Ensuring water for high priority uses during periods of hydrologic drought is increasingly difficult due to the frequency of drought events and growing competition for limited resources. While some water allocation and drought planning mechanisms are commonly assigned to the local level, local government capacity and willingness to undertake and implement these often is not considered. An in-depth, case study analysis, of the small cities of Windom and Morris, Minnesota, was used to evaluate capacity for water allocation and drought planning in that State. Capacity for drought planning and water allocation was found to be weak in both municipalities. Municipal strengths were noted in the development of vertical and horizontal linkages with other organizations, and stable financial capacity. Some of the primary constraints hindering the development of capacity for periods of drought include local government perception of drought as a minor hazard and limited senior government incentives for compliance with state statues.