An academic study found that American communities at greater risk from wildfires pay higher interest rates on their municipal bonds, though some market watchers say the situation is more nuanced.
The researchers said the trend has forced taxpayers to absorb billions in financing costs in fire prone regions.
Berry-Stoelzle co-authored "Wildfire Risk and Municipal Bond Yields" with Yi Hao, associate professor at Tulane University's A.B. Freeman School of Business. It was published in the Journal of Risk and Insurance in November.
They say the cumulative financial impact is substantial, estimating that taxpayers in the most affected cities collectively paid an additional $4 billion in property taxes between 2000 and 2022 to cover this interest premium. These extra financing costs either fall on taxpayers or restrict improvement projects, they wrote.
Data from the devastating wildfires in Los Angeles in January 2025 and in Maui in 2023 did not fall in the parameters of the study, but Berry-Stoelzle said in an interview he would expect future issuance in Los Angeles to require extra risk premium.
"We looked at risk premium and one standard deviation," he said. "In Los Angeles, I would expect it would be above one standard deviation. I would expect the risk premium would be a bit higher."
Some buyside analysts say the municipal bond market is showing a
While climate change is a larger topic encompassing flooding, hurricanes and tornadoes, wildfires have become a more defined and trackable item or risk, concentrated heavily in California. The primary drivers for wildfires are drought and dry conditions, with wind as a component.
The "numbers tell the story," when it comes to the impact on the Los Angeles County Department of Water and Power's bonds, said Kim Olsan, a senior fixed income portfolio manager at NewSquare Capital.
The pricing history of LADWP bonds demonstrates a stark shift in market perception following last year's Palisades and Eaton fires.
Olsan took a look at spreads from 15 years ago, five years ago, in November and then in March after a judge's ruling on liability for the water side resulted in a
For the 2016 bonds, both water and power bonds showed very tight, often negative spreads to the Bloomberg Evaluated Pricing Service AAA municipal curve, Olsan said.
Five years ago, spreads remained stable and tight showing virtually no change from the 2016 spreads, Olsan said.
Following the Palisades fire and subsequent downgrades, spreads widened significantly, reflecting a market reaction to LADWP.
Power revenue bonds LADWP sold earlier this year were +23 at the 5 year, +32 at the 10-year and +37 at the 15-year mark to BVAL. Water revenue bonds it sold in November 2025 were +44 at the 5-year, +45 at the 10-year and +44 at the 15-year to BVAL.
"I think there are a couple of take-aways," Olsan said. "There was a specific market reaction to these credits after such a large event last year."
DWP faces a dilemma: to cover financial claims and financial needs, the authority can either issue more debt, which puts pressure on existing yields and spreads, or raise rates, neither of which is a palatable option, Olsan said. The market may be anticipating more bonds to come to pay for lawsuit claims, she said.
She said she would not necessarily classify LADWP's wider spreads as rating-related, because there is more awareness that the frequency of natural disasters in different categories — hurricanes, tornadoes, wildfires — are increasing.
"In the mid-Atlantic area — New Jersey and Pennsylvania — there are more tornado watches," Olsan said. "I think the general weather patterns might be changing. It's bringing to the forefront how municipalities are addressing their risk."
The systematic analysis of fire data, like Federal Emergency Management Agency risk information, is not currently the primary driver of bond pricing, said Matt Fabian, a principal with Municipal Market Analytics. "Instead the market has become increasingly driven by rating agency decisions, largely due to the growth of separately managed accounts," he said.
SMA operators buy at a higher scale because they manage tens of thousands of accounts, Fabian said. To manage this volume, they rely heavily on ratings as a source of information, so if the ratings signal risk due to wildfires, prices will reflect that risk, he said.
Headline risk is also penalized more readily by SMAs, because a credit with headline risk could result in 100 phone calls bringing higher operational costs when clients call about a credit with drama, Fabian said.
"The SMAs are the marginal buyer, preferring high-grade bonds that are 10-years or shorter with 'no drama.' This preference reshapes how the market prices all bonds," he said.
The street is pricing the bonds cheaper in headline-risk areas, like LADWP, or in places where drought conditions look bad and forecasts indicate a rough summer, said Matt Posner, head of public finance for The Resiliency Company, a company focused on activating capital into resilience projects and programs.
"I would say generally on this trend: the market is beginning to differentiate exposure to physical and transition risks," Posner said. Utilities with concentrated wildfire exposure, water scarcity issues, or aging infrastructure are seeing more scrutiny, even if that scrutiny is not yet fully codified in rating agency methodologies, he said.
"This is where spreads are moving ahead of ratings," Posner said.
"The market is doing early-stage price discovery. I would not say that these credits are worse all of a sudden, but this is headline risk taking a longer pause over these particular areas," he said.
"To be clear though, this is not a
"If you recall, while DWP was impacted, [the city's] general obligation bonds were not, Los Angeles County Metropolitan Transportation Authority was not… the market generally deciphers the relevant intricacies of these credits," he said. "We are looking at reserve fund levels and modeling them out for financial losses as our way of stress testing credits for climate risk. Many of these headline credits have reserve capacity to sustain modeled perils for the next decade."
The academic study, which included 5,000 cities across the United States, only found a price differential in maturities of one to 15 years, Berry-Stoelzle said. Maturities of less than one year or more than 15 years weren't affected, he said.
"To be fair, we tried to isolate the wildfire effect, however, and Los Angeles has strong finances, so we have to take that into account," Berry-Stoelzle said.
He noted that sea level rise, where most research related to climate risk and bonds has been, had the strongest bond premium in the 30-year maturities.
Olsan said the increase in frequent storm and disaster events is raising focus on all parties involved in the bond process: issuers, investors, underwriters and bond counsel. There is an expectation that standardized, formalized disclosure on climate risk may emerge similar to the filing of audited financial statements, she said.
This could result in a "climate risk score" metric being made available through the Municipal Securities Rulemaking Board, Olsan said.
"While some issuers are proactively addressing investor concerns on an ad hoc basis, the market is poised for a more standard approach in the near future, driven by proactive issuers or regulatory requirements, she said.
Mitigation practices
The study also delivered positive news for high-risk communities, finding that investing in wildfire mitigation efforts can reduce financing costs.
"Risk management matters," Berry-Stoelzle said. "Investors want to know if cities are taking fire mitigation measures when they consider buying a municipal bond."
Berry-Stoelzle noted that increased borrowing costs "can be reduced or almost disappear if cities hire more firefighters or clear wildland areas."
Mitigation measures such as direct expenditure on local fire protection, the number of volunteer firefighters, and the number of reported fire containment activities on wildland were found to reduce the wildfire risk premium on the bonds. From a policy perspective, he added that investing in fire mitigation can lead to a reduction in financing costs and create value for communities.
The researchers examined more than 580,000 municipal bond issues from over 5,900 municipalities across the U.S. between 2000 and 2022. To isolate the effect of wildfire risk, the study focused on comparing the borrowing costs of communities in the same county, but with different levels of wildfire risk, ensuring that local economic differences were not responsible for varying interest rates.
The analysis revealed several key details about how the market prices this risk.
First, the wildfire premium is about two-thirds the premium investors demand for bonds from coastal cities subject to sea level rise, which earlier studies set at 0.53%.
Investors started to price in wildfire risk after 2000, suggesting that is when they became more conscious of the increasing number of fires.
The increased financing costs were only observed in bonds with maturities between one and 15 years. Investors were less concerned about damaging wildfires in the short term, and in the long term, beyond 15 years, the risk was likely overshadowed by other factors related to the city's overall economic health, Berry-Stoelzle said.
