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Advisory panel urges EPA to back plan to pay for green projects via property tax

November 28, 2009

An advisory panel to the Environmental Protection Agency chaired by an Indiana University professor is urging the agency to promote a new method of municipal finance for homeowner environmental projects.

By issuing “voluntary environmental improvement bonds,” or VEIBs, local and state governments could create special taxing districts that finance homeowner purchases of everything from solar panels to rain gardens.

“The VEIB concept breaks new ground in the field of municipal finance,” James Barnes, chairman of the Environmental Financial Advisory Board, said in a letter to EPA administrator Lisa Jackson. The letter accompanied a report on the potential of VEIBs.

“We hope that this concept will indeed, in a far broader form, sweep the country and bring with it major improvements to the environment.”

Barnes, a professor of public and environmental affairs and law at Indiana University, wants the EPA to get the word out on the financing concept already under way in a handful of cities.

For example, the city of Berkeley, Calif., created the Sustainable Energy Financing District, which finances up to $37,500 for the purchase and installation of solar panels.

Homeowners who choose to participate consent to pay for the improvement through an annual assessment paid along with their property taxes.

The idea is that such long-term financing allows homeowners to justify pricey investments such as solar panels. The payments—spread out over as many as 20 years—make such improvements affordable to homeowners. Not only does the term reduce the payment, but the interest rate is also lower than conventional financing because the financing is secured by the improved property.

The concept also removes another homeowner disincentive: the reluctance to spend thousands of dollars that never will be recovered for the average homeowner who moves about every eight years.

A homeowner doesn’t have to settle up with the city when he or she moves. Rather, the debt obligation is assumed by the subsequent owner of the home much as the property taxes are assumed by the new owner.

“It’s really an interesting concept,” said Karen Haley, director of the city of Indianapolis’ Office of Sustainability.

She wonders if such a program could also be extended to certain kinds of businesses.

“The voluntary part I think is key,” Haley said. “You’re not forcing anything on anybody.”

Barnes declined to elaborate on the report, deferring to experts on the panel who wrote it.

They noted that the few VEIBs in place around the country tend to focus on energy-efficiency investments, but that other environmental improvements could be candidates, such as replacing failing septic tanks and ways to capture storm water runoff.

The latter piqued Haley’s interest. She noted that Indianapolis must comply with federal mandates in the years ahead; for example, the city must separate its combined sewer and storm water system.

A VEIB program would have to be approached with care, however.

The issuing government agency would be issuing so-called property-secured obligations. The PSOs and homeowner payments would be secured by a lien against the house. The advisory board said sponsoring governments would have to ensure that the value-to-lien ratio is sufficient to finance the environmental improvements. If not, “not only would the current lenders and lienholders be adversely affected, but subsequent marketability of property might be affected, taking what should have been an environmental success story into an economic sinkhole,” Barnes’ group noted in its report.

Such a program might also require changes to state law, as municipal bonds are mostly issued to pay for government projects.

Earlier this month, the New York Legislature passed a program that allows homeowners to pay for energy improvements over 15 to 20 years through property tax bills.

Barnes’ advisory board said the EPA could help set up conditions and requirements of a “properly structured” VEIB program and principles on which state-enabling legislation could be passed.•

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