, “The
five boroughs of the City of New York function as counties for certain purposes, although they are not organized
as such nor do they operate as county governments” (39). New York City is also not included in the New York
State Comptroller’s local government Fiscal Stress Monitoring System, where I obtained data. The Fiscal Stress
Monitoring System Manual (OSC 2017) explains, “New York City is excluded from this analysis, due to its unique
financial structure” (2).

CHEN / Assessing the Financial Impact of Natural Disasters 7

local governments vary considerably in terms of the frequency and severity of the
disasters. Cities and counties are both included in the regressions because they
share responsibilities and resources in response to disasters.7 To control for the differ-
ence between the cities and counties, a dummy variable (City) is added to the regressions.
The data for the local governments are obtained from the New York State Comptroller’s
Office. Account‐level data are coded to construct the financial variables. The financial
condition indicators are used as dependent variables to test Hypothesis 1. The fiscal
institution variables are included as independent variables to test their independent
effects and are also interacted with the disaster damage variables to test their moderating
effect as assumed by Hypotheses 2 and 3. The model is based on the following equation:

Financial Condition Indicatorsit = α + β1 Disaster damageit

+ β2 Unreserved fund balancei (t − 1) × Disaster Damageit
+ β3 Disaster reservei (t − 1) × Disaster Damageit
+ β4 Disaster aidsit × Disaster Damageit
+ β5 Unreserved fund balancei (t − 1)
+ β6 Disaster reservei (t − 1) + β7 Disaster aidsit
+ β8 Controlsit + εit

The variables’ definitions, data sources, and descriptive statistics are shown in
Tables 1 and 2.
The financial condition indicators are calculated according to the State Comptroller’s
Accounting and Reporting Manual (OSC 2011) and the Financial Condition Analysis guide for
local governments (OSC 2008). Four indicators are used to measure financial condition
because prior studies suggest that financial condition has multiple dimensions and it is
necessary to use “an array of financial condition indicators” (Hendrick 2004; Stone et al. 2015,
106). The cash ratio (Cash_ratio) is calculated by dividing total cash (account codes 200 and
201) by total liabilities. The current ratio (Current_ratio) is calculated by dividing current
assets by current liabilities. The fund balance ratio (Fund_balance) is calculated by dividing

7. In New York State, counties and cities are responsible for developing their own comprehensive emergency
management plans (NYS Executive Law Article 2‐B 2018). During a disaster response, all local governments must
fully involve all resources before they can make a request for state assistance (NYS Department of State 2011,
138). Generally speaking, cities and counties both take responsibilities and share resources for disaster
responses. For example, Albany County’s (2013) emergency management plan defines their disaster response
responsibilities as “(a) Response operations in the affected area are the responsibility of and controlled by the local
municipalities, supported by the county emergency operations as appropriate. (b) If a municipality is unable to
adequately respond, County response operations may be asked to assume a leadership role” (6‐7). When cities’ and
counties’ responsibilities overlap, such as in the areas of police, fire, and emergency medical services, the
coordination between governments is resolved in a mutual aid program. In our dataset, the per capita disaster‐
related spending for counties is $2.89 and for cities is $1.90.

8 Public Budgeting & Finance / Summer 2019

 TABLE 1
Variables, Definitions, and Data Sources
Variables Definition Data source
Disaster_damage (log) Property damage per capita SHELDUS (1996‐2012)
adjusted by inflation (all
disasters)
Declared_disaster_damage (log) Property damage per capita SHELDUS (1996‐2012)
adjusted by inflation matched with
(federally‐declared FEMA (2016)
disasters)
Non‐declared_disaster_ Property damage per capita SHELDUS (1996‐2012)
damage (log) adjusted by inflation matched with
(nonfederally declared FEMA (2016)
disasters)
Cash_ratio Cash/total liabilities NYS OSC Local
Government Data
Current_ratio Current assets/current NYS OSC Local
liabilities Government Data
Fund_balance Fund balance/total revenues NYS OSC Local
Government Data
Debt_ratio Debt balance/total revenues NYS OSC Local
Government Data
Unreserved_fund_balance Unreserved fund balance/total NYS OSC Local
expenditure Government Data
Disaster_reserve Disaster reserve/total NYS OSC Local
expenditure Government Data
Disaster_aid Disaster aid from federal and NYS OSC Local
state levels Government Data
Population_density Population density per sq. mi. NYS OSC Local
Government Data
Income Per capita income (in Bureau of Economic
thousands) Analysis
Unemployment Unemployment rate NYS Labor Force and
Unemployment Data
Population Population size (in thousands) NYS OSC Local
Government Data
Poverty_rate Percent of people in poverty US Census Small Area
Income and Poverty
Estimates (SAIPE)
Program
Intergovernmental_transfers Percent of total revenue that is NYS OSC Local
from federal and state Government Data
transfers
Voter’s_political_affiliation (D) Percent of registered voters NYS Board of Elections
that are affiliated with the
Democratic party
(continued)

CHEN / Assessing the Financial Impact of Natural Disasters 9

 TABLE 1 (Continued)
Variables Definition Data source
City Dummy variable indicating
whether the government is
city (=1) or county (=0)

the fund balance (end‐of‐year balance) by total revenues. The debt ratio (Debt_ratio) is
calculated by dividing the debt balance (end‐of‐year balance) by total revenues. These ratios
reflect cash solvency, budgetary solvency, and long‐run solvency8 (Stone et al. 2015; Wang,
Dennis, and Tu 2007). Governmental funds are used in the model because governmental funds
finance most of a government’s major functions. The average values of the financial condition
variables shown in Table 2 indicate that, on average, New York State counties and cities are in
good financial condition between 1996 and 2012.9
Three variables are used to represent fiscal institutions. The Unreserved_fund_balance
ratio is calculated by dividing the unreserved fund balance by the total expenditure. The
Disaster_reserve ratio is calculated by dividing the disaster reserve by the total ex-
penditure. The previous year’s (t−1) values for these two variables are used in the model
because last year’s end‐of‐year reserve represent the resources available for local gov-
ernments to address the current year’s natural disasters. As shown in Table 2, the mean of
Unreserved_fund_balance is 0.15, indicating that the local governments in the sample on
average have an unreserved balance that can pay 15 percent of their annual expenditure.
The average size of Disaster_reserve is 4 percent of the annual expenditure.
The Disaster_aid variable measures the direct disaster aid from federal and state governments.
Account‐level data from the State Comptroller’s Office are used to construct this variable. Federal
disaster aid data are from account code 4960 “Federal Aid, Emergency Disaster Assistance” (OSC
2011). State disaster aid data are from account code 3960 “State aid, Emergency Disaster Assistance”
(OSC 2011). The current year’s (t) disaster aid is used in the model because I assume that the current
year’s aid increases the financial resources for local disaster response. The Disaster_aid variable is
constructed as a per capita measurement.
Disaster damage information is obtained from the Spatial Hazard Events and Losses Database
(SHELDUS) (Center for Emergency Management and Homeland Security [CEMHS] 2018). Federal
disaster declarations information is collected from FEMA (2016). Disaster events data and decla-
rations data are matched by the dates and locations of the events. Property damage per capita adjusted

8. For a detailed discussion about how cash solvency, budgetary solvency, and long‐run solvency are measured
by financial indicators, see Wang, Dennis, and Tu (2007).
9. The average values of the four financial condition indicators of the cities and counties between 1996 and 2012
are above the thresholds that the New York State Fiscal Stress Monitoring System (OSC 2017) uses to designate a
local government as being in fiscal stress. A close examination of the changes over the study period shows that
financial indictors decreased during recession years; however, the average values during the recession years
remained above the level that indicates fiscal stress (OSC 2017).

10 Public Budgeting & Finance / Summer 2019

 TABLE 2
Descriptive Statistics
(1) (2) (3) (4) (5)
Variables N Mean SD Min. Max.
Disaster_damage (before log) 2,006 146.52 884.98 0.00 18,165.08
Declared_disaster_damage (before log) 2,006 98.70 823.37 0.00 18,096.53
Non‐declared_disaster_damage (before log) 2,006 47.82 220.39 0.00 5,038.82
Disaster_damage (after log) 2,006 2.46 2.05 0.00 9.81
Declared_disaster_damage (after log) 2,006 0.88 1.89 0.00 9.80
Non‐declared_disaster_damage (after log) 2,006 2.02 1.74 0.00 8.53
Cash_ratio 2,006 0.38 0.41 0.03 2.75
Current_ratio 2,006 6.65 6.82 1.42 41.47
Fund_balance 2,006 0.25 0.19 ‐0.20 0.82
Debt_ratio 2,006 0.62 0.47 0.00 2.45
Unreserved_fund_balance 2,006 0.15 0.17 ‐0.26 0.70
Disaster_reserve 2,006 0.04 0.05 0.00 0.29
Disaster_aid 2,006 3.69 12.11 0.00 85.20
Population_density (in thousands) 2,006 2.39 2.88 0.00 16.89
Personal_income (in thousands) 2,006 39.67 12.42 25.93 89.39
Unemployment 2,006 0.06 0.02 0.03 0.11
Population (in thousands) 2,006 112.08 222.47 2.86 1,493.35
Poverty_rate 1,888 12.13 3.05 3.70 21.00
Intergovernmental_transfers 2,006 0.26 0.08 0.08 0.73
Voter’s_political_affiliation (D) 1,888 0.33 0.07 0.19 0.51

by inflation (in 2012 dollars) is used to measure the damage caused by the disasters. This is an
indicator commonly used by disaster managers to determine the severity of a disaster’s impact
(Cavallo and Noy 2010; Husted and Nickerson 2014; Reeves 2011). The Disaster_Damage variable
represents the damage caused by all types of natural disasters in the SHELDUS database.10 Addi-
tionally, to capture the impact of federal declaration, disasters are separated into those that were
federally‐declared (Declared disaster damage) and those that were not (Non‐declared disaster
damage). The damage variables are transformed to their logarithm form11 to reduce skewness. For
governments where the fiscal year does not correspond with the calendar year, disaster damage is

10. SHELDUS equally distributes loss information across all affected counties. Therefore, the damage data might
overestimate the loss in certain counties and underestimates the loss in other counties.
11. Because of the existence of zeros in the damage amount, one is added to the damage variable before the
logarithm form is taken. Therefore, an observation with no disasters in that year shows a logarithm value of zero.
To ensure that this logarithm transformation approach does not change the results, the model is also estimated
without this transformation; the results are found to be consistent. The skewness of the damage variables is due to
the zero values during years when there were no disasters and the large values during years when there were
extreme disasters. The logarithm transformation reduces the skewness of Disaster_Damage from 14.52 to 0.63,
reduces the skewness of Declared_disaster_damage from 16.09 to 2.22, and reduces the skewness of Non‐
declared_disaster_damage from 13.78 to 0.67.

CHEN / Assessing the Financial Impact of Natural Disasters 11

recalculated to reflect the disasters that occurred in a fiscal year. Table 2 shows that the average
damage (before log) caused by all disasters is $146.52 per capita, the average damage caused by
declared disasters is $98.70 per capita, and the average damage caused by nondeclared disasters is
$47.82 per capita.
The damage that a disaster causes is potentially endogenous to a jurisdiction’s soci-
oeconomic status (Miao and Popp 2014). Therefore, personal income per capita (Income),
unemployment rate (Unemployment), population density (Density), the poverty rate
(Poverty), and population size (Population) are included as control variables. Damage
measurements are likely to correlate with economic development because of the pre-
paredness and mitigation efforts of governments and citizens (Cavallo and Noy 2010).
These variables are usually included in prior research of disasters (Reeves 2011). Eco-
nomic and demographic variables are also included because prior studies of govern-
ments’ financial conditions find that these variables are important determinants (Capalbo
and Grossi 2014; Jones and Walker 2007; Warner 2001). Political influence is included as
a control because financial management decisions are likely to be influenced by the
political environment. I used the New York State voter enrollment and party affiliation
(percentage of voters registered with a Democratic affiliation) to measure the local po-
litical environment. I also include the general intergovernmental transfer as a control
variable. The intergovernmental transfer is measured by the percent of total revenues that
are fiscal transfers from federal and state governments.
The model is estimated with multilevel models (MLM). Lynn, Heinrich, and Hill
(2000) suggest that because many relationships in governance systems span multiple
levels, MLM is more appropriate for estimation than regular fixed effect estimation
(Lynn, Heinrich, and Hill 2000, 250). The concern of this panel data is that each gov-
ernment (city or county) might have random characteristics that affect their financial
condition and that the financial condition might correlate with time. MLM is a reasonable
choice because both fixed and random effects can be controlled. MLM can be used for
panel data in which the same entity is measured multiple times (Steele 2008). We can
treat time as level 1 and entity as level 2 (i.e., time is nested within entities). In Stata, the
estimation is performed using the package xtmixed. I allow each year to have year fixed
effects and allow the entity variable to have random effects to influence the intercept in
the regression equation. Both autocorrelation and heteroskedasticity are detected; thus, I
used clustered standard errors for correction.

RESULTS

Table 3 shows the annual property damage caused by all disasters, federally‐declared disasters,
and nondeclared disasters. The two years with the highest disaster damage are 2006 ($310.56
per capita) and 2011 ($276.89 per capita), which are mostly due to the severe storms and floods
in 2006 and Hurricane Irene and Tropical Storm Lee in 2011. In these two years, most of the
damage is caused by federally‐declared disasters, although non‐declared disasters also caused

12 Public Budgeting & Finance / Summer 2019

 TABLE 3
Property Damage Per Capita (1996 to 2012)
Year All disasters Federally‐declared disasters Nondeclared disasters
1996 103.75 96.98 6.78
1997 8.85 0 8.85
1998 68.50 36.37 32.14
1999 14.39 8.16 6.23
2000 26.90 1.31 25.59
2001 12.12 4.11 8.01
2002 9.09 0 9.09
2003 46.45 31.59 14.86
2004 30.31 25.93 4.38
2005 27.85 11.71 16.14
2006 310.56 278.95 31.62
2007 4.53 2.54 1.99
2008 14.47 0 14.47
2009 39.21 14.76 24.45
2010 6.77 0.01 6.76
2011 276.89 259.36 17.54
2012 4.65 0.92 3.73
Note: Damage is shown in per capita dollar amounts adjusted to 2012 dollars.

TABLE 4
Disaster Damage by Type of Disaster (1996 to 2012)
Type of disaster Property damage
Flooding 3,324,750,576
Winter weather 496,738,772
Wind 374,185,264
Severe storm 165,657,827
Tornado 163,921,489
Coastal 51,595,171
Hail 12,665,637
Lightning 11,306,889
Landslide 2,163,297
Tsunami 351,775
Wildfire 132,234
Hurricane 41,007
Note: Damage is shown in dollar amounts adjusted to 2012 dollars.

CHEN / Assessing the Financial Impact of Natural Disasters 13

property damage. In 1997, 2002, and 2008,12 all the disaster damage is caused by non‐declared
disasters. Table 4 shows the total amount of disaster damage by different types of disasters
between 1996 and 2012. Flooding causes the highest property damage, followed by severe
winter weather, strong wind, severe storms, and tornados. Hurricane shows a low amount of
damage because most of the property damage is caused by the flooding that follows the
hurricane. For example, most of the damage from Hurricane Irene and Tropical Storm Lee in
2011 is categorized as flooding damage in September 2011.
The regression results are shown in Tables 5–7. Table 5 shows the impact of all disasters,
including federally‐declared and non‐declared disasters, on the four financial indicators of cash
ratio, current ratio, fund balance, and debt ratio. Table 6 shows the impact of only the fed-
erally‐declared disasters. Table 7 shows the impact of only the non‐declared disasters.
The results show limited support for Hypothesis 1. The only significant coefficient asso-
ciated with a damage variable is in Table 6 for the impact of Declared_disaster_damage on
Debt_ratio. The coefficient’s value of 0.006 indicates that when all the fiscal institution var-
iables are set to zero, higher declared disaster damage is associated with a higher debt ratio,
which is consistent with Hypothesis 1. However, because the disaster damage variable also
interacts with the fiscal institution variables, the impact of disaster damage on financial in-
dicators also depends on the values of the fiscal institution variables. Table 8 shows the
predicted values of the financial indicators when all the control variables and fiscal institution
variables are set to their means. In Table 8, many of the predicted financial indicators show
changes in expected directions in response to a one standard deviation increase in disaster
damage. The clearest pattern is shown in columns (4) and (5) for declared disasters. With a one
standard deviation increase in declared disaster damage, the cash ratio decreases by 0.004, the
current ratio decreases by 0.049, the fund balance ratio decreases by 0.0001, and the debt ratio
increases by 0.0004. Although the directions of the impacts are as expected, significance tests
for the marginal effect of disaster damage, when fiscal institution variables are set to the means,
show that the differences are not significant at the p < 0.05 level. Therefore, there is not
enough evidence to support Hypothesis 1 when the fiscal institution variables are set to their
average values.
Regarding Hypothesis 2, regression results show that Unreserved_fund_balance sig-
nificantly increases cash ratio, current ratio, and fund balance, and reduces debt ratio, while
Disaster_reserve significantly increases the current ratio and fund balance. The findings are
consistent in Tables 5–7 and indicate that when governments maintain a better fiscal reserve,
their financial conditions will be better in the following year. However, the only significant
variable associated with an interaction term between disaster damage and fiscal reserve is in
Table 6 for declared disasters. The negative coefficient value of −0.041 shows that for a higher

12. There is no federal declaration in 1997. In 2002, there are two declarations. The first is an earthquake (April
20, 2002), which is not included in SHELDUS. The second is a snowstorm (December 25, 2002 to January 4,
2003). The damage from this storm is mostly recorded as 2003 damage, according to SHELDUS. In 2008, there is
one declaration for a severe winter storm (December 11, 2008 to December 31, 2008), but the declared counties in
FEMA do not match with the declared counties in SHELDUS.

14 Public Budgeting & Finance / Summer 2019

 TABLE 5
Impact of Disasters on Financial Indicators (Multilevel Models)
(1) (2) (3) (4)
Variables Cash_ratio Current_ratio Fund_balance Debt_ratio
Disaster_damage −0.005 −0.058 −0.003 0.003
(0.006) (0.137) (0.003) (0.006)
Unreserved_fund_balance(lag) 0.021 0.533 0.007 −0.025
× Disaster_damage (0.035) (0.552) (0.012) (0.023)
Disaster_reserve (lag) −0.016 0.951 0.028 −0.012
× Disaster_damage (0.068) (1.049) (0.042) (0.056)
Disaster_aid −0.0002* −0.0112** −0.000 −0.000
× Disaster_damage (0.000) (0.004) (0.000) (0.000)
Unreserved_fund_balance(lag) 0.398*** 3.670** 0.594*** −0.358***
(0.096) (1.574) (0.052) (0.089)
Disaster_reserve (lag) 0.295 10.016*** 0.803*** −0.331
(0.341) (3.764) (0.112) (0.329)
Disaster_aid 0.001* 0.029* 0.000 −0.001
(0.001) (0.016) (0.000) (0.001)
Population_density −0.004 −0.552** −0.006* −0.001
(0.020) (0.218) (0.003) (0.025)
Personal_income −0.001 −0.051 0.002* 0.001
(0.003) (0.035) (0.001) (0.004)
Unemployment −1.721*** 10.085 −0.039 0.488
(0.583) (12.923) (0.200) (0.482)
Population −0.000*** 0.001 ‐0.000 0.000**
(0.000) (0.001) (0.000) (0.000)
Poverty_rate −0.002 −0.041 0.003 −0.007
(0.007) (0.157) (0.002) (0.007)
Intergovernmental_transfers −0.359 −2.542 −0.123* 0.170
(0.291) (2.886) (0.074) (0.242)
Voter’s_political_affiliation(D) −0.700 −6.772 −0.144 0.762
(0.601) (5.675) (0.094) (0.719)
City −0.118 7.746*** 0.021 0.622***
(0.100) (1.430) (0.019) (0.105)
Constant 0.887*** 7.577** 0.123** 0.067
(0.153) (3.315) (0.055) (0.227)
Random‐effects parameters
Entity (government) 0.308 3.882 0.062 0.292
(0.058) (0.456) (0.007) (0.029)
Residual 0.207 4.027 0.098 0.194
(0.022) (0.410) (0.005) (0.013)
AIC −125.69 10,979.83 −3,125.41 −374.74
BIC −25.91 11,079.6 −3,025.631 −274.96
Observations 1,888 1,888 1,888 1,888
Number of groups 118 118 118 118
Note: Clustered standard errors in parentheses. AIC: Akaike’s information criterion. BIC: Bayesian information criterion.
*p < 0.1.
**p < 0.05.
***p < 0.01.

CHEN / Assessing the Financial Impact of Natural Disasters 15

 TABLE 6
Impact of Declared Disasters on Financial Indicators (Multilevel Models)
(1) (2) (3) (4)
Variables Cash_ratio Current_ratio Fund_balance Debt_ratio
Declared_disaster_damage −0.004 0.003 −0.001 0.006*
(0.004) (0.140) (0.003) (0.003)
Unreserved_fund_balance(lag) 0.021 −0.251 0.001 −0.041**
× Declared_disaster_damage (0.031) (0.545) (0.011) (0.018)
Disaster_reserve (lag) −0.000 0.648 0.035 0.006
× Declared_disaster_damage (0.050) (0.908) (0.041) (0.038)
Disaster_aid −0.000* −0.002 −0.000 0.000
× Declared_disaster_damage (0.000) (0.002) (0.000) (0.000)
Unreserved_fund_balance(lag) 0.435*** 5.174*** 0.610*** −0.387***
(0.082) (1.354) (0.038) (0.083)
Disaster_reserve (lag) 0.260 11.948*** 0.837*** −0.369
(0.291) (4.261) (0.100) (0.271)
Disaster_aid 0.001 −0.003 0.000 −0.001
(0.000) (0.008) (0.000) (0.001)
Population_density −0.004 −0.571** −0.006* −0.001
(0.020) (0.225) (0.003) (0.025)
Personal_income −0.001 −0.051 0.002* 0.001
(0.003) (0.035) (0.001) (0.004)
Unemployment −1.632*** 11.750 −0.003 0.478
(0.579) (12.674) (0.199) (0.486)
Population −0.000*** 0.001 −0.000 0.000***
(0.000) (0.001) (0.000) (0.000)
Poverty_rate −0.002 −0.056 0.002 −0.007
(0.007) (0.160) (0.002) (0.007)
Intergovernmental_transfers −0.364 −2.984 −0.128* 0.174
(0.302) (2.820) (0.075) (0.245)
Voter’s_political_affiliation(D) −0.684 −6.588 −0.142 0.725
(0.627) (5.953) (0.095) (0.720)
City −0.122 7.825*** 0.020 0.623***
(0.099) (1.446) (0.019) (0.104)
Constant 0.875*** 7.599** 0.119** 0.073
(0.148) (3.352) (0.054) (0.227)
Random‐effects parameters
Entity (government) 0.308 3.933 0.063 0.291
(0.059) (0.463) (0.007) (0.029)
Residual 0.207 4.040 0.098 0.194
(0.023) (0.416) (0.005) (0.013)
AIC −125.638 10,994.37 −3,124.057 ‐379.41
BIC −25.859 11,094.15 −3,024.278 ‐279.63
Observations 1,888 1,888 1,888 1,888
Number of entities 118 118 118 118
Note: Clustered standard errors in parentheses. AIC: Akaike’s information criterion. BIC: Bayesian information criterion.
*p < 0.1.
**p < 0.05.
***p < 0.01.

16 Public Budgeting & Finance / Summer 2019

 TABLE 7
Impact of Non‐Declared Disasters on Financial Indicators (Multilevel Models)
(1) (2) (3) (4)
Variables Cash_ratio Current_ratio Fund_balance Debt_ratio
Non‐declared_disaster_damage −0.004 −0.083 −0.004 0.002
(0.009) (0.126) (0.004) (0.009)
Unreserved_fund_balance(lag) 0.037 0.778 0.016 −0.023
× Non‐declared_disaster_damage (0.042) (0.605) (0.015) (0.027)
Disaster_reserve (lag) −0.058 2.542 0.052 −0.008
× Non‐declared_disaster_damage (0.106) (1.763) (0.056) (0.097)
Disaster_aid −0.000 −0.015** −0.000 −0.000
× Non‐declared_disaster_damage (0.000) (0.007) (0.000) (0.000)
Unreserved_fund_balance (lag) 0.371*** 3.333** 0.580*** −0.375***
(0.098) (1.553) (0.054) (0.091)
Disaster_reserve (lag) 0.373 7.251* 0.770*** −0.358
(0.354) (4.232) (0.107) (0.369)
Disaster_aid 0.001 0.031* 0.000 −0.000
(0.001) (0.018) (0.000) (0.001)
Population_density −0.004 −0.557*** −0.006* −0.001
(0.020) (0.216) (0.003) (0.025)
Personal_income −0.000 −0.045 0.002* 0.001
(0.003) (0.034) (0.001) (0.004)
Unemployment −1.711*** 8.998 −0.060 0.474
(0.584) (12.947) (0.201) (0.484)
Population −0.000*** 0.001 −0.000 0.000**
(0.000) (0.001) (0.000) (0.000)
Poverty_rate −0.001 −0.027 0.003 −0.007
(0.007) (0.155) (0.002) (0.007)
Intergovernmental_transfers −0.362 −2.638 −0.120 0.172
(0.285) (2.824) (0.073) (0.241)
Voter’s_political_affiliation (D) −0.739 −7.531 −0.150 0.768
(0.590) (5.572) (0.093) (0.732)
City −0.120 7.716*** 0.021 0.623***
(0.102) (1.416) (0.019) (0.106)
Constant 0.883*** 7.550** 0.122** 0.073
(0.150) (3.248) (0.055) (0.227)
Random‐effects parameters
Entity (government) 0.308 3.858 0.062 0.291
(0.058) (0.457) (0.007) (0.029)
Residual 0.207 4.019 0.098 0.194
(0.023) (0.408) (0.005) (0.013)
AIC −125.51 10,971.96 −3,129.81 −373.770
BIC −25.74 11,071.73 −3,030.031 −273.991
Observations 1,888 1,888 1,888 1,888
Number of groups 118 118 118 118
Note: Robust standard errors in parentheses. AIC: Akaike’s information criterion. BIC: Bayesian information criterion.
***p < 0.01.
**p < 0.05.
*p < 0.1.

CHEN / Assessing the Financial Impact of Natural Disasters 17

18
TABLE 8
Summary Impact of Disaster Damage on Financial Indicators
All disasters Declared disasters Nondeclared disasters
(1) (2) (3) (4) (5) (6) (7)
Average Average
With one declared With one declared With one
Average SD disaster SD disaster SD
Variables Mean damage increase (3)–(2) damage increase (5)–(4) damage increase (7)–(6)
Cash_ratio 0.383 0.378 0.372 (0.005) 0.379 0.375 (0.004) 0.383 0.382 (0.001)
Current_ratio 6.651 6.728 6.771 0.043 6.586 6.537 (0.049) 6.822 6.954 0.133
Fund_balance 0.253 0.253 0.252 (0.001) 0.255 0.255 (0.0001) 0.255 0.255 (0.000)
Debt_ratio 0.622 0.620 0.617 (0.002) 0.623 0.623 0.0004 0.618 0.615 (0.003)
Note: Column (1) “Mean” shows the means of the variables from Table 2. Columns (2) through (7) show the predicted values of the financial indicators using regression
coefficients from Tables 5–7 and descriptive statistics from Table 2. Columns (2), (4), and (6) are estimated with the average disaster damage (all other variables are set to
means). Columns (3), (5), and (7) are estimated with a one standard deviation increase from the average disaster damage (all other variables are set to means).

Public Budgeting & Finance / Summer 2019

unreserved fund balance, the impact of declared disaster damage on the debt ratio decreases.
When Unreserved_fund_balance is set to its mean of 0.15, the moderating effect is already
sufficient to offset the impact of declared disaster damage. A possible explanation for this
finding is that if local governments have established an average‐sized unreserved fund balance,
they would be able to address the possible impact of disaster damage on the debt level. The
other coefficients for the interaction terms are not significant, so the moderating effects of
Unreserved_fund_balance or Disaster_reserve on cash ratio, current ratio, and fund balance
are not supported by the regression analysis.
There are mixed findings to support Hypothesis 3 regarding disaster aid. In Table 5, with all
disasters considered, when disaster aid is included as an independent variable, disaster aid
significantly increases cash ratio and current ratio (both are liquidity ratios). When disaster aid
is interacted with disaster damage, the coefficients (−0.0002 and −0.0112) show that with
greater disaster damage, the positive effect of disaster aid on liquidity ratios decreases. The
same negative moderating effects of disaster aid on liquidity ratios are found in Tables 6 and 7.
The possible interpretation for this finding is that with larger disasters, it will usually take a
longer time for local governments to request reimbursements and for FEMA or the state to
process their reimbursement requests. This lengthy process would negatively moderate the
positive effect of disaster aid.
The coefficients for the control variables show expected signs and they are consistent
across all three tables. Population density, unemployment rate, and population size are
negatively related to local governments’ financial conditions, while personal income is
positively related to governments’ financial conditions. For a robustness check, the model is
also estimated with only the general fund and with all funds separately. The general fund
model is of interest to local administrators because the condition of the general fund is an
important indicator of fiscal health. The analysis of all funds is also important because some
governments access enterprise funds for responses to disasters. The regression results based
on only the general fund and on all funds show the same coefficients for the variables, but
the size of the coefficients and the standard deviations are marginally different. Because of a
smaller standard deviation, the negative coefficient for the impact of federally‐declared
disaster damage on the general fund cash ratio is significant, which is consistent with
Hypothesis 1. Additionally, the analysis based on all funds shows that federally‐declared
disaster damage significantly reduces all funds’ cash ratios and fund balances, which also
supports Hypothesis 1.
Because of the concern that the correlation between the interaction terms and the disaster
damage variable might reduce the significance level of the coefficients, the model is estimated
without the interaction terms. The results are mostly the same except for the impact of declared
disaster damage on debt ratio, which is no longer significant. The model is further estimated
with the past year’s disaster aid (t−1) as an additional independent variable because of the
concern that the disaster aid for the prior year’s disasters would affect governments’ financial
conditions. The results show that past disaster aid (t−1) increases the cash ratio and reduces the
debt ratio, while the current disaster aid’s positive independent effect and negative moderating

CHEN / Assessing the Financial Impact of Natural Disasters 19

effect on liquidity ratios remain. Due to the page limit, the results of the additional analysis are
not presented in this paper but are available upon request.

CONCLUSION

This research examines the financial impact of natural disasters on local governments
in New York State during the 17 years between 1996 and 2012. The key findings are
summarized below.

• Predicted values show that disaster damage is negatively related to the financial conditions
of local governments. However, the marginal effects are not significant when the fiscal
institution variables are set to their means.
• Federally‐declared disaster damage is positively related to a local government’s debt ratio,
while the unreserved fund balance moderates the impact of declared disaster damage on
the debt ratio.
• The prior year’s fiscal reserve, including an unreserved fund balance and disaster reserve,
strongly improves the financial condition of a city or county government.
• Disaster aid improves liquidity ratios for local governments. However, when the size of the
disaster damage increases, the positive effect of disaster aid decreases, which might be
explained by the lengthy process of reimbursement for larger disasters.

This research only finds limited support for the notion that natural disasters negatively affect
a local government’s financial condition. The results should be interpreted considering the
scope and the limitations of this study. This study pools all disasters into one damage variable
regardless of their types and sizes. Although disasters have been separated into federally‐
declared disasters and non‐declared disasters, the results are not substantially different. If
several major disasters are individually analyzed, the results could be different. The study also
only focuses on the financial condition indicators as dependent variables. If local governments’
revenues and expenditures are examined, the results would also be different.
There are three limitations with this research that could be addressed in future studies. First,
this research only examines the impact of disasters on the current year’s financial condition.
Recent studies find that disasters have lagged impacts on government finances (Miao, Hou, and
Abrigo 2018). FEMA disaster assistance may also be received in the years after disasters occur
(Hildreth 2009). The long‐term impact of both the disaster damage and disaster aid could be
examined in future studies. Second, I assume that disaster damage is exogenous in the model.
However, the previous financial condition of a government could affect its efforts to make
expenditures for disaster mitigation and preparedness (Fannin, Barreca, and Detre 2012),
which might also affect disaster damage. If so, endogeneity could be an issue in the model,
which should be addressed in future studies that consider governments’ disaster mitigation and
preparation efforts. Third, the disaster damage variable is constructed based on SHELDUS
data, which evenly distributes disaster losses across all the affected counties and aggregates

20 Public Budgeting & Finance / Summer 2019

damage caused by all different types of disasters. Disaster damage is only measured by the per
capita property damage, which could cause measurement error because property damage is also
correlated with the community’s characteristics. Although socioeconomic variables are con-
trolled, the measurement error could cause bias in the results. With more detailed data, future
studies can identify the particular impacts of a single disaster on specific governments.
This study shows that financial institutions remain the most important factors to influence a
government’s financial condition. When fiscal institutions are set to their average values, disasters do
not affect the local governments’ financial conditions. Do the results indicate that on average local
governments are already financially prepared for disasters? How large should the unreserved fund
balance and disaster reserve be to address disasters? Do the FEMA grants provide sufficient funding
for local governments to respond to disasters? These questions remain unanswered. Prior studies
already indicate that it is possible for local governments to incorporate disaster preparedness into their
budgeting process. Disaster‐related expenditures can be estimated based on past disaster experience,
climate data, and social vulnerability data (Enarson 2007). The size of a budget reserve fund may be
associated with the analysis of disaster risk and the possible liquidity issue resulting from the
intergovernmental grant process. Prior studies also indicate that disaster mitigation (i.e., reducing the
risk that disasters occur) is the most important stage of emergency management (Sylves and Búzás
2007). The sufficiency of local governments’ preparedness for disasters and investments in disaster
mitigation should be examined in future studies.

ACKNOWLEDGMENTS

This research is supported by the Faculty Research Awards Program at the University at
Albany, SUNY.

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