As the effects of climate change and extreme weather events become more pronounced, the financial burden of creating resilient infrastructure appears to increasingly fall on state and local governments. Compounded by a federal deficit that continues to spiral, these levels of government are now faced with the challenge of not only maintaining existing infrastructure but revamping it to meet future needs. Fortunately, experts suggest that localities have the financial latitude to navigate these challenges, as investor interest in municipal bonds continues to rise.
Investment analysts, speaking at The Bond Buyer’s recent Infrastructure conference, have espoused a bullish outlook on municipal bond issuance. Hector Negroni, the CEO of Foundation Credit, emphasized the fact that local issuers remain under-leveraged. He encourages them to seize this unique opportunity to borrow funds for infrastructure projects that not only benefit their communities but also mitigate climate risks. “Now is the time to act,” he stated, reflecting a growing sentiment among stakeholders that immediate action is essential for long-term sustainability.
Tom Doe, founder of Municipal Market Analytics, believes that the municipal bond market is positioned for explosive growth. He forecasts that annual issuance will surrealistically climb to $1 trillion as local governments look to finance climate adaptation efforts. With climate-induced migration expected to alter demographic landscapes dramatically, supporting infrastructure has never been more critical.
As climate change forces migration patterns to shift, local leaders will need innovative financing opportunities to address those sudden population increases. Doe recognizes this intersection of public policy and necessary infrastructure upgrades as a “big opportunity” for municipalities to position themselves and attract investment. By aligning policy goals with infrastructure planning, local governments can not only remain competitive but also create numerous economic opportunities.
The growing interest from retail investors offers further validation to the municipal bond market. According to Adam Stern of Breckinridge Capital Advisors, numerous retail buyers are actively seeking investments in municipal bonds—driven by the tax advantages they provide. With a significant portion of the population aging and becoming more risk-averse, the demand for such tax-exempt investments is likely to grow substantially.
Stern highlighted that some states, especially those with perilous climate risks, are presented with formidable challenges but also unparalleled opportunities to finance adaptive infrastructure. Other states remain entirely debt-free, proving that the ability to take on new debt for necessary projects is indeed viable. He pointed out that the ratio of municipal debt to GDP has seen a decline from 20% to around 10% since 2010, reinforcing the argument that the market can effectively manage more debt without jeopardizing long-term financial stability.
The urgent need for resilient infrastructure encompasses a broad spectrum of factors, including climate resilience and demographic shifts. Negroni urged municipalities to consider quick action to capitalize on immediate financing opportunities and prioritize crucial projects. The term “unfunded infrastructure liability” was invoked, illustrating the need to address not just the situations at hand but also potential liabilities that may arise due to climate change.
As the industry braces for impending tax policy debates that threaten the existing benefits associated with tax-exempt municipal bonds, stakeholders must push Congress to recognize the worth and potential of municipal investment. Doe posited that it is imperative to proactively champion the industry’s strengths to lawmakers, rather than remain in a defensive posture. For too long, the municipal sector has acted reactively; now it must assert itself as a critical partner in addressing one of the most pressing issues of our time: climate change.
The combination of the growing threat from climate change and the necessity for resilient infrastructure presents unique challenges, as well as significant opportunities for state and local governments. The financial capacity exists, and the demand is palpable. As figures in the municipal bond market recognize, the time for action is now—a fact that can no longer be underestimated. The future entails more than just maintaining the status quo; it requires diligent investment and foresight to create sustainable and resilient infrastructures that will endure the challenges of tomorrow.