As the coronavirus pandemic continues to ravage the U.S. and the American economy, state and local governments are taking a significant revenue hit. As a result, many cities and towns are going to need to reduce their spending, and school systems are going to suffer as a result. Fortunately, new advancements in sustainable finance can help these cities and towns look to other ways to reduce their spending, before having to lay off teachers and cut educational programs.
It hasn’t gotten the attention it deserves, but the coronavirus has taken a significant toll on state and local government finances. In May, state sales tax revenues dropped 21% in the U.S., and in six states it dropped more than 30%.
When these revenues drop so precipitously, they must be made up for elsewhere. Perhaps some states and cities will raise taxes, but for the most part, this means spending cuts. Where will those spending cuts come from? Well, some local governmental services remain “essential”: waste needs to be picked up and dealt with, water needs to be available at the tap, and so forth. And so, inevitably, attention turns to another big spending area, education.
As Fitch Ratings put it recently, while arguing that municipalities are likely going to be able to continue to pay their debts, that comes at the cost of “K-12 spending will continue to be a primary pressure point for states and school districts.” NPR put it even more bleakly, stating that “With the nation’s attention still fixed on the COVID-19 health crisis, school leaders are warning of a financial meltdown that could devastate many districts and set back an entire generation of students.”
At a time when schools probably need significantly MORE financial resources just to keep up with the changes necessary to deal with a pandemic, the local government spending pressures are ramping up.
Few people really want to further cut school budgets. But needs must. After all, even municipal infrastructure projects are being delayed or canceled right now, wherever they can. More than 700 U.S. cities have done so already. Even though municipal bonds aren’t finding a lack of takers right now (although investors are being more demanding than they were before the COVID-19 Crisis), these cities know they’re not in a position to borrow more to spend more.
This is where recent advancements in sustainable finance might be able to help. Borrowing lessons learned from the rooftop and community solar markets, some investors are stepping in to help enable cities to take on infrastructure modernization or simply keeping up with their existing “essential services” mandates, at lower cost.
How does this work? Well, the real (potential) hero is two decades of sustainability innovations around distributed waste treatment, and water and wastewater technologies. Innovators and entrepreneurs have worked for years to develop localized solutions in these areas that are lower-cost (at least on a system-wide basis, including costs for pipes, transport, etc) versus the status quo. And, by the way, the reason that they are lower-cost tends to be that they are less resource intensive as well, and thus more sustainable. A win-win for cities, right?
The problem has been, adopting these new solutions has required cities and other local governments to pay up front (or borrow to do so) to acquire the systems, and then pay city workers to run them. And that has been difficult, and in the current context perhaps impossible, for many municipalities.
Enter third-party capital to enable entrepreneurs to provide these new solutions — and run them — as “waste / water as a service”. Outside investors pay for the projects to be built. They pay for the staff to run the systems. The city signs a contract to buy the services provided, but at a lower cost than the existing solutions, thus providing savings from day one. This has already been a trend for large-scale projects, but a lot of the opportunities for cost-savings at the municipal level (especially for small to mid-sized cities) are smaller-scale. Now a new breed of investors are enabling this same model for smaller, distributed waste and water systems as well.
The savings for each individual such localized project can be relatively small, perhaps a couple of million dollars of cost savings per year. For the Aries Clean Energy plant being put in place at Linden, NJ to deal with wastewater biosolids (disclosure: one my firm is helping to finance), we estimate that nearby cities will save around $2M per year once the plant is up and running. We’re tracking another opportunity with the city of Atlanta, which is looking to outsource their organic solid waste to outside vendors, which looks like it could save the city around $3M per year. Water and waste treatment aren’t often in the headlines. And each of these individual projects would save a few teachers’ salaries, not entire K-12 arts programs… but these are small individual projects that can be replicated easily. Imagine if there were dozens more being put up in each region. And this is now possible, with the emergence of third-party capital for such “distributed infrastructure”.
Cities need to provide essential services, and they are in the midst of a spending crunch that is largely out of their control. Before turning to children’s education to make up the difference, they should look at these new opportunities to have outside investors finance cost savings in water and waste treatment. These savings can add up, and might make a big difference.