The Storm Next Time

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Image from Washington State Dept of Transportation: https://www.flickr.com/photos/wsdot/5455957937/in/photostream/

Image from Washington State Dept of Transportation: https://www.flickr.com/photos/wsdot/5455957937/in/photostream/

The issue of how to pay for dealing with stormwater runoff into the Santa Monica Bay has begun to engulf all urbanized areas in Los Angeles County. While the impacts are most acutely felt by coastal cities such as Santa Monica and Hermosa Beach, inland cities are grappling with how to manage urban runoff. Recent court decisions found Los Angeles County liable for stormwater pollution in the San Gabriel and Los Angeles Rivers. The latest ruling simply underscores the reality that all municipalities, regardless of their proximity to the coast, will be required to be more proactive in stormwater management. So how do we finance stormwater infrastructure improvements with limited funding for infrastructure projects?

Local governments in California have few attractive options to finance major infrastructure projects, but there is momentum building to create new financing tools. Governor Brown proposed legislation to ease the onerous requirements imposed on municipalities when forming infrastructure financing districts [PDF] – a topic we explored in our March newsletter. But although the budget trailer bill that contained the IFD revisions has been tabled, another option may be found in the concept of stormwater credit trading, which attempts to leverage private capital for the construction of public works.

In stormwater credit trading, a government entity establishes a market for private developers to create and trade infrastructure obligations. The concept assumes that as on- and off-site stormwater management requirements become more stringent, developers and property owners will be required to build additional stormwater management infrastructure. However, the feasibility of meeting these regulations will vary from parcel to parcel. Larger parcels with significant amounts of open space will be better able to accommodate stormwater infrastructure than smaller lots.  Consequently, it’s likely that certain parcels would be able to exceed their stormwater management requirements, while other parcels would require cost-prohibitive remediation to be compliant.

The concept of stormwater credit trading was jointly developed by NatLab, a partnership between the Natural Resources Defense Council, EKO Asset Management Partners, and the Nature Conservancy.  Similar to the cap-and-trade market for carbon credits, stormwater credit trading establishes a market where developers can, in lieu of managing runoff on-site, instead purchase “credits” for offsite stormwater retention in order to be compliant with regulations.  For other developers with parcels capable of exceeding requirements for on-site retention, such excess capacity can be monetized.  Of course, the challenges for creating such a market that is both viable and sustainable are setting an appropriate value for the “credits,” and establishing a framework that minimizes regulatory uncertainty and project risk in order to attract private capital.

In a precursor to the credit trading described above, a program in Philadelphia creates incentives for non-residential and condominium property owners to implement stormwater management projects.  A more comprehensive credit trading program was implemented in the District of Columbia.  In 2013, the city revised its stormwater management regulations to require most new or redeveloped sites to retain at least 50% of the “Stormwater Retention Volume” onsite, with the “Offsite Retention Value” met through either an in-lieu fee of $3.50 per gallon per year or the purchase of Stormwater Retention Credits.  In Los Angeles, the Little Tokyo downtown is exploring a similar program to finance a district-wide stormwater infrastructure system described in its newly-crafted community vision.

Moving forward, municipalities may very well increasingly tap into unconventional or new financing mechanisms such as stormwater credit trading to bridge the gap between what currently exists and what the courts, populace, and environment require.

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