Communities can use many funding sources to pay for stormwater program implementation. While some communities rely on just one funding source (often general funds), many communities draw from a variety of sources to fund local programs and projects. Moreover, many other communities would like to expand their funding sources and strategies to obtain more reliable, sustainable funding for the future. As such, devising a comprehensive funding strategy—and then identifying, obtaining, and frequently combining funding sources—can be complex and time-consuming.
Defining funding, financing, and revenue
Sorting through different funding and financing options can be confusing. The financing community uses precise terms with specific connotations and meanings, but those outside of this profession can misunderstand or misuse this language. Key terms relevant to stormwater include the following:
- Funding: The means methods used to pay for stormwater services, such as bond or loan proceeds.
- Financing: Debt or borrowing in anticipation of future revenue; financing always involves some form of repayment.
- Revenue: Future source of repayment for financing vehicles (fees, rates, etc.).
- Sub-market interest rate: Interest rate associated with a financial product that is lower than the presiding rate available to a community through municipal bonds. Examples of sub-market interest rate funding include EPA’s Clean Water State Revolving Fund or Water Infrastructure Financing and Innovation Act loans.
Navigating funding and financing options
Many funding and financing options are available for stormwater program implementation. You should consider the following when selecting an option:
- Pay-as-you-go versus long-term financing: Stormwater programs can use revenues available within a given year, which is referred to as “pay-as-you-go” (pay-go) funding, or they can use a longer-term financing to invest in stormwater infrastructure. Pay-go is a more short-term approach that implements programs and projects year to year. A 2016 study found that 88 percent of surveyed municipalities pay for their stormwater programs using pay-go, while 11 percent use financing (see Black & Veatch [2016] in additional resources).
- Benefits of a combined funding/financing approach: Relying on pay-go limits program investments to funds available within a single year and promotes short-term planning. Financing, in contrast, allows communities to spread the payment out over the lifetime of the infrastructure, enabling larger-scale investments. Combining regular funding mechanisms (e.g., dedicated stormwater fees) and financing (e.g., bond or loan funding) enhances a community’s ability to obtain sufficient, sustainable funding over time for short- and long-term program needs.
- Strength of diversity in funding and financing: Most communities fund their stormwater programs using general funds or other non-dedicated sources, which means they must compete for funds with other local programs. Over the past few years, more and more communities have used fees or taxes to create a dedicated funding source for some or all stormwater program costs. As few local programs receive sufficient single-source funding to cover all long-term capital and operation and maintenance (O&M) costs, most programs have had to assemble a mix of funding sources to meet stormwater program goals and needs.
- Benefits of leveraging a dedicated funding source: Communities that have dedicated funding sources can access other funding options that are likely unavailable to communities with only general funds. Obtaining even a modest dedicated funding source can enable a community to leverage other resources to help pay for larger projects over time and to more reliably attend to O&M needs. Communities can use these dedicated funds as future revenue to secure longer-term project financing.
Relying on a single funding source, whether it be pay-go funding or debt financing, is less likely to provide sufficient, reliable funding for the long term. Developing a dedicated local funding source that helps leverage access to other funding and financing vehicles will likely yield a sustainable, long-term funding plan to address capital and O&M investments.
Selecting a funding/financing approach
A number of factors can impact the nature and scope of your funding and financing strategy, including the following:
- Funding/financing program needs and goals: First, identify capital, O&M, and programmatic needs for the current, short-term, and long-term timeframes to determine the most appropriate funding or financing strategy and to justify additional stormwater investments. Without a complete understanding of funding needs, decision-makers may not be adequately persuaded to meet or trust the funding needs you present. Similarly, focusing only on short-term needs eliminates many possible funding and financing options that can address long-term and ongoing needs.
- Experience/history: The background and past patterns of funding/financing for stormwater and other infrastructure sectors may predict the most likely future options. For instance, many communities with regulatory obligations invest in stormwater on a year-to-year basis with cash on hand rather than financing. That means they won’t use financing unless other options become more readily available and stormwater program managers become more aware of the advantages of long-term and large-scale investment planning approaches associated with infrastructure financing. Similarly, communities that are not aware of sub-market financing options, such as EPA’s Clean Water State Revolving Fund or Water Infrastructure Financing and Innovation Act loans, may miss opportunities to take advantage of affordable financing options.
- Political support: Communities with strong political support for stormwater management program funding and investments will have a better chance of establishing robust funding programs.
- Legal/statutory landscape: There may be state, local, or other restrictions on the type of funding and financing you can use for infrastructure investments, and communities should fully understand the legal ramifications of specific approaches.
- Revenue stream: The lack of a dedicated revenue stream for stormwater programs will severely limit financing options for stormwater management investments. Community discussions about establishing a dedicated revenue stream should include the dynamics associated with financing options. Highlight the fact that this is not just a new fee imposed on the community; it is a dedicated revenue source that can greatly expand overall investment as other infrastructures use the financing options available to them.
- Credit rating and capacity: Financing options may be limited by the community’s credit rating or the amount of credit available to the community. Credit ratings are based on factors such as median income, diversity of tax base, trends in tax revenues or other dedicated revenues, and the rate and nature of population growth and demographics. The community’s capacity for bond financing limits the total amount of money it can borrow. A community must consider the different needs for bond financing when determining how to best prioritize investments within its existing bond capacity.
- Community goals: Communities should consider their goals and needs when evaluating funding and financing approaches. Some funding sources and financing programs have limitations or conditions on how programs use funds. For instance, Clean Water State Revolving Fund assistance is designated for capital investments and planning efforts only. This limits a community’s ability to use these funds for O&M or programmatic investments. Grant dollars also commonly have narrow uses. For instance, a grant focused on economic development might require the stormwater program to include workforce development.
Refer to the Developing and Administering a Dedicated Revenue Source page and the following additional resources for more guidance on funding your municipal stormwater management program.
Like an individual’s credit score, a community’s credit rating expresses the amount of risk to help potential lenders make decisions about lending. Similarly, a community’s capacity for using bond financing resembles the way a credit card holder has a credit limit.
Resources
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