March 25, 2016 - From the March, 2016 issue

VX2016’s ‘Where’s the Money’ Highlights California’s IBank and Green Bonds

As governments and utilities across the nation seek to implement green infrastructure and renewable energy projects that address climate change and enhance quality of life, they face a fundamental question: Where’s the money? Even amid a national crisis of aging infrastructure and limited funding, innovative ideas are being implemented that promise to dramatically increase access to capital and change the investment markets for energy efficiency and renewable energy. TPR presents edited excerpts of a VX2016 plenary on this topic, featuring CA Infrastructure Bank’s Teveia Barnes and CA State Treasurer John Chiang, moderated by Manatt, Phelps & Phillips partner and former California Treasurer Kathleen Brown

Teveia Barnes

“[The Treasurer’s Office has a] plethora of financial tools in our kits.” -State Treasurer John Chiang

Kathleen Brown: Green energy is a serious industry with major financial and industrial players. However, green energy’s ascendance as one of the 21st century’s major industries is fraught with challenges. Countering the threat of global climate change, increasing energy independence, and providing good jobs are all good reasons why green energy is important, but a variety of countervailing factors will make sustaining and growing the transition to a green economy difficult. These complications involve technology, finance, politics, and, quite simply, the low cost and convenience of today’s existing fossil fuel-based infrastructure. 

John Chiang: Nine years ago, I was in my first year as the State Controller, the chief fiscal officer for the State of California. One of the things I had identified when I was campaigning for the position was that I wanted to help finance greening the economy. Early on in that first year, I was California’s representative to Prince Charles’ P8, eight of the largest pension plans in the world, to figure out how we were going to finance the green economy, especially through institutional investors. We were trying to make that more widespread. It wasn’t generally accepted that institutional investors and others ought to be investing in a cleaner, greener economy. When I went back to Virginia years ago to talk about what we were doing with CalPERS and CalSTRS, at the most positive end of the spectrum, they were hesitant. There was actually some downright hostile opposition. I’m very glad that California, Prince Charles, and others said, “We can actually make this work.” 

Nine years ago, in regard to financing through the institutional investors and others, it was precision targeting. We didn’t think about taking those actions portfolio-wide. We were talking about: What do we do in regard to governance? How do we engage in regard to public equity? How do we invest properly in private equity? We took a bath in private equity because of what happened in the general markets. But that doesn’t mean we shouldn’t invest, and learn the lessons of what happened during the recession as to how we invest in those types of technologies and products—how you invest in the infrastructure and the hardware of growing companies. 

At the Treasurer’s Office, I sit on over a dozen financing authorities. We understand that the most productive economies have great creative destruction. That raises a whole different set of concerns, because we have to figure out how we address those who lose during creative destruction and lift them so that we don’t have growing income disparity. How do you have workforce development, and continue lifelong learning to make sure that individuals are competitive in the 21st  century?

We have to have a greater and deeper spectrum as to financing, because the needs are ever greater. Instead of strictly equity investments, one of the areas that I’m going to push very aggressively is green bonds. 

There’s an existing green bond market, but it’s not well defined. It lacks the substance of a well-developed market. Those who issue and those who want to invest are very concerned about the green bond market. My predecessor, terrific Treasurer Bill Lockyer, issued about $300 million worth of green bonds out of a $2.3 billion issuance a few years ago. Some of the discussion was concern about traditional institutional investors: Are we going to cannibalize that market? We want to make sure that we provide clarity as to what actually is a green and clean product across the spectrum. We want people interested in investing in specific projects to jump into that market to create a larger, more substantive pool. Right now, anybody can say their product is green. That doesn’t present the opportunities we want. 

From the financial perspective, we have to think about it from two rails. As the issuer, I want to make sure that we have yields as low as possible because I’m trying to protect the taxpayer’s pocketbook. However, we know the cost of certification for those green projects can be materially expensive. What do we do to change that market so we can get certification at lower prices, so that we can sell yields that are competitive to the taxpayers for the State of California? 

On the other hand, one of the issues with the size of the market is that there’s not sufficient liquidity. If you do not have sufficient liquidity, the yields that the state has to pay are greater to match the investor needs. 

That market needs to be fully developed. I’m going to spend the spring of this year working with socially responsible and socially motivated investors. I’m going to talk to the insurance companies, the environmental community, the labor community, and the business community about what this market needs to look like so that we can be successful.

Kathleen Brown: Can you define green bonds?

John Chiang: The definition will have to be developed. We want to make sure that, within each category, the guidelines are clear and these projects are clean, in order to create a standardized green bond market. 

We’re going to start nationally. There is an international green bond effort, but some leaders in the United States said that it would be great if the largest state took the lead as to the definition of what constitutes a green bond. Then we could tie into some of the international efforts currently occurring.

In regard to other projects, we were able to successfully lobby for, and the governor was supportive of, continuing the state’s sales tax exemptions for advanced transportation and alternative energy. We had hit the cap and so we were very concerned. We finance things from taco trucks to Tesla in this state, and we want to make sure that we can continue to innovate and be competitive. 

We want to replace the old car manufacturers and bring the EV and hydrogen-based automobile manufacturing into the State of California. We don’t want to lose that type of innovation. In the Treasurer’s Office, we have a plethora of financial tools in our kits—whether it’s loan loss reserve provisions, credit support programs, rebate programs, or private activity bonds. We have to continue to grow our tools, because we want to capture the myriad needs through the innovation that’s happening in clean and green energy.

Teveia Barnes: When I started with the IBank in 2013, the thing that was most prominent and glaring to stakeholders was that we had this phenomenal piece of legislation giving the IBank very broad authority to issue bonds and do any type of financing and guarantees—but it wasn’t being used. The folks who knew about it found it difficult to work with it. The IBank was this quiet jewel that no one knew about. 

In the past two and a half years, I’ve worked with the IBank Board to bring a renaissance to IBank in terms of our openness, financing, public private partnerships, and work with Treasurer Chiang, his staff, and administration. 

In the last year, we were able to create the California Lending for Energy and Environmental Needs (CLEEN) Center at IBank. We wanted it to be as broadly focused as possible. In the governor’s State of the State address in 2015, he talked about infrastructure, climate change, clean energy, and water. Heading up the state’s only very broad authority in terms of infrastructure and economic development, I talked to our staff about our very unique position to start to address the needs fairly quickly that the governor had identified—not because we don’t have oversight, but because our legislative authority is so broad. We need only to go to the board to get authority to start a new program. We were in a better position than many other financing agencies in the state to pull it together. So we did. 

We came out with a business plan that was reviewed by the public and the board. We came out with criteria. And we now have a functioning CLEEN Center at IBank where we’re able to finance clean energy and water projects that run the full gamut of what you can possibly imagine. Our projects can be as low as $500,000 to $30 million, or any larger amount approved by the board. 


IBank has been around since 1994. It was originally capitalized with $400 million of appropriations. Then in 2003, the state asked for $290 million back. At that point, IBank had to think about how it was going to survive and be sustainable. 

IBank issues its own bonds. Those bonds are supported by loans financings to the MUSH market—municipalities, universities, schools, and hospitals. The full faith and credit of IBank and the full faith and credit of the state are not at risk. It’s purely the principal and interest payments from the loans that support the bonds. It’s a state revolving fund. We have found that by financing in that manner and having very high ratings from the rating agencies that translate into lower costs for IBank, we are able to pass on that lower cost to our communities. 

Those seeking to meet California’s goals for greenhouse gas emissions, particularly cap-and-trade, are looking at how these funds can be used not just to address the main issue, but also to help disadvantaged communities. When we look at financing, we look first at the credit quality of the borrower (I’m a banker, I was a regulator, and I want this program to be sustainable—we’re not making grants), we look at whether they’re rated, and then we pass on the savings from the IBank’s financings to our borrowers. 

All of our borrowers in our infrastructure program start with a 15 percent discount off the rate they would ordinarily receive in the commercial market. Our CLEEN Center provides a 25 percent subsidy to our borrowers. Then we look at where the projects are located. For a disadvantaged community, or for one with very high energy needs in terms of GHG reductions, we provide additional subsidies, except that we don’t go below our cost of funds. We bring the benefits of the financing market, and the policies, insights, and safety and soundness measures from that environment, to a public environment. We have seen an increased demand in the use of IBank’s programs. We’ve issued bonds in 2014 and 2015, and we’re looking at another issue in 2016.

Kathleen Brown: There are two big issues. One is funding, and one is financing. They’re often confused. You’ve both referenced a number of different financing tools: green bonds, loans, and loan guarantees. Funding is the money to pay those back. Where are the revenues going to come from to pay back the loans to finance the development of the green infrastructure?

John Chiang: We know that the largest source of revenues is taxes. In California, the three largest sources of revenues are: income taxes, on which we depend disproportionately—slightly in excess of 69 percent of the governor’s budget is going to come from income taxes; sales tax and use taxes; and corporate taxes. If you go back 35 years, sales tax used to be the number one source of revenues for the State of California. Property taxes have an impact on the state budget; however, property taxes are a local revenue government source. We’ve created additional tools such as cap and trade, and sometimes we go to the ballot.

We’re going to have to think about what additional types of revenue streams we’re going to do. I’m very concerned about making sure that we maintain a certain pathway. The governor was very astute in bringing in a rainy day fund. But when you plan for the future, you always want to make sure that you build in a margin where your nominal growth and productivity—and you want to associate nominal growth and tax revenues—exceeds your baseline for expenses going into the future.

Kathleen Brown: Teveia, how do we know where to go if we have a great idea? Do we go to the IBank? Do we go to the Treasurer’s Office? Do we go to both? 

Teveia Barnes: When you come to the IBank, you’re actually coming to both of us. 

The IBank can do any type of infrastructure, clean energy, or economic development, but we do not have statutory authority to do any housing projects. For any other project besides housing, you can come to IBank. The treasurer is an active member of IBank’s board and has one vote. 

We don’t have money for grants. We look at projects in terms of their ability to repay. In addition to the excellent comments from Treasurer Chiang in terms of the revenue stream, we also work with local governments’ water districts. We have those revenue streams from special funds as well that we consider. But there aren’t that many revenue streams. 

The treasurer and IBank work very well together. We have similar programs. For example, we both have federal funds from the US Treasury for a guarantee program. The Treasurer’s Office, through the California Pollution Control Financing Authority, has the Capital Access program. IBank has a small business loan guarantee program and a small farm direct loan program.

John Chiang: The IBank is creative and thoughtful about project financing and how to structure projects. 

For example, during the recession, I was trying to promote a warehouse line of credit in the State of California to help Class B commercial buildings. Class A can take care of itself and for those below Class B, you’re not sure you want to refinance with the type of risk that’s involved. Everybody liked the idea, all the way up to President Obama’s administration, but California was in recession, so we couldn’t get it through the Legislature—rightfully so, because they were concerned about the financial stability of the state. 

Also, in government, it can be incredibly siloed. We were thinking: If we’re going to do a warehouse line of credit for energy efficiency, which is very important, we would have had to use the Board of Equalization or the Franchise Tax Board for the remittances of taxes. We were looking at the California Energy Commission as to evaluation of projects. What type of partnership, what type of bridge, would you build with the private sector? It was really extensive and involved, and it was slow. 

The new administration and Infrastructure Bank’s leadership have been absolutely terrific in trying to make sure that we move this project along.

If you have that type of idea, even though it may not fit perfectly, make sure that you think about the Infrastructure Bank and the Treasurer’s Office.


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