Shifting Paradigms: Solutions for Watershed Infrastructure Financing

The Clean Water State Revolving Fund (CWSRF) is dedicated to addressing water quality concerns caused by both point source and nonpoint source pollution. It has been a reliable resource for municipal wastewater and stormwater infrastructure financing for over 30 years and state CWSRF programs have collectively provided over $150 billion in assistance. With the injection of $11.7 billion over the next five years from the Bipartisan Infrastructure Law (BIL), the CWSRF has the opportunity to lead a massive shift in how infrastructure is perceived and financed. The bright line that has long existed between 'traditional' permitted infrastructure and the watershed that surrounds it is fading, and the paradigm is shifting toward a more holistic vision of what water infrastructure means today. As utility manager Paul Sommerfelt from the City of Flagstaff stated, 'if we talk utility infrastructure and water ' we need to look at the source as important as anything. The forest we don't own is our infrastructure.' The need for increased resiliency in the face of climate change requires a strategy for integrating watershed-based water quality solutions into the municipal planning model. Recent pilot projects in Arizona, Maine, Maryland, and Wisconsin provide case studies of how the CWSRF utilizes innovative mechanisms to overcome the challenges of financing watershed infrastructure projects. Communicating the Benefits of Watershed Infrastructure Severe weather, flooding, wildfire, and drought have imperiled critical water resources at their very source. States and municipalities are increasingly recognizing that 'distributed infrastructure' is a complement to the centralized infrastructure that has historically been used to improve water quality. Distributed infrastructure refers to technologies and practices that are decentralized, taking place throughout the watershed at many locations, such as forests, farms, businesses, homes, streets, and parks. While these projects may not be under direct control of the utility or municipality, they benefit from these investments that help them to achieve water quality criteria and meet permitting requirements. CWSRF programs are taking various approaches to enable and promote these investments. Transitioning to the idea of including distributed infrastructure as part of the CIP planning process requires expanding stakeholder engagement to new demographics, such as nonprofits, watershed groups, private enterprise, and local citizens. The ability to effectively communicate the benefits of undertaking nonpoint source, stormwater, and source water protection projects that will mitigate, prevent, or restore healthy watersheds is critical to garnering financial and public support. Tools that effectively translate the social, economic, and financial benefits of watershed projects into communications that are meaningful and relatable to local decision-makers and residents can be key factors to obtaining that support. Several CWSRF programs have taken steps to develop communication tools to complement the vast financial resources they can offer to high-priority watershed projects. The increasing frequency of massive wildfires not only scar landscapes, but can result in intense flooding, substantial water treatment costs, and loss of life in post-fire storms. To promote the potential use of the CWSRF for forest thinning and restoration, Arizona created a Measurable Benefits tool that allows users to quantify the costs of wildfire suppression and rehabilitation, impacts of property values, lost recreational value and economic activity, and other key metrics in a way that is engaging and easy to understand (Fig. 1). The City of Flagstaff employed a similar approach to build support of a $10 million ballot initiative to pay for forest thinning and restoration, receiving an overwhelming 74 percent of the vote. Maryland's Department of Environment (MDE) has embarked on an initiative to emphasize ecosystem restoration activities to protect the Chesapeake Bay, exploring innovative approaches to messaging and marketing the benefits of reforestation projects. The initiative also highlights the CWSRF as a low-cost solution for municipalities and private landowners. MDE created the Forest Financing Implementation Tool (MD FFIT) as a project planning tool that demonstrates clearly and concisely for non-scientists how reforestation can be used to reduce nonpoint source pollution loads in the Chesapeake Bay watershed and meet TMDL targets. It enables project implementers to anticipate costs, consider financing needs and options, estimate pollution prevention and stormwater credit earning potential, and measure project cost savings (Fig. 2). Reimagining the CWSRF with Creative Financing Solutions Effectively communicating the benefits of watershed infrastructure are critical for securing funding for implementation. In many cases, non-municipal entities, such as non-profits and private landowners, could benefit from low-cost CWSRF financing but are unable to access the program due to state regulations or other administrative hurdles. In response, many CWSRF programs have created innovative financing arrangements to overcome the hurdles. Many CWSRF innovative financing arrangements were created to address agricultural runoff and failing septic systems, but CWSRFs are increasingly considering innovations that would leverage additional financing for watershed infrastructure. The key is understanding which financing mechanism best fit the projects and watershed partners to tailor a customized solution that delivers optimal outcomes at the lowest cost. A. Conduit lending arrangements allow an eligible CWSRF borrower (typically a municipality) to act as a conduit through with funding can flow to the project implementer. While used by many states to address agricultural runoff or septic systems, these arrangements can be expanded to address stormwater and green infrastructure needs through partnerships with watershed associations, special districts, non-profits, or private corporations. The Arizona CWSRF offers a pass-through lending approach to reach watershed partners to engage in forest restoration activities (Fig. 3). B. Sponsorship lending pairs CWSRF assistance with both a traditional point source project and a nonpoint source or land conservation project in the same agreement, but at a lower interest rate that effectively allows the secondary project to proceed at no cost, removing the repayment burden on watershed partners while still benefiting the utility (Fig. 4). C. Similar to municipal bond financing, several CWSRF programs offer 'programmatic financing' whereby the financing is provided to a capital improvement program on a multi-year basis rather than to individual projects. The Wisconsin Department of Natural Resource is pioneering a ProFi approach to watershed infrastructure financing, allowing municipalities to finance a suite of green infrastructure and phosphorous reduction approaches on both public and private property (Fig. 5). The municipality may use the financing to provide incentives to private landowners to implement phosphorous-reduction techniques and to implement stormwater projects on public property. D. Guarantees are a tool whereby the state CWSRF program uses its financial strength to guarantee a bond or other financial agreement for another entity. The guarantee can help lower the interest rate of the entity receiving it without requiring cash flows by the CWSRF. The Maryland CWSRF program is using this approach in concert with MD FFIT to finance ecosystem restoration projects for reforestation efforts within the Chesapeake Bay watershed to further expand the flexibility and reach of the CWSRF. E. Environmental justice and disadvantaged communities not only benefit from traditional wastewater financing, but can experience health and quality-of-life benefits from investments in watershed health. CWSRF programs have identified mechanisms to allow their principal forgiveness financing to flow to watershed partners, environmental justice groups, and other stakeholders through conduit lending, helping ensure partners are not left on the hook for defaults. These solutions will help bring watershed investments to a wider audience. Congress has provided the CWSRF with enormous flexibility to address high priority water quality concerns around the country, enabling states to choose the approaches that best serve their needs and stakeholders. State CWSRF programs, in partnership with watershed groups, nonprofits, municipalities, and other stakeholders have demonstrated creative thinking in designing new solutions to improve water quality through innovative approaches. With the vast BIL funding already awarded and still to come, watershed groups and municipalities are encouraged to identify new ways that CWSRF programs can contribute to water quality.