Process Format. Convening on Financing Sustainable Water Infrastructure Systems. July - August, Summary:

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1 Process Format Convening on Financing Sustainable Water Infrastructure Systems July - August, 2011 Summary: The Johnson Foundation, in collaboration with American Rivers and Ceres, will convene a group of experts at Wingspread to discuss ways to leverage both public funding and incentives as well as private financing to drive innovation for more sustainable and integrated management of water resources in the U.S. Our expert participants will come together for two virtual briefings (via teleconference) and two full days at Wingspread as follows: Conference call, July 26, 2011, Time TBD Conference call, August 10, 2011, Time TBD In person roundtable at Wingspread, August 16 18, 2011 Participants are asked to commit to all three companion events. The conversations will be progressive designed to build off of one another and the information previously presented. Pre-roundtable virtual convenings Two teleconferences with on line tools will be used for two informational briefings to address foundation setting topics. The format will focus on presentations to help prepare

2 participants for key issues combined with a question and answer style discussion. Two virtual sessions are planned. Virtual Convening #1: Kick off and what is sustainable water infrastructure Target: July 26, hour teleconference to cover the following topics: 1. Kick off a. Provide background on the overall effort b. Introduce participants and key roles c. Present timeline 2. Defining Sustainable Water Systems a. Principles of sustainable water systems b. Case studies of sustainable systems c. Financial benefits of sustainable water systems Possible Speakers: Chuck Clarke, Cascade Water Alliance and Doug Scott or Kathy Masterson, Fitch Ratings Desired outcome from virtual convening #1: A clear understanding of the overall effort and a sense of the group s perspective on what sustainable water infrastructure means. Virtual Convening #2: Unpacking the financing options Target: August 10, 2011 Proposed 1.5 hour teleconference to address the following topics: 1. Municipal Finance 101 a. Basic primer on current municipal finance options and how they work b. Impact of tight fiscal budgets and volatile bond markets c. Differences between declining/shrinking and rapidly growing cities Possible Speakers: Brian Thomas, Public Financial Management 2. Private Financing of Water Infrastructure in the U.S. and Abroad a. Understand the current status of public and private investment in water infrastructure in the U.S. b. Public investment strategies and mechanisms Convening on Financing Sustainable Water Infrastructure Financing Process Format 2

3 c. Learn about various models of private investment PPPs (public private partnerships), equity investments, etc. Possible Speakers: David LaFrance, American Water Works Association 3. Innovative Public Finance Strategies a. Water sector innovations (e.g., green infrastructure and water efficiency retrofit programs, stormwater utilities) b. Learn about models from other green markets and incentives (e.g., renewable tax credits) that might be applied to water Possible Speaker: Brad Gentry, Yale School of Forestry Desired outcome from virtual convening #2: Broad understanding among the group members about municipal financing overall and a sense for the range of public and private options. Wingspread Roundtable on Innovative Water Infrastructure Financing Target: August 16 18, 2011 A facilitated roundtable will be held at Wingspread to discuss ways to leverage public funding and incentives as well as private financing to drive innovation for more sustainable and integrated management of water resources in the U.S. The roundtable will begin the afternoon of August 16th. Participants will engage in a full second day of discussions and depart after lunch on August 18th. A detailed agenda will be provided to all participants in advance. The overarching question on which the roundtable will focus is: How can we drive funding toward the new infrastructure we need in the 21 st Century? There are two key elements to this question: What new financing techniques can communities use to pay for integrated and sustainable infrastructure approaches? How can we direct private capital toward the right kinds of water management projects? Convening on Financing Sustainable Water Infrastructure Financing Process Format 3

4 Suggested Discussion Focus Over the course of the two teleconferences and the facilitated roundtable, we envision pursuing the following flow of dialogue to identify opportunities for financing sustainable water systems: 1. Identify investment priorities for sustainable water systems There is a growing consensus that traditional siloed, centralized, and single purpose water infrastructure systems are no longer as effective or adapted to the challenges and needs of the 21 st century. Recent efforts, such as the Dialogue on Sustainable Water Infrastructure in the United States, convened by the Aspen Institute and The Johnson Foundation s Charting New Waters have identified a set of sustainable water principles and designs that many cities, utilities, and businesses have already begun to employ. We will leverage these general principles for sustainable water management as the basis for discussions on infrastructure financing, including these steps: a. Develop a working set of assumptions and definitions for our desired 21 st century water infrastructure. b. Based on these assumptions, identify priorities and baseline standards for future investments that embody 21 st Century infrastructure principles. Examples of the kind of principles that will be considered include the following: i. Restoring or maintaining natural hydrology and ecosystem services as a primary infrastructure system. ii. Integrating management of water, and water and energy. iii. Mimicking natural hydrology through distributed source controls (e.g., green infrastructure techniques to manage stormwater). iv. Maximizing efficiency before investing in new capacity. v. Employing full life cycle management and system optimization. 2. Identify challenges to financing sustainable water systems Over the long run, systems with strong asset management practices, proactive water demand management, resilient supply sources, protected ecosystems, and distributed green infrastructure should be more financially stable, and thus, less vulnerable to Convening on Financing Sustainable Water Infrastructure Financing Process Format 4

5 unforeseen credit deterioration. Such systems are more flexible to changing conditions and obviate expensive centralized infrastructure. In a rational market, investors should prefer such systems. Yet, today s investors tend to value the sector based on retrospective financials and physical characteristics that have neither kept pace with the latest integrated water management designs, nor properly captured the system s resilience under future conditions. Consequently, utilities building sustainable systems may not find competitive cost of capital or may even find it difficult to attract financing to such non traditional infrastructure investments. Since existing public funds are not sufficient to finance the necessary investments in our water systems, utilities must continue to access private capital. Yet, existing standards and practices across the financing value chain from bond rating methodologies to federal oversight requirements may discourage the flow of private funding toward the most effective water infrastructure. Finally, traditional financing vehicles, such as revenue backed bonds, may not meet the needs of utilities seeking to implement sustainable water systems; for example, infrastructure shared by other regional systems or implemented by customers on private lands, or systems with a significant disconnect between downstream beneficiaries and upstream suppliers of water ecosystem services. Participating experts will be asked to discuss these and other challenges to understand the most significant barriers to financing sustainable water systems. We will: a. Identify discrepancies between our definition of sustainable water systems and credit factors currently used by investors and credit rating agencies. b. Assess existing federal, state, and local requirements and incentives that may encourage business as usual infrastructure. c. Identify how existing accounting standards (GASB) are an obstacle or can be used to promote more sustainable water systems. d. Define the conditions under which traditional financing vehicles may fall short of meeting utilities needs. 3. Assess options for directing capital to sustainable water solutions. Across the country, utilities and resource planners are testing new mechanisms for financing necessary capital investments in infrastructure and ecosystem restoration. Convening on Financing Sustainable Water Infrastructure Financing Process Format 5

6 Traditional financing vehicles like revenue backed bonds can play a significant role in making these necessary investments. Yet, new standards of disclosure and credit risk assessment are necessary to ensure that the market adequately prices risk and rewards sustainable systems. As the ability of systems to bond finance capital projects runs up against liquidity constraints, utilities are turning to alternative financing mechanisms, including watershed user districts, asset privatization, privately capitalized revolving loan funds, and innovative transfer payments between downstream beneficiaries and upstream suppliers. As the third step in our logic flow, participating experts will be asked to discuss connecting financing to sustainable water systems: a. Pinpoint mechanisms for improving valuation and risk assessment of water systems, including: i. Disclosure: Encourage the development of voluntary standards or regulatory guidance to drive enhanced risk disclosure in the water sector. ii. Risk Assessment: Assist investors and credit rating agencies in strengthening credit risk assessment practices to internalize emerging risks. b. Consider various kinds of innovative financing mechanisms, and narrow down the most promising financing innovations for building sustainable water systems and the best opportunities to promote their expansion. c. Identify existing and proposed public funding sources that could be most effective at encouraging sustainable water investments. 4. Chart the roadmap to make change happen Finally, we will consider how to translate these ideas into action, including: a. Identify and map out priority actions and audiences. For example: i. Educating regulators and legislative oversight committees (e.g., SEC, GASB). ii. Promoting key actions with Treasury and other federal agencies. iii. Developing a national water infrastructure bank. iv. Educating investors on good disclosure and water investment opportunities. v. Developing good disclosure and financing practices among utilities. b. Identify untapped advocates for sustainable water infrastructure investment, such as including labor unions who can build on the ground political support. Convening on Financing Sustainable Water Infrastructure Financing Process Format 6

7 Outcomes As a result of this series of discussions, we anticipate the following outcomes: 1. Create an opportunity for a diverse range of financial and policy experts to share expertise, familiarizing each other with respective issues and concerns, build understanding of diverse perspectives and build partnerships. 2. Explore sustainable water infrastructure financing alternatives. 3. Identify priority issues and possible solutions. Understand the range of perspectives and identify where common ground, divergent views and strong agreement exist. 4. Catalyze action for future efforts, by identifying leadership organizations and larger groups dedicated to ongoing coordination and cooperation. 5. Agree on whether there is value in creating a body for ongoing policy coordination and cooperation. Convening on Financing Sustainable Water Infrastructure Financing Process Format 7