Sunday, February 8, 2015

Put America to Work: Energy Efficiency Investments for Municipalities

Regardless of what "size of government" you believe is appropriate (large government vs. small government), I think we can all agree that government needs to be as efficient as possible in utilizing our tax dollars. And, if investments can be made which do not raise our tax dollars now, and promise lower taxes for us all in the future, such investments deserve to be rapidly undertaken.

Here's how it works, in simple terms. If I loan you $1,000,000 at 3% interest, with a payback over 10 years, in equal installments, your annual loan payments (paid monthly) would total about $105,000, or 10.5%. But what if taking out the loan results in energy efficiency improvements for you that: (1) save $105,000 to $200,000 in electricity costs each year, for 20 years (varies, depending upon electricity cost per Kwh and installation costs); (2) in some communities, effect a slight drop in crime in your area; (3) save on greenhouse gas emissions; and (4) creates well-paying jobs for members of your community - installers and domestic manufacturers of LED lighting.

Sounds too good to be true? It isn't.

While I'm no expert in LED street lights nor their installation, from reading several articles about past and planned installations of LED street lights (which are said to last for 20 years or more, resulting in lower future maintenance costs as well compared to traditional street lighting), as well as reading articles about how rapidly LED light fixture prices have declined over the past few years, it seems apparent that dramatic cost savings are possible for municipalities where street lighting is widely employed. All that is needed is capital.

What's the solution for municipalities to acquire capital to make these infrastructure improvements? Here are three alternatives:

(1) The first would be the issuance of general revenue municipal bonds. But, such bond issuance has its (often substantial) underwriting costs, and interest rates for many municipalities (due to shaky finances) might be much higher.

(2) A better solution, in my view, is for Congress to authorize a government loan program under which the federal government (U.S. Treasury) issues 10-year government bonds (yields as of 2.8.15 - about 2%), and then loans funds to municipalities at 3%. The spread would easily cover the costs of administering the programs and the costs of any defaults. If administrative and default costs are lower, then perhaps rebates to municipalities could take place. Debt could also be staggered, with the U.S. Treasury authorized to issue 1-year, 2-year, 3-year, 4-year, etc. securities, and loaning to municipalities with principal paybacks over time. (This would lower effective borrowing costs for municipalities even more, and

(3) For those desiring to keep the government's balance sheet smaller, the U.S. government could guarantee municipal loans (thereby ensuring a very high rating), adopt legislation for a shorter prospectus (given the guarantee), and thereby result in possibly lower borrowing costs via 10-year municipal loan obligations (AA-rated 10-year municipal debt yields, as of 2.8.15, are about 1.8%). The federal government could charge 1.0% per year on outstanding debt to the municipalities, to cover the costs of any loan defaults and the costs of administering the program. Again, if the administrative and default costs are lower, then perhaps rebates to municipalities could take place.

Want to make a huge dent? Authorize tens of billions of such loans or loan guarantees to be undertaken, over the next three years.

Of course, interest rates could rise. Then again, costs of LED street lighting could fall over time. Even if interest rates rise moderately, cash flow savings would still likely result over the first 10 years, at least for the vast majority of municipalities. And even if loan repayment amounts rise slightly and equal energy savings over the first 10-year period, the real savings result in years 11-20, when the huge energy cost savings result flow to the bottom line of muncipalities, after the loans are repaid in full.

Other avenues exist for direct loan programs or government loan guarantee programs, for promoting energy efficiency for federal, state and local governments - such as improving energy efficiencies within office and other government buildings (including, as well, the halls in our colleges and universities). Payback times vary, however, and need to be more thoroughly examined to ensure savings actually take place.

Some federal government intiatives in this area already take place, as well as some state programs. What I suggest is that these iniatives be greatly expanded through Congressional authorization. Let's ... PUT AMERICA BACK TO WORK ... and ... SAVE ON OUR OWN FUTURE TAX BURDENS. And let's do it in A BIG WAY.

The future of America is bright. Innovations in materials sciences, health sciences, renewable energy, robotics, and computer applications continue - and the pace of such innovations is even accelerating. Let's together - act smart - and enable our own future prosperity.

Ron A. Rhoades, JD, CFP(r) is an Asst. Professor of Business at Alfred State College, Alfred, NY. This blog post reflects his personal views only, and not those of any organization with which he may be associated. Prof. Rhoades may be contacted at: 

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