Cities are constantly working to repair, replace and improve critical infrastructure like buildings, streets, transit, and pipes. Accomplishing this takes innovative policy and infrastructure solutions, but it also comes with a high price tag. Furthermore, the need for climate resilient infrastructure makes finding the money even more critical. But financing this work can be complicated – decreasing support from states and the federal government and competing priorities are straining municipal budgets.
What Cities Can Do
This is an accordion element with a series of buttons that open and close related content panels.
A common way for cities to finance capital investments, municipal bonds provide up-front capital that is paid back over the life of the bond out of general revenues. Municipal utilities often have bonding authority as well, which allows them to borrow against expected revenue from ratepayers.
This instrument elevates the environmental benefits of infrastructure projects, but is essentially identical to other municipal bonds, with two exceptions: the proceeds of the bond sale are reserved for particular “green” projects, and the city commits to track and report on the environmental benefits (e.g. reduced carbon emissions) of the projects. Green Bonds may be general obligation, revenue, project based, or secured by an asset. Green bonds can be used for a range of projects, such as energy efficiency improvements, renewable energy installation, sustainable waste management, clean transportation, sustainable water management, and climate change adaptation.
Johannesburg, South Africa’s green bond will finance a wide range of green infrastructure projects across the energy, water, waste and transport sectors.
Another twist on a basic municipal bond, a century bond is paid back over 100 years. Most cities look for the shortest feasible payback (often 10 to 20 years) for their bonding, so as not to carry debt. A century bond makes sense when the infrastructure it finances has a lifespan of more than 100 years, as it spreads payment out over all those who will benefit from it.
Environmental Impact Bonds
Designed for projects that will provide both financial and societal benefits in the long term, these bonds use a “pay for success” model, combining a regular bond with a performance contract. If the project is successful, investors will receive a premium out of the budgetary savings created by success. If not, investors will either only receive principal and interest, or be required to share the cost of failure.
Green Revolving Funds
These funds are capitalized with an initial investment that is used to make improvements to municipal infrastructure that will yield savings over time, such as energy or water efficiency projects. Those savings accrue in the fund, and are then used for additional projects that generate savings.
Atlanta and San Antonio both use green revolving loan funds. Atlanta’s Sustainability Projects Fund holds $1.8 million, and has been used since 2009 for lighting efficiency projects. San Antonio’s, created in 2001, is $1.4 million and is used for a range of energy efficiency projects.
The London Green Fund in London, UK consists of three urban development funds in waste, energy efficiency, and green social housing.
Energy Service Contracts
Used to finance improvements to municipal infrastructure that will yield financial savings, most often via reductions in utility bills, these contracts guarantee a certain level of savings to the municipality. A private company (Energy Service Company or ESCO) will make improvements, pay the utility bills, return the guaranteed savings to the city, and keep any additional savings. These deals can be advantageous for cities without technical expertise in building science or sufficient capital to fund projects, but should be carefully negotiated to ensure the maximum benefit for the city.
Value capture describes a range of financing techniques that are predicated on the assumption that certain municipal investments (e.g. transit) increases the value of surrounding properties, and that those properties should contribute towards the cost of developing that infrastructure. Tax Increment Financing and Special Assessment Districts are both examples of value capture.
The KC Streetcar in Kansas City, MO uses value capture to fund operations. A Transportation Development District (TDD), which is a form of special assessment district, contributed to the capital costs of constructing the system, and continues to fund operations. The TDD is funded via property and parking assessments, and a one-cent sales tax within the district.
Sao Paulo, Brazil implemented a value capture strategy that raised substantial amounts of public revenue to pay for infrastructure projects in the area, including housing projects for displaced favela residents.
These are a new twist on catastrophe bonds that could allow cities to invest in infrastructure that improves resilience and reduces risk. Catastrophe bonds are not bonds as described above; they are a financial instrument that bets that a certain defined catastrophe (e.g storm surge above 10 feet) will not happen. If it does, the investor will have to pay to cover losses caused by the event. Catastrophe bonds are more valuable if the risk of the event goes down, and this fact can be leveraged to increase investment in infrastructure projects that decrease risk and increase resilience.