- Significant amount of money available for qualified projects—direct pay to public owners
- Renewable generation facilities (solar, wind)
- Storage/microgrids
- Biogas
- Substantive requirements and compliance
Transcription:
David Erdman (00:08):
Well, thanks everybody for coming back for this session on the Inflation Reduction Act and Direct Pay Tax Credits. Hopefully enough coffee to keep you awake through this. Hopefully less sweets to fill a tummy, but this is going to be a good discussion talking about the Inflation Reduction Act, that massive bill that passed in August of 2022 that address climate energy, healthcare, and some tax law changes. I have a great panel with me today going to have them introduce themselves and when they do introduce themselves, provide a little bit of a perspective as to how they're involved with the Inflation Reduction Act. So we'll start right here and work our way down the table.
Michael Gaughan (00:45):
Hey everyone. Michael Gaughan, Vermont Bond Bank. I'm the Executive Director. The Bond Bank is essentially Vermont's infrastructure bank. We were the first in the country and one of about 14 bond banks across the country. The IRA has presented a really interesting opportunity for us, given our service area of small rural communities to help distill this fairly complicated piece of legislation into tangible pieces of benefit for our communities. And so we'll talk a lot about elective pay, but we're also heavily involved with applications of the Greenhouse Gas Reduction Fund and its various iterations through both state government and national nonprofit lenders and then structuring pieces of debt around those opportunities to be plug and play for communities.
Devin Brennan (01:42):
Everyone. Devin Brennan from Orric. I met most of you a few minutes ago. I'm, as I said, a Bond Lawyer, not a tax lawyer, so why am I on the panel? Many of my clients are large utilities, transportation insurers and others who have a number of opportunities that have come up under the IRA. And so I work with our tax attorneys at ORIC to put together advice, direction and information about the impact of the IRA on their finance programs as well as opportunities that they might have to achieve tax credits under it.
David Eichenthal (02:19):
Great. Good afternoon everyone. I'm David Eichenthal. I'm a Senior Advisor for policy implementation at the Department of the Treasury. After the passage of the Inflation Reduction Act, secretary Yellen created a program office within treasury to sort of work with the Office of Tax Policy and the IRS in terms of actually getting the regulations out, but also importantly letting those different organizations, entities, corporations, and individuals who could benefit from the tax revisions know about it. So my focus is really on state and local governments. I'm not a bond lawyer, I'm not a tax lawyer, I'm not an accountant, but I did spend about 30 years working in and with state and local governments around the country.
Nikolai Sklaroff (03:10):
Good afternoon, I'm Nikolai Sklaroff, I'm the Capital Finance Director for the San Francisco Public Utilities Commission. I'm also a Commissioner on the California State Debt Investment Advisory Commission where I was nominated to represent California's cities on that body. And we are a relatively large issuer. We have four rated entities. We have about $11 billion of debt financing over the next 10 years to do, and this is an important tool that we are looking forward to using to reduce the impact of all of that capital investment on our rate payers.
David Erdman (04:02):
And last and least important, I'm David Erdman. I'm with Baker Tilly Municipal Advisors. I've been there two years before. That was a long time, a government official for the state of Wisconsin. My role in a municipal advisor for the Inflation Reduction Act is helping with financings related to those projects. But more important, our firm is uniquely situated in the sense that we have an energy industry team and a tax consulting team, so we are able to package energy tax and municipal advising together in order to help our clients out with the Inflation reduction Act. So I do have some moderator comments I was going to provide, but I think they're all going to be answers you're going to hear later from the panel, so I'm going to hold my comments and I'll inject them later if you guys don't bring 'em up. So I think we'll get to going.
(04:44):
We have just an exchange here. I'm going to ask some questions. Everyone's going to comment on 'em, provide some input. We are saving some time at the end for some questions and answers. I think so far there's been one question from the audience, so we're going to change that with this panel. Hopefully make it five questions from the audience. So start thinking about your questions now or I will call on people, right? Ben? Yeah. Okay. The IRA August, 2022 just celebrated second anniversary generally speaking, and it's kind of staying away from the mechanics of the pre-registration and the actual filing processes. Just want the panelists just to kind of just talk what has worked well and what hasn't worked well for the IRA and Nikolai. We'll start with you.
Nikolai Sklaroff (05:29):
First of all, I'm a Philadelphia born, started my career here in Philadelphia and I'm really excited to be back here. But again, I am from California. For those of you who don't know the San Francisco Public Utilities Commission, it's going to be helpful to understand what we do to understand why we're so excited about what's been working in this program. For us. Our operations begin up in Yosemite National Park where we derive some of the cleanest drinking water to serve 2.7 million people around the Bay Area. We also use that water that's gravity fed down through seven counties to San Francisco to produce renewable hydroelectric energy. We have a third entity that is also delivering clean energy to residents and businesses in San Francisco. We're investing heavily in solar projects. We currently deliver about 80% of the power that's consumed in San Francisco. We deliver it through PG & E's distribution system.
(06:44):
We are in a very public process to potentially acquire that distribution system as well. And finally, we have wastewater services. Now, let me talk about what's working so great about this program. We have already been the beneficiary from the federal government of some terrific programs. W you in particular SRF. What is really unique about this program for a tax exempt entities to be able to benefit from tax credits and more importantly, to be able to benefit from them by, right, we're not in competition with our peers, we just need to make sure that we qualify for these. So that's the first thing. Second thing is that this program implemented a retroactive element. In other words, beginning with tax years starting after December 31st, 2022 projects could take advantage of this program. What that meant for an entity like ours that is already in the business of delivering clean energy is that we were able to immediately start taking advantage of this program, setting up the infrastructure, setting up the team to put it into place to do bigger things in the future. We have third, we've got projects that are ongoing right now for those retroactive and ongoing projects. This has found money that will allow us to deliver even more clean energy.
(08:20):
Fourth, we've got future projects that have already gotten started, but we've been able to make modifications based on the availability of these funds. It's changed the way we're procuring some projects, changing the way we're financing projects, and we're excited about that. But the part of it that I'm most excited about is that we've been using this as an opportunity not just to teach our finance staff about the IRA tax credits. We've also been using it as an opportunity to teach our project managers, our engineers about the availability of this because this is really game-changing legislation. Again, I mentioned we have a plan for 11 billion dollars of debt and most of that is advantaged financing, which means we're reducing our borrowing costs by 30%, which is great, but the opportunity to potentially return 30, 40, 50% of the actual project costs, that's game changing and having the opportunity to give our engineers the chance to rethink how they fundamentally deliver a project, what is possible when that much money is potentially available. What's been most exciting for me,
David Erdman (09:47):
Michael, for you, what generally has worked well? What hasn't worked well?
Michael Gaughan (09:51):
Yeah, I think that what has worked really well with the IRA overall and though even though it was passed in 2022 and really talking about projects that are emerging, despite that fact, the speed of the whole thing I think has been very encouraging and a compliment to David's work. The guidelines around the elective pay have been very transparent and there's been an industry GFOA leader in that along with some others that have provided really good information about how to access them and what the process will look like. Similarly, I talked about the greenhouse gas reduction fund. The main part of that that is of interest to a bond bank or a rele is the $14 billion NCIF award, and that has gone really quickly as well. That has been deployed by EPA to nonprofit lenders and is now in the ecosphere where folks like us can access it.
(10:50):
And so it seems a little slow, but in the speed of government, I've been really, really impressed. Now, the problem obviously is that you need projects to incorporate that and you need the capacity to do it. And I was just at a meeting this morning and at every level of government capacity remains an issue. And so how do we sort of simplify that and make it palatable to small communities is a big part of the question. But the speed has been kind of extraordinary in some ways, and at least as it relates to the NCIF, our counterparty will be a nonprofit lender who at least presumably will be quicker to work with than governmental partners because of things largely outside their control.
David Erdman (11:35):
Devin,
Devin Brennan (11:36):
From my perspective, I think I'm going to echo a lot of what Nikolai and Michael said. The fundamental thing that this did was it put public agencies on an almost level playing field with private developers of significant renewable energy projects. And why do I say almost? I say almost because public agencies still don't get some of the tax goodies like depreciation and other aspects that the private developers will take advantage of. But we spent a long time in the mid 20 teens working out structures that would allow a public agency and a third party concessionaire to try and take advantage of both tax exempt financing and the investment tax credit that was available to private parties. And this just completely wiped that away, made this much less complicated, made it possible to do right away. The second thing that does is that really opens up a lot of flexibility for public agencies around their contracting for these types of projects and energy.
(12:33):
It's not just a sort of standard PPA arrangement where the private entity takes tax ownership, takes all the depreciation and the tax credits, and the public agency pays through a some other, ongoing fee through the PPA. There are now multiple ways of getting these done and that extends from public ownership all the way to partnerships that may be possible between the public agency and the private parties delivering the renewable energy. So it really, that financial footing made possible a lot of contractual arrangements that will potentially be rolled out and you don't need to pursue more exotic structuring devices to get to those. In terms of some of the things that are still in the ramp up phase, my own personal experience, there was a lot of interest in the IRA, particularly among utilities and other large issuers. There were some among smaller cities or counties or others who had particular projects that they thought might qualify and were interested in doing the analysis for that.
(13:40):
And from that perspective, the small projects for the smaller counties who either weren't issuers of debt or just sort hadn't gotten there yet, they still haven't gotten moving forward on that once they figured out what the process was going to be. And so I think there's a lot of opportunity for creating some sort of pools or using infrastructure. Banks are doing other regional sort of solutions to get some of these smaller entities who otherwise maybe don't have the capacity internally to manage this. I mean, these are, again, even public entities. These are entities that haven't filed a tax return before. They might've filed to 80 30 eights, they have never filed a tax return, they haven't done a cost segregation analysis. They don't know what goes into that. And so building that capacity in a way that's regional, I think is a really huge potential opportunity still.
David Eichenthal (14:31):
Yeah, first of all, thanks to those who've cited the good work of my colleagues at treasury in the Office of Tax policy and also colleagues at the IRS. The pace of the guidance that's been issued across all of the tax credits I think has been pretty remarkable. And others may know this better than I do, but my understanding is that the transparency that Michael talked about with regard to the guidance around elective pay and really a lot of the guidance around the tax credits has sort of been extraordinary. My understanding is that the IRS doesn't always issue very, very lengthy and detailed FAQs for every new tax provision. So I think there's been a deliberate effort to do that well because obviously the administration is really interested in achieving the goal of incentivizing activity in this area. The other thing that I'll say that I think has gone really well and sort of pulling back a little bit is I think overall the tax credits are working well, not just for government entities, not just for nonprofit entities, but I think there's been a real strong uptake by the private sector in terms of announced investments in clean energy and clean energy manufacturing.
(15:52):
We know that there's been real uptake among individual consumers and households around those credit provisions. From the direct pay perspective though, the thing that I would say that I've been really heartened by is over the course of the last year, I think the field is moving and moving with a really positive trajectory. Nicola, and I think we were at A-G-F-O-A meeting in March in Orlando, and I had talked at one in DC and probably November of last year. And if you did sort of a survey of local government finance directors in October of 2023, it would be a pretty small minority who knew what you were talking about when you were talking about elective pay or direct pay. That's shifted, right?
(16:43):
To Michael's point, not everybody has a project to start building tomorrow and file for in the next year or so, but I think we've sort of seen real progress along this continuum from beginning to understand to planning to actually executing projects and then filing for it. Now I think, well, I said this to a group of higher ed institutions actually here locally in the Philadelphia area. I think that's going to continue to grow and maybe even grow exponentially over the next year or so. I don't think it's sort of a gradual upward trajectory. I think particularly as some entities start getting checks, actually getting cash in the door, that's going to be a game changer in terms of the pace with which other applicable entities are pursuing this.
Michael Gaughan (17:38):
Just a quick comment on that. So I've been extremely impressed with the speed, but there are some headwinds, and again, my perspective is that of rural communities, so on the heavy vehicle EVs, they bought those diesel trucks, they run 'em absolutely to the ground. We credibly finance those for 20 years because they last a really long time and they're taken care of. So this is a very short window in terms of the IRA. So will that machinery be up for at the end of its useful life during that time period? The other thing that is a headwind for us, and I think nationally to some degree is the municipal. I think where we see the biggest opportunity for cost savings for municipalities is on solar installations. It's really easy to do relatively, it makes sense. They have space in which to install them. However, they are really using the residential solar industry for the most part to do those installations.
(18:34):
And there have been a lot of contractions in the residential solar industry and getting to the appropriate scale to have those installers interested in these projects is increasing the problem. One of the major installers in Vermont filed for bankruptcy, they're sort of a regional entity. And so that's one of the reasons we've been trying to work on a mousetrap to facilitate this, where some sort of centralized entity could do the procurement to get to scale, could do the debt financing with all of our usual public finance tools, and then a project finance structure could sort of parcel out the risk of O&M and tax compliance and things of the like. But there are some traps to run on that and figuring out how we can make that structure work under the safe harbors.
David Erdman (19:17):
And related to that, I think the last year we've seen some great strides with the regulations coming out and people starting to apply for the tax credits. But the cards that we were dealt, I mean the IRA is a complex piece of legislation, hundreds of programs, and you mentioned a good about the mid-sized communities. States and large cities have staff that can look for projects are out there for qualifying projects. It's these smaller communities where it requires a lot of communications between their advisor, their underwriters, their councils, their energy providers, just to make sure they're aware of what provisions are out there. And my fear is that there are some tax credits that are going to slide by because people just didn't realize they had projects that could qualify it for it. So again, not the fault on anyone, it's just the depth and the complexity of the legislation that was passed.
David Eichenthal (20:05):
I think we're going to talk more about capacity and technical assistance later. I think I completely agree, it's a big topic. I'm beginning to become convinced that as part of that continuum, we're starting to pick up some of those places at least from an awareness perspective. And I think it's because of really good work that other states have started to do in terms of trying to think about vehicles like the ones that Michael's talking about, but from a financing perspective, but also from a technical assistance perspective.
David Erdman (20:36):
So that was the first question about just generally what works, what doesn't work just now I want the panelists to kind of nail down a little bit further and maybe look at a program or a provision underneath the IRA that really excites them. And it might be a program that isn't a straightforward tax credit, a direct pay tax credit might be a different program or it could be a provision related to the direct pay tax credit that they're really excited about and how it benefits them as an issuer, as an advisor or as a government official. It may be a program that people aren't aware of. So Michael, ask you to start with this. I think you've done some good work in Vermont.
Michael Gaughan (21:08):
So outside of the elective pay, I've mentioned a couple times we're very excited about the, I think I believe it's the National Clean Investment Fund, NCIF, hopefully I got that right. But part of the Greenhouse Gas reduction fund, I sort of view this, that portion is 14 billion, which kind of seems like a drop in the bucket compared to our 400 billion a year issuance in the market. But if you compare that to say SRF appropriations, which I think are about 3 billion annually, then it starts to take on a meaningful number. And I see it in the municipal space. I see municipal issuers as being particularly adept at working with this because it will be subject to CFR 200 and uniform guidance. And whereas private entities as potential sub-recipients are going to be very nervous about that, public entities have an existing base of knowledge on that subject.
(22:02):
And it really lends itself well towards the structure that the Vermont Bond bank is super familiar with and other pool loan issuers are familiar with in terms of coming in to provide some of that first loss capital at a low rate and then create a more conventional structure around that with some sort of senior financing on top of that, that at the end of the day can get to a low cost of capital. Because while many projects are tax supported, particularly in schools, which is where some of the recipients of that NCIF funds are focused, they haven't done the projects. And nationally we are under invested by one number out there is 85 billion a year on school facilities. And so we have in Vermont and many other places, school facilities were left out of the IJ build back better did not pass. And so there are huge facility needs around schools and school modernization and 21st century work environments and how do you lower that cost?
(23:09):
So those bonds actually pass. We've passed maybe one out of every 15 bond issuances that comes to voters. And so we've got to lower the cost and there's a huge opportunity to make large advances in some of the goals of the IRA through institutional applications. And so I think there's a lot of appetite from those recipients of NCIF to work with public issuers to fit themselves into a structure that makes sense in the municipal market. And there's a playbook for, and we are anticipating that. I'll give a shout out to our bond council, Megan Burke at mince who's worked very closely with me in thinking about how we adopt some of our emerging programs to accommodate this new source of capital down the road.
David Erdman (23:55):
Nikolai.
Nikolai Sklaroff (23:57):
So you've heard several of the speakers talk about the breadth of this program. And I think that for me is what is so exciting, and it's just how audacious this program is and how many different tax credits there are under the program, but more importantly, how many people can benefit. I already explained we have two power entities as part of our four entities, but we have two other entities that aren't in the power business. And yet our largest project that will benefit from this program is in one of those and the opportunities in those other entities. And so I think that's what I'm most excited about is the fact that all of our entities across the country, you could have set up legislation that specifically targeted private sector power generators or power generators more broadly, but it's a fact that this is such an inclusive scope.
(25:04):
So one of the projects that we're pursuing is we have a multi-billion dollar bio gas project that is underway already. And we are developing towers that will digest all of the sewer water and storm water produce on the eastern slopes of San Francisco before it goes into the San Francisco Bay. And those digesters will not only produce clean water before it goes back into the bay and also high grade fertilizer, but the most important product will be high grade methane gas that can be injected right back into the pipeline and then deliver to other city entities. And that is an example of how even non-traditional power participants potentially can benefit from this program. And that's the exciting thing is to think about, for example, our water enterprise. We are already putting solar panels on top of covered reservoirs, but now because of the game changing aspect of this program, we can begin to contemplate well, are there other places where we have hard to find hard to come by real estate that could accommodate solar panels? Well, our water enterprises in California have lots of land watershed, the reservoirs themselves. Are there ways that panels could be used to mitigate the evaporation that is such a problem for water entities in California while also producing energy. So it's that kind of creativity. And I'm not an engineer. I'm hoping there are better ideas out there, but it's that kind of innovation that I'm hoping that we'll begin to continue to see for the next 10 years of this program.
Devin Brennan (27:24):
And I think Nikolai touched on some of the things that I find exciting too, and it really is the breadth. You're going to hear a lot of talk about the direct pay tax credits for investment tax credit purposes and production tax credit purposes on energy generating facilities. The breadth of the act though includes the addition of microgrids and the addition of biogas property qualified biogas property of the type that Nikolai just mentioned. And those additions really brought in a number of different municipal utilities and municipal interests that wouldn't have otherwise been there had it been just the pure energy focus. And the one issue that I would just flag there is that in the most pure form, those credits and that support sunsets at the end of 2024 for eligibility purposes. And so there is this sense that I have that the IRA started quite quickly has gotten going quite quickly and isn't slowing down.
(28:27):
So there are things that are coming online including additional requirements over domestic content and other types of requirements for projects as well as things that are going to be sunset over time that folks need to pay attention to. The only other one that I wanted to mention too was the electric vehicle subsidies and the electric vehicle charging stations, which they allowed 7,500 per vehicle and 40,000 for the large vehicle replacements, and they changed the charging station subsidies from 30,000 per location to a hundred thousand per unit. And so these sorts of big initiatives are all packed into there.
David Erdman (29:08):
Okay, let's get a little bit more technical and let's talk about the actual dollars getting the money into your hands. This is the first calendar year in which you can actually make those filings. I just want the panelists maybe to pass on some tips that they've learned, some lessons they've learned through the pre-registration process or the filing process or anything related to that that needed to get filed and completed in order to actually receive the funds in hand. And David, this is up your alley. You control the checkbook, so interested to hear what you got to say.
David Eichenthal (29:35):
Yeah, I wish I controlled the checkbook, but I think that generally speaking, pre-filing registration has gone rather well. Again, it's an area where the IR, we actually did some beta testing with a number of local government entities to not sort of spring the portal on everybody without some local governments, without some nonprofits actually seeing it. When I was told that there was a 73 page user guide for the pre-filing registration portal, I got a little nervous, but every feedback that I've heard about it is that it's actually great. It really takes you through step by step, step-by-step. It really does effectively answer every question. There are still some places that have had struggles with pre-filing registration. Again, I think the IRS has sort of taken extraordinary steps of doing office hours around questions around the pre-filing registration portal. We're now starting to hear about entities that have either already filed or are getting ready to file.
(30:45):
Again, I think it's a new process for all of these entities. I always tell local government officials if when I was city finance office or if somebody had walked into my office and said, I've got a great tax credit program for you. I'd say That's very nice. Why are you here? I don't pay any taxes. So that this is a very new thing. But again, I think most entities are going through well. I will tell you the one thing that we've heard about, it's less on the government side with the actual filing is government entities are allowed to file using paper filings. Nonprofits are actually required to file electronically.
(31:29):
There are not enough electronic filing services particularly to help some of the smaller nonprofits. It's another sort of technical assistance capacity issue that we could talk about. But I think the really important thing is what we're learning is it pays to get started even if you're getting started small. So a number of local governments have said to me, we just bought a couple of EVs, is it worth it for us to do this? And the answer is, yes, you've already paid for it. Getting some money back would be a good thing. But also actually going through the pre-filing registration process, even if it's just for a couple of EVs and actually filing a tax return and figuring out what your tax year is for the first time is worthwhile.
David Erdman (32:21):
David, anything you want to add from a council perspective? Yeah,
Devin Brennan (32:23):
So something actually, David mentioned right at the end there, there's this dynamic that's come because the IRA really it looks backwards as well as forwards. And there are existing projects that are underway that could be qualified for subsidies. And so the issuers look back and see what have I been doing that's qualified? How can I take advantage of this as well as looking forward, seeing what am I going to be doing? How can I maybe accelerate that? How can I change what I'm doing to qualify for the prevailing wage and the apprenticeship requirements? How can I adjust my future capital on expenditures to do it? But in the lookback, one thing that issuers should be aware of is that the elective pay, the direct pay tax credits are only available for projects that are coming online after December 31 2022. And the filing that's required has to be a tax year that includes 2023.
(33:20):
And so if you have projects that went online January 1 to June 30th, which is the typical end of a fiscal year for a lot of municipal entities, you have to decide what tax year you're going to adopt as part of that process. And that tax year doesn't have to correspond with your fiscal year. You can choose an annual tax year and if you have projects in that particular timeframe that actually may guide your choice on that point, but the filing, then the filing is due five months after the 15th day of the fifth month after the end of your tax year. And so that's May 15th, 2024 for a 2023 calendar year. There is an automatic extension that's paperless, that's available that gets you to November. But this kind of look back and the choice that you make about your tax year and whether you're going to change that tax year in the future to make some of the accounting processes or reconciliation processes for your own fiscal tax year if that's what you're on later, those are all things that need to be considered as you're walking into this process right up front and really right now given where we're at in the year.
(34:32):
And then the other thing that I'd add is just the interplay between direct pay tax credits and tax exempt financing. So if you finance the facilities that you're taking tax credits for, that presents an immediate 15% haircut off of the direct pay tax credit that you're eligible for. But the other issue that's sort of the more my inner tax layer, which I'm going to not comes out, is that how do you allocate financing versus equity that's gone into a project? So kind of imagine that you've got a university that's building a parking lot and plans to suspend a solar array above that parking lot to generate PV electricity. And the projects are clearly quite separate from both contracting process and a tracking and allocation of funds. The tax exempt rules provide quite clearly a way that that allocation can be done, and you're pretty certain about how that happens.
(35:33):
And on the tax credit side, it's not yet clear how that kind of all hangs together and whether the allocation provisions will be the same and if they are, how they apply. And so some of the ways in which the IRA touches on other sort of typical aspects that you think about on the legal side of these projects is still yet to play out for them. And that's obviously a challenge. It's also fun for us, but as the attorneys, but it is a challenge as you put together these programs and figure out what your capital programs going to look like with these projects.
David Erdman (36:13):
And now from our issuers Nikolai,
Nikolai Sklaroff (36:17):
So as both a GFO, A debt committee member and a C-DAC commissioner, I spent a lot of my time trying to help teach my fellow issuers. And my three pieces of advice relative to all this is first, assemble the right team. Number two, educate your internal team, and third, be careful about your assumptions. And I'll confess here, we have a large portfolio of Build America bonds. Not withstanding how many people in the room send proposals to refund those, but I think we made some assumptions about how easy this would be based on our experience with filing tax returns for our Babs. And we quickly were educated by our team how this is different. So the most important thing for us was getting that team on board. And what we decided is we have five municipal advisors who are tasked with various parts of our four entities programs, but we decided we wanted to have one municipal advisor take a comprehensive look at these tax credits. We engage PFM financial advisors to assist us with that in a similar way, while we have different bond council who work with us on all of our programs, we wanted one overarching tax counsel to be able to help us with our tax credit program. And we engaged Devin and his peers at ORIC for that.
(38:01):
And as I say, with Build America Bonds, we normally simply have our tax attorneys prepare those filings for us for this program, we needed to also engage an accounting firm in order to do the cost allocations that Devin referred to. We also hired them to help us actually mechanically take care of the registrations and filings as well. And one of the important considerations, particularly foreign entity, we are technically part of the city and county of San Francisco while we serve a broader community and we have a very strict procurement process. So we found one of our accountants who had existing contract authority to assist us with that, and that's MGO. And then finally on some of the more complex projects, we actually have our tax counsel for the program working closely with the tax council on those bond programs and in some cases helping us deliver joint memos to help project teams understand how do we protect the tax exemption on our bonds, which is a red line for us, and how do we optimize the tax credits as well. So those are the aspects that we've learned through our experience.
Michael Gaughan (39:42):
Okay. Is the SEC still here because I'm going to give structuring advice, but I'm an issuer, so I guess it doesn't matter so much. The number one issue that people are worried about is the time to receive the credit back. It's interesting, we have a medium-sized community in Vermont is 1800 people, but when we go out and we talk to the rating agencies or anybody else, the things that we're observing are the same things that are being observed nationally. So we had a little stakeholder group recently meet and talk about this topic and everyone, if they have the capacity to do it, which is not something to be taken for granted of as ARPA winds down and all those reporting requirements sort of sunset is how long it's going to take to get the payment. Just as a for instance, the context in which people are working is we have some deep subsidy bonds from the Ara era Q scs and REBs, and we're still waiting on two of our subsidy payments from our June 1st payment and we filed electronically and we took it over ourselves.
(40:44):
And this is the story now since COVID started. And so that time period from which you place the project in service and receive that is a direct impact on the value of the credit itself. And so that has to be taken into account. And so we are a lender and what we're very focused on is taxable flexible sources of capital that can be repaid at any time without penalty taxable. So we avoid the haircut and reduce the TVM discount on receiving that elective pay and flexible because you have no idea when that elective pay credit is coming. And so we're fortunate in that we found a really good taxable source, but at some point we're going to be oversubscribed on that source and we're going to have to go out and find another source. And so I think as bankers and as finance people, this is the analysis you're going to have to do is to say, where are ratios right now relative to the haircut and relative to taxable alternatives and what is the cost of an X call taking it from the housing sector and putting into the more conventional governmental sector and weighing all those things together and coming up with a plan of finance that makes sense for your borrowers.
(42:03):
So that's my perspective on the things we need to be thinking about to make this work.
Devin Brennan (42:09):
Let me just jump in there. I actually wanted to talk about that too is that there's really a distinction between the private and the public on this one too, just like there is with depreciation, whereas the private investor on the tax equity side knows that they're going to get the tax credit in their next quarterly estimated tax payment. The payment timing for issuers who are taking the tax credit is not as certain, and therefore you can't present value it in the same way. You can't be as certain about it in structuring financing around it. And so there really is a difference there in the way in which you enjoy that benefit and how you look at it.
David Eichenthal (42:45):
Just one quick thing on this point, I think that's right. I think we're going to know more when entities actually start getting checks and we actually have some data about the turnaround. One of the things that we did do in the issuance of the final guidelines on elective pay is sort of say to the IRS, you have to give some level of guidance. So is it two days, two weeks, two months, two years or even longer? And at least as a starting point with what we did in the FAQs around elective pay is say it's reasonable to assume 45 days after the filing period ends, whether that happens, whether that's applicable for some of the government entities that are doing paper filing versus electronic filing. We're going to find out. But it's absolutely an important question.
David Erdman (43:36):
And I guess bouncing off what Michael already started, we have a full room of registered licensed advisors, councils, investment bankers. How can this group help issuers and others go through this process? And David, why don't we start with you on that question?
David Eichenthal (43:54):
Yeah, I mean I want to put exclamation points behind everything that's been said about the capacity and technical assistance issues for smaller government entities and for nonprofits. In March, secretary Yellen gave a speech about place-based economic development, and one of the things she pledged to do was to go out with treasury affirmatively going out to 150 cities around the country that have had population loss, that have poverty rates higher than 20% with a population of 20,000 or more. Realizing that's not going to cover every economically challenged or capacity stress place, but it's a start and we've been doing that. I think we've now reached out to over half of the one 50 by the way. We're happy to talk to anybody that's not on that list. We're going out to more rural parts of the country because you go to a place like Vermont, I assume New Mexico, I know the 20,000 and up number when you're looking at economically challenged places doesn't get you to the places you want to go.
(45:03):
So treasury's trying to do that and create that sort of capacity and technical assistance where this room could be particularly helpful. And where I think we've seen some of the most promising activity, as I said, is the work that's really being done at the state level in some places. I think I spent a lot of time, I guess about eight years ago working on an initiative focused on economically challenged cities around the country. And quite honestly, state governments were not heavily engaged in working with those communities in a meaningful way. It was disappointing to me, but it was the reality that is not the case now, right? I think there has been basically muscle built in a lot of state government entities, particularly because of the infrastructure law where there was a recognition that yes, it's great if my state government gets dollars, but it's also good if all the local government entities in my jurisdiction get dollars.
(46:08):
We are seeing this in Minnesota, which has gone out and said, we're going to hire a tax advisor for the state to get direct pay, but we're going to make that available to all of our local government entities. We're seeing that in a big way here in Pennsylvania where the commonwealth has talked a lot about creating sort of a service bureau with the notion that not every school district in the entire Commonwealth of Pennsylvania needs to go out and hire their own tax expertise to figure it out that the state could play this important intervening role. We're seeing it with some of the green banks who are focusing hard on some of the entities both through NCIF and other provisions of the Greenhouse Gas Reduction Fund where states are sort of seeing that there's this bridge financing need and therefore there's an opportunity. So I guess what I would say is I think to the extent that you're engaging with state governments that this is really a critical area for them to be focused on, it's great that they're focusing on how they could maximize the value, the tax benefits under the IRA for the state government entity, but it's also really important for the success of the bill and for the success of these places that they're engaged around thinking about what types of capacity, what types of TA do these smaller, more economically challenged places lead need.
(47:39):
The last thing I'll say is we're not sitting on our hands at treasury. We're actually trying to convene a lot of different entities that are thinking about both capacity building and technical assistance so that we could at least start to map out what places are already doing and where the biggest gaps are.
David Erdman (47:59):
Nikolai, where can you do some help from this room?
Nikolai Sklaroff (48:01):
Yep. I think one of the most important things to understand about this legislation, it's not simply designed to reward people to do the same things. It's designed to make changes. And in order for that to really happen, I think all of us need to work to continue to streamline this process. I think those of us who have entered this early recognize that we would be working with teams who hadn't had experience with this legislation. By definition it's new legislation, and that there would be a learning process and an expense associated with that process. And in addition, we've greatly appreciated the FAQs that have come from treasury and they've been helpful throughout, but because they have been coming while we were going through this process, some of our colleagues at GFOA have called it a little bit like building the wings on an airplane while you're flying because we've been making adjustments as we go along.
(49:17):
So my hope is that all of us together streamline this process. We had to invest with our team on developing questionnaires of what do we actually need from the project teams to be able to go forward with these processes. What we need to be able to do is not turn this into a burden where we're constantly asking for new and new information from the project teams. If we can streamline that as entities as we get into the complex projects, that's even more the case. I think from this group here, I think it's the same thing that we would ask for all of our transactions, simply show us the same things that you want to talk about, really help to deliver solutions to our problems, and that is one of the problems that we're facing.
David Erdman (50:25):
Michael, anything else you want to add?
Michael Gaughan (50:28):
Yeah, I think the last thing I would say to advocate from this group and it's my horse, is to advocate for bond banks. There's so many capacity issues that exist and bond banks can play a really significant role in providing efficiency to accessing capital. And by the way, efficiency for the broker dealer community, which historically has been a little hesitant to embrace them because of the potential for limited deal flow, but bankers are raging. The workforce issues that are faced at the governmental issue are also faced in the private sector. And so what do you get with the bond bank? You get scale, larger deal sizes, easier underwriting in some respects and liquidity and oftentimes a higher rating. So I think for all those reasons and all the things we just discussed considering bond banks and the way that they can channel deal flow and reduce costs in terms of deal origination and also reduce risk in terms of your coverage are important considerations. So go bond banks.
David Erdman (51:42):
We're running a little bit short on time. I'm going to have one final question and we'll open up for those five questions from the audience. The future looking forward, the IRA is a 10 year program. We've got two years GFR belts asking the panelists just any concerns they have out there as to what could impact the future of the IRA and we'll start with Devin.
Devin Brennan (52:02):
Yeah, again, I think the feeling right now is that we've been shot out of a cannon or flying and we're still getting the sense of what we're doing and some of the things are already expiring. So watching what's expiring, watching how the domestic content and other adders and in some cases subtractors change over time and trying to get out ahead of that with your projects are really important for the future to continue to grow. I think the other thing that's big that I've heard from issuers is they feel concerned given the history of the Build America bonds and some of the things that they're going through currently right now with the extraordinary optional redemptions and other things that are going on in the market with those in the sequestration and the nature of a tax credit is not like the nature of issuing sort of tax exempt bonds or getting a grant more direct, sort of if you get a grant, you know that you've applied, you've been approved, and you get the grant with tax credits, you do the project, you submit the return, and then you hope that it's granted.
(53:07):
And if it is granted that that's actually sort of a judgment passed on it and the uncertainty that I've heard issuers express over, that would be great if there's language in the act that intends to gross up the tax credit if sequestration either the pay or maybe the other type sort of hit it, but knowing what maybe treasury's view is on potential sequestration and how that works and trying to figure out if there is any sort of potential long-term issue there. It certainly figured into conversations I've had with issuers about whether they choose the ITC or the PTC given that the PTC comes in over time and the ITC obviously comes in in the year that they file.
David Erdman (53:57):
Nikolai, any concerns from you for the future of the IRA?
Nikolai Sklaroff (53:59):
Yeah, two things. The way this legislation's been designed is to motivate people to accelerate their work and over time certain provisions become more restrictive. In addition, I'll be the one who says it out loud. One of our concerns is that as we're planning longer term projects, there is some uncertainty about what will be going on in Washington DC And so because of the element that Devin just alluded to, we don't have a piece of paper that says yes, like our WFI loans, that we have this commitment. It makes it difficult. For example, our budget, people want to begin putting these dollars into their plans. Those are our concerns and I think we're going to be taking a very conservative approach to that forward planning.
David Erdman (55:09):
David?
David Eichenthal (55:10):
Yeah, I gave up political prognostication a long time ago in terms of what happens to the bill, what happens to provisions going forward, what Congress does with the president does. I think Devin talked about sort of the plus up or the gross up around sequestration. That was a very deliberate thing in the legislation to, in trying to address that concern. I mean, I think that, and I understand the risk around uncertainty. Nobody hates anything more than uncertainty in just about anything. I've sometimes took to people that I assume that when the tax good was first enacted in people from treasury like me started going around to budget directors and saying, let me tell you about tax exempt financing. The finance directors were all saying, no, this can't possibly be true. So I think what's going to happen is over time, projects are going to go forward, people are going to get checks, and there's going to be a steady trajectory of acceptance of the power behind direct pay. I mean, I guess the concern that I have about the future goes back to what I've said and what other people have said that this not be a multi-tier system where there are places that have the capacity and the technical skills to move forward, but that there are places left behind. I think that doesn't achieve the objectives in terms of legislation, and I think it's sort of damaging to the underlying effort here.
Michael Gaughan (56:49):
Yeah, I think small picture, my concern is that it's not long enough. Eight years is a blink of the eye in the lifetime of a capital asset, and I'm just worried we might miss the timing a little bit for communities that don't have that many capital assets. Big picture, I'm worried it's the wrong innovation as it pertains to climate. We've experienced two major floods the past two summers, and we are by some accounts at Climate Haven, and so our focus on financing innovation is going to be around resilience and adaptation rather than the things that save money at the margin.
David Erdman (57:27):
Yeah. All good answers. And again, funding. In the last panel, Leslie talked about the tax discussions coming up from the 4.1 trillion cost and everything's on the table. I think this is going to be on the table and what Washington showed us with sequestration and taking away tax to advance refundings, it's not a good trend line for governments and issuers. So with that, I said I needed five questions from the audience. We ran a little bit over here, so I still need three questions from the audience. So where's question number one that not seeing any questions from the audience? How about question number two?
Nikolai Sklaroff (58:10):
I didn't peg this as a shy audience.
David Erdman (58:12):
We may have exhausted them. We'll go for question three. Okay, well next panel, you get 10 questions for the next panel. Join me in thanking the panelists for excellent discussion.