Qualified Energy Conservation Bonds

Qualified Energy Conservation Bonds (QECBs) were first authorized by the United States Congress in October 2008. The 2009 American Recovery and Reinvestment Act (ARRA) appropriated $3.2 billion nationally for QECBs. The Governor’s Energy Office (GEO) is responsible for assigning the state’s allocation to qualified projects selected through a competitive process.

Applications Now Closed

Colorado State and local governments, colleges and universities, and qualifying quasi-governmental organizations are now invited to apply for a QECB volume cap allocation. The GEO expects to award a minimum of $9,000,000 and a maximum of $45,000,000 in allocations statewide. The GEO is accepting project applications in two categories; (1) for capital expenditures incurred for the purpose of reducing energy consumption in publicly-owned buildings by at least 20 percent and (2) for green community financing programs. The Large local governments who have already received a volume cap allocation may also submit an application for an additional allocation.

This is not a grant program. Bond issuers must repay the bond principal over time. Specific federal tax regulations apply to projects financed under this program. Bond issuers will need the advice of qualified bond counsel and tax counsel in order to ensure the project and the bond issuance are in compliance with all applicable federal bond and tax regulations. Federal Davis-Bacon prevailing wage rules apply to projects financed with QECBs.

Frequently asked questions:

Who can issue a QECB and how much funding is available?
The maximum face amount of bonds (volume cap allocation) was determined in proportion to the population of the states. For Colorado, this allocation is $51,244,000. Within Colorado, each large local government and the state government shall be allocated a portion of the total allocation in accordance with the population of the large local government. “Large local government” means any municipality or county that has a population of 100,000 or more. Additionally, an Indian tribal government shall be treated as a large local government. The GEO will determine the large local government allocations in accordance with federal law.

What happens to a large local government volume cap allocation, if the local government chooses not use the allocation?
Per Colorado House Bill (HB) 09-1346, any portion of the QECB volume cap for a calendar year that is allocated to a large local government and has not been used on or before November 10 shall, on November 11, automatically revert to the GEO. Large local governments may also submit an application for an additional volume cap allocation to the GEO.

Are QECBs available for state-owned projects?
Yes. HB09-1346 provides the GEO with the authority to develop a list of state-owned projects to be financed or refinanced with a single QECB issued by the State Treasurer. A list of recommended projects recieved through the above application will be submitted to the Colorado General Assembly for approval during the 2010 legislative session. The repayment of the QECB will be secured by certificates of participation attached to energy performance contracts or another form of revenue acceptable to the General Assembly and the governor.

Are QECBs volume cap allocations available for local governments with a population of less than 100,000?
Yes. HB09-1346 provides the GEO with the authority to allocate a portion of the GEO volume cap to smaller local governments. A small local government may obtain a QECB volume cap allocation in one or both of the following ways:

• If the small local government wishes to issue a QECB to finance or refinance energy efficiency improvements in its public buildings, the local government may submit an application to the GEO. The project application will be reviewed along with energy efficiency projects in state-owned buildings. The GEO will prioritize projects that are ready to be financed or refinanced and that are most consistent with the purpose of the QECB program. For small government projects selected by the GEO, the GEO will provide them with a volume cap allocation, the small local government will issue the QECB, and the small local government will enter into a lease-purchase agreement, certificates of participation or other financing mode.
• If the small local government wishes to issue a QECB for any other purpose, the local government must obtain voter approval by November 10, 2009. GEO will set aside a $3,000,000 volume cap allocation (from its total $9,000,000 volume cap allocation) for green community financing programs. This allocation will be divided between all small local governments who receive voter approval. If large local government volume cap allocations revert to GEO, creating a larger statewide allocation, the allocation for green community programs will increase.

What is the QECB interest rate?
A QECB is a tax credit bond. The bond issuer (state or local government) will repay principal on a regular schedule, but generally do not pay interest. Bond holders do not receive an interest payment; instead they receive a tax credit against federal tax liabilities. Theoretically, a QECB could provide the issuing state or local government with interest-free project financing. However, bond purchasers may require a discount on the QECB or a supplemental interest payment, bringing the cost of financing to and estimated 1% to 2%. The applicable maximum maturity, the discount rate for determining the maturity, and QCEB credit rate are published for that date by the Bureau of Public Debt on its Internet site for State and Local Government Series securities at www.treasurydirect.gov.

What types of projects can the QECB finance?
Capital expenditures incurred for purposes of any of the following:

• reducing energy consumption in publicly-owned buildings by at least 20 percent,
• implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs),
• rural development involving the production of electricity from renewable energy resources, or
• any qualified renewable energy facility

Expenditures with respect to research facilities, and research grants, to support research in:

• development of cellulosic ethanol or other nonfossil fuels,
• technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels,
• increasing the efficiency of existing technologies for producing nonfossil fuels,
• automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation,
• technologies to reduce energy use in buildings.

Mass commuting facilities and related facilities that reduce consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting.

Demonstration projects designed to promote the commercialization of:

• green building technology,
• conversion of agricultural waste for use in the production of fuel or otherwise,
• advanced battery manufacturing technologies,
• technologies to reduce peak use of electricity, or
• technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity.

Public education campaigns to promote energy efficiency.

Can a QECB be used to finance private activities?
At least 70% of each allocation must be used for governmental purposes; however, up to 30% may be used for private activity bonds, which are bonds that benefit businesses or individuals. In the case of any private activity bond, the term “qualified conservation purposes” shall not include any expenditure that is not a capital expenditure.

Can a QECB be used to establish financing programs?
Yes. A provision added by the 2009 Act provides a special rule for bonds to finance green community programs, stating that bonds issued for the purpose of providing loans, grants, or other repayment mechanisms for capital expenditures to implement green community programs are not treated as private activity bonds. These bonds must be issued by a local government, the state treasurer will not issue this type of bond.

Where, how, and when do I apply for bond issuing authority?
Use the application above. Large local governments may create their own processes for projects within their jurisdictions. Individual project developers will need to work with their local jurisdiction to arrange for the bond issuance.

Are there any other rules or obligations I need to know about?
Specific federal tax regulations apply to projects financed under this program. Bond issuers will need the advice of qualified bond counsel and tax counsel in order to ensure the project and the bond issuance are in compliance with all applicable federal bond and tax regulations. Federal Davis-Bacon prevailing wage rules apply to projects financed with QECBs.

I still have questions, who do I contact to get more information?
Contact Brett Johnson, GEO Finance Manager at brett.j.johnson@state.co.us or 303-866-2432.