Please note these are only a few examples. In practice, Progressive Energy works with local officials to develop a range of options. Officials can choose the option that best meets their community-specific needs. More than one program described below, as well as options not presented, may apply to a project. The ultimate goal is to create a bond-financed renewable or energy efficiency project with a desired level of risk (technology and financial) at the lowest possible cost. For instance, our strategic partner, the law firm DeCotiis, created an innovative approach to issuing bounds through county improvement authorities in New Jersey to support solar projects at a variety of municipal facilities. We are working with DeCotiis to expand these opportunities across New Jersey, as well as adapting the model to other states and technologies. This innovative program does not fall squarely into any program below, yet it presents a viable opportunity for economic development and clean energy across the state, and possibly the country.
Build America Bonds:
The stimulus bill passed in February 2009 authorized the Treasury Department to create new bond programs to help states fund capital projects and create jobs. One program, Build America Bonds (BABs) provides funding to state and local governments at lower borrowing costs for work on public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, governmental housing projects and public utilities. BABs are taxable bonds issued by state and local governments that provide access to conventional corporate debt markets. The Treasury Department subsidizes the bonds with a direct payment to the issuer of 35% the interest payment on the BABs. As a result, state and local governments have lower net borrowing costs and can reach more sources of borrowing than with more traditional tax-exempt or tax credit bonds.
Based on the wide range of projects that may be financed through BABs there are many opportunities for state and local governments to implement RE/EE projects that not only create jobs, but also reduce energy costs and save government money. For instance, in Illinois, school districts are financing the construction of windfarms with BABs.
Clean Renewable Energy Bonds:
Through a series of energy bills passed in 2008 and 2009, Congress created Clean Renewable Energy Bonds (CREBs) specifically for entities in the public sector to finance renewable energy projects. The list of qualifying technologies is extremely diverse. CREBs may be issued by electric cooperatives, government entities (states, cities, counties, territories, Indian tribal governments or any political subdivision thereof), and by certain other lenders. Until recently, CREBs were classified as tax-credit bonds. Due to the recession, there has been low demand for tax credits as companies have less revenue to offset, making CREBs a less attractive and common source of project financing. However, under the Jobs Bill that was passed earlier this year, CREBs are now entitled to direct subsidy BAB-style payments, which is more in line with investor demand and makes CREBs a more viable source of funding for state and local governments across the U.S.
Industrial Revenue Bonds:
Most states and many local governments offer industrial revenue bonds (IRB) as a way to encourage relocations and expansions of companies that provide jobs and expand economic opportunities for residents and the community. An IRB is a loan to a company to build or buy a facility or buy land and/or equipment. The city issues the bonds but is not making the loan. The investor buying the bond makes the loan. The company must find its own bond purchaser. It can also buy its own IRBs. The city technically owns title to the facility built with IRBs and leases it to the company for up to 20 years. At the end of the term, title is transferred to the company. Since the city is not responsible for the loan, the IRB does not have an impact on the city’s credit rating. IRBs help companies save money in two ways: Because the city owns the title to the project, it’s exempt, for up to 20 years, from 95% of property taxes on land, buildings, and equipment. Also, a company may receive gross receipts and compensating tax exemptions on initial purchases of equipment made with bond proceeds. Because of financing costs, IRBs are typically used for larger capital projects. They are generally not recommended for projects less than $2 million.
Property Assessed Clean Energy Bonds:
Local and state governments, as well as D.C., are promoting property assessed clean energy (PACE) programs that finance solar systems and energy efficiency upgrades on private property through additions to property tax bills. Piloted by the city of Berkeley a few years ago, the concept has gone nationwide. Sixteen states, including California, Colorado, Texas and New York, passed legislation enabling PACE programs. Florida and Hawaii already had authority to establish PACE programs without the need for enabling legislation. The next step is for individual counties or municipalities to issue bonds. Cities have the ability to form a “special tax districts” or “assessment districts” to finance energy improvements. Some municipalities already have the authority, but many require enabling legislation. PACE bonds are issued by municipal financing districts or finance companies and the proceeds are typically used to retrofit commercial and residential properties. On-site distributed energy systems also represent viable projects. Communities get the benefit of job creation and reduced energy costs, without adding any credit or general obligation risk for the government.
Private Activity Bonds:
Private Activity Bonds (PABs) are municipal securities that are issued to support the activity of one or more private entities. A municipal security is considered a PAB if it meets either of two sets of conditions set out in Section 141 of the Internal Revenue Code. A PAB, with certain exceptions, must use more than 10% of the proceeds of the issue for private business (private business use test) or the principal or interest on more than 10% of the proceeds is secured by property used for a private business (the private security or payment test). A municipal security also is a PAB if, with certain exceptions, the proceeds of the issue are used to make loans to non-governmental borrowers in excess of 5% of the proceeds or $5 million (the private loan financing test). Interest on PABs is not excluded from gross income for federal income tax purposes unless the bonds fall within certain categories (qualified bonds or qualified private activity bonds). Most categories of qualified PABs are subject to the alternative minimum tax. Tax-exempt PABs involve facilities owned or used by private entities, including airports, docks and certain other transportation-related facilities; water, sewer and certain other local utility facilities; solid and hazardous waste disposal facilities; certain residential rental projects (including multi-family housing revenue bonds); and certain other facilities.
Qualified Energy Conservation Bonds:
Qualified Energy Conservation Bonds (QECBs) can be used by local and state agencies on a wide range of activities including municipal solar projects and capital expenditures that reduce energy consumption on publicly owned buildings by at least 20%. They can be used to support a variety of green community programs in cities, which issue QECBs to fund loan, rebate or grant programs. QECBs can also be used by municipal utilities to fund community solar programs, or for public education campaigns to promote energy efficiency. Of course, the source of the bond repayment must be identified, and Progressive Energy can help develop programs and projects with clear benefits and reliable cash flows. Finally, up to 30% of the QECB allocation can be used for private activity bonds. As with CREBS, above, the recent Jobs Bill authorized QECBs for direct subsidy BAB-style payments, which should expand the universe of potential projects available to state and local governments.
Qualified School Construction Bonds:
The stimulus bill also authorized Qualified School Construction Bonds (QSCBs). Issuers of QSCBs are eligible to receive direct payments from the federal government to offset interest payments on the bonds. As an alternate, QSCBs may be issued as tax credit bonds under which buyers receive federal tax credits in lieu of interest as a means reducing the issuer’s interest cost. The ARRA provides for an allocation to each state, along with separate allocations for large school districts. QSCBs are to be used “for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such a facility is to be constructed…” Schools that choose to use such bonds for RE/EE projects not only create jobs and improve school infrastructure, but also save money for their children to receive an education with better services. For instance, in New Hampshire, school districts have used QSCBs to install biomass boilers and conduct energy efficiency retrofits at no upfront cost to the district, and providing long-term energy and cost savings.