Federal infrastructure loan programs are well-positioned — for obvious and not-so-obvious reasons — to offer contingent loans for climate adaptation investment in public infrastructure projects.

Two things are certain.  The first is that a lot of basic public infrastructure will need to be built, replaced or rehabilitated in the near term.  The second is that these long-lived projects will be operating for decades in changing climate conditions.

These certainties create a potentially expensive uncertainty.  Decisions about the benefits and costs of climate adaptation must be made when projects are designed and built.  But a major input of that decision is now a moving target because the climate conditions in which the project will operate can’t be predicted with confidence.  Climate systems are too complex to model precisely and there’s not enough data for accurate extrapolation yet.  What’s the real chance over the next thirty or forty years of what used to be a 100-year rainfall, drought or sea-level rise event?  It’s certainly going to be different than the historical baseline, but by how much?  We’ll find out eventually.  But by then we’ll need to live with the outcomes of infrastructure decisions that are made today.  And there’s plenty of scope for expensive mistakes both in projects that are over-adapted (if conditions are closer to current baseline trends) and those that are under-adapted (if conditions are extreme).

These decisions are especially tough for public infrastructure in the US, most of which is funded at the state and local level.  It’s hard enough to get people to accept higher rates or taxes to pay for basic replacements and upgrades that have certain and immediately visible value to their own community.  Proposing even higher rates or taxes for additional adaptation investment that may (or may not) have value (at some point) in the future is a heavy lift that many local politicians won’t attempt.  Regardless of nuanced analyses or the simple prudence of erring on the side of caution, in many cases a local consensus for funding will not be practically possible.  Adaptation investment will too often be another can that gets kicked down the road.

That’s bad enough on a local level.  But the impact of widespread under-adapted basic infrastructure on an aggregate national level will be much worse if extreme conditions develop due to infrastructure’s very significant direct and indirect network effects.  A national undersupply of adaptation investment is the most likely result of cumulative local decisions.  Accepting that outcome – or simply ignoring it — becomes in effect a gigantic national bet that the investment won’t turn out to be necessary.  Are we feeling lucky?

The Official Statement for the City of Hampton’s recently issued Environmental Impact Bond (EIB) describes a transaction that isn’t quite as ‘impactful’ as the press releases suggest. In fact, the sole basis on which the $11 million of Series 2020A Bonds are designated as an EIB is the City’s intention to review some specific social and environmental outcomes on three small stormwater projects. The intention is very explicitly not a promise:

A more accurate description of the 2020As would be “Environmental Intention Bonds”. Still, good intentions matter. For the City to go to the extra effort of considering social and economic outcomes, summarizing all that in a lengthy appendix to the OS and stating very publicly that they intend to check it again with third parties as the projects are completed is definitely going in the right direction. But is there some way to turn good intentions into at least a little actual impact to this type of minimalist EIB?

In the same way that water infrastructure isn’t built simply to be financed, WIFIA doesn’t exist simply to make loans. Both the loan program and the infrastructure it finances belong in the context of their ultimate purpose – better water resources for communities. That often involves physical water infrastructure, but not always. WIFIA’s mission should — and can — extend beyond the project itself.

As often noted here, WIFIA loan proceeds must be spent on the infrastructure project, but WIFIA loan benefits can be allocated to other non-infrastructure purposes. In practice, the lower debt service requirements of a WIFIA financing usually end up keeping water rates lower than they would have been otherwise.

Lower water rates are great, of course. But once the non-infrastructure allocation principle is established (and even effectively acknowledged by WIFIA itself), the question arises: What other non-infrastructure purposes within a public water system’s scope of responsibility could WIFIA loan benefits go towards? Water equity initiatives? Specific environmental enhancements? Workforce training? COVID-19 recovery efforts? Like many state & local public agency in these interesting times, public water systems have a big ought-to-do list. WIFIA loan benefits should be seen as part of the solution.

It won’t be easy to get things done in a divided and polarized government. Yet the economic effects of the Covid-19 pandemic are likely to continue — or even intensify — throughout 2021. On top, of course, of everything else.

Infrastructure loan programs aren’t perfect for many wish lists, but they might be one of the few federal policy tools that can expect bipartisan support. The WIFIA Loan Program is a model, both in how it is working now and how it should be expanded. Here’s a recent article in this month’s Water World Magazine that sketches out three specific and realistic actions that will make the program (even) more useful in 2021.

Low-cost federal loans to investment-grade state & local governments and infrastructure agencies are a powerful tool that works well on many levels, including for federal taxpayers. But the potential impact on the municipal bond market needs to be carefully — and explicitly — considered.

The classic role of a federal loan program is to be a lender in situations where borrowers don’t have many cost-effective alternatives, either because their credit isn’t yet good enough (student loans) or there’s something wrong in the capital markets (ARRA loan programs). In those cases, pretty much the whole cost-benefit story is about the impact of the program on two stakeholders – the borrowers and federal taxpayers.

But when a federal program makes loans to investment-grade state & local governments and infrastructure agencies, another stakeholder has to be included in the mix – the municipal bond market. A federal loan that by definition is intended to be advantageous to state & local public-sector borrowers will almost inevitably displace a municipal bond issue that the market would have loved to buy, an outcome that’s clearly disadvantageous to investors and market intermediaries.