Floods and droughts in Texas

Central Texas is reeling from catastrophic floods. Meanwhile, Corpus Christi could run out of water in the next two years.

The horrifying vision of a river rising more than 25 feet in 45 minutes is alive in our collective consciousness this week. But just two and a half hours away from the devastating flooding in Central Texas sits the City of Corpus Christi, which may run out of drinking water in two years. Imagining either situation is terrifying.

Like Kerr County in Central Texas, where heat-fueled heavy rain fell on parched soil that couldn't absorb the downpour, Corpus Christi is suffering from drought.

City of Corpus Christi

Water is scarce in Corpus Christi, where around 400,000 people live and work, and the city is essentially hoping for a not-too-harmful hurricane to refill its watershed. Based on reporting from KIII 3NEWS, unless a desalination plant or two is quickly brought online the city will run out of water by the spring of 2027. (The city is working on the state's first large-scale desalination plant, but it's not expected until 2028.)

It's quite a story, and although drought and evaporation of needed lake surface water are key elements, climate change isn't the only culprit. City planners approved new large-scale industrial expansion in the 2010s without supplementing the city's water resources, presiding over a large increase in industrial water consumption over the last three years—a category that now represents about 60 percent of the area's total water use and continues to grow. At the same time, residential consumers have been urged to conserve. Many of the city's existing water sources are depleted and could fail at any time. As the 3NEWS reporters put it, "Corpus Christi is on a tightrope with water."

The federal administration is saying that the cataclysm in Central Texas was a "big surprise." That may or may not be true. The National Weather Service seems to have done its job issuing warnings. But the appalling physical risk posed to Corpus Christi can't be dismissed in the same way. We know about it and it is coming. (Lots of other cities in the Southwest face similar issues.)

Corpus Christi has issued about half a billion dollars of municipal bonds backed primarily by the taxes it is able to collect (not including its debt supported by specific revenue streams, like utility system revenue). In essence, the city is promising to use all its available revenues to pay back bondholders. If a city can't reliably get water to its residents or industries, its economic stability and ability to collect taxes could be constrained. Surely this amounts to a credit risk. Yet Corpus Christi's muni bond ratings are positive and unchanged.

Financial Times commentator Robert Armstrong joked recently that although market forces are seen as wise, perfectly discounting the future into infinity—Treasury Secretary Scott Bessent takes the view that "markets live in the future"—markets are often acting "out of greed." It is very hard for markets—like people—to deal with uncertain but high consequence events like climate stresses, extreme weather, and water scarcity, even as low-probability events become much more likely. People make decisions based on past experiences ("muni bonds never default") and simplified decision rules and biases.

Some of these cognitive biases will sound familiar. You have them too. Dr. Howard Kunreuther wrote and spoke about them: Myopia, optimism, inertia, simplification, and herding. Because markets haven't been through accelerating climate change before and have these biases, shifts aren't happening and risks are mispriced.

Myopia. Both muni bond investors and analysts are focused on immediate financial metrics and interest rate change—wanting to make money in the short run. A default directly attributable to water scarcity isn't likely to happen next year. It's a future high-consequence, catastrophic event. Analysts care about avoiding immediate, clear credit failures, not slower physical climate risks. (Even though 2027 isn't very far away.)

Optimism. "It's not going to happen to [Corpus Christi]. Running out of water happens in other places in the world, not in America."

Inertia. General Obligation bonds are viewed as "safe." Today, most muni bond credit problems, like defaults or distress, are found in "risky" sectors, like speculative development projects or in places that are bad at handling their finances. An investor or analyst could say, "Let's just keep going" in safe sectors. Why change investing behavior? But couldn't significant credit problems stemming from climate change affect "safe" areas of the bond market as well?

Simplification. Risk is made up of both the likelihood of an event (losing water) and its consequences. But investors, analysts, and human beings generally mostly focus on the likelihood—which feels low in our developed land of America. But shouldn't we be putting both elements together in making these decisions? The consequences of running out of water are unthinkable.

Herding. People invest in munis to shield the interest income they get from federal taxation. Everyone does. Someone, surely, must be looking hard at the risks. (But what if nobody is?)

It is right and expected to focus this week on the tragedy in Central Texas. There should have been far better early warning systems in place—such systems have saved untold lives in Bangladesh.

But I'm looking at Corpus Christi as well. Drought and water link these two stories together. One happened overnight, and the other will happen soon. There is evidence that the market, the force Sec. Bessent believes "lives in the future," is not adequately preparing for the systemic, long-term financial risks posed by physical climate change. These risks may affect even the most traditionally secure investments, and thus all of us.

And, sadly, we may forget about Central Texas's grief: We all suffer from amnesia when it comes to dealing with the physical effects of climate change. That's another of our cognitive tricks, and it is perhaps the most powerful of all.

Do you remember when Jackson MS had a water crisis? That was just three years ago.