Trump considers abolishing FEMA

President Donald Trump signed an executive order Sunday establishing a task force to evaluate the Federal Emergency Management Agency as he floated the idea of abolishing a department that many in the municipal bond market consider key to stabilizing city and state credit ratings in the wake of natural disasters.

“FEMA is going to be a whole big discussion very shortly, because I’d rather see the states take care of their own problems,” Trump said last week in an interview on Fox News.

Trump later suggested the federal government would continue to send aid by allocating it directly to states. “I think we’re going to recommend that FEMA go away and we pay directly — we pay a percentage to the state,” he said Friday visiting North Carolina, still struggling to recover from Hurricane Helene. “But the state should fix this. If the state did this from the beginning, it would have been a lot better situation.”

Reimbursement by FEMA is often a long and arduous process and many states either front the money from their own reserves, or issue bonds to pay for certain damages. Despite the red tape, federal disaster aid has long been considered a key credit buffer for disaster-struck states and cities that have traditionally relied heavily on federal aid to ease the recovery.

“FEMA and federal disaster relief is a really important source of funding for states and local governments, not only in the immediate aftermath but also years following the disaster,” said Sarah Sullivant of S&P Global Ratings. “The assumption and historical track record of federal disaster relief funding supporting local government credit is part of what keeps local government credit stable after a natural disaster.”

If cities and states need to dip deeper into their own coffers it could pressure liquidity in the short term and potentially “fiscal performance over the years,” Sullivant said.

Sullivant noted that disasters are growing more costly, increasing pressure on cities and states even if federal aid remains flat.

Emergency public assistance to state and local agencies has nearly doubled in the last decade, excluding the pandemic,” S&P noted in a Jan. 8 U.S. local governments outlook report. “As the cost associated with climate-related disasters climbs, we expect that the balance of risk sharing between federal, state and local agencies will continue to evolve, particularly around flood risk,” the report said.

Fitch Ratings, in a Jan. 14 report on the California wildfires, highlights that “as in past natural disasters, FEMA support will be crucial to maintaining fiscal stability.”

Trump’s executive order would establish the Federal Emergency Management Agency Review Council which will recommend changes and advise the president on next steps. “Despite obligating nearly $30 billion in disaster aid each of the past three years, FEMA has managed to leave vulnerable Americans without the resources or support they need when they need it most,” the order said.

The council will be made up of the heads of Homeland Security and Department of Defense and other “relevant agency heads and distinguished individuals and representatives from sectors outside of the federal government appointed by the President.”  The non-federal members will have “diverse perspectives and expertise in disaster relief and assistance, emergency preparedness, natural disasters, federal-state relationships, and budget management.”

Congress would need to approve the elimination of the agency. Last week, Sen. Chuck Schumer, D-N.Y., called the proposal “dangerous.”