Innovative Finance Models for Sustainable Cities of the Future
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City budget deficits are far from rare. San Jose, Chicago, Phoenix and Las Vegas are just a few examples of cities confronting likely shortfalls in the upcoming fiscal year. A wave of cost-cutting, and in many cases conflicting, policy drivers awaits the sustainability champions of US cities.
With business starting to take sustainability seriously, not only is there a commercial opportunity in implementing city sustainability strategies, but also a ‘read-across’ in terms of public and private sector strategies. The key question is how to find effective models of financing that will meet the objectives of both public and private stakeholders when it comes to sustainable cities.
Tax Incremental Financing (TIF)
A new report, Investor Ready Cities released by Siemens, PwC and law firm Berwin Leighton Paisner, aims to help cities think about new ways to fund their infrastructure projects – by exploring traditional funding models like taxes and user fees and by attracting private investors.
For example, tax incremental financing (TIF) is an innovative a way to fund urban infrastructure projects. TIF can be a valuable public finance tool for city redevelopment projects. Establishing a TIF program allows the city to invest selected new property tax dollars into the neighborhood instead of into the city’s General Fund, for a defined period (typically 20 years). TIF funds are used to leverage public funds to promote private sector activity in a targeted district or area or supporting sustainable community. TIF districts are typically established in areas with redevelopment potential and enable municipalities to use anticipated growth to raise money to finance essential infrastructure improvements by leveraging public sector bonds based on future tax gains.
The 2013 Sustainable Communities Tax Increment Financing (TIF) Designation and Financing Law passed by the Maryland General Assembly as House Bill 613 uses TIF supported bonds in a Sustainable Community for:
- Historic preservation and rehabilitation;
- Environmental remediation, demolition and site preparation;
- Parking lots, facilities and structures of any type for public or private use;
- Highways and transit services that support Sustainable Communities;
- Affordable or mixed income housing; and
- Storm water management and storm drain facilities.
Crowd and micro funding projects are not unheard of in the social cause community. Kiva has enabled developing world entrepreneurship through microloans since 2005. But until recently, crowdfunding hadn’t really been applied to creating businesses and sparking innovation around the triple bottom line of sustainability – people, planet, and profit. Crowdfunding – popularized by platforms such as Kickstarter and Indiegogo, provides a way for many people to pool resources, typically through online donations, toward a larger goal.
For example, Missouri in their bid to grow and support Kansas City’s B-Cycle program, and deliver infrastructure improvements to the bike share system, recently launched a crowd funding campaign on the Neighbor.ly platform. The goal was to run simultaneous mini-campaigns, ranging between $50,000 and $250,000, to bring one to five stations to 10 different Kansas City neighborhoods. The current campaign is the second crowd funding effort by B-Cycle. The first gathered funding for the purpose of maintaining existing stations.
In February 2014, Binghampton, a neighborhood on the east side of Memphis, Tennessee broke ground on the Hampline: a two-mile cycle track that will connect Binghampton to nearby parks and trails. While the bulk of the money for Hampline came through the usual avenues of city grants and foundations, the last $69,000 of the $4.5 million project was raised via ioby, a crowdfunding platform that’s helping to launch environmental and community development initiatives around the country.
Green Revolving Fund (GRF)
Energy efficiency saves money. But there is always the challenge of justifying and securing the upfront capital often needed to implement efficiency projects. The Green Revolving Fund (GRF) model is emerging as an effective solution. The model is increasingly common among higher education institutions and state governments, and it is gaining traction with healthcare facilities, municipalities and businesses. A GRF is an internal investment vehicle that provides financing to parties within an organization for implementing energy efficiency, renewable energy, and other sustainability projects that generate cost savings. These savings are tracked and used to replenish the fund for the next round of green investments, thus establishing a sustainable funding cycle while cutting operating costs and reducing environmental impacts.
For example, the City of Ann Arbor established The Municipal Energy Fund in 1998 to be a self-sustaining source of funds for investment in energy-efficient retrofits at city facilities, so the City could continually reduce its operating costs over time. The Energy Fund is financed by re-investing the funds saved through energy efficiency measures into new energy saving projects. In 1988, the City utilized its municipal bonding authority to fund a $1.4 million Energy Bond which enabled the City to implement energy efficiency measures in 30 City facilities. The payments for this ten-year bond were generated through energy cost savings. With the bond paid off in 1998, the City chose not to eliminate the bond payment line item in the annual budget but rather to reduce it by 50% to $100,000. This money was then used to finance the new Municipal Energy Fund.
Vision for the Future
Cities are hubs for ideas, commerce, culture, science, social development and innovation. At their best, cities have enabled people to advance socially and economically. The challenges cities face can be overcome in ways that allow them to continue to thrive and grow, while improving resource use and promoting sustainable development. The vision is to give people a tool to build their own city. They can use these finance models as a vehicle to organize, invest and manage and be a part of development around them. It is going to create better cities that are more connected and relevant to local community.
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This article was originally published on September 8, 2020.
Update for April 20, 2021:
After the murder of George Floyd we wrote this article as a kind of blueprint, a beginning to a new way of working with equitable resilience in our cities and beyond. Now, as the trial of Derek Chauvin comes to a guilty verdict in Minneapolis and the whole country reflects on the legacy of that verdict, we have to remember another senseless murder – another young Black man, Daunte Wright, at the hands of law enforcement, just miles from the courthouse. Again, Minneapolis is all of us. We have protested, we have voted. We stood up, we spoke out, we have raged about the anti-Black racism. We have seen people come together, we can feel a shift in this country. But there is so much more to do. No equity, no resilience.
-Ron & Stewart
Housing that is affordable to low-income residents is often substandard and suffering from deferred maintenance, exposing residents to poor air quality and high energy bills. This situation can exacerbate asthma and other respiratory health issues, and siphon scarce dollars from higher value items like more nutritious food, health care, or education. Providing safe, decent, affordable, and healthy housing is one way to address historic inequities in community investment. Engaging with affordable housing and other types of community benefit projects is an important first step toward fully integrating equity into the green building process. In creating a framework for going deeper on equity, our new book, the Blueprint for Affordable Housing (Island Press 2020), starts with the Convention on Human Rights and the fundamental right to housing.
Since the Great Recession of 2008, the housing wealth gap has expanded to include not just Black and Brown Americans, but younger White Americans as well. Millennials and Generation Z Whites are now joining their Black and Brown peers in facing untenable housing precarity and blocked access to wealth. With wages stuck at 1980 levels and housing prices at least double (in inflation adjusted terms) what they were 40 years ago, many younger Americans, most with college degrees, are giving up on buying a home and even struggle to rent apartments suitable for raising a family.
What makes it hard for policy people and citizens to accept this truth is that we have not seen this problem in a very long time. Back in the 1920s of course, but not really since then. But this is actually an old problem that has come back to haunt us; a problem first articulated by Adam Smith in the 1700s.