Creative Financing for Managed Retreat

By Amelia Taylor-Hochberg, CBI Climigration Intern

How Novel Financing Models Could Help Make Managed Retreat More Manageable

When considering migrating entire communities out of natural hazard risk areas, homeowners and local governments deal with a whole new can of financial worms. Governments may lack the funds necessary to buy out all needy areas, and banks aren’t attracted to assets that will literally and figuratively be underwater. Homeowners are between a rock and a hard place: as property values fall due to increasing risks, they may not be able to sell at a price that allows them to buy elsewhere.

This difficult subject has been the focus of CBI’s ongoing webinar series, “Funding & Financing Coastal Retreat”. The latest webinar, held on October 25, focused on creative mechanisms from within the private and public spheres to finance retreat due to climate change. In contrast to the federal government’s Hazard Mitigation Grant Program, where homeowners can voluntarily seek buyouts with FEMA money (post-disaster), these strategies can be more proactively employed to reduce risk in a wider variety of cases.

Of the diversity of financial tools discussed in the webinar, critiques of the more traditional options were weighed against the risks of promising but untested models. Green bonds for investments towards sustainability have been used already but are imperfect. There’s no way to guarantee compliance, and the market is still small, so holders won’t necessarily be able to sell whenever they like. More novel solutions — such as catastrophe bonds, conservation mitigation credits, and social impact bonds — might appear like the less safe bet, but ultimately be better suited to specific retreat situations. A major complication in all of this is the difficulty in determining the financial incentives for what comes afterwards — the economic value placed on remediated land is difficult to determine.

A range of financial tools were discussed in the webinar, from more traditional options, like municipal green bonds, to emerging models, like social impact bonds and catastrophe bonds. Green bonds have been used by municipalities and city agencies to finance sustainability projects like infrastructure upgrades, but have not yet been used to finance managed retreat. The more novel solutions for supporting sustainability and climate resilience work — such as catastrophe bonds, conservation mitigation credits, and social impact bonds — may be potential tools for managed retreat projects. However, using any financial tool requires a source of repayment to the investor(s). For managed retreat to access any of the financing tools discussed, an economic value has to be placed on the remediated land, and a repayment source must be identified.

One untested but intriguing avenue brought up by Jenna deAngelo, program manager at the Lincoln Institute of Land Policy, brought up one untested but intriguing avenue to minimize federal government involvement and taxpayer risk in coastal retreat buyouts: mortgage contingent loans. With these loans, at-risk homeowners cede their property to the government, which then issues them a commercial loan tied to the value of their home, rather than their income. The homeowner can then use the loan to buy another property elsewhere. The government now holds the mortgage to the home, and can sell it on the commercial market, transferring risk from the taxpayer to the private market.

If the occupant moves out of the house or passes away, the government retains the net equity and can sell the house and pay off the loan. Alternatively, the government could keep the house and turn it into public housing, as selling it could mean a loss, depending on the real estate market. This in turn brought up a larger discussion of equity issues surrounding climate-related displacement, and how financial support of communities is related to their socioeconomic makeup.

Although these kinds of loans haven’t been tried before within managed retreat strategies, they could offer an innovative approach to financing risky futures, compared to the context of federal funding. Mark Skidmore, professor in Government Finance and Policy at Michigan State University, as well as the Director of the North Central Regional Center for Rural Development, pointed out that current federal disaster assistance programs are not risk-adjusted to where they are actually applied — so those living in risky areas (and the state and local governments) have no incentive to take risk-reducing precautions. This ultimately encourages people to to stay in risky areas, rather than seeking safer (both financially and environmentally) land elsewhere.

To learn more about creative financing strategies for managed retreat, you can watch the entire webinar here. Outlines from the featured presentations, as well as cited resources, can be found here. The webinar was hosted by CBI’s own Bennett Brooks and Osamu Kumasaka.

Participants:
Jenna DeAngelo is a program manager at the Lincoln Institute of Land Policy. Prior to joining the Lincoln Institute, Jenna was a senior benefits administration analyst at Xerox Business Services and a human resources analyst at the MBTA. Jenna earned her B.S. in Economics and M.S. in Urban and Regional Policy, both from Northeastern University.

Katie Grace Deane is associate director of research and field development at the Center for Community Investment. Prior to joining the Center, she spent 7 years at the Initiative for Responsible Investment at the Harvard Kennedy School where she led research on public policy and impact investment, sustainable investment trends, and place-based frameworks for community development. Katie began her career as a research analyst at the Tellus Institute, where she researched corporate sustainability performance indicators and the effects of university endowments on employment and the community. Katie has a BA from Williams College in Political Science with a Concentration in Leadership Studies, and is a member of the Miss Hall’s School Board of Trustees.

Mark Skidmore is Professor and Morris Chair in State and Local Government Finance and Policy at Michigan State University. He is also Director of the North Central Regional Center for Rural Development (NCRCRD). Mark holds tenure system appointments in the Department of Agricultural, Food, and Resource Economics and Economics. He has served as a consultant on a range of issues including economic development, government public finance and policy, and price determination. Recent research areas include economics of the public sector, economic development, and the economics of natural disasters. He has published the results of his research in journals such as Economic Inquiry, Economics Letters, Journal of Urban Economics, National Tax Journal, and Public Choice. Much of Mark’s research and outreach focuses on public finance policy and the relationship between public finance policy and economic development.