Dillion’s rule has much more of an impact on climate and sustainability policy in the U.S., than previously thought. But what is it, and how can climate policy adapt? 

What is Dillon’s Rule? 

In 1868, Iowa Chief Justice John F. Dillon ruled that the city of Clinton, Iowa, could not block a railroad from laying track across a public street. The city’s authority over its streets was subordinate to the rights granted to the railroad by the state. 

Dillon turned that logic into a general rule after Iowa cities defaulted on debt taken on to attract railroads, limiting local borrowing and spending to narrow, state-approved channels. About 40 of 50 states in the US now apply some version of the rule, one in which once protected bondholders, now shape which climate policies a community can use. 

• In Dillon’s Rule, a city or county must obtain permission from the state legislature before passing a law or ordinance not specifically permitted under existing state legislation. 

• 40 out of 50 U.S. states apply some version of Dillon’s Rule, which is what limits categories of power local municipalities, cities, and counties hold. 

• States allow local discretion across four categories: Structural (choosing a form of government), Functional (breadth of local self-government), Fiscal (tax rates, borrowing, revenue), and Personnel (employment rules, bargaining). 

• For investors and companies underwriting climate-linked infrastructure or real estate, this means state law determines how much power local policy can carry.
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Image Taken from Wikipedia 

Dillon’s Rule Principles 

1. State Rule: local governments are considered “creatures of the state” or “tenants at will” of the state legislature. 

2. Strict Construction: if there is any reasonable doubt about whether a local government has authority to act, the power is presumed not to be conferred. 

3. Limited Powers: localities can only exercise express powers, implied or incident powers, and powers indispensable to their corporate existence. 

So where does climate policy fit in? 

Minnesota, for instance, is both a Dillon’s Rule state and a home rule state at the same time. Minneapolis, working within that overlap, is on track to meet its near-term goal to achieve carbon neutrality by 2050. It’s required to comply with the Minnesota Energy Code, but advocates for more stringent statewide codes, and it has requirements for EV readiness and low energy use. The key is that the city only offers a range of financing and incentives for energy efficiency and solar projects because it can only offer incentive; but it cannot mandate energy efficiency ordinances. 

This distinction practically is how Dillon’s Rule influences a majority of U.S. cities working on climate policy. 

Energy Policy 

U.S. energy efficiency policy is a mix of federal guidelines and state-level regulation. Primary legislation like the Energy Independence and Security Act (EISA) sets overarching goals, but implementation happens at the state level, using one of two dominant model codes: ASHRAE Standard 90.1 and the International Energy Conservation Code (IECC). The current ASHRAE 90.1 version is 90.1-2022; the IECC is revised every three years, with the 2024 update run through the ICC’s Standard Development Process rather than the prior governmental consensus process. Because states will adopt, delay, or modify these codes independently, energy efficiency standards vary widely from state to state and municipality to municipality, thus highlighting one of the main issues with Dillion’s Rule being fragmentation.  

New York City provides an example of how Dillon’s rule, in use, highlight how cities can still enact policy change. In 2010, the New York state passed legislation specifically amending its Energy Law to satisfy ARRA Section 410’s funding conditions, updating its energy code to the 2009 IECC and ASHRAE 90.1-2007 equivalent that December. This same code has since been revised twice more under the recurring EISA-driven certification cycle: to the 2015 IECC and ASHRAE 90.1-2013 equivalent in 2016, and, as of late 2023, toward the 2024 IECC and ASHRAE 90.1-2022 equivalent. New York City, exercising its own home rule authority on top of the state floor, went further, by enacting the NYC Energy Conservation Code under Local Law 85 of 2009. The city was able to pass its local law and set its own energy code, authorizing already granted state constitution authority, and bypassing additional ruling from the State. 

Why This Matters:

Policy risk is simply harder to map than physical risk. Climate hazards may be similar everywhere, but a local government’s ability to respond may be different. 

• Authority: Forty of the fifty states apply some form of Dillon’s Rule, which restricts local governments to the powers their state has delegated. 

• Incentives take precedent: Where a city cannot require a climate measure, it can still offer incentives, such as Minneapolis does for energy efficiency and solar.

• Thresholds: In Texas, a city can adopt home rule only once its population exceeds 5,000 and voters approve a charter. In California, 125 of 478 cities were charter cities as of January 2020, a status that gives them control over their own governing structure. 

• Tools can only be used if the state decides: PACE programs for instance require the state to pass legislation, but this does not guarantee establishment of programs.  

• Commitments do not equal action: What a jurisdiction can actually do depends on layers that most risk tools do not track.

Investor Risks and Opportunities: 

U.S. municipal bond investors need to understand how Dillon Rules may impact actions that can be taken by the municipalities they are invested in. With an overall market valued at more than $4.5 trillion, over one million bonds currently issued, trade count doubling since 2021, par amount up 59% compared to 2021, and new issuance up 13% in 2025 from 2024, the U.S. municipal bond market is increasing in both scope and scale.  

Regardless of whether municipal bonds are general obligation bonds – principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer’s unlimited or limited taxing power – or revenue bonds – with a promise to repay principal and interest from a specified stream of future income e.g., utilities, toll roads, bridges, airports, water and sewage treatment facilities, hospitals and subsidized housing – investors need to consider when assessing investability of U.S. munies’ “use of proceeds” Dillon Rules constraints. 

Of course, Dillon Rules or their equivalent will be assessed in a municipal bond’s prospectus. Nonetheless, use of proceeds may be constrained by Dillon Rules in ways that investors and analysts have not considered.  

Take Action:

1. Read the issuer’s legal authority, as well as finances: Confirm the financed program, for instance a EV-charging requirement, rests on authority the state has granted, not just funding the city has allocated. 

2. Flag incentive-funded revenue streams separately from mandated ones in credit models: A revenue bond backed by voluntary program uptake holds different repayment risk than one backed by a state-sanctioned mandate. 

3. Track state legislative sessions that could change issuer authority: A change in authority could add or remove the authority for a bond’s use of proceeds depends on, which changes the ability of investors.