Opening New Doors: The Impacts of Expanded Financial Bond Instruments for Large-Scale Community Resilience Projects

While debate about climate variability continues, many local and state governments are considering how climate and extreme weather in the future could potentially impact their community infrastructure as they develop capital plans. Generally, these projects are of significant size and scope such that they cannot be incorporated into the annual budget as a line item. Consequently, most communities seek funding through bond issuances.

Relatively new financial instruments are providing entities with more options for financing these projects, and may be attractive depending on the need.  Some of the new bond funding mechanisms for community resilience projects include:

  • Social impact bonds
  • Catastrophe bonds
  • Resilience bonds

New Financial Instruments in Practice

As outlined in this 2017 Quantified Ventures article, Washington, D.C., issued a “green” social impact bond—one of the first in the nation—to finance a green infrastructure solution to part of its stormwater overflow prevention plan. Investors in the bond assume the risk associated with the performance of the green infrastructure; if it performs better than expected they share in the savings associated with the successful project. However, if it performs worse than expected, investors make a “risk share” payment back to the project. While the project’s performance is unknown at this time, it received an Award for Excellence in Government Finance from the Government Finance Officers Association in 2017. Similarly, New York’s Metropolitan Transit Authority (MTA) issued catastrophe bonds (cat bonds) in 2013 and again in 2017 to guard against the risk of storm surge impacts on its infrastructure. As explained in depth in this Wall Street Journal article, investors in these bonds provide coverage for a specified set of conditions in exchange for regular payments if these conditions are not exceeded.

Our three-phase study for the City of Virginia Beach consisted of an impact assessment, adaptation strategy development, and implementation. The Hampton Roads region ranks within the top 10% of the nation in terms of the rate of relative sea level rise. 

Why is this Expanded Funding Relevant to Firms like Ours?

Entities with good credit ratings and/or available capital may still elect to use traditional approaches like municipal bonds. However, credit rating agencies like Moody’s have said they may consider if the entity is incorporating the potential for future climate variability into their long-range plans when re-evaluating their credit rating, which could impact the cost of capital. For example, Virginia Beach was issued a questionnaire by Moody’s in 2015 when its bond rating was being re-evaluated. We helped the city secure a grant to undertake studies. Following these efforts, we assisted with completing the survey and helped provide proof of the studies and analysis being undertaken to evaluate climate impacts on the city. By demonstrating the city was evaluating climate variability in conjunction with long-range planning, Virginia Beach was able to retain its AAA bond rating from Moody’s. This rating allows the city to continue to finance infrastructure projects at a relatively low cost of capital.

The increase in available funding mechanisms provides a lot of additional opportunities to replicate and expand on current resilience projects at the municipal and state level. In addition to helping entities respond to climate readiness surveys from bond rating agencies,  our current line of work has us collaborating with clients to assist them to evaluate if, how much, and how to adapt to impacts of climate variability and extreme weather after capital funding is secured. We also can help with identifying and prioritizing vulnerable assets and developing resilience approaches to help use the bond funds effectively and get the most for the money. In addition to our work for the City of Virginia Beach, some recent examples of our work to assist with climate adaptation include a pilot test and subsequent modifications to New York City’s Climate Resilient Design Guidelines and our introduction of the first statewide program to examine historical and cultural resource preservation in Connecticut. These projects are helping to incorporate forward-looking planning and guidelines that could be replicated more often and at an even greater scale with the advent of the additional funding provided through some of the new financial instruments. Our organization is excited for what future opportunities this expansion in funding will have to make our communities safer and more resilient from future threats. 

Although not regulatory, our climate change guidelines for New York City are recommended for new capital projects to design stronger, more resilient buildings and infrastructure which are vital to the long-term resilience of the community.

  • Laurel McGinley
    Laurel McGinley
  • Jessica Fleck
    Jessica Fleck
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