Sunday, September 25, 2011

Refurbishing Our Schools: Can It Be Done Without Federal Help?

Senator Sherrod Brown has introduced a legislative initiative called FAST: Fix America’s Schools Today. The goal is to begin repairing and renewing our nation’s public schools. The needed upgrades are estimated to run between $270 billion and $500 billion. Brown is asking for $30 billion to initiate activity. The procedure appears to follow the standard process. Federal funds are granted to states for a targeted purpose and there will be mechanisms in place to determine accountability for how the money is spent. The cost of the program would be offset by revenue from closing tax loopholes. This sounds like a good idea. The need is there, and such an effort should be efficient at creating new jobs.

The amount of funding being requested is quite small given the scope of the project. Even so, the probability of getting any new initiative funded is quite small. This leads one to wonder if there are any nontraditional paths that could be followed to get this work done.

We reported here recently about an effort aimed at refurbishing old commercial buildings to make them more energy efficient. It seems that the anticipated energy savings are sufficiently high that everyone involved sees a sure return on investment. The potential profits are such that major investors see this as such a good opportunity that they will provide the seed money for the various projects rather than requiring some sort of government inducement.

There is an article in the New York Times by Justin Gillis, Tax Plan to Turn Old Buildings "Green" Finds Favor, that explains the concept. The idea is called PACE: Property Assessed Clean Energy. The goal is to allow owners of properties to upgrade their facilities to make them more energy efficient without incurring any upfront costs. The way this works is that a bank provides a loan to cover the cost of upgrades. The city or state agrees to be responsible for collecting payment on the loan through a property tax surcharge that could be spread out over as much as twenty years. A contractor comes in and does the work. When finished, the owner of the building covers his tax surcharge with the savings from the energy bill.

People believe the savings from lower energy consumption will be large enough that the loan risk is small. Rather, the belief seems to be that the return on investment will be quite large. In fact, the intention is to bundle these types of loans into, presumably, a CDO and offer them at 7% rate of return. One suspects the outfits like pension funds would jump at a safe 7% rate of return. There is talk of investors putting up hundreds of millions of dollars for these efforts. Environmentalists love the notion also, hoping the investments get into the billions.

How might this pertain to schools? First of all, consider the money. The biggest potential source of funding for any initiative has to be corporations. They are said to be sitting on around a trillion dollars in liquid funds, just waiting to find some good way to invest the money. One suspects that a safe 7% return would look rather enticing to them.

Making an analogy between schools and commercial buildings would put the school district in the place of the owner of the commercial building. Thinking just in terms of energy conservation, a similar process could work if the savings from lower consumption was in the same ballpark as that for commercial buildings. If so, the district would rebate savings back to the state to cover the loan expenses. If the savings exceed the cost of covering the loan, the excess can be used to finance other structural upgrades. Furthermore, if one was adept at predicting costs and savings, it would be prudent to include these additional upgrades in the initial contract if possible. Such a move would add to risk, but this suggests a role for the federal government to play by providing some sort of guarantee to the holders of the financial instruments.

I have no philosophical problem with having the government fund these types of activities. But it looks like it cannot happen. If one wishes to get action, the best way is to convince corporations with money that you can help them make more money.

If a variation on the PACE activities can be applied to the goals of the FAST initiative, do we then have something called FASTPACE—a logo that would be a lobbyist’s dream?

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