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6. Use performance contracts and other financing options.

After an effective maintenance and operation program is in place, the district should turn to more capital-intensive retrofit projects. These might include heating and air conditioning systems that may not only be inefficient but at the end of their useful lives. Incandescent lighting may need to be replaced with high-efficiency fluorescent or metal halide lighting systems. Mechanical or computerized energy management controls may yield excellent paybacks.

The district should use a master planning approach to establish priorities, consider project dependencies and set up the most appropriate sequence for completing the retrofits.

After you have conducted a thorough energy audit and know where the greatest potential for energy savings exist in your school or district, the next step is to consider how you will finance those projects.

In moving to the financing area, the district must carefully identify and evaluate all available funding options: local maintenance money, bond money, grants, loans, alternative funding methods (lease-purchase, performance contract and shared savings arrangement). In making the final decision, it may well combine several methods to get the best overall “bang for the buck.”

Cash. Those fortunate districts with a significant fund balance may be capable of paying for the entire project with cash. If this is practical, there are no financing costs, and the energy savings can be realized as soon as the projects are completed. Certainly this is ideal; no interest – immediate savings.

Some communities simply do not believe in financing anything – not even new schools. Money is saved until the expenditure can be afforded. With energy retrofits, this can be a costly decision. Every year the retrofits are postponed is another year that energy costs will remain high. A cost-benefit analysis for these districts should clearly show the energy costs (losses) for not acting as well as the cost for conventional and performance-based financing after being offset by the projected energy savings.

Bonds. Bonds carry a stated interest rate and are typically payable over 20 to 25 years. When deciding whether this is the best option for your district, there are several big questions to consider. What is the useful life of the equipment being purchased? How much will this cost, with interest, over the life of the contract? What is the overall effect on cash flow?

If the equipment must be replaced every 10 years, it would be inappropriate to finance it for 20 to 25 years. If the equipment will still be around in 20 years, the district needs to consider the total cost of the project over time. In performing a cost-benefit analysis, the district should calculate the total amount of interest that will be charged over the life of the bond versus the total amount of implied interest that will be paid during the course of a performance contract.

Finally, everything boils down to cash flow. If projects are financed with a bond, the payments may be lower than with a performance contract and the costs may be paid out of debt service rather than maintenance and operating (M&O) funds, while the energy savings are savings to M&O. This could be good for a district at or near the $1.50 M&O tax cap.

Performance contracts. Performance contracts are a means to an end. They enable a district to fund needed projects without issuing a bond or tying up district funds. Only projects with hard-dollar energy-saving potential should be considered for performance contracting, since these contracts are dependent on energy savings to finance the overall project cost.

With a performance contract, energy savings are used to pay for capital improvements. Depending on how the contracts are worded and the manner in which they are accounted for, these are all typically M&O savings and costs – an offset.

Some districts need energy retrofits and lack either the needed manpower or the expertise to oversee these projects. By funding these projects through a performance contract, the projects are handled in a turnkey fashion and the district looks to one contractor for the entire project.

Performance contracting should be your decision. School districts should use a request for proposal (RFP) when soliciting performance contractors. This does not obligate the district to enter into a contract, but it will help to ensure that your district will be receiving the equipment it wants and needs at a fair price.

You should know what you want to purchase through the performance contract. An independent party, preferably an engineer, can help you develop specifications that you can take to the performance contractor. Don’t let the performance contractor determine the equipment you will be installing. They are in the business of selling and installing equipment. Buy what you need, not what they want to sell you.

In 1997, the Mount Pleasant ISD entered into a performance contract with a vendor that installed equipment to monitor and control building temperatures, enabling Mount Pleasant ISD to lower its utility costs sufficiently to pay for the new system. The district also developed a two-year plan to improve its HVAC system at several schools and used performance contracting to guarantee energy savings on those projects.

Energy retrofit project financing. The State Energy Conservation Office (SECO) has information on obtaining a very low-interest loan for installing and retrofitting energy-efficient equipment. The LoanSTAR (Saving Taxes and Resources) revolving loan program offered by SECO has served as a national model for state and federal loan programs for energy efficiency retrofits. To date, the program has saved Texas taxpayers more than $94 million through energy efficiency projects financed for state agencies, institutions of higher education, school districts and local governments.

Projects financed by LoanSTAR include, but are not limited to, energy-efficient lighting systems; high efficiency heating, ventilation and air conditioning systems; computerized energy management control systems; boiler efficiency improvements; energy recovery systems; and building shell improvements.

LoanSTAR’s annual percentage rate (APR) of interest for school districts is a constant 4.04 percent. This is a flat rate that is charged to school districts across the state. The program’s revolving loan mechanism allows borrowers to repay loans through the stream of cost-savings generated by the funded projects.

The Tyler ISD in East Texas conducted an assessment of the lighting system districtwide and installed new lighting with funding from a low-interest state loan and bond funds. An assessment of HVAC equipment was also conducted. Since 1997, the district reports electricity savings of $275,000. The Corpus Christi ISD, a district with nearly 40,000 students, is realizing annual savings of more than $475,000 from its use of performance contractors.

To assure the school district will generate the anticipated savings, SECO performs design specification review and construction monitoring when the project is 50 percent and 100 percent complete.

Qualified Zone Academy Bonds (QZAB). The QZAB program is a federal program. QZABs are a new type of bond that school districts can use to save money on school renovation projects. The QZAB program is designed to provide tax credits to bond holders that are approximately equal to the interest that states and communities would ordinarily pay the holders of taxable bonds.

Texas was allocated $32.5 million in bond authorization for calendar year 2000. The Texas Education Agency is now accepting and reviewing applications for the QZAB program. The agency may designate school district bonds as QZAB eligible after reviewing district applications and private business contributions submitted by the district and its partners. The bonding authorization will be allocated on a first-come, first-served basis.

For the district to gain QZAB designation, it must meet the program’s proof of eligibility, provide an assurance of private business contribution, and submit the district’s program intent. An application must be filed and the designation must be approved prior to the district issuing its QZAB debt.

Texas Association of School Boards Capital Acquisition Program. This program also offers loans to purchase and install energy-saving equipment. The minimum loan amount is $100,000 and interest rates range from 4.4 percent to 5.3 percent, depending upon current financial market conditions, the length of the loan, and the district’s bond rating. Loan terms are set at three year, four year, seven year, or ten year periods and are not related to project payback. The application procedure is simple: completion of a one-page form and submission of the district’s most recent budget and audit.

Private Lending Institutions or Leasing Corporations. Banks, leasing corporations and other private lenders have become increasingly interested in the energy efficiency market. The financing vehicle frequently used by these entities is a municipal lease. Structured like a simple loan, a municipal leasing agreement is usually a lease-purchase arrangement. Ownership of the financed equipment passes to the district at the beginning of the lease, and the lessor retains a security interest in the purchase until the loan is paid off. A typical lease covers the total cost of the equipment and may include installation costs. At the end of the contract period, a nominal amount, usually a dollar, is paid by the lessee for title to the equipment.

Additional Resources:

Below is a list of additional resources you may find helpful. Information in the documents and URLs listed below are not necessarily endorsed by this agency, only provided as a resource.

Qualified Zone Investment Bonds
(Texas Education Agency)
The Texas Education Agency provides information to school districts regarding eligibility and allocations for the QZAB program.

Texas Association of School Boards Capital Acquisition Program
Toll-free phone number: 1-800-580-8272

LoanSTAR Revolving Loan Program
(State Energy Conservation Office)
Toll-free phone number: 1-800-531-5441, extension 3-1931