Rep. Mina Morita's Blog


sPACEd out – Property Assessed Clean Energy

Posted in Clean Energy,Legislation/Capitol,Sustainability,Uncategorized by Mina Morita on April 29, 2010

Some would like to give the impression that political posturing and bickering was the sole reason for the demise of House Bill 2643, the Property Assessed Clean Energy program.  I have, along with Speaker of the House Calvin Say, taken the brunt of criticism in the press and from PACE proponents for killing a bill I introduced by not moving it to conference committee and passing out House Resolution 47 instead.  However, if one were to take a pragmatic and reasoned approach in analyzing House Bill 2643, simply put, it was not ready for prime time.

PACE is a property tax lien oriented financing that can be used as a tool to improve the economics of energy retrofits where the biggest barrier to their installation is coming up with the upfront cash to make such improvements.  Unfortunately, PACE is a relatively new program fraught with lots of buzz and attractive sound bites, after all who doesn’t want to promote easy financing for clean energy.

Let me make this very clear.  There is nothing in statute that prevents each county within Hawaii from instituting a PACE program on their own.  House Bill 2643 proposed floating state bonds and establishing a state revolving loan program to filter funding to the counties for loans to property owners to install clean energy improvements where the loan repayments would be made through a special assessment in the collection of property taxes.  This is very different from what is happening in mainland cities where the municipalities who are directly responsible for assessing and collecting property taxes are adopting the program by floating municipal bonds, not state bonds.

The mayors of each of our four counties are not totally sold on PACE and fully supported House Resolution 47 which called for the Department of Business Economic Development and Tourism to work out the bugs with all the stakeholders.  Without buy-in from the counties PACE simply would not work.

So I guess the first question to be asked, why should the Legislature move forward on a program the counties are ambivalent about?  As each county faces reduced revenues and budget shortfalls, the creation and administrative cost of a new program is of serious concern.  And these types of issues were not resolved by the time the bill reached conference.

Mortgage lenders are concerned about the priority of liens, and rightly so.  This concern is not only being raised by Hawaii lenders alone but by lenders across the country.  A  March 25, 2010 Wall Street Journal article touches on this concern.

. . .This debt (the PACE loan) would be senior to existing mortgage debt, so if the homeowner defaults or goes into foreclosure, it would be repaid before the mortgage lender gets any money. While property-tax assessments are usually senior to existing property debt, cities have traditionally used their assessment authority for community-wide improvements like sewers and roads—not for upgrades that homeowners elect to make on their own homes. . .

. . .But the regulator of Fannie Mae and Freddie Mac—which guarantee half of the nation’s $11 trillion in mortgages—has raised concerns in meetings about the program with federal and state officials. Alfred Pollard, general counsel for the mortgage companies’ regulator, the Federal Housing Finance Agency, said he was worried about the problems that a first-lien, or first-in-line, loan could create. “The goal of enhancing energy efficiency, which we share, should not overcome the need for prudent underwriting,” he said.

Fannie and Freddie aren’t allowed to speak out on public policy, and the companies declined to comment for this article. PACE advocates have lobbied for a measure barring Fannie and Freddie from taking any adverse action over the next two years on communities participating in PACE.

Critics of the program say that Fannie and Freddie, or mortgage lenders themselves, could raise rates in such communities to cover the risk that a PACE loan will displace payments to the mortgage holder. Cities could also face legal challenges, they say. The state of Maine is considering making energy loans junior to existing debt in legislation that would establish its PACE program.

“The fundamental problem is that there isn’t a free lunch but there often appears to be,” said William K. Black, a professor of economics and law at the University of Missouri-Kansas City.

One of the challenges of PACE is insuring that the bond rate, the interest rate for the assessment and the administrative fees associated with the program are affordable and attractive enough to make the program a success.  Currently, mortgage and home equity interest rates are very low.  In many cases on the mainland people who initially signed up for PACE dropped out because it was far cheaper for them to either restructure their mortgage or draw on their home equity.  In an analysis of the Berkley PACE program it was found that property owners who were creditworthy and did not have a problem securing financing but just had to be motivated to make these improvements.  Therefore, if PACE cannot compete with traditional financing, there may be a propensity for PACE programs to attract less creditworthy property owners.  As this is a relatively new program there is no track record or risk evaluation.

Because PACE is an opt-in type of program and needs pull-through to make a substantial impact, the key is for the State and counties, as critical partners, to educate property owners and to assist in making the energy assessments and financial evaluations to help implement the retrofits.  The objective would be for a transparent, easy-to-access, standardized, with correctly “sized” incentives, not subsidies, with installation by qualified vendors for a self-sustaining program.  DBEDT intended to put the details in administrative rules, however, by the end of second crossover and as the bills were being scheduled for House-Senate conferences there were more questions than answers.

Overzealous proponents of PACE may feel that this is a serious setback in our advancement for renewable energy and energy efficiency.  However, it is not the lack of a PACE program that will put a brake on the Hawaii Clean Energy Initiative but the lack of funding overall to carry out the long term strategy for energy and food security in Hawaii.  It was the Governor’s veto of the barrel tax last year and again this week that gives Hawaii’s energy security strategy an uncertain future.  All of the Energy Division’s special funds and stimulus money will be sucked dry by the end of the next fiscal year and their general fund funding will be jeopardy like any other program if we fail to fund this Division with a dedicated tax.  The reality could be that there wouldn’t be anybody to run a PACE program in the next Administration or the county level given the current furlough and economic conditions.  However, there now is a little light of hope with the veto override of the barrel tax.

Advertisements

One Response to 'sPACEd out – Property Assessed Clean Energy'

Subscribe to comments with RSS or TrackBack to 'sPACEd out – Property Assessed Clean Energy'.

  1. Kauaibrad said,

    Will give two responses. One quick one here to contest the facts and one in-depth response a little later to dig deeper at the solution of PACE.

    “House Bill 2643, simply put, it was not ready for prime time.”

    The bill could have been drafted ready back in January 2010.

    “Unfortunately, PACE is a relatively new program fraught with lots of buzz and attractive sound bites…”

    It may be new here in Hawaii, but it’s already being done, no buzz or soundbites, in almost 20 states and many more local communities. Now that the session is over, might recommend a field trip to Berkeley (that’s with an ‘e’ ) to see how they are doing it and also to Cisco Devries at http://www.renewfund.com/ on details of implementation that are already working.

    “The mayors of each of our four counties are not totally sold on PACE”

    Only one of the County Administrations gave testimony on HB 2643, prior to HR 47, with concerns about the bill. All the other counties gave testimony in support of HB 2643. It is questionable whether that one county’s testimony was based in substance. The committees during and after that one letter of testimony did not make substantive changes to the bill based on that one county’s testimony.

    “Without buy-in from the counties PACE simply would not work.”

    There was buy-in from the counties, already.

    “As each county faces reduced revenues and budget shortfalls, the creation and administrative cost of a new program is of serious concern. And these types of issues were not resolved by the time the bill reached conference.”

    It is interesting that the bill as drafted and introduced left out implementation details and delegated that to DBEDT as administrative rules to be made after the bill’s passage. If that’s not what was wanted, then the bill should have been drafted differently from the start. As the bill was drafted and continued through the committees, it was understood that the details would be worked out and implemented by DBEDT. The details and issues did not need to be worked out before Conference Committee. A short legislative session is hardly the place to start micro-managing a program that can be easily copied from elsewhere. That will be no different next legislative session, except that we will have lost another year before the difference between supply and demand for liquid petroleum fuel starts really opening up in the next couple years.

    “Mortgage lenders are concerned about the priority of liens, and rightly so. This concern is not only being raised by Hawaii lenders alone but by lenders across the country. A March 25, 2010 Wall Street Journal article touches on this concern.”

    As you may know, or should know, the solution to that had already been proposed, that the portion of the PACE lien that would be senior to the mortgage would only be the current year’s portion of the PACE loan owed, not the total amount of the PACE loan. We are talking about only a couple, three thousand dollars or less depending on the system. Banks regularly have condominium and association fees equal to that to have to deal with in foreclosures, in fact it’s a reason why many foreclosure closings are being delayed by banks. Not necessarily a bad thing.

    Again, seniority of the lien and what lien amount has been dwelt with and solved in an equitable manner in other jurisdictions. It’s a none issue.

    “One of the challenges of PACE is insuring that the bond rate, the interest rate for the assessment and the administrative fees associated with the program are affordable and attractive enough to make the program a success.”

    DBEDT already put a lot of time and effort into figuring that out. It’s a Reimbursable General Obligation Bond, not a Revenue Bond that some in the Legislature wanted to change it to not considering the numbers and cost to the property owners.

    “In many cases on the mainland people who initially signed up for PACE dropped out because it was far cheaper for them to either restructure their mortgage or draw on their home equity.”

    You say we don’t have the numbers yet, and then you say “many,” when it is more like “some.” The key factor is that home equity lines are a line of credit, not a term loan. As interests rates rise, that could quickly become a problem for homeowners. That is why significantly not many homeowners here in Hawaii are using home equity lines to put in PV systems. Home equity lines would be better for something like a solar water heater, but still involves risks. PACE on the other hand is effectively a fixed rate paid back as a line item on the property tax bill. Part of the qualifying process looks at the property owners mortgage payment and property tax payment history, but not personal credit history, to qualify them for the PACE loan. And looking at the amortization, the property owner can see the semiannual payments (over as much as 20 years) for themselves beforehand to decide whether they want to do it. Certainly if they think they can pay it back in a lot shorter number of years, then they might consider what is effectively a variable rate personal loan like what the banks are offering, but not many people in Hawaii have been making that choice in the past couple years. And none here have the choice of PACE, yet.

    “In an analysis of the Berkley [sic] PACE program it was found that property owners who were creditworthy and did not have a problem securing financing but just had to be motivated to make these improvements.”

    True, but that’s a moot point. BTW, that should be creditworthy with their performance on the mortgage and property taxes, not personal credit.

    “Therefore, if PACE cannot compete with traditional financing, there may be a propensity for PACE programs to attract less creditworthy property owners.”

    Nice use of the word “if.” In fact what is happening on the mainland is that traditional financing cannot compete with PACE. PACE is the superior financing arrangement for this purpose. The banks do not have a product that competes effectively, head-on with PACE. That is why they don’t like it, not because one year of the loan payments are senior to them. PACE does not attract less creditworthy property owners. It attracts more astute property owners who choose to pay back the system over a longer period of time than for the variable rate loan products that the banks are offering.

    “Because PACE is an opt-in type of program and needs pull-through to make a substantial impact”

    You said yourself there is not enough years of data out there on the PACE programs. You cannot accurately say beforehand that PACE requires “pull-through to make a substantial impact.” Certainly government will not be the one to provide effective “pull-through” marketing. The market price of oil and electricity within the next few years, without any added punitive taxes, will provide plenty of stimulus for “pull-through to substantial impact.”

    “…the key is for the State and counties, as critical partners, to educate property owners and to assist in making the energy assessments and financial evaluations to help implement the retrofits.”

    There is little to no history of either this State or it’s counties of doing that. The PUC may be able to foster that with the proper framework that is currently being decided in the dockets. Utilities may be able to assist with that too, but the proper framework needs to come from the PUC. More likely it will be energy market determinants that force property owners here into astute decisions. It’s not going to come from well intended government educators.

    “DBEDT intended to put the details in administrative rules, however, by the end of second crossover and as the bills were being scheduled for House-Senate conferences there were more questions than answers.”

    DBEDT may have voluntarily offered that, but the original drafting of HB 2643 (nor any later drafts of the bill) did not expect that of DBEDT until after it’s passage. Only after this became a political issue was that additional request made of DBEDT, that they come up with the administrative rules BEFORE they needed to come up with administrative rules by the requirements of the bill. The “questions” and “answers” are the nature of which have actually been solved elsewhere. They are “questions” that did not need “answers” before passage of HB 2643.

    “Overzealous proponents of PACE…”

    We’ll take that as a badge of honor, mahalo.

    “…may feel that this is a serious setback in our advancement for renewable energy and energy efficiency.”

    It is only a serious setback in that it is an unnecessary waste of a year when we don’t have anymore years to waste, all to wait for the next administration to get credit for implementing this program. We are aware that the esteemed Chairperson believes the State has many more years to make this transition. That is not based on the most current information from conservative, reliable sources like the EIA and DOD which indicates that liquid petroleum fuel prices of which Hawaii utilities uniquely rely precariously upon will begin rising dramatically in as soon as 2 years.

    “It was the Governor’s veto of the barrel tax last year and again this week that gives Hawaii’s energy security strategy an uncertain future.”

    Why are we talking about the Governor and the barrel tax in a PACE article? Why? The barrel tax is NOT going to solve Hawaii’s energy security situation. Properly funding the PUC would go a lot further toward that goal than the new bureaucracies envisioned by HB 2421. If one were going to ask which is the more useful to Hawaii’s energy transition, PACE or the barrel tax, hands down, it would be PACE. If a legislator were asked to choose between the two bills for their time and effort, PACE would have been the better choice based in market realities, not arbitrarily designed government “solutions.”

    “The reality could be that there wouldn’t be anybody to run a PACE program in the next Administration or the county level given the current furlough and economic conditions. However, there now is a little light of hope with the veto override of the barrel tax.”

    PACE was never going to be funded at either the State or county level by the barrel tax. A well managed, efficient PACE program would be funded by a reasonable, competitive fixed interest rate on the loan to the property owner as is already being done in many local jurisdictions, elsewhere.

    The next article response on this will be an in-depth report on what is really happening with PACE in other jurisdictions.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s


%d bloggers like this: