Creative Use of Local Resources
What do you do if your locality is reliant on heating oil and some of the most expensive electricity in your country? What do you do if you realise that rising costs are inevitable and will harm your homeowners … and you have unemployed youth looking for work in the middle of an otherwise affluent community?
There is not much you can do – without cash. However, what can you do with cash that you cannot afford to just give away?
What do you do if your cash is accumulated in a ‘solid waste fund’, accumulated to pay for waste collection and disposal and the creation of new landfills (waste tips) – and your recycling program has reduced waste disposal costs so the fund keeps growing?
You could just stop collecting for the fund … but people are used to paying and not complaining, so that will not create any political goodwill, so why bother? Not collecting will not employ those who need work and will not help homeowners with their energy bills, and those are real problems you face, not collecting the fees.
If you are Babylon, NY, you rewrite your municipal solid waste code to declare carbon a ‘solid waste’ and you use the funds to finance a program of energy retrofits to private homes staffed by local unemployed youth.
Obviously, the story is not that simple. It started in 2006, before the major increases in crude oil prices – and before the financial crises. In fact, it started with a single local official’s concern over climate change and rising seas. Babylon has a shore line, but does not front on the Atlantic Ocean. It has marinas and other installations in the Great South Bay of New York, protected by barrier islands from the ocean surf. However, the barriers are low lying sand dunes that could easily be wiped away with rising seas – and take with them billions of dollars in the city’s waterfront facilities that would then be vulnerable to the open seas.
Planning ahead is rare in the United States, as it is elsewhere. However, Babylon did look forward and conducted a greenhouse gas emissions inventory in 2006. It found that its emissions came primarily from existing buildings (38% from residences and 24% from commercial structures) and had the political will to try and address that fact. The town benefited from being a largely affluent commuter community on Long Island outside New York City, with high demand for properties and little idle land. It thus could afford to place conditions on new construction, knowing that competing locations around it would pose comparable costs for development – and knowing that more efficient buildings had become cost competitive with traditionally built, less efficient structures by 2007.
Babylon thus promulgated a comprehensive green building code, one of the first in the US. It adopted the aggressive energy efficiency standards of the Federal government’s EnergyStar New Homes performance standards for new home construction. For commercial buildings, it decided to require LEED-certification for all new structures over 4,000 sq ft. Pushing to distinguish itself from the many other towns on Long Island, Babylon also committed to reducing its greenhouse gas emissions 12% by 2012 – signing up to the Sierra Club’s 12X12 Initiative to Combat Global
However, a program to make new buildings more efficient was not enough for a community that was already built up. The efficiency of existing buildings – overwhelmingly single family homes – also had to be improved. That was where the existence of the solid waste fund’s surplus reserves came into play.
Homeowners might be willing to retrofit their homes and make them more energy efficient – whatever their beliefs about climate change – if they saw an economic return to their spending. But they faced two barriers in the US:
- First, the prospect for an economic return was weakened by the frequency with which the average household changes homes – every seven years. That meant that either the return on the energy efficiency investment would have to occur in three to four years and/or the homeowner would have to gamble on the energy improvements increasing the value of their home at resale.
- Second, there was the matter of the up-front cost to make the energy improvement investments and the access to the needed capital, which might not be available to the middle-income homeowners that could best benefit from lower operating costs for energy.
These two barriers were directly addressed by Babylon’s Long Island Green Homes Initiative (LIGH). Being in the US, the town had had to generate over 80% of its operating revenues from its own sources – and therefore also had control over those funds. The fees property owners were charged for solid waste disposal had been too high and had resulted in a surplus of funds that could be used at the locality’s discretion.
In excess of $2.5 million of the town’s waste reserve fund was set aside to finance energy retrofits through the redefinition of carbon as a solid waste. This redefinition was necessary since the municipality did not have the legal right to lend funds to a private party for the improvement of private property. Only if the loan could be defined as serving a public purpose could provision of the solid waste fund monies to individual homeowners be legal. This was accomplished by the redefinition – which meant that reduction of the waste (the emissions from energy consumption) could then be the public purpose served by the loan for an energy retrofit.
This redefinition attracted little local response since it did not involve any tax increases or imposition of any requirements on any property owner or taxpayer. A reallocation of funds that served some of the community immediately but cost no resident anything was not a politically problematic move and Babylon’s Supervisor (chief executive) Steve Ballone knew that.
Loans under the new program were to be made at a 3% ‘interest rate’ since that was what the funds allocated would have earned had they been left in a risk-free money market account. As a result, the only risk of loss to the solid waste reserve fund was that of non-repayment of the loans. That risk was minimised by the loans being attached to the properties being improved in the form of tax liens, collectible in the same manner as any outstanding taxes due on real estate in the community.
‘Benefit assessments’ have a century-long history in the US, with localities across the country using supplemental liens on properties to generate the debt service funds needed to finance infrastructure improvements such as new sewer lines, sidewalks or repaved streets. Therefore, Babylon was not innovating or generating an alien program, just using funds in a manner well understood by its citizens.
Even debt service and repayment collection required no additional municipal commitments: since the town already assessed property owners for solid waste services, those homeowners that voluntarily entered into the LIGH program accepted an additional assessment on their solid waste bill to cover the debt service. The program conducts a pre-screening process for potential applicants and deems only those property owners that are completely current on their tax bills to be eligible for the support. Controlling the retrofits through its own construction arm, Babylon designs the improvements and assessment durations to ensure that homeowners are saving more money on reduced energy expenditures than they are paying for the improvements. LIGH requires a $250 audit, but deducts this amount from total financing costs if applicants go on to participate in the program. When launched, the average home improvement effort was expected to reduce energy bills by over $1000/year, and funds of up to $12,000 a home were to be available.
Therefore, the capital was made available by the municipality at little political or economic cost to the taxpayers and residents of Babylon. But capital availability was only part of the problem: would the property owners be willing to invest when they expected to move before the investment would pay them back?
This issue was addressed and solved by another feature of the traditional benefit assessment structure: the financial obligation for a benefit assessment repayment can be attached to a property rather than and owner. Therefore, if the property was sold before the investment had paid for itself and there was still some assessment due, the assessment would be assigned to the new property owner. This arrangement would allow the seller not to risk reducing the capital available from sale if the property did not increase in value by at least as much as the outstanding payments due on the benefit provided.
By eliminating the risk to the property owner of not recovering the cost of the funds accepted for the energy efficiency improvement, Babylon could increase the voluntary uptake of the support offered to homeowners. There remained two steps needed to maximize the value of the program from the community: publicizing potential returns and assuring that the program provided employment and income benefits to local unemployed people, construction workers and contractors.
The pilot program run by Long Island Green Homes provided evidence on coats and returns. With 309 Homes audited and/or completed, the pilot showed:
- Average cost of improvements to meet EnergyStar-type standards of $8,080.06.
- Average annual savings to homeowners on heating and cooling bills of $992.52.
- A resulting average payback period of 8.19 years.
- A expected Savings to Investment Ratio (SIR) over the lifetime of the improvements of 2.1.
These savings were generated at constant expected costs of heating oil and electricity and would be even greater if, as the trends have indicated, costs rose rather than remained constant.
Therefore, the pilot provided the data needed to publicise the program across the town’s over 200,000 residents, in some 70,000 dwelling units. Getting to this scale will obviously require far more than the funds initially provided from the solid waste fund – but the initial investments have proven to be strong evidence that will help generate owner interest and, in the ideal, debt capital from other sources. While external debt capital may raise requisite interest rates above the 3% used at the outset, the trend in rising energy costs (pushing 5% per annum) is such that comparable numbers to those exhibited by the pilot may be available for interest rates in the 7.5 to 9.0% range.
Moreover, the pilot has provided Babylon with information on how to deal with contractors doing energy retrofits, standards to apply for work to be conducted, needs for auditing the work completed and the willingness of local contractors to train and employ local unemployed youth as they expand their workforces in response to the offer of new construction work from the municipality.
Under the LIGH program, homeowners pay $250 upfront for an energy audit that determines the work needed on a home. If the homeowner then agrees to proceed with the retrofit, the $250 can be reimbursed out of the municipal benefit improvement loan. The funds provided for the retrofit are committed to a property based on the energy audit, but the work is assigned by municipality, so Babylon has the power to limit work to local contractors, and to provide incentives for those contractors to utilize local unemployed people, many of whom need training in the relevant building trades skills.