As federal funding for climate adaptation dries up, Illinois sets an example for what states can do

The state is launching a new flavor of revolving fund to support climate resilience, a first in the nation

Whether or not the Trump administration decides to do away with FEMA entirely, it's clear that the federal government is reluctant to spend billions on adapting to the increasingly ferocious physical effects of climate change. The trouble is that adaptation is everyone’s problem but no one’s responsibility. Large-scale initiatives to reduce physical climate risk for communities are essential, but they are very expensive upfront—even though they have long term benefits. What's needed is low-cost money. States will have to step in.

This month, an innovative, elegant, and powerful tool arrived in Illinois that you need to know about. At its heart is a financing model that has been working well at the state level for fifty years: the revolving fund. But now that idea—nearly magical in its flywheel effects over time—will be put to work in service of very broadly defined "climate resilience" projects.

Think of revolving funds as savings accounts for reducing climate risk. Initial funding provides "seed capital," a small lump of money that keeps working and grows over time. The entity running the fund makes loans from that seed capital, and as the loans are paid back the money goes back into the fund—allowing it to make more loans. That growing capital can then be regularly amplified with bond funds. It will grow and grow and grow.

One of the Illinois innovations is to ensure that communities and entities (schools, hospitals) that need funds will be able to apply for support for working capital, operations, and maintenance—lifecycle costs that have to be covered in order for resilience investments to keep functioning. Rather than thinking to itself, "Oh, don't worry, FEMA and the Small Business Administration will take care of us if something happens," Illinois is taking a leadership role. To the extent there are trumpet blasts in the world of adaptation finance, this is one.

The EPA looked to existing state revolving funds in New York and Ohio when it began providing seed capital for clean/drinking water revolving funds in the 80s and 90s. In the years since then, those state funds have provided ~$213 billion in assistance for water projects. Bottom line: This model works, and Illinois is improving on it.

Here are five key things about the Illinois framework.

1. Support for funding "climate resilience projects" is bipartisan. Rivers, rainfall, wildfires, and droughts affect everyone. The legislation that got this done, giving the Illinois Finance Authority the power to finance projects that reduce the potential impact of climate change, was sponsored in the Illinois House and Senate by Republicans and Democrats. For example, Sen. Jil Tracy (R-50th), whose key issues are fiscal responsibility, limited government, and public safety, was a co-sponsor, and Rep. Brad Stephens (R-20th) (also mayor of Rosemont, a suburb near O'Hare) co-sponsored the bill in the House.* These material financial issues are inherently nonpartisan. The legislative leadership clearly got the bill inserted into the budget omnibus, House Bill 2755, because it was critical—and that's why it went into effect right away, on July 1.**

2. Climate resilience and adaptation are huge problems that must be tackled broadly. The Illinois Finance Authority now has the power to approve and fund "climate resilience projects." Here's the definition:

The revolving fund can finance anything aimed at reducing hazards or risks from future disasters or climate related conditions. (It goes without saying, but I'll say it anyway: Proposed projects will be vetted, prioritized, overseen. Not everyone who needs financing will get it.)

3. States need to cover the gap for maintenance and salaries. Adaptation requires more than building concrete objects and buildings.

The State of Rhode Island has an infrastructure bank that has recently announced it is doubling down on climate resilience efforts, creating a state revolving fund for "municipal resilience and stormwater abatement projects."

As far as I can tell, the Rhode Island revolving fund, which is a terrific development on its own, will cover only capital expenditures—low-interest loans to support infrastructure investments, things made out of steel and concrete. Construction projects.

Similarly, more and more states have these dedicated resilience bond funds or revolving loan funds. New York and California famously have state bond funds. Eleven states have received FEMA seed capital grants to set up state-level revolving funds for resilience projects under the Safeguarding Tomorrow through Ongoing Risk Mitigation Act. (Those are small-dollar grants of about $5 to $17 million under a program that may well go away.) But again, as far as I can tell, these funds are for capital projects.

The trouble is that routine operations and maintenance still have to be paid for. Steel infrastructure can fall apart. And not all investments should involve building things. We'll need to vacate some places, which will require buyouts. We'll need to temper the impacts of wildfires by removing brush. We'll need to allow marshes to migrate. Cities and other entities needing financing will have to pay for a huge range of other expenses, like insurance and salaries. Rather than forcing their borrowing entities to scramble for other sources of funding to fill this yawning financial gap, the Illinois legislation broadly allows for operations and maintenance to be financed:

This is a crucial step, because it allows for broader adaptation planning, enabling communities to (for example) fund long-term risk management, or build their capacity for adaptation.

4. Philanthropic organizations should step up to provide seed funding. It's clear that the federal government will not be prioritizing seed funding for state revolving funds. The recently adopted federal budget severely cut EPA's ability to provide seed grants to states, despite the powerful multiplying effect of this money. Illinois's allocation was cut from over $100 million to $11 million. And litigation is ongoing over whether money previously obligated to states from a grant program by the Biden administration can be frozen or clawed back. (The Congressional Budget Office says most of this money can't be, but for the moment $100 million Illinois was counting on can't be accessed.) This is a cliff, not a slope. To get these climate resilience projects rolling, foundations looking for ways to spend their required 5 percent should deploy capital that will go into revolving funds. This is is a worthwhile investment, because, among other things:

5. State revolving funds for climate resilience can access private capital to amplify their power. After consolidating seven state-level financing agencies over time, and gaining the legislative label "Climate Bank" in 2021, the Illinois Finance Authority has essentially become the development finance arm for the state. It has gone to the rating agencies and issued more than two billion dollars in bonds for its state water revolving fund; its debt, for the Illinois Water Reclamation Agency, is very highly rated. Having the Illinois Finance Authority at the table to work with investors and borrowers on raising debt to support the revolving fund will be powerful. There are many things to work out—for example, what is the revenue stream backing bonds for resilience that is akin to a water bill, something that people will always pay for?—but the governance structure, the legislative clarity, is in place for success.

Across the country, the calculus for adaptation is starting to change. We are seeing reductions in big dollar spending at the federal level. Illinois is ahead of the curve, doing something that (as far as I can tell) no other state has done. We don't know what the future will be like because we haven't lived with an acute lack of federal dollars before. Right now, as weather becomes more visibly intense, the nonpartisan, well-crafted, broadly-defined state revolving fund facility Illinois has launched can be a model for other states.

Someday, it will be married to adaptation priorities and standards ("no money unless you do X"). Someday, it could become part of federal operations as well, just as the state revolving fund idea bubbled up to the EPA in the 80s. That would require reality to set in, though, and our federal authorities aren't currently operating in that realm.

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*For the full text of the initial bill (SB2306 as amended in the Illinois Senate), go to ilga.gov and search for SB2306, go to "full text," go to "Senate Amendment 001." I'd provide a direct link here if I could.

**Under Illinois House Rule 19(a), a bill can be re-routed—all or part of a bill's language can be inserted into other legislation.