Green Infrastructure Toolkit

How to Pay for Green Infrastructure: Funding and Financing

Introduction

Communities are increasingly turning to green infrastructure as a vital tool to help manage stormwater and improve climate resilience. However, many local governments seeking to establish green infrastructure programs face budget constraints that may limit the scope or effectiveness of program implementation. Fortunately, local governments have the opportunity to draw upon a wide range of funding sources, revenue models, and financing strategies to support green infrastructure programs. This Funding and Financing Chapter provides strategic guidance on how to pay for green infrastructure. 

Stormwater management is increasingly becoming a major expense for local governments addressing persistent flooding or responding to legal and regulatory mandates, such as combined sewer overflow (CSO) consent decrees,^{See footnote 1}  total maximum daily load waste load allocations,^{See footnote 2}  or municipal separate storm sewer system (MS4) permits.^{See footnote 3}   

Investing in green infrastructure can cost-effectively help communities manage stormwater while also producing significant co-benefits. Examples of co-benefits include improvements in air quality and public health, increased climate resilience, opportunities for community recreation, and enhanced community aesthetics.^{See footnote 4} Designing green infrastructure programs to maximize co-benefits may open up funding sources that would otherwise not be available for stormwater management projects or programs. For example, communities can use funds for programs such as transportation and street design, open space and wildlife conservation, or disaster relief to pay for green infrastructure programs. Additionally, communities can implement innovative financing strategies to capture the economic value created by flood costs avoided, increased health benefits, or increased property values. Communities can aggregate multiple funding and revenue sources, or combine a funding source with financing options such as low-interest loans or green bonds.

Green Infrastructure Cost Effectiveness

Green infrastructure can effectively manage the “first flush” of stormwater while producing significant cost savings for local governments. For example, Philadelphia’s city-wide Green City, Clean Waters program is projected to save the city $8 billion over a twenty-five year implementation period compared to the traditional gray infrastructure that would have been required under an agreement with the U.S. EPA to control the city’s stormwater.^{See footnote 5} Similarly, Chicago, Illinois, has reported that its green infrastructure installations are more effective at managing stormwater than traditional techniques on a per-dollar basis.^{See footnote 6} The Chicago Green Alley Program is estimated to manage stormwater between 3 and 6 times more effectively per dollar compared to traditional stormwater infrastructure.^{See footnote 7} However, it can still be hard to find the funds to build and maintain green infrastructure.

This chapter provides descriptions of multiple strategies that a local government can use to pay for green infrastructure program implementation.  The tools covered in this chapter are broken down into five categories. For each of the funding or financing strategies, this toolkit provides an overview of how the mechanism can be used to pay for green infrastructure projects or programs. Linked resources in the Georgetown Climate Center Adaptation Clearinghouse provide more detailed information about funding programs or descriptions of jurisdictions that have successfully paid for green infrastructure projects or programs using the various funding or financing tools. This Chapter explores federal funding sources, state funding sources, local funding models, government financing options, and private financing options (each described in more detail below).^{See footnote 8}  

Each funding or financing strategy can be compared under a set of decision-making criteria, including:

• Funding Availability, which includes the ease of getting funds and the ability to sustain them over time. For example, whether a federal program is available every year and calculated by a formula, as opposed to being a competitive grant program.
• Funding Flexibility, meaning the amount of discretion the local government has to decide how to use the funds, or the breadth of activities that the funds can support.
• Municipal Budget Impact, meaning whether the particular funding strategy takes money out of the local government’s general fund.
• Administrative Burden, which includes the time and resources necessary for the local government to administer or manage that funding strategy, in addition to any potential administrative process to begin the program (writing new regulations, for example).
• Legal Constraints, such as whether the funding strategy is constrained by state statutes that may give the local government legal authority for that strategy (or not), or by related state laws such as, for example, caps on borrowing.

Federal Funding

Overview

Federal programs can provide significant funding for local green infrastructure programs. Federal funding can come in the form of competitive grants or formula programs.^{See footnote 9}  that local governments are already likely to be receiving. Grant funding may provide a local government with the resources to implement green infrastructure projects. However, federal grants can be highly competitive, may require lengthy application, are limited in size and scope, and often are awarded on a one-time basis. Many federal grants require a funding match from state or local sources for some percentage of the awarded funds. Some funding sources also prohibit the use of grant funding for operations and maintenance expenses. Local governments that use grant funding for green infrastructure installation should take these factors into account and recognize the importance of identifying additional funding streams to support on-going expenditures.^{See footnote 10}

Local governments can expand opportunities for federal funding by designing green infrastructure projects in ways that maximize particular co-benefits. For example, designing bioswales with native plants may provide eligibility for wildlife conservation or pollinator grant funding (e.g., State Wildlife Grant Programs, funded by U.S. Fish and Wildlife Service).^{See footnote 11}  Similarly, green infrastructure can be included in local programs that already receive or apply for federal funding, such as transportation projects or disaster recovery plans.

This toolkit covers several types of federal funds in more detail below: 1) water quality; 2) economic and community development; 3) disaster recovery; and 4) transportation. Within each substantive area, some federal funding strategies are competitive grant programs and some are regularly given, formula grant programs.

Water Quality Funding

Green infrastructure projects may be funded by federal programs that support efforts to reduce water pollution and manage stormwater. Programs include the US Environmental Protection Agency’s Section 319 Nonpoint Source Program^{See footnote 12}  and the Urban Waters Small Grants Program (UWSG). Under Section 319 (of the Clean Water Act), EPA provides grant funding to states to reduce pollution from stormwater runoff and other sources; EPA recognizes the “importance of green infrastructure … in managing stormwater” has made clear that funds can be used for green infrastructure projects.^{See footnote 13}   EPA’s UWSG Program focuses on improving the quality of urban waters and stimulating neighborhood revitalization in underserved communities, and can be used specifically for innovative or new green infrastructure practices.

Economic and Community Development Funding

Community development money can be used to fund green infrastructure because these projects can create jobs, increase economic activity, and increase property values. Urban tree planting can increase economic activity in a commercial district.^{See footnote 14}   Additionally, green infrastructure can increase property values by mitigating flooding, improving neighborhood aesthetics, and providing other co-benefits.^{See footnote 15}  As a result, green infrastructure can be funded using Community Development Block Grant (CDBG) program funding (formula funding), administered by the U.S. Department of Housing and Urban Development (HUD).

Disaster Recovery Funding

Local governments eligible for disaster recovery and relief funding following a presidentially declared disaster may be able to use this federal funding to pay for green infrastructure projects. Many local governments have included green infrastructure in disaster recovery and rebuilding plans to mitigate flood risk and manage stormwater. The FEMA Hazard Mitigation Grant Program (HMGP) provides post-disaster federal aid to states to mitigate the risks of future disasters and can fund flood mitigation projects, including acquisition and relocation of flood-prone properties and soil stabilization projects like the installation of vegetative buffer strips.^{See footnote 16}  The Community Development Block Grant – Disaster Recovery (CDBG-DR) program also provides federal aid to states post-disaster, and funds can be used for a variety of community development activities that benefit low- and moderate-income individuals, reduce blight, or address an urgent community need. In rehabilitating housing and constructing public amenities, cities may be able to incorporate green infrastructure techniques (like street trees and permeable pavements) in street design.

Transportation Funding

Green infrastructure projects are often eligible for transportation funding because they improve transportation networks by efficiently and cost-effectively mitigating street and alley flooding.^{See footnote 17}  The U.S. Department of Transportation’s (DOT’s) Transportation Alternatives Program (TAP) provides funding for “transportation alternatives,” including “off-road trail facilities for pedestrians, bicyclists, and other non-motorized forms of transportation.” TAP funding could be used to pay for green infrastructure components of trails and sidewalks such as permeable pavements.^{See footnote 18}  The Congestion Mitigation and Air Quality (CMAQ) program allocates federal funding for infrastructure projects that reduce congestion and improve air quality.^{See footnote 19}  Bicycle transportation and pedestrian walkways are eligible uses of the money, and can be designed to include green infrastructure features, such as permeable surfaces for trails, and bioswales and bioretention for areas adjacent to trail surfaces. The Transportation Investment Generating Economic Recovery (TIGER) program funds investments in road, rail, transit and port projects. TIGER grants have been awarded to projects that included green infrastructure components.^{See footnote 20} 

State Funding

Overview

Many states have grant programs that may be used to fund green infrastructure projects and programs. Because of the varied and broad benefits of green infrastructure, a diverse array of stormwater and other environmental programs, including those for wildlife preservation, land conservation, tree planting, and water quality improvement, may be available. For example, Cumberland County, Pennsylvania, supported its green infrastructure planning by applying for and receiving funding to  develop an open space and smart growth plan from the state Department of Conservation and Natural Resource (DCNR) Keystone Grant Funding program.^{See footnote 21} 

The City of Tucson, Arizona, used a grant from the Arizona Department of Environmental Quality to fund a series of green infrastructure projects in the Rincon Heights neighborhood, including the conversion of vacant lots into stormwater management pocket parks featuring bioretention elements, curb cuts, and the removal of impervious surfaces.^{See footnote 22} 

State-administered transportation grants can provide a regular funding source for municipal green infrastructure programs. The City of Grand Rapids, Michigan, used a Michigan Department of Transportation Enhancement Grant (complemented with funding from neighborhood and business associations and a regional environmental council) to construct bioretention islands in the roadway. These islands capture stormwater and reduce sediment runoff and phosphorus loading.^{See footnote 23} 

The greater Memphis region created a plan to combine multiple sources of federal, state, and local funding – including transportation funding for recreational trails – to implement a regional plan for trails and open space to mitigate flooding and promote community growth.  In 2015, the Mid-South Regional GreenPrint, a vision for the next 25 years, envisions a regional network of green space, including parks and greenways. The plan includes a comprehensive description of how multiple sources of funding, from federal funds to state wildlife and conservation funding, could be combined to pay for this network.^{See footnote 24} 

Local governments can increase the effectiveness and reach of grant funding by leveraging federal or state grants through environmental loan programs.  For example, the City of Lancaster, PA, funded a program that installed stormwater management features in parking lots by leveraging grant money from the state natural resources agency (as well as from the National Fish and Wildlife Foundation) to secure a loan from Pennsylvania’s infrastructure bank.^{See footnote 25} 

Local Funding

Overview

Local governments have multiple options for using local funding to pay for green infrastructure projects. If resources are sufficient, local governments can include green infrastructure programs and projects in capital budgets.^{See footnote 26} If local governments want a dedicated source of funds just for green infrastructure and stormwater management, municipal and stormwater utility fees may also provide an important source of revenue.

Coordinating Across Multiple Agencies

Local governments can increase the efficiency of green infrastructure programs and expand the pool of available funding by coordinating funding across municipal agency budgets. Such coordination can reduce project costs by ensuring that projects are installed at the most cost-effective times – for example, when street or sidewalk construction is already scheduled. In addition to improving cost effectiveness, encouraging collaboration among agencies may enable sharing of green infrastructure costs among agency budgets.  For example, in Los Angeles, CA, the Bureau of Street Services and the Bureau of Sanitation collaborated to implement the Oros Street project – a $1 million installation of bio-retention areas in the street parkway and a large infiltration basin underneath a nearby park.^{See footnote 27}   Boulder, Colorado’s Greenways program is funded by equal contributions from the City’s Transportation Fund, Stormwater and Flood Control Utility Fund and the state’s Lottery Fund, with additional funding by the Urban Drainage and Flood Control District.^{See footnote 28} 

Local Funding Options

Municipal Budgets

Many local governments fund green infrastructure and stormwater management programs through the general fund, which in most local governments is primarily funded through income and property taxes. A local government using funds from general tax revenue for green infrastructure will not need to set up new revenue collection and appropriation systems, but funding for green infrastructure programs may not be stable year-to-year if other spending obligations are seen as higher priorities. Additionally, the use of general funds could be seen as inequitable, because some property owners that contribute to stormwater runoff (such as public facilities, universities, and churches) may be exempt from the income or property taxes used to fund the program.^{See footnote 29} 

The Ramsey-Washington Metro Watershed District in the Twin Cities in Minnesota provided initial funding for its green infrastructure program with the watershed district’s Capital Improvements Budget.^{See footnote 30}   The project received additional support from property tax revenue and state grant funding.^{See footnote 31} 

Permit Fees

Local governments can assess permit fees to provide additional revenue for green infrastructure programs. The fees allow local governments to raise revenue directly from any proposed development or construction that might worsen stormwater impacts.  Portland, Oregon, has established a “One Percent for Green” Fund, which requires that all construction projects in the public right-of-way that do not include “green street facilities” (including curb extensions and porous pavement) must contribute one percent of project costs to a city fund for other green infrastructure projects that exceed city requirements.^{See footnote 32} 

However, assessed fees may not provide sufficient funding for full program implementation, and likely would need to be combined with additional funding sources. Additionally, fees may not be a consistent source of revenue, as they may decrease during a time of slow construction.^{See footnote 33} 

Stormwater Utility Fees

Local governments may choose to assess stormwater utility fees as a reliable means of paying for green infrastructure programs. This approach is advantageous because it provides a dedicated funding stream with sustainable and predictable revenue over time.

A stormwater utility fee may be seen as a more equitable way to pay for stormwater management, compared to general funds, because local governments or utilities may be able to raise money in a way that is directly related to a property’s stormwater impacts. Many local governments allow property owners to offset stormwater user fees or earn incentives and credits by managing stormwater onsite through best management practices such as reducing impervious surface area. For example, the programs in Prince William County, Virginia, and Lenexa, Kansas, provide fee reductions or credits to property owners who manage stormwater onsite.^{See footnote 34} 

However, establishing utility fees may face regulatory and legal limitations, including sometimes approval of a legislative body. An entity (local or regional government or utility) that decides to establish a stormwater user fee must first determine its legal authority to do so, and must structure the user fee in a way that meets all applicable state legal requirements. State law sets the parameters for what types of local or regional entities are allowed to establish fees or taxes, and local governments must be extremely clear that they meet their own states’ definition. While these requirements vary by state, they can include procedural questions (e.g., whether a vote by the local elected body or the voters is necessary) and substantive questions (e.g., whether the fee is structured in such a way as to fairly relate to the amount of impervious surface on a particular property).

A number of local governments have faced legal challenges following the imposition of utility fees, including stormwater fees.^{See footnote 35}  One of the most commonly litigated issues is whether an assessed utility fee is considered a fee or a tax. Because some jurisdictions require voter approval to assess a tax, this distinction can be critical. In the event of a legal challenge, courts commonly look to several elements to distinguish between a tax and a fee. These elements include: the relationship between the assessed fee and the service provided by the local government, the purpose of the fee, the uniformity of application of the fee, and whether the fee benefits those who pay.^{See footnote 36}  Similarly, lawsuits have been filed challenging the authority of a local government to establish a utility.  Local governments should carefully consider all applicable legal requirements and relevant case law before implementing a stormwater utility fee.

Establishing and assessing a utility fee requires upfront administrative costs, including a feasibility study, stakeholder outreach, and fee structure design and implementation. Additionally, there have been a few high-profile examples of public resistance to the stormwater user fee model.^{See footnote 37}  However, through effective outreach, local governments may be able to establish strong community support for stormwater user fees. The City of Orlando, Florida, funds its stormwater management activities through a stormwater utility fee, and successfully built public support for fee implementation by linking the fee to citizens’ concerns about flooding and clean waterbodies.^{See footnote 38} 

Government Financing

Overview

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 39} 

States have significant flexibility over CWSRF program administration, and can provide several forms of financial assistance to local governments, including:^{See footnote 40} 

• 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 41} 

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 42}   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.

Bond Financing

Local governments and municipal utilities may be able to finance capital spending through the issuance of municipal bonds.^{See footnote 43}  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 44}  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 45}   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 46} 

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 47}  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 48} 

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 49} 

Many investment institutions, including major private and public banks, have developed independent principles and guidelines governing green bonds.^{See footnote 50}  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 51} 

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 52}  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 53}  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 54} 

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 55}  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 56} 

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 projects^{See footnote 57}  or, in many jurisdictions, to provide a sustainable revenue source to pay for operations and maintenance of green infrastructure installations.^{See footnote 58}   

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 59}  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 60}  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 61}  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 62} 

Private Financing

Overview

Communities may also explore innovative strategies to leverage limited municipal funds to attract private capital. One approach that is common to infrastructure projects but has been limited in green infrastructure stormwater management is the use of public-private partnerships. Even more innovative strategies to engage private sector capital include pay-for-performance funding mechanisms such as social impact bonds.

Public-Private Partnerships

A public-private partnership (P3) is a collaboration between a government and one or more private sector partners. Under a P3, the private sector partner contracts to fulfill one or more traditional government functions, including financing, delivery, operations, and/or maintenance of public infrastructure.  

A P3 may allow a local government to make significant upfront capital investments without straining its municipal debt limit, by leveraging limited public funds to attract private capital.^{See footnote 63}  Commonly cited benefits of P3s include more cost effective and faster program implementation, due to potential economies of scale and technical expertise that a private-sector partner can provide.

However, local governments exploring a P3 must examine several significant legal and policy considerations.  A local government must first determine whether its state has passed enabling legislation for P3s, as well as any restrictions in the enabling legislation on the categories or structures of P3s.^{See footnote 64}  Additionally, there can be some degree of public opposition to private-sector management of traditional public functions such as operations and maintenance post-installation.^{See footnote 65}  Prior to establishing a P3, local governments should conduct meaningful stakeholder and community outreach to ensure that the goals of the P3 and terms of the contract agreement align with community interests and achieve community objectives.

For example, local governments can structure a P3 to achieve those community objectives such as community development and local jobs growth by adding local workforce training and hiring requirements into the P3 contract agreement. Prince George’s County, Maryland, has entered into a P3 to address its stormwater management problems through a comprehensive, county-wide green infrastructure program.  Corvias Solutions, the private sector partner, assumes responsibility for design, construction, operations, and ongoing maintenance. As part of the P3 agreement, Corvias will use small and minority businesses in Prince George’s County for at least 30 to 40 percent of the total project.  To verify the effectiveness of the P3, Prince George’s County is independently conducting its own green infrastructure program using conventional public processes during the first three years of the contract. After three years, the county will evaluate the effectiveness of the P3 and determine whether or not to extend the agreement with Corvias.^{See footnote 66}