Leveraging Private Investments & Localizing Finance: An Overview of Public Banks

1. Leveraging Private Investments & Localizing Finance: An Overview of Public Banks EARN Conference – September 14, 2011 Anthony Gad agad@stateinnovation.org

2. Four Public “Banks” to Leverage Private Investments & Localize Finance Green Banks • Green Bank of Kentucky • Connecticut Clean Energy Finance & Investment Authority Infrastructure Banks • California Infrastructure & Economic Development Bank Land Banks • Michigan Land Bank Fast Track Authority State Partnership Banks • Massachusetts Small Business Banking Partnership • Bank of North Dakota

3. An Economic Development Fund Is Not a Bank A bank . . . • is able to quickly raise its own finances • has flexibility to offer a range of interventions • can leverage private investments • brings banking expertise • is permanent and independent

4. Green Banks Issues: • Misaligned price signals from the external cost of global warming • Capital market shortcomings in financing innovative industries & rules that favor incumbent technologies • Cost of R&D, commercialization, manufacturing, and deployment

5. Green Bank of Kentucky • Launched by Gov. Beshear in September 2009 • Gov. Beshear’s energy plan calls for 25% reduction in statewide energy demand by 2025 • Green Bank of Kentucky set up as a revolving loan fund for public building retrofits

6. Green Bank of Kentucky Source of Funds: • Started with $14.4 million in State Energy Program funds from the American Recovery and Reinvestment Act (ARRA) • Fixed Rate of 3.25% and 14 year terms • Loans are repaid to the bank over a period of time with the monetary savings realized through reduction in energy usage

7. Green Bank of Kentucky Use of Funds: • eSelf Revolving Loan Program: self-performed energy efficiency projects costing between $50,000-$225,000 • Hybrid Revolving Loan Program: agency procured labor and materials with a cost between $50,000-$600,000 • Energy Savings Performance Contract Revolving Loan Program: typically over $600,000 and utilizes ESCOs

8. Green Bank of Kentucky Energy Savings Performance Contract Revolving Loan: • $1.3 million to the Kentucky Department of Education (KDE) • Combined reduction of carbon emissions equivalent to 1,383 tons of CO2 annually • Rate for financing the KDE performance contract through a traditional loan would have been 5.1% (+ $160,000)

9. Green Bank of Kentucky “The $14.4 million Recovery Act investment provided a great start, but we have more than a $200 million need expressed by state agencies alone. And that does not include the even larger universe of county, municipal, and school boards across the state.” – Testimony of Jonathan Miller, Secretary of the Kentucky Finance and Administration Cabinet to the U.S. House Ways and Means Committee on May 13, 2010

10. Connecticut Clean Energy Finance and Investment Authority • Created July 1, 2011, the law allows the Authority to provide financing support to clean energy projects if the total amount financed by the authority and other non-equity financing sources does not exceed 80% • The Authority may seek to qualify as a Community Development Financial Institution

11. Connecticut Clean Energy Finance and Investment Authority Source of Funds: • Primarily supported by a 0.1 cent per kilowatt-hour charge on electric bills • Contracts with private funding sources to raise debt or equity from private sources • Pledges its revenue to secure any borrowing

12. Connecticut Clean Energy Finance and Investment Authority Additional Sources of Funds: • Charitable gifts, grants, loans, federal funds, contributions • Earnings and interest from financing support activities • Funding from the Community Development Financing Institution Fund (if qualified) • Investments by depository institutions • Auction allowance proceeds from the Regional Greenhouse Gas Initiative

13. Connecticut Clean Energy Finance and Investment Authority Use of Funds: • Low-cost financing and credit enhancement mechanisms to support a wide range of renewable energy and energy efficiency projects • Support projects that seek to deploy electric, electric hybrid, natural gas, or alternative fuel vehicles and associated infrastructure and any related storage, transmission, distribution, manufacturing technologies or facilities

14. Infrastructure Banks Issues: • Risk of delay as state officials wait for the state or federal funds to become available • Risk that a poorly selected project will fail to produce social or economic benefits and tie up scarce capital resources

15. California Infrastructure and Economic Development Bank • The state’s only general purpose financing authority, the CA I-Bank has extremely broad statutory powers to issue revenue bonds, make loans and provide credit enhancements for a wide variety of infrastructure and economic development projects and other government purposes

16. California Infrastructure and Economic Development Bank Source of Funds: • State general fund appropriations of $50 million in FY1998 and $425 million in FY1999 • Current sources of funds include fees, interest earnings and loan repayments • “Leveraged Loan Program” which involves the issuance of revenue bonds secured by the repayments from previously-approved loans

17. California Infrastructure and Economic Development Bank Use of Funds: Infrastructure State Revolving Fund –low-cost loans up to $10 million per project to local governments for:

18. California Infrastructure and Economic Development Bank Serves as a “conduit issuer” for Industrial Development Revenue Bonds and 501(c)(3) Revenue Bonds. CONDUIT FINANCING – The issuance of municipal securities by a governmental unit (referred to as the “conduit issuer”) to finance a project to be used primarily by a third party, usually a for-profit entity engaged in private enterprise or a 501(c)(3) organization (referred to as the “conduit borrower”). The security for this type of issue is customarily the credit of the conduit borrower or pledged revenues from the project financed, rather than the credit of the conduit issuer. Such securities do not constitute general obligations of the conduit issuer because the conduit borrower is liable for generating the pledged revenues.

19. California Infrastructure and Economic Development Bank Other Financing Support: • Emergency apportionment Lease Revenue Bonds • Energy Efficiency Bonds • California Insurance Guarantee Association Bonds • Toll Bridge Seismic Retrofit Bonds • Clean Water State Revolving Fund Bonds • Tobacco Securitization Bonds • Recovery Zone Economic Development Bonds • Tribal Compact Asset Securitization Bonds • Imperial Irrigation District Preliminary Loan Guarantee

20. Land Banks Issues: • Tax liens exceeded fair market value and state law set minimum auction bids at the amount of delinquent taxes • Investors elected neither to invest in improvements to the property nor pay subsequent years’ taxes • Properties not sold to private investors automatically defaulted to the ownership of the local government

21. Michigan Land Bank Fast Track Authority • Created in 2004 as a “Second Generation” land bank • In a structure not found in other jurisdictions, the Michigan statute created a state authority both to deal with tax-foreclosed properties owned by the state as well as to exercise a limited degree of supervisory oversight of all locally created land banks • Currently over 30 land banks in Michigan

22. Michigan Land Banks Source of Funds: • Portfolio of properties with negative value, market value, and values substantially exceeding management and remediation expenses • 50% of all real property taxes for 5-years following conveyance to a private owner • Bonds backed by 100% of future tax revenue increases from brownfield development • Cash flow from interest and penalties

23. Michigan Land Banks Use of Funds: Acquisition • Authorized to receive forfeited properties, but not required and not automatically conveyed • Discretion to acquire properties through voluntary donations and transfers from private owners • Can purchase or lease property on the open market

24. Michigan Land Banks Property Management: • Michigan land bank legislation contains most extensive management powers and includes a provision that such powers are to be broadly construed to grant complete control to the land bank “as if it represented a private property owner.” Property Disposition: • Complete authority to establish the terms and conditions for transfers of their properties

25. Genesee County Land Bank Authority • Most active land bank in country • Responsible for more than 10,000 properties that have been foreclosed in Genesee County since 2002 • Demolished over 1,000 abandoned houses, conveyed “side-lots” to next-door homeowners • Rehabilitated hundreds of homes • Redeveloped historic buildings

26. State Partnership Banks Issues: Credit crunch, decreased small business lending, stifled economic activity, loss in jobs, etc.

27. State Partnership Banks “Move Your Money” - Small and medium sized banks generally loan at a higher rate and make a greater percentages of small business loans. For example:

28. Massachusetts Small Business Banking Partnership • Launched on May 5, 2011 by MA State Treasurer Steven Grossman • Invests state reserve funds into Massachusetts community banks with the understanding that the financial institutions will use the deposits to make new loans to small credit-worthy businesses to help them expand and create new jobs

29. Massachusetts Small Business Banking Partnership Source of Funds: • $100 million in state deposits under the control of the Treasurer • Obtain competitive interest rates on the Commonwealth’s deposits • Require that all funds are insured or collateralized to ensure that there is no risk to the taxpayer’s money

30. Massachusetts Small Business Banking Partnership Use of Funds: • Promote small business growth by providing creditworthy enterprises with greater access to loans • Provide capital support through cash deposits to banks with a strong record of small business lending • Banks commit to using funds to increase loans to creditworthy small businesses or for commercial loans of $500,000 or less • Banks make determinations of creditworthiness

31. Bank of North Dakota Selected Policies of the Bank of North Dakota (May 12, 1919): • To promote agriculture, commerce and industry. • To be helpful to and to assist in the development of state and national banks and other financial institutions and public corporations within the State and not, in any manner, to destroy or to be harmful to existing financial institutions. • To base credit upon financial responsibility and integrity, irrespective of party affiliation; to ignore politics and to recognize merit. • To mobilize the assets of the whole State and its entire financial worth into one large central bank . . . therebyenlarging its powers and opportunity for the development of the whole State.

32. Bank of North Dakota Source of Funds: • $2 million start-up capital from a bond issued in 1919 • Legislature determines amount of profits to send to general fund, the remaining becomes bank capital • North Dakota law grants the bank authority to receive deposits from any source • All funds of state departments and state agencies must be deposited with the Bank of North Dakota

33. Bank of North Dakota Deposit Base: • Local governments may deposit funds at the bank but are not required to do so • Bank allowed to receive deposits from any source, including the United States government, individuals, corporations, and other entities • At the end of 2010, 86% of deposits from state & local government and less than 3% from private individuals and businesses

34. Bank of North Dakota More on Deposits: • Not a member of the FDIC and its deposits are not FDIC-insured • All deposits are guaranteed by the full faith and credit of the State of North Dakota • North Dakota law exempts all deposits from state, county, and municipal taxes

35. Bank of North Dakota Use of Funds: • Involved in direct lending and participation loans, or loans made with another financial institution • Participant in secondary market for residential loans • Performs banker’s bank functions • Makes capital available to local banks via direct bank stock lending • Majority of lending is with in-state customers

36. Bank of North Dakota General Fund Profits: • In 1945, the state legislature began transferring profits from the Bank to the state's General Fund • Because the North Dakota Legislative Assembly meets every two years, the transfers in the budget are authorized over a biennial period • Since FY 1999-00, the legislature has authorized $308.7 million in transfers to the state's General Fund

37. THANK YOU For additional information on . . . Green Banks: Coalition for Green Capital (coalitionforgreencapital.com) Infrastructure Banks: CA Infrastructure & Economic Development Bank (ibank.ca.gov) Land Banks: Center for Community Progress (communityprogress.net) State Partnership Banks: Center for State Innovation (stateinnovation.org/statebanks.aspx)