Deep Dive: Opportunities for Resilience in the Municipal Bond Market

Building Resilience through the Muni Bond Market: 6 opportunities for states and municipalities to finance a safer future

The American Society of Civil Engineers gave the United States a C-minus in its last infrastructure report card. Meanwhile the largest capital allocator for localities in this country, the municipal bond market, is being overlooked. This gap presents a powerful opportunity for financing a stronger future: we can leverage the muni bond market as the foundational tool to raise the grade and make America resilient.

The U.S. faces a nearly $3 trillion infrastructure funding gap and, even after the Biden Administration made New Deal-level investments in public projects, the nation needs $7.4 trillion over the next decade to provide essential services to our communities. Much of this involves climate-resilient upgrades to the nation’s water systems, electrical grids, roads, mass transit systems, ports, schools, parks and healthcare systems, of which an overwhelming majority are currently paid for via municipal bonds. In 2024, the country saw 27 “billion-dollar” natural disasters, a continuation of the upward trend in weather-related disasters this century. 

The U.S. faces an urgent need to allocate more thoughtful capital into resilience projects, at scale, to combat the growing risks posed by a changing climate. The municipal bond market, which currently finances 75%-90% of the nation’s infrastructure, is uniquely positioned to be the foundation for financing resilience. However, it is largely overlooked by many that may not be familiar with this uniquely American marketplace. Not only is it well suited to support the country’s needs, but recent trends demonstrate that it is capable of doing so. 

Dynamics that position the overlooked municipal bond market to address resiliency needs

• The muni bond market has existed for over 200 years. Since the financing of its first project, the Erie Canal that started in 1817, this marketplace has established well-respected market norms and processes. Furthermore, it is trusted by communities nationwide, a trust that will be essential when considering the size and scope of the resiliency financing needs this country faces over the next several decades. 
• The muni bond market was created so that local people invest in local projects...in a big way. Between 75% and 90% (or $4.2 trillion currently deployed) of all U.S. infrastructure is financed through the municipal bond market. This means that nearly every state or local road, school, healthcare facility, sewer system, or public housing program with a ribbon cutting in the U.S. is done through capital raised via the muni market. This unique U.S. marketplace allows localities, municipalities, and states to make their own financial decisions about what to build and where. While maintaining local autonomy and authority, the muni bond market connects investors to community resilience opportunities, and is already a cornerstone of American adaptation finance. 
• Over the last decade, the muni bond market has been increasingly utilized by governments. With an all-time record high of $507 billion in muni bonds issued in 2024, state and local governments are increasing their reliance on this marketplace to provide funding for essential services and infrastructure. Parsing this upward trend indicates that the market has already been leveraged to meet adaptation needs and is expected to only increase over the next decade as a low-cost of capital option for states and localities. 
• Sustainable and prudent growth in the muni market is realistic based on most economic historical benchmarks. The U.S. municipal bond market stands at approximately $4.2 trillion, which is about 18% of the U.S. GDP (~$23 trillion). In comparison, public infrastructure investments in Europe are often supported by borrowing levels equivalent to 20–25% of GDP, demonstrating that U.S. state and local governments could increase borrowing while remaining aligned with international norms. This essentially means the muni market has the potential to expand as much as $1.5 trillion in borrowing capacity, or better put: has the potential to finance as much as 51% of the $3T funding gap necessary to build more resilient infrastructure for local communities.
• There is a lot of room to grow the market without being considered overburdened with debt. The U.S. federal debt-to-GDP ratio is over 120%, highlighting a high level of borrowing at the federal level. State and local government debt is much lower, averaging around 20% of GDP, significantly below the federal level and European standards for public borrowing to support infrastructure.

As these dynamics illustrate, the municipal bond market not only has the capacity to responsibly grow to meet needs, but is already doing so. Why then, is the municipal bond market not part of the national discussion around addressing the $7 trillion needed over the next decade? With the potential to grow to meet the scale required, we must ask: Why does the municipal bond marketplace not fund more resilience projects?

This briefing highlights six critical gaps in the system and invites innovative solutions from policymakers, investors, and stakeholders to leverage the muni market’s untapped potential for resilience finance.

6 Key Challenges and Opportunities

The key challenges stifling the muni bond market’s potential for resilience finance, and the associated opportunities

Challenge #1: Resilience Is Not a Driver of Issuance.

Decision-makers in the municipal bond market prioritize projects and programs that a community understands are generally supported by taxes: public schools, roads, and parks, for example. They tend to lean towards the politically palatable. While essential, this does not lend itself towards long-term structural resilience needs–like counter-wildfire vegetation removal–that provide no present revenue nor upfront community value. Until resilience is recognized as a top priority, it will not be a driver of a bond. Meanwhile, critical resilience needs, such as flood mitigation, are deprioritized, leaving communities vulnerable. While they exist, climate adaptation plans financed by municipal bonds are not the status quo. Communities will be safer in the future if it becomes the norm. 

Opportunity: 

• Financial blueprints and narratives highlight that the resilience dividend can demonstrate the measurable economic, social or weather-related benefits derived from investments in infrastructure. By demonstrating that these benefits extend beyond risk reduction and translate into cost savings, increased economic activity, and enhanced asset value over time can help resilience become a driver of issuance.

Challenge #2: The absence of resilience-specific incentives hampers investment in long-term risk mitigation and adaptation.

While the tax-exemption on income for investors in municipal bonds is highly effective in supporting public projects, it fails to distinguish between resilience and non-resilience projects. While public infrastructure in general should be prioritized, projects identified as having unique resilience characteristics that offer greater long-term financial and societal benefits should be incentivized. Given dynamics described in challenge #1, states and local governments are less inclined to prioritize resilience investments, even though research consistently shows that every dollar spent on resilience can save multiple dollars in future disaster recovery costs. 

Opportunities: 

• Policy-makers should introduce resilience-specific tax credits akin to the Small Business Tax Credit program.
• Identify policy changes that create long-term value such as adhering to the National Institute of Building Sciences (NIBS) building codes. This achieves what LEED-certified did for green buildings, as a way to “hack” local policy to encourage resilient change while increasing asset value.
• Create subsidies and/or discounts to encourage investment in projects where co-mingled benefits exist. Similar to tying broadband access to housing vouchers, we can encourage resilient activities across sectors where there is additional economic, social, or environmental value. In the case mentioned, the state encouraged affordable home owners to add high-speed internet to units through subsidies, essentially increasing the value of the property and the quality of life and economic opportunities for the tenants. In the resilience vein, a local government could incentivize a local business improvement district to support a flood mitigation effort whilst also increasing other commerce-generated activities. 
• At the federal level, the Congressional Budget Office can align their tax scores on tax-credits and other programs with Federal government studies proving the ROI on adaptation projects. If resiliency offers 10x-plus returns, then our budget office and policy makers should be aligned (and themselves encouraged to understand) that this is the true cost of such efforts.

By embedding resilience-specific incentives into the financing framework, governments can unlock long-term cost savings, protect communities, and attract investors interested in impact opportunities creating a win-win for issuers, investors, and society at large.

Challenge #3: Insufficient funding and support for pre-development creates barriers to entry for resilience projects. 

Many communities struggle to finance the critical pre-development work necessary to advance resilience projects. Resilience projects often face a dual hurdle: 1) the absence of clear revenue streams to build from and 2) a lack of immediate political saliency, as these investments do not deliver upfront, tangible benefits like job creation or new schools. From an engineering standpoint, resilience tends to reflect an adjustment to critical infrastructure, which tends to mean a higher up-front price tag. This challenge is exacerbated by a growing dependency on grant funding from foundations and the federal government in recent years, which has shifted focus away from financing strategies. 

As a result, without adequate pre-development support, projects stall at the earliest stages, leaving communities unable to progress toward bond funding or other financing solutions. This bottleneck limits the deployment of meaningful adaptation infrastructure and prevents communities from making informed financial decisions about resilience investments.

Opportunities: 

There is precedence in the muni market to support pre-development work with state bond banks, infrastructure banks, and/or state revolving funds (SRF) that could be expanded as follows:

• Establishing state-entities that explicitly focus on pre-development resilience work with local communities within their jurisdiction has begun in a few states. There are obvious parallels to these successful programs that promoted clean drinking water since the 1990s. These funds would provide communities with the much-needed resources to conduct feasibility studies, stakeholder engagement, permitting, and other essential pre-construction activities. 
• Pairing SRFs with consistent, well-designed grant programs and technical assistance would help build the capacity of communities to navigate financing and resilience project development, avoiding one-off solutions and fostering scalable, replicable processes.
• SRFs can play a role in creating “bond-ready” communities, guiding them through key pre-development steps and preparing them to borrow from the state entities themselves or issue bonds separately, which are both low cost of capital options. These SRFs would be a boon to thoughtful resilience strategy on a state-by-state basis.  

These approaches will prepare local governments to make informed decisions about loans and financing, ultimately leading to the successful implementation of adaptation infrastructure. By integrating these strategies, resilience-focused pre-development efforts can become less fragmented. They can also become more equitable, ensuring communities—especially those with historic underinvestment—are positioned to access long-term financing and build sustainable, impactful resilience projects.

Challenge #4: The failure to fully integrate climate risk into municipal bond ratings and valuations undermines public confidence and public policy in resilience efforts 

The industry would benefit from an adaptation lens into the creditworthiness of communities engaging in resiliency finance. Rating agencies can do more to recognize the resilience dividend by adjusting credit ratings to reflect the reduced risk profile of communities and assets that invest in adaptation. This would create a dual incentive for both the government and the investor: a monetary boost through tax benefits and a structural boost via improved credit ratings. As it now stands, communities are not penalized for imprudent development decisions, nor are they rewarded for proactive investments in resilience. This misalignment perpetuates short-term thinking and discourages sound public investment. 

The lack of financial consequences for risky development and the absence of rewards for forward-looking resilience investments undermine the proverbial "carrot and stick" approach that could incentivize better decision-making. Communities engaging in resilience finance are not recognized with lower costs of capital or improved credit ratings, discouraging broader adoption of adaptation strategies.

Opportunities: 

Approaches to creditworthiness that value traditional metrics to ratings, while offering a longer-term climate lens, must grow in use in order to preserve functional financial markets. Major rating agencies have offered important initiatives to draw attention to the very present climate risk U.S. communities face, but the scope of the risk is not fully recognized. The mere fact that mortgages are being originated in places where insurance is unavailable is an unavoidable red flag–and it is one that will have drastic implications for state and local governments. Specific opportunities include:

• One way for rating agencies to address this dislocation, as it pertains to fiscal stability at the state and local level, is to create a mandate for short- and long-term rating risks for sub-sovereign U.S. governments (i.e. states and localities). This new approach would offer the needed physical risk appreciation that is required for prudent long-term, fixed-income investors whilst maintaining the system it currency uses. A shorter-term rating would focus on economic development, fiscal stability, tax-base strength, debt management and other traditional metrics whereas long-term ratings would include climate modeling and projects to evaluate exposure to longer-term risk such as sea-level risk and increased storm intensity and drought. 

In the absence of major reforms to rating methodologies, investors can also coalesce around:

• Inclusion of climate risk in ratings and valuations to align market incentives with long-term resilience goals;
• New investment vehicles that offer an evaluation of a community’s readiness to respond to weather-related disasters, both acute and chronic, that offer a blended strategy of both municipal bonds and shared ownership models of public assets;
• Supporting resilience taxonomies for bonds such as this Climate Bond Initiatives approach;
• States and local governments with resilience or climate adaptation plans should open resilient order periods similar to existing retail order periods where market demand would result in lower cost of capital. 

Challenge #5:  Fragmented funding sources leave local governments unprepared.

The decentralized nature of the municipal bond market leaves resilience funding fragmented across various federal, state, and philanthropic programs. This leads to inefficiencies, missed opportunities, and gaps in addressing large-scale challenges. Without comprehensive planning frameworks, local governments are left unorganized and struggle to coordinate their efforts across overlapping jurisdictions. State and local governments are forced to rely on piecemeal solutions rather than pursuing holistic resilience strategies. This fragmentation often delays critical investments, reduces efficiency, and exacerbates vulnerabilities in climate-exposed areas. The absence of a unified approach hinders progress toward addressing the systemic challenges posed by a changing climate.

Opportunities: 

• Resilience community districts, similar to the Resilience Authority of Annapolis and Anne Arundel County, can act as central entities for managing climate adaptation within overlapping jurisdictions. These districts should have bonding authority to fund large-scale resilience projects, be empowered to implement zoning changes, manage infrastructure upgrades, and coordinate resources across municipalities and focus on protecting climate-exposed places through targeted investments and community-driven planning.
• A National Resilience Authority could serve as a new body that promotes cross-jurisdictional collaboration by fostering partnerships between local, regional, and state governments. There is little consistency between various federal agencies that touch disaster response and a single point of entry would be preferable. This approach would reduce redundancies, encourage shared resources, and enable comprehensive planning efforts that address resilience at a systemic level. As a first course of action, the Authority should develop a nationwide framework or toolkit for creating and operating resilience districts, ensuring consistency while allowing flexibility for local adaptation. Such a framework can include templates for governance, financing mechanisms, and community engagement strategies.

Challenge #6:  Resilience finance does not win elections. 

Despite the fact that there is a long political history of disaster response being an impetus to positive community engagement, elected officials, responding to public demand and election cycles, often focus on projects with immediate, tangible returns. As a result, resilience initiatives—despite their profound long-term value—remain underfunded and deprioritized. This shortsightedness leaves communities vulnerable to the escalating risks of climate hazards and hinders proactive adaptation efforts.

Opportunities: 

It is time to change the narrative. A strong response to a disaster has yielded political success (and failures, See: Brownie) but we’ve yet to see pre-disaster risk mitigation strike love into the hearts of community members. Storytelling-driven communication campaigns to humanize the importance of resilience could be of viral calibre if done correctly. Specific opportunities include:

• Sharing compelling stories of communities that have benefited from resilience investments, such as how flood mitigation saved a neighborhood or how wildfire prevention protected homes and businesses will become more important as our society spends more time with media. 
• Visualizations and narratives to highlight the stark contrast between proactive resilience investments and the devastation of inaction can thrive in a social media saturated environment. 
• Featuring voices from those directly impacted—residents, small business owners, emergency responders—who can articulate the real-life stakes of climate risks - is where the consumption of news and ideas can be translated into better policy and, eventually, safer communities.
• Engaging colleges that offer meteorology as a degree along with communications to engage with future weather reporters at local television stations is a way to connect communities in unique ways to resilience. 

Conclusion

The municipal bond market represents an untapped opportunity to finance a more resilient future, yet its full potential remains unrealized due to structural, political, and financial barriers. By addressing these challenges head-on—whether through integrating climate risk into credit ratings, creating resilience-specific incentives, establishing pre-development funding mechanisms, or aligning fragmented funding sources—we can transform the way resilience projects are prioritized and financed. 

Resilience is not merely an environmental or fiscal issue—it is a matter of economic stability, public safety, and affordability. If we fail to act, communities will bear the mounting costs of inaction, locked into cycles of disaster and recovery. But if we seize this moment, leveraging the municipal bond market as the foundation for adaptation finance, we can build a future where resilience is not an afterthought, but an expectation. The tools exist—the question now is whether we have the will to use them.