Last week, San Francisco became the latest local government to start implementation of low interest loans for energy efficiencies that can be paid back “on-bill.” Unfortunately for the Northwest energy efficiency advocates supporting ESSB 6656, a bill that would pilot on-bill financing in a part of western Washington, legislators made changes that could limit the pilot’s effectiveness. Legislators removed critical language that placed lenders in a superior position—meaning lenders would get paid back first—in the event of a default on the loans that could be issued under the legislation. Taking out the “superior lien” language simply means that the already attenuated pilot program will face further hurdles.
The program in San Francisco is much like the one being run very effectively in more than a dozen states and numerous local jurisdictions, where it is often called PACE—Property Assessed Clean Energy financing. The City and County of San Francisco will provide financing, which borrowers can use for energy-saving retrofits, paying the loan back on their bill. From San Francisco’s FAQ on the program:
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Since the City and County of San Francisco is the lender, the loan is repaid through a special line item on the property tax bill. If the property is sold or transferred, the tax payment obligation will be assumed by the new owner. Standard property sales disclosures will indicate the existence of a tax, so owners will know that they are benefiting from the retrofit improvements at the time of sale and can set their price accordingly.
Loan programs like the one being kicked off in San Francisco have become best practice for making these kinds of energy efficiency loans. Loans are small, affordable, easy to pay back, and the savings can be tracked on a monthly basis along with the pay back. As I have said more than once to the committee that is considering this legislation in Washington, each one of these elements is critical to incentivizing people to make energy improvements. Sightline’s research on green collar jobs has informed our view that easily accessible financing for retrofits can build demand for energy efficiency workers, creating new jobs.
Unfortunately, some community banks and credit unions have kicked up dust about the superior lien for lenders, confusing legislators about why putting lenders in first position is important. Washington’s legislation will allow local governments to sell bonds and use the proceeds from those sales to fund a loan program for retrofits. Local governments can usually get very inexpensive loans this way and then pass the savings on to borrowers. Borrowers then pay back the local government over time on their regular tax bill.
The superior lien is crucial because—as experts who deal with setting up the bond sales for local governments know—without the superior position bond buyers will charge more interest for their money. That means either less money for a city to loan, or higher interest rates for customers who want to borrow. In the first case, that means fewer retrofits, and in the second case smaller savings for homeowners. Incentivizing lots of retrofits by creating the maximum savings is whole point of the legislation.
The banks opposing the language seem to be doing this for two reasons. First, they are worried about competition. If local governments make these loans then the banks can’t get the interest. But that is part of the problem. Numerous real people working on retrofits testified in Olympia that banks simply won’t make these kinds of loans in the current economy because they are too small and don’t produce very much revenue. Far from clamoring for this business, banks generally aren’t interested in small energy efficiency loans.
Second banks are worried about some of the additional work associated with processing payments associated with loans on existing homes. Because pay back is on the property tax bill banks worry that they will be on the hook to make the payments to the local government if the homeowner doesn’t pay their bill. But banks already have to deal with new and significant collection issues associated with tax bills for properties all the time, like school levies and other local tax measures. And those collections happen for every property in a city while this program will only affect the households that decide to borrow.
In order for the pilot program to have a chance to work like the one in San Francisco the legislature ought to ignore the concerns of bankers for now. Put the superior lien language back in ESSB 6656 and let’s see what happens. The legislation is a pilot after all. As time goes forward, a robust loan program can teach us the best way to implement this kind of simple, affordable and effective loan program in Washington State.