Resiliency and Adaptation Planning

How are issuers meeting the growing needs for upgrades of existing infrastructure along with investments in new projects amid a higher-cost environment, local capacity limitations combined with reduced federal support and amid more frequent severe weather events?

Transcription:

Lynne Funk (00:08):
All right. Hello everybody. I'm Lynne with the Bond Buyer, Lynne Funk. Thank you Sean. I'm very excited about this panel to close this conference out. I think it seems like throughout the past day and a half we've heard resilience a lot, but I do promise you that this panel will be the most resilient panel discussion of the conference. I think it's telling that there's been so much discussion of it and when we hear figures of like 7 trillion of infrastructure deficits in the US and the need for maybe 1 trillion annually after we hit a record last year of 500 billion. It's telling, and I think building resilient infrastructure is top of mind no matter what side of the aisle you're on, and the actual definition of what might fall under resilience is also shifting. We might get into that as well today.

(01:11):
The rub of course comes in as who pays for it, as with all things in this market. So to get things off, I actually would like to hand it off first to Tom Doe, who I think was one of the first ones in the industry I heard who said the trillion dollar mark that we actually need to spend on infrastructure. So why don't you, Tom, delve into how you and your firm came to that call and we can delve into whether issuers are prepared to bring more debt to face these challenges and how the value of the capital markets serves as a solution for financing some of these projects. So Tom, take it away.

Thomas Doe (01:53):
Well, once again, I find myself between the audience and cocktails. So yes, that's kind of my fate, but it's always a pleasure to be on these panels and again on this whole resilience topic. Before I answer that, I think it's really fascinating to me from the first time that I got thinking about resilience and adaptation in regards to municipals back in 2018. Very few people were talking about it; it wasn't on anyone's radar screen. And here we are, almost every panel of the last two days has made some mention about climate adaptation and resilience, acknowledging that it's an issue we're dealing with and how do we finance it, et cetera.

(02:44):
A lot of people have drawn the analogy of resilience and the climate issue to the pension issue that we dealt with. I think if you think of how that evolved, that was about a 10-year process. I think we're somewhere maybe around year five or six in the municipal industry coming around to the fact that this climate issue is material. "Material" is a really important word since that's one used to avoid putting a lot of the transparency and disclosure in documents. So the correct quote, Lynne, is that I said by 2035 that I thought annual issuance would increase to a trillion dollars a year. The rationale behind that was what we're already seeing. And that's the manifestation of the federal government pulling back dollars to support things through FEMA or any kind of climate adaptation.

(03:49):
It was certainly the big problem in the Inflation Reduction Act in that most of that money went to mitigation efforts to try to cool the planet and alternative energies, which is all great and wonderful, but it really doesn't help us battle the things that John Sullivan so clearly articulated about the flooding and just being able to look out your window and see what's going on. That's a problem. But also to look back historically on municipal issuance, I looked at this decade over decade how we've increased issuance over the history of the industry. There have been numerous times, whether it's in the 1920s, the 1940s, or the 1970s, where we had decade-over-decade growth of over a hundred percent. So given the factors that there's a growing need and there's less federal money, it's not unusual for these surges of debt to occur. Since we are at 500 billion now, to get to that trillion number by 2035 is not unreasonable to think of it that way.

(05:03):
As I said a little bit yesterday and I think other people are acknowledging, with that growth, it's a tremendous opportunity for the municipal industry. I've talked with numerous banking groups of our client base to discuss how you bring up that conversation. Again, reflecting on the prior panel's discussion about the issue: there is a challenge, there is a financing need, and that's an opportunity for business. We'll get into the risks that accompany that, but it will just create a really dynamic industry going forward.

Lynne Funk (05:49):
Excellent. Thank you Tom. I want to pivot over. We have two issuers on the panel who are actually doing work in the space. Bill, why don't you jump into what you have been working on with the Rhode Island Infrastructure Bank?

William Fazioli (06:04):
Absolutely. So the Rhode Island Infrastructure Bank is a traditional state revolving loan fund that has been operating drinking water and clean water revolving loan projects for 40 years. About five years ago, the state of Rhode Island created a chief resiliency officer position that was actually housed in the infrastructure bank. So it's been a good five years of history that the bank's been devoted to resiliency work. Our first work was working with every city and town to develop risk assessments and vulnerability analysis to see where they would have challenges from climate change, sea level rise, and inland flooding. We have 39 cities and towns in Rhode Island, so it took us five years, but they all had these workshops that were sponsored by the Nature Conservancy and involved other state agencies like the Department of Environmental Management.

(06:57):
Each one of these communities has a catalog of projects that they would like to fund if funding was available. Out of that, there's about 1600 projects statewide that have been identified. The state slowly started to fund these projects on a grant basis sort of piecemeal. The first round of grants was only $2 million and that was really bank capital that was contributed. Then after that, the state put money into the green bond, which supported our activity to about $20 million over three or four years. So we've done about 25 million in projects on a grant basis. However, we realized that every time we did an RFP for these projects, the demand for the funding exceeded the available funding by five or six times. So we needed to come up with another model. We leaned on what we know is a proven, effective, time-honored public finance approach: a revolving loan fund.

(07:55):
I've been in municipal government long enough to know the accounting department is always hiding money somewhere. So we just went to them and said, "Tell us where the money is and we're going to deploy it because we know you have it." In January of 2025, the town of Bristol, a coastal community, came to us with a significant flooding problem in its downtown area. At that time, we had exhausted all of our grant funds. We had to devise a revolving loan fund in three or four months because they wanted to start construction this spring. We created the new fund, called the Resilient Rhody Fund. Now we have our first project, $15 million in the fund, another 10 million coming in from a state GO bond issue, and later this fall we'll be doing a call for proposals to fund projects on a lower interest loan basis.

(08:52):
We'll still have grants to fund some of the technical assistance and preconstruction design, but I think communities just need to realize that relying on what is proven and effective is the way to go. We've done about $2.6 billion on drinking water and clean water projects through the revolving loan fund model. This is all state money; there's no federal money involved. We hope to get another $20 million in the fund in 2026. The revolving loan fund has many positive features, including a high leverage ratio—for every dollar we put in, you can support at least $3 worth of projects. As the fund matures, that multiplier effect will continue to increase. The fund was established by law by the General Assembly this past year and signed by the governor. We hope to start funding projects in early 2026 to allow communities to realize that these projects have to happen. You can't ignore pre-disaster mitigation efforts because that's really the only way you're going to avoid long-term harm to your businesses, your communities, or your tax base.

Lynne Funk (10:12):
Excellent. Chris, do you want to give an overview of what you've been working on as well?

Christopher Osgood (10:15):
Sure, gladly. I have the great pleasure of leading the City of Boston's Office of Climate Resilience. There's a tremendous amount of work happening in the city. A lot of that, similar to what Bill just highlighted, has focused on planning and policy work over the last 10 years. On the planning side, we identified coastal flood risk, stormwater risk, and extreme heat as the principal climate risks facing the city of Boston. We then worked with the community, consultants, and scientists to analyze what we should be doing and where.

(10:58):
Then we complemented those plans with a set of policies that change the way in which we build going forward. For example, we have the Coastal Flood Resilience Overlay District. It ensures that large new buildings are built not just for the 1% storm of today, but for the 1% storm of 2070 at a higher design flood elevation. We're now moving from a decade of planning to a decade of implementation—putting shovels in the ground. Two things have been very helpful for that. One is a significant increase in the amount of city capital funding going towards resilience projects. For coastal resilience alone, we have about $150 million allocated towards projects to transform our coastline and lower risk for our neighborhoods.

(11:51):
One example is the reconstruction of Ryan Playground in Charlestown at about 27 million. For those of you who stroll the North End after this, I encourage you to check out Langone Park. It has beautiful terrace seating and acts as a storm surge barrier or flood wall to help protect that neighborhood. We are also creating new programs and sources of revenue, such as the stormwater fee. Finally, we are building partnerships to deliver more enduring infrastructure. We are collaborating with groups like the US Army Corps of Engineers on projects to address flood risk for the balance of this decade. I think this constellation of work in Rhode Island and Boston is a repeatable model: understanding the risk and then adjusting policies, programs, and capital budgets to address them.

Lynne Funk (13:01):
That's great. This is a national infrastructure conference and we want to talk about things that are replicable. Maybe Dave, we could pivot to you. As a municipal advisor and former issuer yourself, what are some things you've done to assist your clients in developing financing plans for resiliency, sustainability, and adaptation?

David Erdman (13:27):
Thanks for the question. Before I start, we're talking about global climate change, and it's scary how many people still have an ignorant opinion of it. Personally, I remember in the 1970s riding around on my snowmobile from Thanksgiving till March 1st. Now I ride around my snowmobile maybe four hours a winter because in Wisconsin we just don't have snow anymore. I was at a conference recently where the chief meteorologist for Homeland Security spoke. She had 55 slides of data points as to what's going on. One thing that popped up to me is that because the earth is round, these storms and climate changes go through the United States, impact the other side of the globe, and come back around to hit us again.

(14:26):
Because it keeps going round and round, it actually makes the issue worse. Another thing is the impact on different parts of government operations. She had examples of how cyber attacks are often tied to times where the power is out or there's been a natural disaster. Cyber criminals really focus on those weaknesses. But enough about my revelation about climate change; I just thought I'd share that before I dive into the question.

Lynne Funk (15:04):
Dave, real quick, was it Sunny Westcott?

David Erdman (15:05):
Yes, it was.

Lynne Funk (15:07):
I've heard of her.

David Erdman (15:08):
Yes, she talks faster than I do, which is why she covered 56 slides in an hour. But as a municipal advisor helping people with their securities, stepping back from that, resiliency is more than just climate change. It includes federal shutdowns, changes in federal policies, cybersecurity, housing, healthcare costs, and general fiscal health. All of this needs to be looked at from a governmental perspective to develop financial and strategic planning.

(16:01):
Developing a plan that addresses not only climate but other risks is a big part of it. As a municipal advisor, I help with debt issuance, and part of that strategic plan is carrying out a plan to address investment in the right debt to meet infrastructure needs. From a consulting standpoint, it involves addressing a vision and being innovative. We heard a lot this morning about thinking outside the box with P3 approaches. Part of that starts long before you have an issue; it starts with your strategic plan five or 10 years out so you have things in place to address P3 options.

(16:46):
A couple of things come up from my perspective on debt issuance. The first is disclosure. I heard this morning that disclosure regarding climate change probably isn't keeping up with what's needed. I took that a little personally, but the reality is that when I was an issuer, I understood finance, but writing an official statement about climate change is a challenge. You have to purchase resources to do that, and as Nikolai mentioned, that is an additional cost. He also mentioned how investors are getting more information through AI than what issuers might provide in official statements. That's a very good comment. The AI issue is bigger than just climate change; it's something the industry will have to address going forward. Disclosure will get better, though it might be painfully slow for investors. The other thing is designated bonds—green bonds and social bonds—and working with clients on the pros and cons of those.

Lynne Funk (18:23):
Okay, excellent. Let's stick with our agenda. In previous years, there has been a general consensus that the muni market does not price in climate risk. Issuers often ask when they will see cost savings for addressing these risks in their disclosure documents. I think we can answer that, but the other question is: when will they see a penalty? I think we're leaning more that way, but I will let the expert investor on the panel address that. Erika, please.

Erika Smull (19:05):
Sure, I guess I'm the expert investor. I work at Breckenridge Capital Advisors. For those who don't know us, we're right down the street. We are an asset manager primarily focused on municipal bonds. I was at New York Climate Week last week and I was surprised that the conversation was focused much more on adaptation and physical climate risk than in years past. This exact topic of the pricing signal of climate risk in the muni market came up a lot.

(20:00):
About a year ago, we wrote a piece about the pricing of physical climate risk in the muni market—the forces that make it not so salient and how we anticipate that changing. There is good reason why climate risk has not been adequately priced thus far. We still believe the risk is mispriced, but the reasons are complex. One is certainly supply-demand dynamics. Another is the robust credit environment we've been in; many areas with high climate risk have seen high growth and strong credit fundamentals. You've also had the critical federal backstop in FEMA and the idea that private property and casualty insurance would be there. Those have all started to shift. While there isn't yet a robust pricing signal on the primary market, new academic works suggest a climate risk signal is becoming more likely in certain regions and sectors.

(22:02):
We did see a pretty large widening of spreads for Los Angeles Department of Water and Power bonds, and LA area bonds generally, following the wildfires. I think that was a bit of a turning point. In our piece, we highlight five trends that we think will change the way investors price climate risks. The first is better data and better disclosure. Disclosure is noticeably better than it was five or 10 years ago, and third-party data is getting better every year.

(22:57):
The second piece is that the tools to manage this data are better, with integrated data science becoming more a part of the industry. The last three things involve the change in backstops: rising premiums or dropping coverage in the private insurance market, and cracks in the FEMA system. If you read recent news, you'll see stories about FEMA funding being delayed or not showing up. The final one is that while municipal credit has been strong, we're starting to see some weakness. It's not falling off a cliff, but there is weakness in certain sectors and regions. In our view, investors were turning away from longer-term risks like climate when credit was strong, but they will likely take a sharper look going forward.

Thomas Doe (24:29):
And that's exactly the opportunity for the issuer. Currently, the market is not pricing it in. I think every firm should profile their clients' climate risk, identify those whose physical assets are at the greatest risk, and bring those issuers to market ASAP. There's a window of opportunity where that climate risk penalty is not being felt because of the supply-demand equation and benign credit stability. This is the time to act if you are at risk. Data is available for free that gives a profile. There are commercial products that are better, but there is data that says "you've got a problem or you don't."

(25:34):
I also think some commercial providers would provide data to issuers at a favorable price to help them out. This summer, a smaller SMA shop with several billion under management hired someone interested in the climate issue. They took free FEMA data to profile their holdings. When they had to raise money, they put up the bonds with the highest climate risk. Instead of getting 12 bids, they got four.

(26:34):
This is just one data point, but it's a sign. There wasn't a price concession, but there was a liquidity issue. I think liquidity becomes the canary in the coal mine. We're seeing commercial providers like ICE marrying municipal data with trading platforms to see if bonds with high climate risk are being traded differently in the secondary market, which will help inform investors and issuers.

David Erdman (27:16):
To back up what Tom said, I recently proofed an academic paper on this topic. The conclusion was that we're probably three to four years away from the market actually pricing in the risk from climate change. The conclusion was that you should be addressing your capital needs now. This was an academic paper, not one written by investment bankers, and it found that in three to four years, you'll see increased cost of capital to address this risk.

Lynne Funk (27:45):
Tom, you mentioned yesterday that you see a "credit tsunami" on the rise because of climate risk. Does that coincide with this three-to-four-year window?

Thomas Doe (28:01):
I think we're within five to 10 years of it. I think what will precipitate that is when the rating agencies finally take definitive action. I applaud S&P for the action they took on LADWP. They took a lot of criticism, but they put a climate premium of about 60 basis points on those bonds in the secondary market. That may be what we're all waiting for. One problem the municipal industry has had is that we all started chasing the ESG issue, but now we're unwinding that to deal with the reality of climate resiliency and adaptation risk. Similar to the pension issue, when rating agencies finally started holding issuers accountable for liabilities, investors started to pay attention and it got priced into the market. I think climate may have a similar path.

Lynne Funk (29:17):
Chris or Bill, do you have any thoughts on this, being that you are already addressing these issues?

William Fazioli (29:26):
I agree with Tom that now is the opportunity for communities to act. Local governments aren't always known to be proactive; sometimes they need a nudge or incentive. We think programs like a low-cost revolving loan fund provide that nudge. It might be a short-term tradeoff where they have higher debt ratios, but protecting your assets is a better play financially and economically in the long term. Tom is right; the window is the next three or four years while the cost of capital is still reasonable. With our program, you can borrow for 20 years at 3% or less. Pre-disaster mitigation is much cheaper than post-disaster recovery. The Chamber of Commerce even came out with a study on that. Our message to communities is: if you plan and design it, we will fund it.

Christopher Osgood (30:45):
The one thing I would add is that Boston is being proactive and putting millions into pre-disaster mitigation. That is an important part of the data used to assess risk. It can't just be a picture of unmitigated risk; it must include the efforts being taken to reduce that risk. Having a data standard where risk reduction efforts can be shared and consumed by the market would be very valuable. I'm not sure we have seen as much focus on quantifying the response as we have on quantifying the risk.

Lynne Funk (31:34):
Do you think some issuers are already doing the work and just need to tell their story more clearly in offering documents or on EMMA?

David Erdman (32:01):
Regarding disclosure, there's a lot of discussion to be had about what's needed in primary offering documents versus the secondary market. When I was at the State of Wisconsin, I loved voluntary disclosure and made many filings. If you have material information, do voluntary disclosure. The problem is the expectation. The unfunded pension and OPEB liability was a classic example. In 2008, people thought the sky was falling and no one could retire, but we got through that. There was a lot of voluntary disclosure about pension programs. It's part of the planning process—having a plan to address resiliency and a plan for how to disclose it.

Erika Smull (33:01):
I can add that about a year ago, we looked at a representative sample of official statements. In 2010 or 2015, only about 5% of official statements mentioned the phrase "climate change." By 2023-2024, that number increased to between 30% and 40%. That's a big change for our industry, though it's still below 50%. From what I see, Boston and similar issuers are still outliers in terms of actually implementing adaptation plans. There is still a gap in disclosure, but an even bigger gap in actually doing the adaptation work.

Thomas Doe (34:30):
Nikolai made the point about identifying risk versus updating what you are doing to mitigate it. I have a question for David. We did disclosure studies on different areas of the country—Maricopa County, Harris County, San Diego County, and New Jersey coastal communities. We looked at what was reflected regarding climate risk and found it was incredibly inconsistent. The issue of materiality always comes up. Rating agencies often say a rating is about whether you can repay the bonds, so climate doesn't get disclosed if payment is presumed to occur regardless of risk. However, if you look at SEC regulations on disclosure, you get a different picture of what should be in offering documents. GFOA has also put out some best practices, but they aren't always followed.

David Erdman (37:14):
I'm going to avoid the question about materiality. But I want to highlight that while the SEC has put out guidance on the corporate side, I don't think standardized disclosure is the answer for the municipal standpoint. Climate change is a global issue, but the risk to individual municipalities varies. Standardized disclosure would cause too many hardships for too many people.

Lynne Funk (37:14):
Chris, were you going to add something on how you look at risk versus how the rest of the market does?

Christopher Osgood (37:22):
We look at risk in very similar ways, though a local government might look at it slightly differently. We think about the impact on lives and community dislocation, not just property and revenue. Second, cities are systems. For example, a principal produce hub for Boston exists in neighboring Chelsea and Everett in a flood risk area. We are interested in protecting that hub because it's a critical system for the region.

(38:22):
Third, we think about the opportunity that addressing a risk presents. The Boston Harbor cleanup was a multi-billion dollar effort that transformed how the city embraces the harbor and created growth. Taking down the congested central artery as part of the Big Dig also transformed downtown and opened up growth areas. In the projects we are doing, we want to reduce risk in a way that is additive to the city and sustains life for everyone living here.

Lynne Funk (39:21):
It's interesting because Dave mentioned that universal disclosure standards are a challenge. Let's move to something that affects everyone: the federal government and threats to FEMA. It's not just FEMA; it's cuts to grant funding, clean energy programs, and Medicaid. How does all of this factor into how you think about addressing infrastructure?

William Fazioli (40:07):
What we're seeing at the federal level will trickle down. State and local governments will have to be more responsible and put more money on the table for things that were traditionally federal responsibilities. We spoke with Pete Gaynor, former FEMA administrator, who said, "Get used to the idea that we'll show up, but it won't be as quick as it used to be." Cities and towns are starting to realize they have to take matters into their own hands and set aside reserve funds for things that typically would have been FEMA reimbursements.

Erika Smull (40:56):
As an analyst, I can say certain sectors are already feeling the pain of this new environment. Hospitals and higher ed are hurting, and we don't anticipate that getting better. States will be hurt by Medicaid changes. While states are currently in strong fiscal condition, more responsibility being pushed on them will stress budgets, which could be problematic for climate resilience.

(42:01):
We've talked about FEMA funds being delayed. The Wall Street Journal just wrote about St. Louis not getting funds following a major tornado. Some municipal issuers have started to change their reserve or budget stabilization policies so they have more cash on hand to respond, but not all issuers are in a position to do that.

David Erdman (42:55):
Federal funds are going to be reduced, and taxpayers or ratepayers probably won't be able to keep up. We heard a lot about P3s this morning. As a longtime bureaucrat, I did zero P3 projects because I thought I could do better from a tax-exempt standpoint. But those days are probably gone. We can't rely solely on ratepayers and taxpayers. Part of the planning is making sure local ordinances and statutes don't have language that prohibits P3 transactions, so you can pivot quickly if needed.

Lynne Funk (43:51):
With these risks, there seems to be an opportunity. We have to start thinking creatively. Tom, you've pushed on the "willingness factor" of issuers. Why do you think they should take on more debt at this moment?

Thomas Doe (44:31):
It's going to cost more later. You aren't being penalized yet, so you should take that opportunity. By articulating to rating agencies that this is "protective debt," you show you are taking steps to protect assets in the future. That should be viewed differently. Many issuers are just trying to protect their rating using an old lens, and that has to change. It will lead to better information and better infrastructure, which is a revenue opportunity for everyone in the room.

Lynne Funk (45:41):
Chris and Bill, it took 10 years to get to implementation in Boston, and Bill, you're talking about SRF programs. It takes time to put everything in place. Can this be sped up, and what are the hurdles?

William Fazioli (46:17):
Funding is the biggest constraint. We are undergoing a statewide coastal resiliency study that will generate projects in the neighborhood of $200–$300 million. That funding isn't available yet. However, the most effective way to finance these is through municipal bonds because demand is strong and default rates are low. At the SRF level, we try to help communities with below-cost financing to make it more attractive.

Christopher Osgood (47:18):
In Boston, we created a coastal resilience reserve—a $75 million part of our five-year capital plan—which allows us to match competitive state or federal grants. It gives us flexibility and speed. Second, we are shifting the prioritization of our traditional capital projects—like roads and parks—to foreground resilience.

(48:17):
While I agree with the notes about FEMA, in our collaboration with the Army Corps, it is clear that reducing flood risk is still a federal interest. Whether it's New York, San Francisco, or Norfolk, there is significant effort with the Corps that could lead to federal investment. But that needs to be matched by local or state participation. That's why the work John Sullivan has been doing with the stormwater program is a critical new source of revenue.

Lynne Funk (49:10):
Excellent. Do we have any questions? No. Well, given that we are coming up on time, I will mention that we have two special people on this panel: Tom Doe, one of our Hall of Famers, and Erika, one of our rising stars. Thank you all. I was going to bring them champagne on stage, but I felt that wouldn't be nice for the rest of you. So let's all go have champagne in the Harbor View Ballroom on the second floor. Thank you for coming to this conference. We'll see you next year in Chicago.