Qualified Energy Conservation Bonds ("QECBs")

Overview – (1) What are the benefits to the user?, (2) QECB Initial Allocation List by County, City, and to the Illinois Finance Authority, (3) What projects can prospectively qualify?, and (4) What are the next steps?:

  1. What are the benefits of Qualified Energy Conservation Bonds to the prospective user? QECB’s are a taxable tax credit bond. The governmental issuer, or private activity borrower, of the QECB financing is eligible for a 70% rebate on the interest paid to the bondholders.

    Example: If a municipality were to issue a $4.0MM QECB for governmental purposes with a 5.0% interest rate, the municipality would pay approximately $200,000 of taxable interest to the bondholder(s) annually. As a result of the QECB financing structure, the municipality would be eligible to receive a check rebating 70% of the $200,000 interest payment (or $140,000) from the U.S. Treasury Department.
  2. U.S. Treasury Department QECB Allocations. Illinois received a statewide QECB volume cap allocation of $133,846,000. This bonding authority was then sub-allocated to counties and municipalities (with populations over 100,000) in an amount that bears the same ratio to the State’s allocation as the population of such counties or municipalities each bear to the population of the State. The following counties and large cities, along with the Illinois Finance Authority on behalf of the State (collectively, the “QECB Allocatees”) have been each awarded a QECB allocation:

    Initial 2009 QECB Allocation Awards

    County AllocationsAmountCounty Allocations (cont.)Amount (cont.)
    Champaign $2,021,135McHenry$3,295,988
    Cook$24,948,146McLean$1,717,486
    DeKalb$1,103,086Peoria$726,949
    DuPage$8,173,550Rock Island$1,540,357
    Kane$3,089,684Sangamon$804,820
    Kankakee$1,170,159St. Clair$2,736,092
    Lake$7,357,456Tazewell$1,371,743
    LaSalle$1,178,255Will$5,008,254
    Macon$1,138,706Winnebago$1,480,857
    Madison$2,797,540
    City AllocationsAmountCity Allocation
    (cont.)    		Amount (cont.)
    Aurora$1,778,201Naperville$1,485,203
    Chicago$29,666,445Peoria$1,190,634
    Elgin$1,085,427Rockford$1,636,106
    Joliet$1,497,510Springfield$1,225,428

    Please contact the city/county administrator or legal department of the QECB Allocatee for more information.

    State Allocation
    Illinois Finance Authority, on behalf of the State$22,620,783
    Less encumbrances (as of 11/8/2011)(18,500,000)
    Unencumbered IFA QECB balance$4,120,783

    Each QECB Allocatee has complete discretion over the use of their QECB allocation. Additionally, a QECB Allocatee has discretion to designate a maximum of 30% its QECB allocation for private activity purposes [including 501(c)(3) entities or for-profit development companies]. Accordingly, a minimum of 70% must be designated for government purpose projects.

  3. What projects potentially qualify for QECB financing (subject to available QECB allocations described in Item #2 above) Prospective Borrowers and Issuers should discuss these qualifications further with a qualified municipal bond attorney (“Bond Counsel”).
    1. Governmental projects including capital projects in publicly owned buildings and facilities that reduce energy consumption by at least 20%
      1. These governmental projects have been designated by the U.S. Treasury Department to receive a minimum of 70% of the designated allocations to each QECB allocatee.
      2. In addition to public facilities, the funding of “green community programs” may also qualify for use of QECB financing, as determined by the IRS.
    2. Capital projects undertaken by nongovernmental entities and used to finance energy conservation projects on privately owned property
      1. These private activity projects have been designated by the U.S. Treasury Department to receive a maximum of 30% of the designated allocations to each QECB allocatee.
      2. These projects may be owned by either for-profit development companies or by 501(c)(3) not-for-profit corporations.
      3. The decision to allocate any portion of a QECB allocation for any non-governmental, private activity project is subject to the discretion of the respective QECB allocatee.
    3. Mass commuting facilities and related facilities that reduce the consumption of energy, including capital expenditures to reduce pollution from vehicles used for mass commuting; or
    4. Rural development projects that involve production of electricity from renewable energy sources; or
    5. Any facility eligible for the Production Tax Credit under U.S. Code, Title 26, Section 45; or
    6. In addition to financing traditional capital expenditure projects, QECBs may also be used to finance other specific initiatives that support energy conservation including:
      1. Expenditures to facilities or to finance grants that support research in the development of:
        1. cellulosic ethanol or other or other non-fossil fuels; or
        2. technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels; or
        3. increasing the efficiency of existing technologies for producing non-fossil fuels; or
        4. automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation; or
        5. technologies to reduce energy use in buildings.
      2. Demonstration projects designed to:
        1. promote the commercialization of green building technology;
        2. convert agricultural waste for use in the production of fuel or otherwise;
        3. advance battery manufacturing technologies, reduce peak use of electricity; or
        4. capture and sequester carbon dioxide emitted from combusting fossil fuels in order to produce electricity.
        5. Public education campaigns to promote energy efficiency.
      3. Next Steps:

        Evaluate the feasibility of obtaining a QECB allocation for your project. As of 2/28/2011, the Illinois Finance Authority (the “IFA”) has a small remaining QECB allocation of approximately $2.62 million that remains unencumbered. IFA will be allocating this remaining QECB allocation on a first-come, first-ready basis (subject to reasonable limitations). However, the IFA has the ability to aggregate and reallocate unused QECB allocations for use at locations outside a QECB allocatee’s jurisdiction. Prospective Borrowers and Issuers should discuss applicable limitations regarding the use of any reallocated QECB volume cap with Bond Counsel.

        IFA encourages prospective projects to discuss obtaining local QECB allocations with one of the counties or municipalities awarded an allocation and identified on the QECB allocation report above as soon as possible. Although the Illinois Finance Authority is responsible for oversight and reporting on use of QECB allocations statewide, each Allocatee has complete discretion over how their QECB allocation is used. More specifically, each QECB Allocatee has complete discretion to determine:

        1. How much QECB allocation is set-aside for non-governmental uses (i.e., up to 30% of their allocation)
        2. How much QECB allocation is transferred to the Illinois Finance Authority for use on projects located outside the Allocatee’s jurisdiction

        Prospective projects should obtain a financing commitment for a prospective QECB project after the project sponsor has obtained sufficient QECB allocation.

        1. For governmental entities:

          1. Governmental entities with ratings from Moody’s, S&P, or Fitch can work with their financial advisor or investment bank to structure a transaction.
          2. Governmental entities may also pursue a bank direct purchase or private placement with their financial advisor, underwriter, or commercial bank.
        2. For non-government entities (i.e., 501(c)(3) entities or for-profit companies):

          1. Non-governmental entities with ratings from Moody’s, S&P, or Fitch can work with their financial advisor or investment bank to structure a transaction.
          2. Non-governmental entities may also pursue a bank direct purchase or private placement with their financial advisor, underwriter, or commercial bank.

        4. Bond counsel and the commercial bank (or underwriter) will coordinate preparation of all required documentation to close the transaction.

      Summary of The Two QECB Project Subsidy Methods Available to Issuer

      Beginning March 18, 2010, the Bond Issuer may choose to obtain its QECB benefits by selecting one of the two subsidy methods described below.

      1. Direct Subsidy Method (i.e., "Refundable" Tax Credit on Interest paid to Borrower)

        For QECBs issued after March 18, 2010, the Bond Issuer may make an irrevocable election to receive a direct payment from the Department of Treasury for interest on the QECBs. For these types of QECBs, the amount of such payment with respect to any interest payment date under the bond is equal to the lesser of (i) 100 percent of the amount of interest payable under the bond on such date; or (ii) 70 percent of the amount of interest which would have been payable under such bond on such date if such interest were determined at the applicable tax credit rate as described in the preceding paragraph. The direct payment comes in the form of a refundable tax credit to the issuer in lieu of a tax credit to the bondholder. The advantage of this Direct Subsidy Method is that it creates a lower effective interest rate for the Issuer because the federal government subsidizes a portion of the interest costs.

        Note: This is expected to be the most commonly selected subsidy method and is the subsidy method described above.

      2. Principal Repayment Method (i.e., US Treasury Tax Credit Rebate to Investor)

        With tax credit bonds, generally the Issuer of the bond pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of traditional bond interest. The tax credit may be taken quarterly to offset the tax liability of the bondholder. The tax credit rate is set daily by the U.S. Treasury Department. QECB bond holders will receive only 70% of the full rate set by the Treasury Department. Credits exceeding a bondholder's tax liability may be carried forward to the succeeding tax year, but cannot be refunded. QECBs differ from traditional tax-exempt bonds in that the tax credits issued through the program are treated as taxable income for the bondholder.

        Calculation of the Tax Credit:

        The tax credit amount is set by the U.S. Treasury Department on a daily basis and can be found on-line at: https://www.treasurydirect.gov/govt/rates/irs/rates_qtcb.htm. The credit rate is 70% of the rate set by the Treasury for qualified tax credit bonds. In theory, QECBs could provide a borrower with a 0% interest rate, but it is likely that purchasers will require a discount on the QECB or a supplemental interest payment. Any supplemental interest earned on a QECB is federally taxable.

        Note: This subsidy method is presented as an informational item - IFA anticipates most Issuers will select the Direct Subsidy Method (QECB Subsidy Method #1 referenced above).


      Form to Waive Unused QECB Allocations to IFA:

      QECB Volume Cap Waiver Form in PDF Format

      Project Application:

      QECB Application Form in Word Format

      Additional Information

      QECBs Initial Allocations List GOMB QECB Allocation Memo

      External Links:


      IRS Guidelines for QECB Volume Cap allocations

      Internet site for State and Local Government Series securities at the Bureau of Public Debt

      Contact:

      • Brad Fletcher: 312.651.1329
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