CHICAGO — Michigan would join a growing number of states allowing local governments to issue bonds to finance loans to residential and commercial homeowners for energy-efficiency upgrades under a bill being considered by a state House committee.
The program is known as property assessed clean energy, or PACE, bonds. Similar programs in other states allow local governments to issue revenue bonds and use the proceeds for loans to homeowners. The loans are repaid over a period of 20 years through a special assessment that appears on the property tax bill. The bonds are additionally backed by liens on the property.
Last year, 16 states introduced or passed PACE legislation. Only two bond issues have been sold so far — by Berkeley, Calif., in January 2009 and Boulder County, Colo., in May 2009.
From a market perspective, interest in PACE bonds will likely be determined by the issuer’s ability to supply additional credit enhancement on top of the special assessments and property liens, market participants said. A bill introduced last October to the House by U.S. Rep. Steve Israel, D-N.Y., would help assuage investors by offering federal guarantees to back the local loans.
Generally, PACE bonds are expected to be issued as taxable debt, though Boulder was able to sell a chunk of its issue as tax-exempt, as proceeds from the issue financed loans to low-income homeowners.
In Michigan, Rep. Rebekah Warren of Ann Arbor introduced HB 5640 last fall, a few months after city officials began meeting with officials from Washtenaw County and nearby Ypsilanti Township to put together a PACE program.
“We really do need this legislation to move ahead with this program,” said Andrew Brix, the energy programs manager for Ann Arbor. “When you go out into the community, the biggest barrier to this type of [energy efficiency] thing is up-front capital. Banks are reluctant [to loan], because they don’t have the data to show that a more efficient home is worth more.”
The state’s House Committee on Great Lakes and the Environment held a hearing on the measure last week and is expected to vote on the bill in the next few weeks.
Despite the growing popularity of the bonds among governments, concerns remain for the marketability of the debt, some market participants said.
Chief among these concerns is the security of bonds backed by homeowner debt or property.
Boulder County addressed the concern by attaching an appropriation pledge to the bonds. If Michigan’s law is approved, Ann Arbor plans to set up a debt reserve fund with $400,000 in grant money it received from the Department of Energy last year, Brix said.
“There are two hurdles to get over,” said Michael McGee, an attorney with Michigan’s Miller, Canfield, Paddock and Stone PLC who testified in support of the bill to the state House committee last Thursday. “One is the security and how reliable is the revenue stream to repay the debt,” he said. “The other major issue, which the mortgage lenders have, is the question of the priority of the lien — they don’t want to fall behind [bondholders].”
McGee and others point to Israel’s HB 3836, introduced in October, as one way to address security concerns.
The bill, which has been referred to the Committee on Energy and Commerce, would offer federal backing to the debt by authorizing the secretary of energy to provide credit support to enhance taxable PACE bonds.
In a memo to a national working group assembled to study PACE bonds, Barclays Capital last year warned the securities would not be able to achieve investment-grade ratings without some sort of credit enhancement.
Boulder’s PACE bonds, Barclays noted, earned an A-plus from Standard & Poor’s, a rating that was based on triple-A rated Boulder County’s pledge to appropriate money to pay off the bonds if the special assessment revenue proved insufficient to pay off the debt.
The credit enhancement is projected to have brought down the price of the bonds considerably. As of Friday, the tax-exempt Boulder PACE bonds were trading with yields ranging from 3.01% to 4.7%, according to Thomson Reuters. The taxable bonds had yields ranging from 3.49% to 6.25%.