The small Texas city of Clyde missed bond payments in 2023 and 2024 amid a severe drought that reduced water sales and damaged infrastructure. Officials raised taxes and utility rates to address the shortfall, highlighting broader risks to the $4 trillion municipal bond market. Experts warn that droughts could expose more debt to climate threats than floods or wildfires by 2040.
Clyde, a city of about 4,000 residents two hours west of Fort Worth, Texas, relies on Lake Clyde for its water supply. Starting in 2022, scorching weather caused lake levels to plummet, leading officials to declare a water conservation emergency. By August 1, 2023, they escalated restrictions to ration spigot use, including lawn irrigation, but the city also missed two debt payments that day.
The drought slashed water sales by millions of gallons, even as Clyde imported water from neighboring Abilene at around $1,200 per day, or $3 per thousand gallons. Parched ground cracked, rupturing a sewer main and requiring a $250,000 repair. With an annual budget under $10 million, the city could not absorb these hits. By 2023, it sold 7 million fewer gallons than the prior year. In August 2024, Clyde missed payments of $354,325 and $308,400, totaling $1.4 million in liabilities by year-end. Standard & Poor’s downgraded the bonds from A- to D and the city’s credit to B, raising future borrowing costs.
Rodger Brown, mayor at the time and now interim city manager, said, “There’s more to a drought than just the cost of water. It tanks your credibility.” The city responded by increasing property taxes by 10 percent and adding a $35 monthly utility surcharge. A resident at a council hearing pleaded, “We have people in this very room who have to decide already, do I buy medicine [or] do I buy groceries?”
This year, droughts affected 43 states and 125 million people. Intercontinental Exchange projects that by 2040, more outstanding municipal debt will face drought risks than hurricanes, floods, and wildfires combined. In a best-case scenario, billions in bonds are at risk; in the worst, hundreds of billions. Evan Kodra of ICE called drought “a dark horse in the conversation right now. It should be a bigger deal.” Jeremy Porter of First Street Foundation added, “Drought is one of those things, if there is an impact, there’s a step-function impact. You just don’t have the capacity to cover the risk.” No FEMA drought declaration has occurred since 1993.
Similar strains appear in Rio Verde Foothills, Arizona, where residents face potential water bill doublings after a 2021 cutoff from Scottsdale. Sara Fletcher of Stanford noted, “Water prices are going up, and up, and up. They are going to go up much faster than inflation for the past decade.” First Street estimates 11.1 million Americans will relocate due to water scarcity by 2055, with property values dropping $1.47 trillion from climate risks. Seven of the 10 counties with the largest 30-year increase in scarcity risk are in Texas.