CFB: Muni Bonds Lay a Resilient Foundation

The uneven distribution of American prosperity becomes starkly evident when examining the resilience of our infrastructure and communities. The term "resilience" spans various sectors such as infrastructure, energy, water, agriculture, healthcare, and financial systems. However, defining and investing in resilience poses significant policy and political challenges due to the complexities of present-day calculations and the lack of immediate political rewards. Despite these challenges, investing in communities vulnerable to natural disasters and underinsurance through municipal bonds offers a strategic approach to address immediate financial needs and long-term benefits.

We make the case for resilience through municipal bonds as part of a resilient action plan for state and local governments in this Community Finance Brief as part of a Summer series on resilience leading up to Fall workshops on resilience, local governments and public-private partnerships.

Redefining Community Development with Green Principles

When we think about the Greenhouse Gas Reduction Fund (GGRF), it's easy to reduce it to just a source of low-cost green capital. However, the GGRF is far more transformative, representing a fundamental shift in how we approach development. It encourages us to get smarter and more efficient in allocating dollars to those who need them most, and to integrate 'green' into every facet of community development. Regardless of what happens in November, the idea that everything is green now is the paradigm shift for a sustainable future.  

Traditionally, most Community Development Financial Institutions (CDFIs) have operated within niche specializations, focusing on specific areas like affordable housing, small business support, or clean energy projects. If utilized appropriately, GGRF encourages a comprehensive approach where these institutions offer a full range of services to effectively address the entire project cycle. By breaking down silos, CDFIs can maximize impact and drive holistic community development. This integrated strategy ensures that every project, regardless of its primary focus, incorporates green principles, thereby fostering a more resilient and sustainable community infrastructure. 

Those taking full advantage of the Fund (and its tax-credits) see that unified financial products tailored to various sub-sectors, alongside transactional advisory services under a single framework is the future. An integrated approach allows for a seamless delivery of financial support and expertise, making it easier for communities to access the necessary resources for green projects. By consolidating financial solutions, we can better address the unique needs of different community sectors, ensuring that green development is inclusive and comprehensive. 

Launching robust business development strategies is essential for expanding the pipeline of green projects beyond conventional channels. The GGRF emphasizes the importance of strategic initiatives that not only support existing green businesses but also foster the creation of new ones. This approach helps in building a demographically and geographically diverse green economy, ensuring that the benefits of green development are widely distributed. By focusing on strategic growth, we can drive innovation and inclusivity in the green sector, making sustainable practices the norm across all communities. 

To stimulate a thriving secondary market for pooled green projects, a successful enterprise will prioritize a securitization-first approach. Securitization helps in bundling various green projects into investment vehicles that can be traded in the financial markets, thereby attracting more private capital into the green sector. This approach not only increases the liquidity of green investments but also provides a scalable model for funding large-scale sustainability initiatives. By prioritizing securitization, we create a robust financial ecosystem that supports continuous investment in green projects. 

The essence of the GGRF lies in its recognition that community development and green initiatives are inseparable. In the face of climate change and environmental degradation, sustainable development is no longer an option but a necessity. The GGRF pushes us to rethink how we allocate resources, ensuring that every dollar spent contributes to a greener, more sustainable future. This holistic approach not only addresses environmental concerns but also promotes economic resilience, social equity, and overall community well-being. 

The Greenhouse Gas Reduction Fund is a powerful tool that transcends traditional financial support, driving a fundamental shift in how we approach community development. By integrating green principles into every aspect of development, breaking down silos, and leveraging technology, the GGRF ensures that sustainable practices are at the forefront of our efforts. It’s not just about low-cost green capital; it’s about redefining development for a sustainable future where every community thrives in harmony with the environment. 

Read how City First Enterprises, a CDFI based in Washington, D.C. is approaching the program.  

CFB: How to Make Little Things Very Big & Powerful In Climate Economy

Contributor James McIntyre joins the CFB this week.

The fight against climate change demands innovative financial models, and the EPA’s Greenhouse Gas Reduction Fund (GGRF) aims to leverage a relatively new network of green lenders across the U.S. These lenders can benefit from traditional public finance markets to achieve their goals. GGRF encourages local lenders and climate banks to support projects that combine environmental stewardship with racial equity, backed by a $27 billion allocation. Securitization will be essential for maximizing the program's impact.

To succeed, GGRF awardees will originate pooled loan funds, already used by municipal and state agencies. These funds, employed by state housing finance agencies, state bond banks, and state clean water State Revolving Funds (among others), aggregate loans from multiple borrowers, enhancing credit quality and reducing borrowing costs through various mechanics. By adopting this model, substantial financial resources can be mobilized to address climate change.

Yet, to date, the silo of community development has largely not communicated with the silo that is public finance. The exception to that is with state bond banks and financing authorities that were named as sub-awardees of the National Clean Investment Fund. That will hopefully change soon - and in this week’s Brief, we offer specific models from which that conversation can start.

Read, learn and ask us questions here.

The Bond Buyer Opinion: Bridging the Gap

CSG recently teamed up with long-time industry colleague James Pruskowski to write a piece about where catalytic capital begins and institutional footprints can cement impact in the public finance space. James ran the institutional muni portfolio at Blackrock for decades before joining 16 Rock Asset Management last year - a group of veteran portfolio managers. With no financial interest in 16 Rock or stand to gain anything else really, co-authoring with their tested insight into the marketplace was valuable as CSG does not manage a portfolio of investments.

The process of putting this together helped to clarify a lot of unfinished purportedly good ideas around what makes public finance and impact a proper alignment. It is not in-depth disclosure about climate risk (the S.E.C. won’t be a driver of change and is a waste of time) we think to have impact cross-over to mainstream it boils down to traditional financial risk and return assessment and aligning established interests with impact in ways not already explored. Simple concepts that healthy people cost less and are more economically productive, or that there are already massive muni buyers out there that can make small adjustments and have an outsized effect on communities nationwide. This is where we can find common ground between where catalytic and philantrhopric big picture ideas and the ‘establishment’ of public finance.

The Bond Buyer published our joint output and you can read our thoughts in this week’s Community Finance Brief.

CFB: Propping Up Public Insurance via Muni Bonds

National headlines and sticker-shock have likely clued most people in this country into the problems that climate change creates for property insurance. The contrast of sky-rocketing insurance costs and the migration trends of people into states more prone to natural disasters is at its clearest in the state of Florida. What many miss is that this is being propped up by the issuance of municipal bonds. Without access to the public finance marketplace, living in some parts of Florida would not be possible for most.

The intent of municipal bonds, as offered by the IRS, is that they serve a public purpose. The exemption from taxes is extremely powerful and as such, the legal definition of public purpose has been stretched in many different ways over the decades by those looking to wield it.

In Florida, the public property insurance system has lately come to rely the municipal bond market to sustain itself. This approach subsidizes living costs for residents but fails to address underlying structural issues. The viability of property insurance is most definitely a public purpose but at what point does the issuance of bonds to shore up this schematic become bad policy?

A recent report from the Environmental Defense Fund, the Florida Policy Project and Appalachian State University put a well placed magnifying glass onto the problems at hand and prompted a follow-up from our Brief six weeks ago.

Read this week’s Community Finance Brief here.

CFB: Inheriting the Wind in Chicago

Last year’s municipal Deal of the Year was a social bond issuance from Chicago. “Your opportunity to fight climate change, create affordable housing and strengthen our neighborhoods,” is what the city’s website tells the public. This transaction also lowered the threshold for a minimum investment (minibonds!) and made a locally focused marketing effort. The details of these aspects and the programs more broadly to make them functional and marketable to the public were very well done. From a cost of capital standpoint, who really knows if the effort was worth it but as a cheerleader for the Public in public finance, there is much to learn from this transaction.

We are now a little over a year from the closing of the bonds and now we learn if the rubber will meet the road as far as long term intent. The biggest lift for a social bond, a green bond, a sustainable bond, is not really in how your market yourself initially - it is how you continue to update the public as to your efforts. Efficacy entails monitoring and evaluation and one cannot do that without the bond issuer keeping the public up to date on its efforts.

In Chicago, it is unclear whether or not this will happen. The issuer has until September of this year to update disclosure, if it intends too. This dilemma is a real-life example of a larger debate in public finance as to how states and localities update the public on their social and environmental efficacy efforts. The lack of continuing disclosure if it happens in Chicago will be a larger tell about the real status of climate change, equity and municipal bonds.

Read more about this litmus test in this week’s Community Finance Brief.

Avoiding A $27 billion Boondoggle

With new financing infrastructure forming around state- and local-government codified banks, Community Development Finance Institutions, and other non-profits as envisioned by the Biden Administration, key issues still need resolution before successfully deploying taxpayer dollars. If the Inflation Reduction Act is to generate the trillions required to curb this nation’s greenhouse gas emissions, there needs to be some guardrails put in place sooner than later.

A failure to do this will result in a $27 billion boondoggle. Many of the new banks and CDFIs that have come into existence in the last three years do not have experience in participating in larger capital market systems. This inexperience coupled with the growth of so-called service providers, advisors and GovTech solution firms for all your GGRF-related concerns may very well be barbarians at the gates. The fast deployment schedule and the politics of this program will make for mistakes.

A reflection onto the how the basic tents of the modern U.S. mortgage system could be accretive to the way in which this new green ecosystem exists teases out a variety of lessons for those actively engaging in the moving parts of the roll-out of Greenhouse Gas Reduction Fund as well as for any stakeholders in the functioning capital markets in the country.

This is an area CSG will be writing on with more frequency in coming months as we see this ecosystem having the potential to adjust the many ways within which public finance functions in this country.

Read more about standards for GGRF and otherwise here.

CFB: Sustainable Sustainability Bonds

Saint Paul, Minnesota’s fight against the Emerald Ash Borer highlights the promise and challenges of sustainable municipal finance. Their Sustainability Bonds addressed the environmental threat while prioritizing low-income communities. However, the project relied on a grant, raising the question: can such efforts be sustained without dedicated resources?

Overall, sustainable bonds are on the rise, and in general, as are impact-oriented securities in the U.S. sub-sovereign space but for local governments with carefully monitored budget, the question remains as to whether or not the juice is worth the squeeze.

Ultimately, a sustainable future for sustainability bonds requires collaboration between government, academia, and potentially the MSRB to create a self-sustaining system for impact assessment within the municipal bond market. Only then can we truly build a future where environmental and social good are financially rewarded.

Read the full brief here.

CFB: Addressing Racial Bias in Property Taxes

This briefing sheds light on an often missed barrier to homeownership in the United States, particularly for Black Americans and where this had made it more difficult for local governments from a tax collection perspective. While rising costs and a lack of affordable housing are well-known challenges, a resulting racial bias in property valuations in the assessment methodology creates an unfair burden. Black-owned homes are often overvalued, leading to higher property taxes compared to similar white-owned homes. This systemic issue undermines homeownership aims and contributes to wealth inequality.

The briefing goes beyond identifying the problem and explores potential solutions. Learn about initiatives promoting frequent property reassessments, leveraging data science to eliminate bias, and fostering collaboration between assessors and local governments.

Read the full brief here .

CFB: Florida's Insurance Bonds Weather the Headlines For Now

Climate change adds risk. This brief highlights how the state's reliance on financing multiple layers of insurance is inadequate considering the increasing frequency and intensity of storms. This, coupled with the potential for federal support limitations, could lead to a situation where the current system struggles to financially handle future hurricane seasons.

The Problem: Rising insurance costs, insolvent insurers, and frequent hurricanes threaten the stability of the system.

• The Solution (Sort Of): Florida uses a public reinsurer, among other quasi-state run entities, to backstop private insurers. One just raised $1 billion to bolster the public reinsurance.

• The Catch: This "defensive" approach doesn't address the root cause - climate change leading to more intense storms.

• The Worries:

  • The system is expensive, relying on assessments, straining taxpayers indirectly.

  • It relies heavily on historical data, which might not reflect the future with stronger storms.

  • Investors seem hesitant about future bond offerings related to the FHCF.

• The Alternatives:

  • Resilient infrastructure to better withstand storms.

  • Adaptation finance to prepare for future climate impacts.

  • Exploring alternative insurance models like community-based options.

Read the brief here.

Keys to the Green Castle

Contributor James McIntyre of Inclusive Prosperity Capital put down his thoughts on one particular way to meld an existing tool to make homeownership more accessible to the broader public while also engaging with new EPA funding on green technology. The approach of a “green DPA" could be part of the lender toolkit. It combines down payment assistance for first-time homebuyers with incentives to make their new homes more energy-efficient.

This concept could be a win-win. Homeowners save money on energy bills while reducing their environmental footprint. The program would leverage funding from the Greenhouse Gas Reduction Fund and utilize existing successful energy loan programs. However, challenges remain. Green mortgages haven't historically been popular in the US, and designing these programs to be tax-compliant and homeowner-friendly will require careful planning and collaboration between lenders and housing agencies.

Read the Brief here.

CFB: A $27 Billion Opportunity for Climate Solutions

Big news yesterday generated much excitement across the climate change universe. The public finance industry seems to be scratching its head. A search of the public finance industry’s paper of record, The Bond Buyer, reveals just two mentions of Greenhouse Gas Reduction Fund since the idea was born.

Joined by James McIntyre this week we offer a view on the stage that has been set and where traditional community finance elements fit in.

Read the brief here.

CFB: Climate Change Policy at the Local Level

A recent poll of 100-plus mayors around the country highlighted important areas of concern when it comes to the Inflation Reduction Act. The hundreds of billions of dollars worth of policy initiatives will only be as successful as local governments implement plans. That only 7% of respondents said the dollars have had a major impact on their community is a bit alarming. Keeping in mind that many of the initiatives are still in the process of being rolled out, it has been about 18 months since being signed into law.

Aside from long-standing issues that fall under the local verus state versus federal government purview umbrella, we focus on the need for a federal concierge service of sorts. Some non-profits are providing such services but where the most impact will be felt will be in communities where the state has infrastructure to drive dollars where they are needed at the local level.

Learn more by clicking here and reading this week’s Community Finance Brief.

CFB: Empowering Communities, Financing Resilience in Chesapeake Bay

As local governments struggle to finance climate change adaptation and resilience efforts due to limited resources and short-term thinking, a new Resilience Authority in Maryland has taken a novel approach to building a more sustainable future for its residents.

By creating an independent body that functions for two local governments (Anne Arundel County and Annapolis), this community can strategize more effectively. It also participated in an incubator lab, Putting Assets to Work, to help understand the value of its physical assets that were not being utilized.

Learn more by reading this week’s Brief

GFOA: Putting Projects in Motion

With the unprecedented amount of Federal dollars flowing into infrastructure nationwide the need to consider the most efficient, transparent and sustainable methods to stretch dollars out is of the utmost importance. By most assessments, the billions from the IRA and Jobs Acts during the first term of the Biden Administration are pocket change for state and local governments when it comes to the trillions needed in coming decades.

CSG was surprised to learn that outside of active public finance market participant universe, the understanding of how state bond banks and conduit issuers fit into the financing of infrastructure is pretty limited.

The Government Finance Officers Association’s mission is in part to elevate the discourse around public finance and through its Government Finance Review publication, introduced the role of bond banks in the current infrastructure discussion in its February issue. You can read it here.

CFB: Beyond a Tax Break: Aligning Personal Interest In A Portfolio

This week’s brief explores the disconnect between individual values and their investments in municipal bonds. Individuals and families have a stake in the muni market worth over $2 trillion USD, contributing massively to community finance yet most view the asset class merely as a tax strategy.

If more people knew they were banning books in Florida or hindering reproductive rights in Alabama with their municipal bond investments maybe this would change. Perhaps if a University’s Board of Trustees dedicated efforts to marketing municipal bonds alongside charitable donations from alumni, the impact of municipal bonds would be better understood.

Read this week’s Brief here.

CFB: The Politics of ESG...meh

One can say this about a lot that relates to politics but with ESG it is just incredibly unproductive. Even the most ardent global warming denier can see the value in building sustainably. On the social front, understanding the social effects of government programs funded by municipal bonds cut deeper as segments of the population believe the existence of some programs is anathema to begin with. But the act of analyzing their efficacy should be something all members of a civil society strive for.

While not an early adopter to ‘ESG’ as a whole, I was engaged in ESG, impact and public finance before most regular market participants. That is because I was one of the early employees of a start-up called Neighborly that, among many things it was trying to do, the firm was trying to introduce municipal bonds into the sexy world of impact investing.

That was 2015, just a few months after the “first” green muni bond was issued in the District of Columbia. As is the case with anything new that comes to public finance, a lot of people entered the space with stars (and dollars signs) in their eyes and soon find out that the world of public finance is beast that for good and bad reasons, is unique and very hard to break into. Green, blue and whatever has made advancements in the space and I think it has generally been a net positive for the industry.

What we did not expect, and should have in retrospect, is how ‘ESG’ would become politicized to such a degree. The goals of such politicization have nothing to do with the merits of the arguments for better transparency and sustainability of government policy. The goals of these politicians and advocates is profit and the next election.

Take Ron DeSantis - who still points to his support of the Everglades during his first gubernatorial run as proof of his support for the environment. This ‘hero for the wetlands’ in the state conflicts massively with his move to essentially ban the rating agencies from considering rising sea levels when looking at the credit implications for communities in the state. This insanity has long-term implications that are not good for people thinking about future generations. DeSantis’ bond guy, like a good yesman, hammers home the Everglades argument whenever asked about climate change in the state at any public gathering of public finance officials.

This piece may not add much new to the dialogue around ESG and public finance but for those passerbyers, I hope this clues you in.

You can read the review here.

Community Finance Brief: Inflation Reduction Act's Climate Puzzle

The Inflation Reduction Act promised a clean energy revolution, but a year and a half later, the money still isn't flowing. Meanwhile, micro-focused community finance organizations are booming, but do they have the muscle to make a real dent in global warming? This brief argues that it's time to rethink the IRA's strategy. We need to supercharge climate action by tapping the vast resources of existing financial infrastructure. If you're wondering why shovels aren't in the ground yet or how to actually achieve the goals of the IRA, this brief is for you.

You can read the brief here.

Community Finance Brief: Beyond Averages: A New Era in Climate Risk Assessment for Local Leaders

“Natural disasters are coming with more frequency and with more tenacity than ever before and the costs to governments and the communities they support are growing. We mitigate through urban planning, we prepare by developing emergency response plans and stocking supplies, and we respond to emergencies with most support coming from the federal- and state-level. The cost of this approach is untenable.”

A new approach to climate risk has been proposed by the largest member association of local governments in North America - the Government Finance Officers Association - the largest insurance broker in the world and top five reinsurer by gross written premium - Aon - and some presumably very smart scientists from Stanford that have a nonprofit called Probability Managment. Add some support from Pew Charitable Trusts and this looks like a group to listen to.

Joking aside, the approach is compelling and there is a call to action.

We reviewed their approach to climate risk and contextualized it for the non-statisticians of the world. You can read it here.

“This could very well usher in a new era of government risk assessment. This group does not have a proposition to lower world temperatures or change where people are building new communities where 1 in 3 in the U.S. are in the so-called wild land-urban interface, but it does propose a radically more informed way to better secure governments financially and could be used to eventually help communities address climate volatility in a holistic fashion.”

Community Finance Brief: Bringing Impact to Homeownership

This week we are once again joined by Oswaldo Acosta, President and CEO of City First Enterprises for the second part of our look at mortgage assistance programs and securitization concepts.

Many low- and moderate-income (LMI) individuals struggle to become homeowners due to down payment requirements and limited credit access. While public Mortgage Assistance Programs (MAPs) exist, they lack scale and consistent funding. This report proposes a new solution: Community Benefit Bonds (CBBs). These bonds would attract impact investors by securitizing MAPs, offering financial returns alongside positive social impact. Careful underwriting ensures CBBs target LMI communities, and data-driven frameworks assess their impact. CBBs have the potential to increase homeownership access for underserved communities, leverage private capital alongside public funding, and create a sustainable model for mortgage assistance. Challenges include developing robust standards and attracting investors, but pilot programs and data transparency can pave the way for success. CBBs could revolutionize mortgage assistance and bridge the homeownership gap for many.

Click here to read the full Brief.