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Background and Methodology
The Economic Development Council of Seattle and King County (EDC) from time to time undertakes studies of sectors or issues pertinent to the strengthening of sectors within the region. During the summer of 2014, two related issues arose: the Governor’s Clean Energy Fund had been passed by the Legislature and was being implemented; and a proposal for a “green bank” was brought forward by a member of the CleanTech Alliance. After some consideration, the EDC determined that these two issues merited further investigation.
The proposal for a “green bank” (actually a suite of policies and financial tools) posed two key questions: was there a need and a demand for below-market-rate capital that was not being met, to the detriment of sector development; and was there a mechanism or mechanisms that could provide this capital without violating the Washington State constitution.1 These two questions, plus an extensive review of existing programs, guided the study’s methodology.
With respect to the legality issue, the EDC sought the counsel of several experts in the Washington state constitution. They were given several hypothetical programs or policies, as well as examples of what had been done in other jurisdictions. While not asked to render a formal opinion, they were willing to provide advice on past decisions and to suggest what might be possible.
At the same time, the EDC assembled a list of organizations, public and private, that might have an interest in programs that made below-market-rate capital available, and conducted a number of in-depth interviews with key individuals. Their knowledge and experience have informed this study.
The remainder of this document contains a review of existing programs, a brief discussion of the legal issues, and a set of conclusions and recommendations.
Existing Programs
There are several state programs that use various mechanisms to provide low-cost capital to the private sector. Each is briefly reviewed here.
Washington State Housing Finance Commission
The Washington State Housing Finance Commission was created by the Legislature in 1983, primarily to address the issue of affordable housing.2 The original legislation also provided for the use of funds for energy efficiency.3 A 2012 amendment allows the WSHFC to include facilities for the development of aviation biofuels.
The Commission has established a Sustainable Energy Trust to make loans for energy efficiency or renewable energy installation of up to $1 million. Projects requiring more than $1 million may be financed through a tax-exempt revenue bond. The WSHFC issues its own bonds. The Commission receives no state appropriation, and its bonds are not obligations of the state. The advantage to the borrower is that, because the bonds are tax-exempt, interest rates are lower.
Washington Economic Development Finance Authority
The Washington Economic Development Finance Authority was created by the Legislature in 1995 to address economic development issues primarily in rural areas, although projects funded by WEDFA could be developed throughout the state. As with the Housing Finance Commission, WEDFA was authorized to issue its own bonds for a variety of purposes, including the development of alternative energy, conservation, transmission facilities, recycling and waste disposal facilities.4
WEDFA, like WSHFC, receives no state appropriation, and any bonds issued are not obligations of the state. Unlike WSHFC, WEDFA can also issue taxable bonds, allowing for a more attractive total financing package.
Clean Energy Fund
In 2013, the Legislature passed a suite of programs aimed at getting additional capital to the clean energy sector. These included:
- A revolving loan fund, administered by two non-profit financial institutions, that made below-market credit available to small companies for energy efficiency and renewable energy projects;
- Smart grid grants to utilities, used chiefly for the installation of energy storage capacity; and
- Repurposed federal funds (returned loans from the ARRA grants to the state).
These programs are administered by the Washington State Department of Commerce. The CleanTech Alliance is supporting an increase in funding and an expansion of programs for the next biennium.
Legal Issues
The State of Washington, along with three or four other states, has a constitutional provision that prohibits the state from supporting individuals, associations, companies or corporations. While this prohibition seems absolute on first reading, the state Supreme Court has in recent years addressed the question by asking whether a public purpose is served in the proposed use of funds, or whether the transaction also includes a benefit for the state – for example, hiring a consultant to perform certain tasks in return for a fee.5
If there is a public purpose inherent in the exchange, the Supreme Court has concluded that it does not constitute an unconstitutional grant of credit. If the exchange is transactional, the Court has tended to look for “donative intent,” or evidence that the transaction was intended to be a gift. In fact, some commentators argue, the Court has never found donative intent, and therefore has rarely disallowed the exchanges in question.6
The implementation of this prohibition by the Court can best be understood by examining some illustrative cases. Louthan v. King County, a 1980 case, determined that the purchase of development rights from private landowners did not constitute a gift, because there was a legitimate public interest in maintaining open land, and that the County received tangible value in return for its funds. Similar cases have upheld public financing of election campaigns, and a public agency’s collection of child support payments on behalf of individuals.7 More recently, the use of public funds to construct a baseball stadium for Seattle’s team was upheld.8
Legal scholars have pointed out several weaknesses in the reasoning of these decisions, and there remains significant uncertainty in the interpretation of terms such as “overriding public purpose” and “moral obligation” used in past opinions. While the Court has usually deferred to the Legislature, there is always the possibility that a change in Court personnel could result in a more strict construction.
Conclusions and Recommendations
Based on our research and interviews with stakeholders and experts in the field, we have arrived at the following conclusions:
- There is a demand for below-market-rate capital to finance energy efficiency or clean energy projects that could not otherwise be funded. This was a nearly unanimous assertion by those interviewed.
- This demand is predominantly for smaller projects (homeowners and small businesses) undertaken by those with limited resources and/or limited access to capital.
- The risk associated with such projects could be reduced through a partnership between public and private entities.
- Existing programs and agencies cannot meet this demand, due to either a lack of funds or limitations in mission.
- It is the intent of the Legislature and the will of the people (viz. I-937) that clean energy sources be developed and utilized. Given the problems associated with fossil fuels, the development of alternative energy sources constitutes a “public benefit.”
- The easiest and most efficient course of action entails the use of existing mechanisms or administrative entities.
Therefore, based on the above, we make the following recommendations:
The programs within the Clean Energy Fund should be continued and expanded.
- The revolving loan fund, now offered through two non-profit financial institutions, could be extended to other, similar organizations so as to achieve better state-wide coverage. By allowing (and encouraging) private lenders to participate by contributing to the pool of available funds, the program will reach more small businesses and individuals while reducing risk.
- The smart grid grants to utilities should also be continued. The adoption of new technologies within this industry is quite difficult, due to the nature of regulations and the risk aversion inherent in the rate-making structure. Disruptive advances would probably not happen, but for the state grants, and there is a clear public purpose in making the generating and transmission system more efficient.
- Repurposed federal funds, because they do not involve the grant or loan of the credit of the state, can be used for these programs without limitations.
Utilities should be allowed to finance alternative energy installations and to collect payments on customers’ electric bills.
Utilities in Washington have a mandate to promote energy efficiency and clean energy, and are allowed to recover energy efficiency expenses from ratepayers. This could easily be extended to allow the utilities to make loans to residential and small commercial customers for energy retrofits or alternative clean energy systems. Recovery of the loan through monthly bills would replenish the loan pool and encourage future investments. The constitutional issue should not be a problem for the investor-owned utilities, since no state money would be involved. As for publicly owned utilities, they are already providing incentives for energy efficiency.
1Article VIII, Section 5, states that “the credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation.” Article VIII, Section 7, applies the same prohibition to municipalities.
2RCW 43.180
3RCW 43.180.140
4RCW 43.163
5David Martin, “Constitutional Limitations on Gifting of Funds to Private Enterprise: A Need for Reform,” (1996), cited on digitalcommons.law.seattleu.edu
6Hugh Spitzer, “An Analytical View of Recent ‘Lending of Credit’ Decisions in Washington State,” (1985), cited on digitalcommons.law.seattleu.edu
7Ibid.
8Jeni Barcelos and Jen Marlow, “Does Cap and Dividend Policy Violate the Washington State Constitution’s Prohibition on the Gift of Public Funds?”; Sightline Institute and the Washington Environmental Council, August, 2008.