Guest Column | January 13, 2021

In The Green: Embracing Innovation To Finance The New Localized Water Infrastructure

By Cynthia Koehler

An uncommon financing model is proving effective at resolving an all-too-common issue throughout the U.S. — underfunded water infrastructure needs.

It is a shiny new year and a brand new day in the water sector. An increased focus on water equity and affordability is coinciding with emerging finance mechanisms for unconventional water strategies. This article briefly explores these trends and highlights several communities and utilities leading the way.

One of the more exciting innovations that WaterNow has successfully advocated for is expanding financing opportunities for localized water infrastructure. Increasingly, utilities are turning to localized options to supplement and extend conventional built systems. Localized strategies being implemented on public and private properties in multiple U.S. communities include water use efficiency, green stormwater installations, and private lead service line (LSL) replacements, among others. These projects perform the same functions as conventional water infrastructure — extending water supply, managing stormwater, and eliminating pollutants — often more affordably and equitably. Typically, they also provide critical co-benefits such as improved climate resilience, local green space, and jobs creation.

The challenge is often finding the funds to bring these strategies to scale. Most utilities pay for green stormwater infrastructure (GSI) or efficiency programs, for example, out of tightly constrained operating budgets or by pursuing limited grant opportunities. As utilities start thinking about deploying these approaches at large scale, access to capital markets will be key, with tax-exempt municipal bonds typically the most cost-effective borrowing option. It has long been assumed that bond proceeds are available only to finance utility-owned and -controlled assets, like pipes, pump stations, and tunnels. However, a 2018 rule clarification issued by the Governmental Accounting Standards Board (GASB) has opened up a new universe of opportunity.

The new GASB guidance involves a technical rule applying to most public utilities called “Regulated Operations” that, boiled down, establishes that public spending on localized water programs qualifies for capital treatment. This means that utilities can invest in GSI or efficiency measures on par with conventional infrastructure, including this decentralized infrastructure in capital plans and amortizing costs over time. Practically, this clarification is a game changer, empowering utilities to access municipal bond dollars for a host of localized water programs.

Related to this development, utilities are also increasingly open to pay-for-performance financing. Environmental Impact Bonds (EIBs), for example, are designed to accomplish social or environmental objectives while providing a meaningful return to investors. EIBs leverage private investment using a “pay for success” approach where investors provide up-front capital for projects, and utilities repay investors based on achievement of agreed-upon project outcomes, creating new paths for utilities to invest in innovative water strategies while limiting the risk to ratepayers. Public utilities can and should leverage debt to finance water strategies that are more sustainable and address pressing equity and affordability concerns. The opportunity to take these solutions to scale will be transformational in securing a more climate resilient and inclusive water future. Cities in the vanguard are effectively demonstrating how to get there.

Denver Leading On Lead Reduction With A Little Help From GASB

Denver Water has been a leader in addressing the public health scourge of lead in drinking water, launching an ambitious Lead Reduction Program to replace private lead lines affecting 64,000 to 84,000 properties. To accelerate implementation, Denver made the bold decision to capitalize this program, the largest public health initiative in its history, committing to spend roughly $600 million over 15 years.

What puts this decision on the cutting edge is that Denver Water will be the first public utility to pay for a major private property lead line replacement program with municipal bonds, using the Regulated Operations approach. In the process, it will substantially accelerate delivery of critical health benefits to the community. Denver’s program is trailblazing also for its focus on equity by addressing a dangerous health risk that impacts primarily vulnerable communities. It plans to prioritize implementation based on populations most at-risk from lead exposure and is expected to reach 95 percent of affected households. With 9 million lead service lines in the U.S., Denver Water will be setting a key precedent demonstrating the efficacy of the new GASB Regulated Operations approach to facilitate capital financing for large-scale decentralized water infrastructure on private property.

New Orleans Leveraging Homeowner Dollars To Scale GSI

Facing serial environmental shocks and floods, which will be exacerbated by climate change, New Orleans has made an intentional pivot in its approach to stormwater. Rather than fighting it, the City has decided to embrace “living with water,” re-envisioning infrastructure to include almost every aspect of the urban environment from parks to schoolyards to streets to rooftops.

GSI is central to New Orleans’ vision for its future as a key element supporting public health, economic development, and improved quality of life. To help meet this challenge, Finance New Orleans (FNO), the city’s housing and development finance agency, has been investigating options for steering capital to GSI on private as well as public property. FNO has been working with Quantified Ventures, an outcomes-based capital firm, to set up a green mortgage program that would support green infrastructure installations on single-family homes. FNO’s vision includes adding programs from other sectors to create a Green Finance Business Model with a fund that can support projects across single-family, multi-family, commercial, and municipal property. This fund could be capitalized through EIBs or other green bonds.

FNO’s initiative is particularly exciting because it will include down payment assistance, in addition to capital for stormwater and other retrofits, for low- and moderate-income homeowners. The green mortgages could also pay for renewable energy projects and energy efficiency retrofits, enabling New Orleans to leverage the financial power of homeowners to accelerate and expand GSI on private properties. With rain gardens, permeable pavements, and green roofs, homeowners can help lead environmentally sustainable water management change, capturing stormwater to abate urban flooding and extending the life of, and taking stress off, over-taxed sewers, treatment facilities, and water supply systems.

The green mortgage initiative would make FNO the first municipal finance authority that we are aware of to position mortgages as financing products for resilience initiatives. Leveraging residential mortgages, a wholly different and potentially constant source of financing, to catalyze investment in GSI could be invaluable in scaling wider adoption of these strategies in urban areas. This unique approach is only one of the things that makes New Orleans a center of innovative thinking around resilience, but it may well be a key model for communities looking to expand their financing options for GSI nationwide.

Centering Equity To Achieve Even More

Ensuring equitable and affordable access to all types of water services for everyone is a financial challenge for many, if not most, water utilities. The COVID-19 pandemic has magnified these issues, bringing home the vital role of water in promoting community health and well-being. It has also underscored the reality that people of color are disproportionately harmed by limited access to safe and secure drinking water supplies and sanitation. This fact adds urgency to addressing equity and affordability issues at the utility level. The opportunity for utility engagement in equity and affordability issues is one of the most promising developments in the water space, along with the growth of creative partnerships to expand their capacity to address these issues. Programs in Cleveland, OH, and Santa Rosa, CA, exemplify opportunities to build more equitable, affordable water approaches in 2021 and beyond.

The opportunity for utility engagement in equity and affordability issues is one of the most promising developments in the water space, along with the growth of creative partnerships to expand their capacity to address these issues.

Cleveland’s Water Champions program is a partnership between the city’s Division of Water, the regional sewer district, and CHN Housing Partners, a local nonprofit, to connect Cleveland’s residents to affordability assistance programs. Cleveland has one of the highest poverty rates among U.S. cities, making it difficult for ratepayers to keep up with water and sewer bills. Local utilities have developed a number of affordability programs, including discount programs for vulnerable populations and bill assistance for major life events or crises. However, only about half of eligible residents participate in these programs.

Under the new program, two full-time Water Champions will leverage their community outreach and organizing skills to connect directly with residents in low-income communities. The Champions will help residents sign up for affordability programs and ensure that people know who to call with water quality concerns and questions about utility bills. By better understanding community needs and priorities, and identifying roadblocks to accessing affordability programs, the Water Champions will gather information to ensure that affordability offerings are designed to meet residents’ needs over the long term. With the Water Champions program, Cleveland’s utilities are going beyond offering assistance — they will also be ensuring that community members have the support required to engage with these programs, as well as a voice in shaping them to increase their effectiveness.

Santa Rosa is facing somewhat different but related challenges in connecting with a critical minority population. In drought-prone California, conserving water is a vital strategy for ensuring water supply reliability, and Santa Rosa offers a host of programs ranging from rebates to water audits. However, utility managers are unsure about whether these programs are reaching the city’s Latinx community, which comprises about one-third of the local population. To address this, Santa Rosa has launched an initiative to analyze Latinx participation in water use efficiency programs and the extent to which they are engaging with these offerings at the same pace as other communities. This data will be the basis for developing a new campaign and outreach strategy to connect more effectively with Latinx communities and enable all residents to take advantage of water efficiency programs and water and cost savings. Engaging the Latinx population will help Santa Rosa advance community equity by increasing residents’ awareness of the opportunities to participate in and save costs through these programs. Wider program participation will also help the City meet its overall efficiency objectives.

The deep dives that Cleveland and Santa Rosa are making to connect with their disadvantaged populations signal an increased awareness for water utilities and a growing appreciation for the role they have in addressing local inequities. These initiatives also demonstrate that centering equity can boost a multitude of objectives such as affordability, sustainability, and public health efforts in an effective and forward-thinking way.

Momentum Is On The Side Of Innovation

Looking ahead to 2021, the trend toward expanding innovation in decentralized and localized water strategies is likely to only increase and pick up steam. The water-tech sector is exploding with new ideas and strategies, particularly around resilience and efficiency. And utilities, facing multiple pressures from climate change, the pandemic, and ratepayer anxiety, are increasingly open to new solutions and the new financial paths needed to pay for them.

In 2020, WaterNow was privileged to work with American Rivers and Corona Environmental Consulting in conducting a training series for 10 communities exploring new avenues to finance GSI on private properties. The training covered when and how municipal bond proceeds can be accessed for these purposes as well as stormwater credit trading, a funding mechanism of growing interest and adoption. But the most telling aspect of the training series was the diversity of the participant cohort — from Milwaukee to Tucson to Greensboro to Eugene to Atlanta to San Mateo — a testament to the breadth of interest in innovative financing options for unconventional water infrastructure.

This is reflected as well in WaterNow’s Tap into Resilience (TiR) initiative, which provides training, informational resources, and technical support to communities starting to explore how they can take better advantage of the benefits of various types of localized water infrastructure. To date, we have trained hundreds of utility leaders, and several thousand have accessed TiR resources.

The opportunity is now. We look forward to working across the water sector on innovative financing for localized water infrastructure and related strategies advancing equity, affordability, and sustainability as the promise of 2021 unfolds.

About The Author
Cynthia Koehler is an environmental attorney and water policy expert with 30 years of experience working on federal and state water and natural resource issues. She is the cofounder and executive director of WaterNow Alliance, a nonprofit network of local water leaders dedicated to advancing sustainable, equitable, and climate-resilient water solutions nationwide. She is an appointed member of the U.S. EPA’s Environmental Financial Advisory Board. She has also served for the last 14 years as an elected member of her local water district, serving a population of about 200,000. Cynthia holds a Bachelor of Arts degree from Pomona College and a Juris Doctor and Environmental Law Certificate from the University of Oregon School of Law.