In addition to using funding and revenue sources, municipal governments may be able to use public financing strategies to pay for green infrastructure projects. Financing a project through a municipal bond or Clean Water State Revolving Fund loan may have significant advantages. For example, a local government may be able to make upfront investments in green infrastructure programs and realize more immediate benefits from project installation. However, financing strategies have limitations. Local governments may not be able to find sufficient financing for small scale or demonstration projects because investors are generally interested in bigger projects. Additionally, financing may only be available for capital projects and not for the operations and maintenance that are essential to successful green infrastructure programs.
Clean Water State Revolving Fund
One important source of financing for water infrastructure projects is the Clean Water State Revolving Fund (CWSRF). The federal government provides grants to capitalize state CWSRF programs. States contribute a 20 percent funding match, and administer and operate the programs. The state programs function as infrastructure banks: repaid principal and interest from loans is returned to the state program, allowing the state to finance new projects.See footnote 1
States have significant flexibility over CWSRF program administration, and can provide several forms of financial assistance to local governments, including:See footnote 2
- Direct loans: CWSRF can provide financing for a project and offer interest rates at or below market rates.
- Debt purchasing or refinancing: CWSRF can be used to purchase a community’s stormwater infrastructure debt to relieve unfavorable loan terms; projects may be refinanced using CWRF funds.
- Loan guarantees and insurance: CWSRF funding can be used to increase access to private credit markets or lower a jurisdiction’s private borrowing costs.
- Additional subsidization: Under certain conditions and federal appropriation levels, additional subsidization in the form of loan forgiveness or grants may be available.
States can use the CWSRF to fund the capital costs of both gray and green infrastructure, but CWSRF funding cannot be used for operations and maintenance expenses.See footnote 3
Although only a small percentage of CWSRF funding has historically been directed to green infrastructure projects, the EPA and many states have recently made green infrastructure a priority for CWSRF programs. The CWSRF operates a Green Project Reserve, designed to encourage environmentally responsible investments with CWSRF funds. Green Project reserve guidance requires states to invest at least ten percent of their federal grant funding in four priority areas, including green infrastructure.See footnote 4 Since 2009, state CWSRF programs have provided $800 million in assistance to green infrastructure projects. In January 2016, the EPA issued a statement of policy encouraging states to support green infrastructure projects by prioritizing these projects for CWSRF funding.
Local governments and municipal utilities may be able to finance capital spending through the issuance of municipal bonds.See footnote 5 Municipal bonds are a very common way for local governments to finance capital projects – in the United States there are approximately $2.8 trillion in outstanding U.S. municipal bonds.See footnote 6 For infrastructure that requires significant upfront capital investment but will operate for a number of years, bond financing allows a local government to pay for a project over the entire life of the infrastructure because the debt is repaid gradually over time.
Municipal bonds can be issued as:
- General obligation bonds: secured by the full faith and credit of a local government, or
- Revenue bonds: secured by a future revenue stream (e.g., a stormwater fee).
While local governments and utilities can raise funds in the private bond market, municipal bonds often provide capital at a lower interest rate.See footnote 7 An EPA study found that a typical interest rate on a municipal bond was 3-4 percent, compared to a private bond typical rate of 5-15 percent.See footnote 8
Municipal bond issuance is regulated by state law, and state laws generally cap the total amount a jurisdiction may borrow through bonding. State law also controls a local government’s authority to issue bonds at all, the type of projects that can be financed with bond issuance, the eligibility of bond proceeds to pay for operations and maintenance expenses, and other factors.See footnote 9 It is important that a jurisdiction considering bond financing look into its applicable state laws on all of these topics to ensure compliance.See footnote 10
Green bonds are an emerging, promising mechanism by which local governments can fund climate resilience and other environmentally focused projects. Green bonds are not significantly different in structure than bonds used for other purposes, but are used to finance environmentally beneficial activities. Because green bonds must be used for environmentally beneficial projects, they may attract the interest of investors interested in environmental issues, as well as traditional investors. This increased interest may in the future reduce borrowing costs (compared to traditional bonds) for governments raising funds through bond issuance.See footnote 11
Many investment institutions, including major private and public banks, have developed independent principles and guidelines governing green bonds.See footnote 12 Green infrastructure installations would qualify under most definitions and institutional guidelines for green bonds, due to the numerous environmental benefits of green infrastructure installations. Over the past several years, green bonds have been one of the fastest growing sectors of the bond market, with over $37 billion in green bonds sold globally in 2014.See footnote 13
Tax Increment Financing
Tax Increment Financing (TIF) is a method of financing a project or development in a designated geographic area based on the anticipated increase in property tax that will be generated by the project. The revenue generated by a TIF is the property tax assessed on the increase in property value of a designated district following a development project, compared to the baseline property value prior to the development project. Tax increment financing originally developed as a means of financing the redevelopment of “blighted” areas, but is now used for a broad range of infrastructure improvements.See footnote 14 Chicago, Illinois, has established more than 120 TIF districts, and has leveraged its public investment to attract over $6 billion in private capital investment in TIF districts over two decades of development.See footnote 15 Revenue from Chicago’s Central Loop TIF has been used to fund the city’s Green Roof Improvement Fund, which incentivizes and provides partial reimbursement to commercial buildings that install green roofs to manage stormwater.See footnote 16
Green infrastructure may be an important component of a TIF development because the installation of green infrastructure can increase property values. The property value increases are driven by the effectiveness of green infrastructure at mitigating persistent flooding, as well as co-benefits such as providing community amenities and improving aesthetics.See footnote 17 The city of Milwaukee performed a quantitative analysis of green infrastructure installations and found that such projects added significant value to neighboring property, as expected when the TIF district was created.See footnote 18
Local governments can use tax increment financing for large capital projects (such as green infrastructure installation) or incremental, longer-term spending. A local government could issue municipal or private bonds to raise capital for a large-scale green infrastructure project, and use the TIF revenue to service bond payments. Alternatively, a local government could use TIF revenue incrementally—as the revenue is collected—to pay for smaller-scale green infrastructure projectsSee footnote 19 or, in many jurisdictions, to provide a sustainable revenue source to pay for operations and maintenance of green infrastructure installations.See footnote 20
Tax increment financing may be a valuable option for a local government because the TIF model allows a development or infrastructure project to “self-finance”—the increase in assessed property value caused by the development is used to repay the cost of the property development. This process allows a local government to finance a capital project without raising property tax rates or exceeding its debt limit.
However, tax increment financing has several limitations that local governments must consider. A local government cannot implement a TIF unless the state has passed TIF-enabling legislation.See footnote 21 State-specific statutory and regulatory requirements regulate the type of projects permitted and administrative procedures required for tax increment financing, such as requirements to pass local ordinances.See footnote 22 For example, some states require a local government to make a finding of blight in a district before using a TIF as part of a redevelopment plan, which might limit the neighborhoods in which a local government could focus green infrastructure projects.See footnote 23 Additionally, TIFs have received significant criticism and opposition due to the potential of TIF financing to divert property tax revenue from other municipal needs, such as school funding.See footnote 24