A growing number of states are enacting laws or have existing statutes that enable cities and counties to overcome one of the biggest obstacles to significant investments in renewable energy and energy efficiency—lack of access to long term, low interest financing. And a growing number of cities and counties are taking advantage of this new authority. This new approach is commonly referred to as Property Assessed Clean Energy (PACE) financing and it allows homeowners and businesses to implement dramatic improvements in efficiency and/or renewable energy and repay those investments over a long-term via a special property tax assessment or via a utility bill.
Some cities have, like Babylon, NY, launched programs by tapping into existing revenue streams. Most have made use of amendments to state laws that have allowed them to issue bonds. There have been some stumbling blocks along the way for some programs and ILSR issued a report in May 2010, Municipal Energy Financing: Lessons Learned, that took a look at some of the hurdles and recommended solutions.
However, despite hundreds of cities reportedly being in early stages of investigating or designing PACE financing programs most if not all of them are on hold as of July 2010. The cities are waiting on a resolution of a dispute between state/local governments and the federal housing finance agency (FHFA, e.g. Freddie Mac and Fannie Mae) related to PACE lien seniority and the risk that PACE may have on federally backed mortgages. In August 2010, the good folks at Lawrence Berkeley National Laboratory published a PACE Status Update Report to illuminate the problems and potential solutions surrounding the FHFA’s opposition.
Once the resolution of the FHFA problem occurs, it is likely that PACE financing programs will sweep across the country as more and more states are enabling the policy and the federal government continues to offer program design guidelines and seed money through the energy efficiency and community development block grant program.
State Enabling Laws
As of August 2010, 24 states have adopted new laws or amended existing statutes and codes to allow their counties and cities to establish special assessment districts for energy financing. These amendments have several key features:
- Permit municipalities to create energy financing districts
- Define the permitted types of renewable energy and energy efficiency projects eligible for financing
- Create an opt-in element that allows the districts to consist of non-contigous, self-selected property owners
- Grant authority to municipalities to issue bonds to provide financing
In 2008, Vote Solar published an excellent legal memo that examined statutes in 15 states and the amendments that would be needed to establish energy financing districts.
As of June 2010, six cities and counties have established energy financing programs using local public funds. These programs vary significantly, as the table to the right reveals (click for larger version). Some finance only renewables, others only efficiency and still others finance both. Some are restricted to residences while others are open to businesses. Program elements vary (e.g. term of loan, maximum amount of loan, interest rate, etc.) But several features characterize most programs.
- Zero dollars upfront are required. The municipality or county offers 100 percent financing. This dramatically broadens the number of households that can take advantage of the program.
- The debt stays with the property. The debt is repaid through the property tax and the debt has a first lien on the property. This overcomes the reluctance of homeowners to make significant investments if they anticipate moving in 2-5 years. When they move, the debt continues to be repaid through property tax assessments.
- Borrowers are eligible for existing federal tax incentives. This is a result of a change in the federal tax code in early 2009. The federal tax code prohibits individuals or businesses who are receiving “subsidized energy financing” from making use of federal incentives. Until recently it was unclear if municipal bonds, even taxable bonds, would be considered subsidized financing. Contained in the American Recovery and Investment Act is a provision that allows home and business owners with qualifying energy projects to remain eligible for federal energy tax incentives while financing their projects with taxable municipal bonds.
Find a Model
Click on a red-shaded state or icon to get details. Shaded states have passed legislation to enable municipal financing based on property taxes.
Know of other communities using property tax financing for renewable energy and energy efficiency? Let us know.
- Municipal Energy Financing: Lessons Learned – by John Farrell, Institute for Local Self-Reliance, May 2010 Although still young and evolving, the existing PACE programs identify stumbling blocks and offer valuable lessons about program design and implementation. This ILSR Policy Brief, based on an analysis of existing programs, identifies important issues that have surfaced and comments on possible strategies for addressing them.
- PACE Municipal Energy Financing: Designing State Policy – presentations given to the NGA Center for Best Practices by John Farrell, Institute for Local Self-Reliance, May 2010
- Growing Collection of PACE Financing Reports and Issue Briefs – Merrian Fuller and others at Lawrence Berkeley National Laboratory, ongoing 2010.
- Efficiency Cities Network
- PACE Now
- Vote Solar’s web site on Municipal Property Tax Financing
- Track Cities Developing Municipal Property Tax Financing Programs – from 1Bog
- Innovative Energy Efficiency Financing Approaches [pdf] – DOE Presentation, June 2009
- PACE Financing Information by State – DSIRE Database
Oregon's municipal finance law allows cities and counties to create "local improvement districts" in order to fund both renewable energy and energy efficiency projects. Cities and counties may bond for funds or borrow small amounts from the Oregon Department of Energy.
HB 2626 - July 2009 [pdf]