Cities Borrowing Green to be Green

There is a way around just about anything.

We have already taked about the $ ½ billion bust of a “connected” solar panel maker.  Well when there is money sloshing around, people with needs seem to find a way to make use of that money.

Class Green Capital Partners of New York advises municipalities on how to use green program incentives to mortgage public building to finance ongoing budget shortfalls.  The gr

Cities Deep in Red Turn to Green Deals

Financing Strategy Skirts Laws on Using Bonds for Deficits

Michael Corkery, Wall Street Journal, 9 September 2011

Here is the twist: A portion of the bond proceeds go to improve energy efficiency in the buildings, which are meant to generate savings for the city.

That "green" element also helps some cities deal with state rules that restrict selling public buildings or borrowing money expressly to fill deficits...

"We combine sustainability with municipal finance,'' says Class Green's cofounder and chief executive John Hirschfeld. The end result, he adds, is that "one plus one equals three."...

"We combine sustainability with municipal finance,'' says Class Green's cofounder and chief executive John Hirschfeld. The end result, he adds, is that "one plus one equals three."

But critics contend that the "green" element disguises the primary purpose of the deals: deficit financing.

There is a type of construction contracting referred to as performance contracting.  In this type of contracting, the government entity (let’s say it’s a school) takes out a loan against a building to pay for energy improvements.  After the work is done, the school pays the contractor out of the “energy savings” that they experience from the work on the building.  Since most of these projects are designed to have a five to seven year payback (break even point), the school then gets to keep the energy savings going forward.  In effect the school gets the improvements for free.

There are all sorts of difficulties with these projects.  There is a tendency to overpay for the low hanging fruit.  The school system could reduce its energy costs by 30%, but it is the first 10% that is relatively inexpensive to produce:  let’s say a couple of days of work by the Heating, Ventilation, Air Conditioning (HVAC) contractors control technician reconfiguring the buildings control programming.   Let’s just say there is a lot of room for play.

But the cost of these projects is supposed to net zero.  One dollar of savings equals one dollar of payment to the contractor at no cost to the school.

But what they appear to be doing is tacking this system onto a larger bond to make the apparent interest rate of the project lower.  It gets your head spinning.  Taking tricky finance method and then using it to fund operating costs.

Performance contracting may have its issues, but the goal is fairly straightforward. The goal is certainly worth pursuing.  Borrowing to fund operational is also very straightforward.  The goal of that process is much more questionable.  Hiding the one process within the other is gimmickry of the highest order.