Financing Energy Efficiency Projects For County Governments in Michigan, Minnesota, Missouri, Ohio, & Virginia

(Prepared for National Association of County Governments and US EPA ENERGY STAR)

Prepared by: Neil Zobler Catalyst Financial Group, Inc. 152 Deer Hill Ave, Suite 208 Danbury, CT 06810 203-790-4177 nzobler@catalyst-financial.com August 22, 2005

Financing Energy Efficiency Projects for County Governments Table of Contents

Introduction: Financing Energy Efficiency Projects for Counties.................................................. 2 Michigan (Huron County)............................................................................................................... 3 Legal Background....................................................................................................................... 3 Funding Alternatives................................................................................................................... 3 Minnesota........................................................................................................................................ 4 Legal Background....................................................................................................................... 4 Funding Alternatives................................................................................................................... 4 Missouri .......................................................................................................................................... 4 Legal Background....................................................................................................................... 4 Funding Alternatives................................................................................................................... 5 Ohio................................................................................................................................................. 5 Legal Background....................................................................................................................... 5 Funding Alternatives................................................................................................................... 5 Virginia ........................................................................................................................................... 6 Legal Background....................................................................................................................... 6 Funding Alternatives................................................................................................................... 6 Summary ......................................................................................................................................... 7

Introduction: Financing Energy Efficiency Projects for Counties

Implementing energy efficiency projects is good for the environment and the Countys operating budget. Unfortunately, limited capital budgets often delay the installation of these needed energy improvements, resulting in more pollution and higher utility bills than necessary. Whether county officials decide to manage the project installation internally, or engage the services of an Energy Service Provider, these projects can usually be financed using low cost tax-exempt financing alternatives. Properly structured financing of energy efficiency projects can use future energy savings to pay for the new energy equipment needed to realize the savings. As long as the energy dollars saved are greater than the cost of financing the improvement, you will improve the cash flow of your organization while improving the environment, without increasing existing operating or capital budgets. If your state offers low or no cost financing alternatives designed to underwrite energy efficiency projects, then the decision to finance these projects should be straightforward. If these special funds are not available to you, then more traditional financing alternatives (like tax-exempt lease purchasing) should be carefully considered. In most states, tax-exempt lease-purchase agreements (TELPs) are ideally suited to finance energy efficiency projects. This is because they often include non-appropriation language, which ties the repayment of the financing to the availability of funds from the current years operating budget. If energy funds are not appropriated in future operating budgets, then the financing agreement is considered terminated without creating a default. Because payment obligations are limited to the current operating budget and does not obligate future budgets, this type of financing is usually not considered debt from a legal perspective (note this is state specific). The Legal Background section of the following analyses addresses the ability of a County to enter into a conditional sales agreement or a TELP for energy efficiency projects. The funding alternatives section identifies special financing that may be available for counties within the state. Neither section is intended to be complete; the descriptions may have been altered or abbreviated from the actual wording used by the source. For additional information about the funding opportunities, please review the actual solicitations located at the net locations provided. This summary was compiled by Catalyst Financial Group, Inc. at the request of ENERGY STAR and the National Association of Counties (NACO). It is not intended to be an exhaustive study of the five states identified by NACO, or of the financing issues for counties. It is intended to help Counties identify energy efficiency funding alternatives specific to their states. It is the result of our best efforts, which includes contacting the relevant contacts by telephone and email. The underlying legislation and funding availability is constantly changing, which may affect the information contained herein. Catalyst Financial Group, Inc. claims no financial or legal responsibility for the correctness or thoroughness of this information and we suggest that local council or tax advice be obtained prior to entering into any financing obligation.

Michigan (Huron County)

Legal Background County commissioners may enter into installment contracts to purchase lands, property, or equipment.1 The contract period may be for the lesser of ten years or the useful life of the property. However, the amount of installment contracts that can be issued is limited and shall not exceed one-half of one percent of the equalized assessed value of real and personal property in the county.2 These installment contracts are not subject to non-appropriation language. Voter approval must be obtained for the county to levy taxes beyond this statutory limitation.3 Energy conservation improvements can be financed using installment contracts not to exceed ten years.4 Energy conservation improvements include, but are not limited to, heating system improvements, fenestration improvements, roof improvements, the installation of any insulation, the installation or repair of heating or air conditioning controls, and entrance or exit way closures.5 Funding Alternatives Michigan Counties are eligible to participate in the State Grant Program to help fund energy efficiency and renewable energy projects. The grant process is quite competitive and only about 10% of the projects receive funding.6 In the Detroit Edison and Michigan Consolidated Gas Companies territories, a Pay-As-YouSave (PAYS)7 utility pilot program is being prepared which would allow counties and other qualifying customers to finance qualifying energy efficiency improvements using a new utility tariff. Funding, product or service and quality assurance would come from third parties, yet the billing and collecting would be handled through the local utility bill as a special PAYS service line item on the bill. Repayment guidelines include not more than 75% of the savings to be used for repayment, over a period not to exceed 75% of the useful economic life of the equipment being installed. This would not be considered debt from an accounting perspective and, as such, is expected to be easier to implement for public institutions (K-12, municipalities, counties, etc.). The Collaborative group developing details for the pilot program expects to finalize its work by mid-September, after which Detroit Edison will present a report and preliminary proposal to the Michigan Public Service Commission. For more information contact Tom Stanton, Michigan Public Service Commission, (517) 241-6086, mailto:tstanton@mich.gov. Traditional funding sources (banks and commercial finance companies) can underwrite the installment contracts mentioned above. These installment contracts can be used in

1 2

Mich. Comp. Laws 46.11b. Id. 46.11b (1), (2) (2001). 3 Id. 46.11b (1), (4). 4 Id. 46.11c. 5 Id
6 7

Telephone conversation (8/16/05) with Tom Stanton, Michigan Public Service Commission, (517) 241-6086 http://www.paysamerica.org

conjunction with energy efficiency performance contracts, available through Energy Service Companies.

Minnesota
Legal Background Minnesota - Counties may lease-purchase personal property or real property. The Attorney General has advised that Counties may enter into lease-purchase agreements without violating debt limitations as long as the financing agreement provides for an option to renew the lease each year (i.e. includes a non-appropriation clause).8 Municipalities (definition includes counties) may enter into a guaranteed energy savings and may enter into an installment payment contract for the purchase and installation of energy conservation measures9. Funding Alternatives Minnesota's Energy Investment Loan Program (EILP), managed by the Minnesota Department of Commerce, will finance up to 50% of the loan principal at 0% interest for qualifying renewable energy, energy efficiency or energy conservation "capital improvement" measures in existing buildings. The measures must have a simple payback of 10 years or less and can not exceed $500,000 per project. EILP participation is limited to a 5 year amortization. EILP will participate with private lenders, who are identified by the participants. Participants most often have used Tax-Exempt Lease Purchase Agreements as the financing vehicle. Minnesota cities, counties, townships, hospitals and K-12 schools are eligible for this subsidized interest rate program. Contact Amy Bicek, Minnesota Department of Commerce, (651) 296-2429; amy.bicek@state.mn.us for more information.

Missouri
Legal Background Counties have the authority to purchase or lease any property, whether real or personal. 10 There are separate provisions for First, Second, Third, and Fourth Class counties, but all appear to have the authority to lease-purchase without incurring debt as long as there is a non-appropriation clause.

8
9

Minn. Stat. Ann. 465.71 (2001)

Id 471.345 subd. 13 10 Mo. Stat. Ann. 49.270 - Vernon 1998

Funding Alternatives Missouri offers an Energy Loan Program for the design, equipment and installation related to implementation of an Energy Efficiency or Renewable Energy Project, managed by the Department of Natural Resources energy center. The loans are off-budget and are not considered general debt obligations. Loan rates are at a fixed interest rate between 2.75% 3.75% based on term. The maximum amount of the loan is eleven times the annual energy savings. This program is open to Schools, Local Governments (including Counties) and Institutional organizations. At the time of this writing (August 2005), the revolving fund is fully funded and the Department of Natural Resources is unable to accept new applications for Energy Revolving Fund loans. They anticipate they will begin accepting applications for a new round of loan financing in late summer/early fall 2005. They expect to underwrite around $10 million per year of new projects. Contact Mr. David Lamb, Missouri Department of Natural Resources, Energy Center, (573) 7516630, david.lamb@dnr.mo.gov for more information. Meanwhile, traditional funding sources (banks and commercial finance companies) can underwrite tax exempt lease-purchase and installment contracts. These financing agreements can be used by themselves, or in conjunction with energy efficiency performance contracts, available through Energy Service Companies.

Ohio
Legal Background Counties can lease-purchase improvements to courthouses and other county offices, with a term not to exceed 40 years11, without incurring debt as long as repayment is subject to appropriations. In addition, counties may enter into the financing contract for energy efficiency improvements without public bidding12. Debt incurred under this section shall not be included in the calculation of the net indebtedness of a county.13 Funding Alternatives Ohio uses Public Benefit Funds to underwrite the Ohio Energy Loan Fund (ELF) 14, which has been established to provide incentives for qualifying energy customers, including counties, to implement energy efficiency and renewable energy projects. ELF is managed by the Ohio Department of Development. The Renewable Energy Financial Assistance Program, one of four loan programs, reduces the interest rate on bank loans15 for qualifying organizations by setting up a linked deposit and using the earned interest to offset borrowing costs on amounts up to
11

Ohio Rev. Code Ann. 307.02 (West Supp. 2004). Ohio Rev. Code Ann 307.041 (D) 13 Id 307.041 (F)
12

http://www.odod.state.oh.us/cdd/oee/energy_loan_fund.htm Tax-exempt lease-purchase agreements are eligible if the Energy Service Company (ESC) finances through a state approved depository (August 22, 2005 e-mail communication with Judy Pacifico).
15

14

$500,000 for periods up to five years on qualifying renewable energy projects. The Business and Institutional Program reduces the interest rate on bank loans for organizations implementing qualifying energy efficiency projects using linked deposits for amounts up to $250,000 for periods up to five years. Contact Carolyn Seward at (614) 466-4053 for more information. Ohio also offers a software program called One-2-Five Energy that is designed to help senior managers by taking a business approach to energy management and to identify opportunities to improve business systems to achieve sustainable energy cost savings. 16 For information about the One-2-Five Energy Program contact Tony Sutor at (614) 387-2733 or email at asutor@odod.state.oh.us. Organizations that complete this program may be eligible for grants for 25% of an energy project up to $50,000 under the Energy Loan Fund Grant Program17 Grantees may then finance the balance of the project using the linked deposit program. For more information on the grant program, contact Carolyn Seward (see above for contact information).

Virginia
Legal Background The General Assembly has stated that it is the policy of the Commonwealth to encourage public bodies to invest in energy conservation measuresstate aid and other amounts appropriated for distribution to public bodies shall not be reduced as a result of energy and operational savings realized from a guaranteed savings contract or a lease purchase agreement for the purchase and installation of energy conservation and facility technology infrastructure upgrades and modernization.18 Counties may acquire personal property by lease or installment purchase contract. The lease payments must be subject to appropriations to avoid the creation of debt. Funding Alternatives HB 1967 Energy & Operational Efficiency Performance-Based Contracting Act allows any public body (including counties) to enter into energy performance-based contracts to significantly reduce energy and operating costs of a facility. The bill provides a contracting procedure to be followed by these entities in negotiating an energy performance-based contract and requires such contract to contain certain provisions. The Department of Mines, Minerals and Energy supports energy conservation and efficiency projects by providing energy management services (such as project financing mechanisms, demonstration projects, and technical assistance with project development and evaluation) for state projects.19 Unfortunately county facilities do not qualify for this support.
16 17

http://www.odod.state.oh.us/cdd/oee/EnVinta.htm http://www.odod.state.oh.us/cdd/oee/ELFGrant.htm 18 VA Code 11-34.1 19 http://www.mme.state.va.us/de/energyframe.html

Summary
While our research was limited to five states, our conclusions are applicable to most public entities in most states. Delaying the implementation of energy efficiency projects wastes energy and incurs substantial opportunity losses. This energy waste can be captured and used to finance energy efficiency projects; however, a lack of funding is frequently cited as the reason for the delay. A good place to start a countys financing search is at the states Energy Office (or equivalent). Financing options found there are tried and proven alternatives with legal precedents which should facilitate this process. However, if no programs are available (as in Virginia) or are fully funded (as in Missouri), counties in all five states have the legal authority to enter into tax-exempt lease-purchase agreements with nonappropriation language. TELP payments are not considered general obligation debt as they are not backed by the full faith and credit of the county. As such, they are not considered part of the countys debt margin (remaining debt incurring capacity for chargeable indebtedness). This is because the repayment of these obligations is subject to the appropriation of annual operating budget funds for these particular projects. TELPs are competitively priced and are readily available from banks, commercial credit companies and lease brokers. A new financing alternative (a new utility tariff) is being tested in Michigan. This would effectively allow the financing charge to be added to the existing utility bill, which may result in easier access to financing and lower interest rates associated with a lower risk of non-payment. The results of the Michigan Pay-As-You-Save (PAYS) utility pilot program should be carefully monitored as this appears to be a novel innovation in financing energy efficiency projects.