Control of stormwater is a big problem and getting bigger. And it’s not just storms like Helene and Chantal that pose risks — “average” storms are causing more frequent and severe flooding. The Stormwater Association of North Carolina (SWANC) created a stormwater education video that additionally highlights the need to plan for and address stormwater.
Stormwater infrastructure can be a significant investment; however, if properly built, operated, and maintained, the upfront investment in stormwater infrastructure can pay dividends down the road by lessening the frequency and severity of flooding and reducing the cost to repair our homes, businesses, and public infrastructure.
Below we describe different ways a community can finance stormwater infrastructure—
Leverage your stormwater fees to support a borrowing: revenue bonds for stormwater improvements
Many local governments charge stormwater fees, but it can take a long time to save for stormwater projects. Instead, consider borrowing money to get funds upfront to pay for larger projects, and then use stormwater fees as a source of repayment. You can use revenue bonds, which are secured by a promise to use the net revenues of some public enterprise for the payment of the loan, as that upfront funding source.
A stormwater enterprise might pledge all or a portion of its annual fees or permit fees as security for a loan, for example. Revenue bonds are commonly used for water and sewer or utilities because these systems produce “revenues” that can pay for the expense, maintenance, and operation of the revenue bond project. We have another blog post that delves deeper into some of the features of revenue bond financing.
Combine enterprises for more favorable borrowing terms: revenue bonds in combination with a water and sewer system
Our revenue bond statutes, and almost all revenue bond documents, allow a locality to combine the stormwater enterprise with another enterprise – such as the water and sewer utility – and use the strength of the other enterprise to help support a loan for the weaker enterprise. This can be especially useful when stormwater revenues are just sufficient to cover debt payments. For example, combining your stormwater enterprise with the water and sewer utility might provide stronger loan security and would likely secure friendlier financing terms, even if you don’t end up paying debt service with both sets of revenues.
Whether that’s a good idea (especially if you don’t have a way to make the stormwater side self-sufficient) is another question, of course.
Leverage multiple revenue streams to finance your improvements: special obligation bonds
Special obligation bonds are secured by the local government’s promise to the lender that it will use a designated set of non-local tax revenues to repay a loan. These “non-local tax revenues” can include, for example, enterprise revenues (such as water and sewer system revenues and stormwater fees), locally collected fees, and State-shared revenues. For a city or town, this pledge can also include sales tax revenues (because cities and towns don’t set sales tax rates).
Stormwater improvements may be eligible for financing through special obligation bonds if the improvements are within a municipal service district (MSD). You can issue special obligation bonds for MSD purposes including downtown revitalization, drainage, and watershed improvement projects. Under the statutes, Improvements to stormwater mains are eligible downtown revitalization projects. Similarly, many stormwater improvements will be qualifying drainage projects, and some may also qualify as watershed improvements.
Special obligation bonds can be a way to finance a variety of projects that might not otherwise fit neatly into another tool or when a project isn’t self-sustaining. For example, you could pledge your stormwater system fees and your sales tax revenues to create a more attractive collateral pledge. We think more folks should consider special obligation bonds when that’s an available technique. For another article on using special obligation bonds, please see our blog post here.
Add stormwater improvements to take advantage of strong collateral: installment financing
Installment financings allow local governments to finance a variety of undertakings by borrowing money and promising to use annual appropriations to pay it back over time. This is how most North Carolina local government capital financings now are done. This tool is used for a full range of projects from vehicles, to parks, to schools, to jails (and just about anything in between) and are either placed directly with a single bank or other financial institution or sold using “limited obligation bonds.”
Lenders for installment financing deals generally are only looking for collateral equal to roughly 50% of the total borrowing amount. This means that you might be able to tack on stormwater improvements to an otherwise planned installment financing. For example, if you are planning to borrow $10 million to construct a new administration building, you could tack on additional funds for stormwater improvements and only use the administration building as the collateral for the entire loan.
Obtain voter approval for lower-cost and longer-term financing: general obligation bonds
General obligation bonds pledge the unit’s taxing power to provide for loan repayment. Because this is such a significant pledge, North Carolina law generally requires that these bonds be approved by a vote of the people (this requirement does not apply to any of the other techniques we’ve described). To successfully use this approach, you’ll need to have a good idea of whether your voters will be willing to approve bonds for stormwater improvements. This undertaking may be more palatable when the costs are part of a similar or related series of improvements. For example, a bundle of resiliency projects that includes stormwater infrastructure could be packaged and presented to the voters as an “infrastructure resiliency projects.”
Some general obligation bonds don’t need voter approval. These are known as “two-thirds bonds,” and can be used for stormwater projects. If you’re not familiar with two-thirds bonds, please see our blog post here.
When approved, general obligation bonds provide low-cost financing, and 20-year financing is readily available (that’s not always the case for the other techniques). There’s no need to pledge any physical collateral, and once approved, the legal process if a simple one. Some of the policies of our Local Government Commission, however, make issuing general obligation bonds a relatively expensive process for projects costing under $5 million or so.
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Of course, the best approach for your community will depend on your local conditions, needs and resources. Many localities use a combination of tools. And, this post is about how to borrow money for these projects, so we haven’t talked about pay-as-you-go financing or obtaining grant funding from outside sources.
Please see our disclaimer, click here for more information about our public finance practice, and contact us if you want to talk about financing for stormwater projects, or anything else we can help you with.