Ann Arbor-backed PACE legislation moves through state Senate with revisions
Ann Arbor-backed legislation that could help property owners across Michigan finance energy efficiency improvements took a step forward on Thursday.
The state Senate voted 25-8 in favor of the Property Assessed Clean Energy legislation sponsored by state Rep. Rebekah Warren, D-Ann Arbor.
After some changes by the Senate — limiting the scope to benefit only commercial properties for now — the bill is on its way back to the House for a vote.
"It's certainly not everything we want now, but it's a good step forward," Warren said, adding that it's a big deal to have the Republican-controlled Senate move the bill forward.
Rebekah Warren
Warren has been fighting for passage of the PACE legislation for several months. Under the program, property owners would be able to borrow money from their local governments to pay for upgrades ranging from high-efficiency furnaces that cost a few thousand dollars to solar-panel systems that can cost tens of thousands of dollars.
The PACE program would allow property owners to repay the loans over time through special assessments added to their property tax bills. Local governments would get the funding by selling municipal bonds to investors.
Several local officials have been pushing for passage of the PACE legislation, including Ann Arbor Mayor John Hieftje and Washtenaw County commissioners Jeff Irwin and Conan Smith.
Irwin had mixed reactions to the Senate's revision of the bill.
"I think that the Senate cut a little bit out of its usefulness, but I'm still glad it's moving," he said. "It's a big huge opportunity. Energy efficiency and conservation, saving money, reducing pollution, putting people to work — it's such a no-brainer."
In a guest column on AnnArbor.com, Warren and Irwin laid out how the PACE program would work: (1) a property owner would contact the city or county; (2) an energy audit would identify the highest value energy efficiency improvements; (3) a financing plan would be agreed to between the government and the property owner stipulating the cost of the improvements and the appropriate rate of the special assessment needed to refund the community over time; and (4) the improvements would be made, saving money and reducing pollution.
Smith said he expects Ann Arbor will be the first city in Michigan to implement the PACE program once the governor signs it into law.
"It's been narrowed to only apply to commercial buildings, but it's a great first step," he said. "I'm just really excited. I had hopes that the Senate would act on this."
Smith is the executive director of the Michigan Suburbs Alliance, a Ferndale-based nonprofit agency heading up a new Regional Energy Office. That office is likely to be involved in the implementation of the PACE program throughout Southeast Michigan.
"On implementation, we'll be working with cities to get ordinances passed and to make sure there's funding available," Smith said. "The program is only for commercial buildings at this point, but that's fine because they are some of the worst offenders."
Smith said one of the problems preventing PACE from assisting homeowners is that, on a national level, mortgage-finance agencies Fannie Mae and Freddie Mac have been resisting efforts to make it easier for homeowners to get loans for energy efficient upgrades. The debate is over who gets paid first if a borrower defaults.
"Fannie Mae and Freddie Mac won't allow PACE financing on any home they have a mortgage interest in, which is one reason we could only get commercial here and not residential," Smith said, adding it's unfortunate "because the loans could be structured like taxes and move with the house rather than superseding their interests."
Warren said she hopes the federal government will resolve those larger issues so the PACE program can help homeowners in Michigan in the future.
For now, Warren said she expects it to be signed into law and give businesses a boost.
"For a lot of our small businesses owners, in particular, it will be a great opportunity and really help them get some savings on their energy bills," she said. "One of the biggest challenges that many of our businesses have right now is (getting funding for upgrades). Just having the funding to do any kind of capital improvements is out of reach for a lot of folks, so this gets them fast access to affordable capital to do improvements that, in the long-run, save them a lot of money on energy use and help us reduce our carbon footprint as a community."
Ryan J. Stanton covers government and politics for AnnArbor.com. Reach him at ryanstanton@annarbor.com or 734-623-2529.
Comments
Conan Smith
Sat, Sep 25, 2010 : 2:37 p.m.
Building energy use is accountable for approximately a third of greenhouse gas emissions, and I think that we have a public interest concern in improving their efficiency. Energy efficiency upgrades to most buildings can be cost neutral over time (saving being realized through reduced energy consumption) but capitalizing those upgrades is a barrier. PACE allows consumers (and taxpayers -- mind you a mess of government money comes from commercial and industrial property taxes) access to cheap capital to help us address a multilateral environmental concern through what is essentially a cost-neutral approach. On top of that, our utility companies do have programs that promote energy efficiency and will pair with PACE very naturally. DTE's Energy Optimization program provides rebates for consumers who upgrade to more energy efficient equipment. Capitalizing those purchases through PACE then taking advantage of the cost reductions from the utilities, local businesses and commercial property owners can improve buildings with very short ROI timelines. This is great policy that promotes private sector participation in meeting a public interest goal.
McGiver
Sat, Sep 25, 2010 : 8:24 a.m.
These are just the kind of stupid programs that legislators promote that continue to needlessly add to the size of government. How about people who own their homes take out home equity loans and finance their own improvements. Aren't interest rates low enough as it is. Or will bad credit risks be enabled to further in debt themselves. Bad enough the Federal governments makes all of us pay for tax credits for similar programs. If improvements are worth doing to save the homeowner some energy costs, then they are worth doing without government help.
Jeff Irwin
Sat, Sep 25, 2010 : 6:53 a.m.
@Stephen Landes: Local communities could design the plan with differing interest rates built into the payback formula. The law doesn't specifically spell this out. Speaking as a Washtenaw County Commissioner, we have discussed passing along the same rate we get to our citizens and then adding in a small administrative charge to offset the staff costs of running the program (I see all the local governments who want to do this sharing an FTE). In other words, the idea is to create a cost neutral program that passes the costs to the participants/beneficiaries. @treetowncartel: It isn't all of the banks or the mortgage companies who oppose this (some banks want to sell the bonds because they are a great investment). It's really the big banks, that acquire mortgage backed securities, who are afraid that this additional encumbrance on the property will prevent them from extracting maximum value in a foreclosure (it also adds complexity to their evaluation of bundled mortgages). So far this hasn't been a problem in other states that have been doing this (16 at this point). That's because the best practice for this type of program is to tailor the size of the financing to the cost-saving opportunity. In other words, if we can save you $500/year with energy efficiency improvements, then we should design the payback formula such that you pay an additional $500/year on your tax bill until the costs of the improvements are paid back. I think, if we stick to simple improvements like insulation, we can design the payback formula such that participants in the program save a little bit more each year on energy than they pay in increased taxes. Of course, participants will also qualify for federal tax credits, the economy gets a boost from the additional work, we reduce pollution and increase our self-sufficiency. Given the benefits to our communities and our state, it's surprising that the Senate wants this opportunity to go only to commercial property owners and not to homeowners generally.
treetowncartel
Sat, Sep 25, 2010 : 12:18 a.m.
Of course mortgage companies who give money to people to help them purchase a home are not in favor of this.It amounts to an encumberance on a property. You end up having two almost identical homes sitting side by side, and one with a much larger tax burden. If the bank has to reclaim that property they are set up to lose since the other similar property does not have the same annual costs of the one with the encumberance. Even if I use fuzzy math I can see how this is a problem.
Stephen Landes
Fri, Sep 24, 2010 : 10:41 p.m.
@Jeff Irwin Pay back with interest equal to or greater than the cost the city or state incurs in borrowing the funds?
Jeff Irwin
Fri, Sep 24, 2010 : 9:01 p.m.
Generating energy from alternative sources is exciting, but there are so many opportunities to conserve that we have not yet implemented. The cleanest and cheapest energy is the energy we never use. As it stands we are wasting billions of dollars in Michigan on energy. There are many, many ways to save these dollars through conservation. Unfortunately, due to difficulties in getting credit and the issue of stranded costs many homeowners will choose not to invest in efficiency measures, even those that will clearly pay off in a short period of time. This is because many homeowners are unsure of their future, especially in this economy. As a result, an investment that will pay for itself in eight years might not make obvious sense for that homeowner. However, across the whole system, these investments clearly do make sense financially and otherwise. So, in steps PACE (hopefully). PACE would allow the local government to borrow funds on the government's credit (obtaining lower rates for us). Then, the local government could direct those funds to worthy projects that, through an energy audit, could demonstrate savings sufficient to pay back the local government. The method of payback is a voluntary special assessment on the parcel where the funds are expended. In other words, we all will not pay additional taxes to support the energy efficiency investments of our neighbors. Rather, our neighbors would have additional financing options to obtain funds and then pay those funds back themselves. I hope this clarifies how this tool would be used.
Stephen Landes
Fri, Sep 24, 2010 : 4:32 p.m.
So, let's see if I understand this: We, that is all of us, are going to sell bonds to raise money, so we can lend it to property owners, so they can install equipment that will save them some money - maybe. If this is going to be attractive to property owners then the interest rate they should pay us will have to be less than market rates. If that is the case then WE will be subsidizing their "cost savings" project. If these investments are really worth making -- that is, the return on investment is greater than the cost of borrowing the money -- then property owners should be making these investments from home equity or funds borrowed legitimately from a bank or credit union. If no one wants to lend money for these "improvements" then it is likely that the return on investment is not greater than the cost of borrowing money. There is an argument to be made that reducing energy consumption through this program will reduce the need for new power plant construction or allow for the decommissioning of existing power plant equipment. If the cost of providing energy via distributed generation is less than the cost of building or maintaining centralized generation then the energy company, in this case DTE, would be better off lending money for these projects than spending it on their own equipment. I don't see DTE jumping at the chance to investment in such energy projects. If they can't because of regulation, then tackle the regulations. If they won't because it isn't a good investment, then one needs to ask what makes us think that some city administrator is smarter than the finance department at DTE? Alternative energy methods are not exactly a new thing: if they were really cost effective without subsidies like PACE we would all be rushing to acquire them. No money is free. Someone is going to pay for this government borrowing. It seems to me that the PACE legislation disguises the fact that the cost of borrowing is born by all of us who pay taxes rather those who benefit from the project. Enough is enough.