Supporting Local Governments as Climate Change Threatens Their Communities
How municipalities can leverage funding streams and ensure equitable dissemination of climate-resilient investments
This article is part of a series exploring challenges faced by households and communities in the wake of extreme weather events and the financing solutions that can advance resiliency.
This year’s Earth Day theme encourages us to evaluate the ongoing investments needed to protect our planet. With climate disasters becoming more frequent and severe, the US Government Accountability Office warns climate change will cost the US economy hundreds of billions of dollars annually by mid-century. To safeguard homes, businesses, and infrastructure, cities and states must invest in resiliency. Financing the necessary long-term infrastructure projects, however, can be challenging due to high upfront costs and diminishing funding sources.
This article focuses on how cities and states can identify and leverage existing funding streams to invest in resiliency projects. With studies showing that every $1 invested can save up to $13 when a disaster occurs, upfront investment in climate resilience measures is a critical step to future-proof assets from climate-related damage and losses.
Municipalities face a range of climate-related risks across the country, from wildfires, to the urban heat island effect, to flooding, and more. Major cities including New York City, Miami, Los Angeles, and Boston face significant risks from sea level rise, threatening some of the nation’s key infrastructure and prime real estate. Property taxes, which account for approximately 61 percent of local government tax revenues in the United States, are threatened to fall as properties risk devaluation or becoming uninhabitable all together due to climate change. Such outcomes could put local governments at risk of long-term financial turmoil.
Exhibit 1: The percent of municipal revenue at risk from six feet of sea level rise in coastal Massachusetts communities
RMI Chart. Data source: MAPC
How can states and cities finance climate resilience improvements and infrastructure?
Cities and states can leverage existing funding programs to alleviate upfront cost burdens associated with protecting and future-proofing infrastructure and property. The dissemination of capital to state departments from the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA) provide an unprecedented opportunity for coordination between state agencies, municipalities, and communities to identify local needs, leverage resources, ensure equitable distribution, and streamline project implementation.
The table below outlines some of the financing tools available for cities and states to fund resiliency measures, such as the weatherization of buildings, resilience planning measures, and ecosystem restoration. A more exhaustive list of available resiliency financing tools can be accessed through the Federal Funding Opportunities for Local Decarbonization tool.
In addition to leveraging existing federal funding streams, it is critical that state governments coordinate with local municipalities to ensure effective planning, budgeting, and financing of local resilience infrastructure projects. Collaboration and coordination are needed to ensure federal funding is allocated in ways that serve communities who need it most.
On a state level, the Resilient MA Action Team in Massachusetts presents an example of a successful, coordinated program that brings together state agencies, municipalities, and other stakeholders to identify and implement solutions for building resilience in communities. One example of their work is the Suitability Assessment for Equitable, Community-Driven Resilience Hubs in Medford, which will enhance multi-use spaces with a variety of programs that build relationships, promote community preparedness, and improve residents’ health and well-being. In times of emergency, spaces may act as communication centers, distribution centers, and potential emergency shelters that are also necessary for emergency recovery.
How do cities and states close financing gaps beyond federal programs?
While existing federal programs offer a strong foundation for financing resilience upgrades, resilience projects can be costly, often exceeding what is allotted in federal funding. Therefore, cities and states must be well positioned to leverage municipal bonds and private financing to plan for and fund equitable resiliency and infrastructure projects that mitigate property damage in the wake of severe climate disasters. Municipal bonds fund about two-thirds of all infrastructure projects, making them the most prominent funding mechanism for rebuilding climate-resilient infrastructure.
Exhibit 2: Growth of sustainable municipal debt issued through US municipal bonds labeled by use-of-proceeds.
RMI chart. Data: S&P Global Ratings
Municipal bonds are one solution that can help cities and states close financing gaps. These bonds are issued to municipalities by governments, multinational banks, or corporations generally with some longer maturity series, and often with low or fixed interest rates and with tax-exempt benefits for bondholders. Many municipal bonds support sustainable infrastructure investments, regardless of their label. Green, social, sustainable, and climate-labeled bonds have also grown in popularity. These specifically labeled bonds easily allow investors to support projects that align with their values and investment goals, while also contributing to global efforts to address climate change. For issuers, these bonds can provide a way to raise capital for important climate-related projects while also building a positive reputation among investors and stakeholders. Some examples include:
- New Orleans’ Green Bond Framework provides financing or refinancing opportunities for projects that meet resiliency goals including adaptation and resilience projects, building upgrades, and clean energy development. The city’s Resilient New Orleans Finance Working Group engages a range of stakeholders who track proceeds from green bond issuances and identify eligible projects.
- New York City’s $4.2 billion Green Bond is a financing tool to fund projects aimed at improving the city's resilience to climate change. The bond was issued with a 20-year term, and the funds have been used to finance projects such as public building retrofits that improve energy efficiency, the construction of a new seawall in Staten Island, and upgrades to the city's water infrastructure.
Broadly speaking, credit fundamentals are strong right now in the municipal market. But climate change will be hard for some issuers to avoid. We like to say that municipal infrastructure is on the ‘frontlines’ of the climate crisis. For that reason, more investors — including us — have begun to integrate climate risk evaluations into credit assessments for municipalities. To date, there's little indication that climate risk has been priced into the market, which presents an opportunity for bond issuers. Communities that exhibit meaningful exposure to climate risks have an opportunity to get ahead of any negative price impacts for their bonds. In some cases, targeting resiliency projects may also be more affordable
Engaging with private sector entities such as banks, insurers, utilities, and energy service companies (ESCOs) can help city and state governments leverage additional financing opportunities. Such partnerships could help city and state governments finance resiliency projects while allowing municipalities the agency to align projects with equity goals and climate action initiatives. For example, the New York City Housing Authority, through its Sandy recovery program, partners with private-sector entities such ESCOs and utility companies to rebuild more resilient, affordable housing with energy efficiency upgrades as part of its New York City's Resilient Neighborhoods Program.
Governors, state energy offices, and other state leaders can leverage resources geared to assist state-level initiatives. For example, the National Governor’s Association and the National Association of State Energy Officials recently published a guide describing the range of resilience governance structures, plans, and funding mechanisms that states are leveraging to enhance energy resilience in the face of rising disaster costs.
Finally, cities and states can play an important role in encouraging the development of insurance plans that help property owners protect against financial risks and losses from property damage. State insurance departments can require that insurance companies consider home resiliency upgrades in calculating premiums, which may incentivize homeowners to make their homes more resilient.
Moving forward, city and state governments must prioritize resiliency initiatives in budgetary planning. By accessing federal funding, partnering with the private sector, and collaborating across stakeholder groups, governments can finance projects to future-proof assets and play an active role in ensuring that communities are better prepared for the growing impacts of climate change.
If you are interested in learning more about industry solutions to address the growing catastrophic climate risks that continue to face the US housing stock, click here.