A new federal loan program provides support for projects that improve the resilience of communities in dealing with the effects of climate change.
In December 2020, Congress passed the Safeguarding Tomorrow through Ongoing Risk Mitigation Act. The law amends the 1988 Stafford Act and authorizes the Federal Emergency Management Agency (FEMA) to provide grants that establish revolving loan funds to states (and the District of Columbia) for resilience projects. Almost a year later, in November 2021, the Infrastructure Investment and Jobs Act provided FEMA with $500 million to get the new resilience program going. On September 12 of this year, FEMA announced the winners of $50 million in first-round funding: the District of Columbia, Louisiana, Maryland, Michigan, New Jersey, New York, South Carolina, and Virginia—notably, all in coastal areas.
States will use the funding from these grants to issue low-interest loans (no more than 1 percent) to local governments for investment in resilience projects. The loan fund is “revolving,” because the loan repayments, including payments of interest, recapitalize the loan fund over time, which ensures that the loan fund remains a sustainable source of capital for new projects. The law requires that states also contribute to the loan fund by matching at least 10 percent of the contribution from FEMA.
For those who are aware of how water infrastructure in the United States is financed, this new resilience program may sound familiar. The US Environmental Protection Agency (EPA) has operated the Clean Water State Revolving Fund program since 1988 and the Drinking Water State Revolving Fund since 1997. In these programs, EPA provides grants to states, which use the money to provide low-interest loans to local governments and water utilities for investment in wastewater and drinking-water systems. But the new program marks the first time that this type of approach has been used to finance resilience projects.
The loan repayments for the new resilience fund, called the Safeguarding Tomorrow Revolving Loan Fund, give the new program a potential freedom from reliance on congressional appropriations for sustainable funding over time. Indeed, for EPA’s state revolving fund programs, interest payments have made up a growing share of the total money available as the programs have matured. For example, federal money accounted for 33 percent of total funding in the Clean Water State Revolving Fund program by 1992, the fourth year of the program, but federal inputs comprised just 16 percent of the fund by 2022. By the fourth year of the Drinking Water State Revolving Fund in 2001, federal money made up 48 percent of total funding; by 2022, the percentage of federal money dropped to 26 percent.
In addition, coupling the loan repayments with cost sharing by states has created a shared commitment in the new program to investing in resilience across all three branches of government (federal, state, and local) and a shared approach to managing risks that are associated with these investments. FEMA already operates resilience grant programs; the new revolving loan fund gives states and localities more “skin in the game.”
Communities are happy about another feature of the new program: the arduous rules that exist in other FEMA grant applications, including strict benefit-cost requirements, do not apply. States use their own criteria to decide where the money goes.
Program Challenges
In spite of the stated advantages, we may need to temper our optimism for this new approach to financing resilience.
First, the $500 million that is provided by the Infrastructure Investment and Jobs Act is only a small drop in the resilience bucket. To be fair, the law includes approximately $47 billion in total for resilience across multiple agencies and programs. Nonetheless, prospects for what the new revolving loan fund can accomplish are checked by the limited funding that is available. The price tags on the proposed seawall infrastructure projects in Norfolk, Virginia; Miami, Florida; and New York City alone are $2.6 billion, $6 billion, and $52 billion, respectively. A single project for flood prevention and improvements to stormwater infrastructure in my neighborhood in Fairfax County, Virginia, is estimated to cost over $9 million; the county requested $5.9 million of this sum from Virginia’s revolving loan fund, which is the total amount of money the state received in the first round of FEMA funding. (Virginia’s loan program has been in operation since 2022 with state funding.)
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Second, unlike the Clean Water and Drinking Water State Revolving Funds, resilience projects do not have a natural source of revenues that local governments can use to repay loans. For wastewater and drinking-water services, local governments and water utilities charge fees to customers; the revenue from these fees is used to repay loans for water infrastructure projects. But for resilience projects, local governments will have to figure out where to get the money to repay loans. Will the money come from property taxes? If so, will local governments charge an additional special assessment? Would that assessment be placed on all properties in the jurisdiction, or just some properties that benefit from the investment in resilience? Should special districts—governmental units that have administrative and fiscal independence from local governments and usually have taxing and bonding authority—be established just for resilience projects? The Sandbridge Special Service District in Virginia is one example. Revenues from special property taxes in the Sandbridge district, which is near the city of Virginia Beach, are used for beach nourishment and shoreline management and restoration. Localities face these decisions in part by spending on resilience projects, of course, but the new revolving loan fund brings these issues into sharp relief.
Third, many resilience projects can be complex, and the future benefits can be highly uncertain. This factor is another that distinguishes the new revolving loan fund from the Clean Water and Drinking Water State Revolving Funds. Local governments have to repay the resilience loan, even if a project fails or if the resilience benefits fall short of expectations. That communities bear some of the risk of failure may be appropriate, since the communities also benefit when the project succeeds, but the expectation may be too high for local governments to have the knowledge and technical expertise to make these investments, along with the financial cushion to endure a failed investment. In light of these risks, potentially high-risk/high-reward projects may be eschewed by states in favor of simpler, low-risk options.
Fourth (and this consideration relates to the previous points), the new program may be challenging for small, low-income, and underserved communities. Government agencies in smaller communities often do not have the technical know-how to evaluate and prioritize resilience projects. These smaller agencies may not even know where to begin. Low-income communities also may not have the tax base to cover the costs of loan repayment. A 2022 study found that these problems have existed for the Clean Water State Revolving Fund: while municipalities with lower median incomes were found to be more likely to receive assistance from the program, smaller municipalities and those with larger populations of color were less likely to receive assistance.
Looking Forward
Time will tell whether the new revolving loan fund will be a game changer for resilience. The impact of the fund may be minimal without more generous federal funding. But if initial outcomes look promising, the program could become a staple of resilience financing in the same way that the two existing state revolving funds at EPA facilitate water-infrastructure financing. Moreover, the new approach could spur innovation at the state and local levels and stimulate new ideas for the resilience projects, along with creative ways to pay for such projects.
