City issues $200 million in ‘green bonds’

Below blue California skies last month, Spokane city officials trekked to downtown San Francisco to argue for “green bonds.”

In two gleaming Bay Area skyscrapers in the heart of the city’s financial district, Mayor David Condon and City Council President Ben Stuckart, along with the city’s financial gurus, pleaded for favorable ratings for what will be the largest bond issuance in the city’s history – with a type of bond that was first used in the country just last year.

It was a show of municipal solidarity, with Condon and Stuckart arguing for the same thing, something the two usual rivals have gotten used to recently as Spokane invests big money in infrastructure.

There was the shared campaign for the 20-year street levy and Riverfront Park bond, both of which passed overwhelmingly this month, leading to hundreds of millions of dollars for new infrastructure and to a hug between the mayor and council president on election night. There is also the city’s upcoming request to the 2015 Legislature for $60 million that would be pledged to the integrated plan to repair water lines and update stormwater systems while fixing streets.

And now, the San Francisco meeting, where Spokane’s Chief Financial Officer Gavin Cooley and Rick Romero, who leads the Public Works department, made a case to credit analysts that Spokane is fiscally sound and that the project the city was embarking on – a massive retrofitting of its wastewater and stormwater systems – fit the new type of funding aimed at environmentally beneficial projects.

Their appeal worked.

The city was handed stellar ratings by the nation’s top credit rating agencies for $200 million in municipal revenue bonds, most of which will be spent over the next three years in a dash to beat a federal clock to get the Spokane River clean.

‘Solid liquidity’

With the money, by the end of 2017 raw sewage won’t pour into the river when it rains and a third level of treatment will be added to the city’s sewage plant in Riverside State Park.

This Tuesday, the bonds will be sold on the competitive market with historically low interest rates, currently around 3 percent.

“To the extent that any investor has a sensitivity to where the proceeds of their investments are going to be used, then they’re going to view these bonds in a more positive way and they might be willing to pay a little bit more,” Cooley said. “Some investors may be willing to accept a lower rate of return if they see the investment as meeting their objectives, if it’s being spent in the right way.”

The rating agencies – Moody’s and Standard & Poor’s – gave the city equivalent ratings, reflecting the health of Spokane’s finances.

In its report, Moody’s said its rating of Aa2 reflected the city’s “solid liquidity.” S&P simply described the city’s ability to pay off the bonds as “stable” and delivered an AA rating.

For most investors, the high, investor-grade ratings would be enough. City officials, however, decided to issue the bonds as “green.”

In 2012, $3 billion in green bonds were sold worldwide. Last year, that number more than tripled to $10 billion. In 2014, the amount of green bonds is expected to account for $50 billion, an impressive amount of growth for a new market, but still little compared to the entire bond market, which totals $80 trillion.

According to The Economist, green bonds have a strong ability to attract new investors. The magazine pointed to a bond issuance last year by the African Development Bank, where about 70 percent of the bonds were bought by insurers, asset managers and pension funds instead of central banks and other official institutions.

Green governmental bonds are new to the United States. Last year, Massachusetts became the first American institution to issue such a bond. In June, the New York State Environmental Facilities Corp. issued a $213 million green bond to finance 128 drinking water and wastewater infrastructure projects across the state. The District of Columbia Water and Sewer Authority sold $450 million in green bonds in July.

That’s about it, until now. As Cooley points out, Spokane is ahead of the pack by using this type of funding.

“Clearly we’re at the forefront,” he said. “We’re in a brand-new and evolving area.”

What makes a project green?

Cooley notes that every market needs standards, even new markets. Green bonds are novel, so the guidelines for them are still unclear.

“It’s an evolving definition. It’s like the LEED definition. It was kind of loose at first and then began to tighten up,” he said, mentioning the rating system for energy efficient, green buildings.

What’s emerged so far are the Green Bond Principles, which sprung from guidelines suggested by the World Bank. Now, the principles have been adopted by 25 banks, including Bank of America, Citigroup, JPMorgan Chase and Deutsche Bank. The guidelines are only voluntary.

As green bonds become more popular, environmental groups such as the Center for International Climate and Environmental Research in Oslo, Norway, have warned that the market is at risk of losing meaning and implosion. Should nuclear power be considered environmentally friendly, thus eligible for green bonds? What about fracking, a destructive method for extracting low-emission natural gas? Should an oil company exploring carbon capture technology be allowed to issue a green bond, as one is reportedly considering?

Cooley expects the guidelines to become stricter and enforced, which he said would make Spokane’s work look great.

“Once it tightens up, we’ll be exemplary. I wish they would tighten up,” Cooley said.

Class A water

The $200 million largely will be spent in the next three years on two overarching projects.

First, there are still 400 miles of combined sewers in the city that flow with both sanitary sewage and stormwater, mainly on the South Side. Most days, these pipes ship their contents to the city’s treatment plant. On very rainy days, however, the system is overloaded and the pipes drain into the river – 54 million gallons of untreated effluent every year. The green bond money would decouple stormwater from household wastewater as well as lessen the strain on the treatment plant by diverting water.

Second, the green bond would fund a third level of treatment at the plant, which treats more than 34 million gallons of wastewater daily.

At the primary level, various junk, rocks and other big items are taken from the water. The secondary level uses chemicals to get rid of suspended solids. A third level of treatment would use membrane technology to pick up more suspended particles and make the effluent even cleaner before it is returned to the river as Class A water – one step below water considered clean enough to drink.

Both elements are integral to the city’s effort to meet pollution deadlines set by the U.S. Environmental Protection Agency. Under Condon, the city’s plan to meet the deadline has been transformed and its price tag substantially decreased by $150 million, to about $310 million. The green bond jump-starts this work, and then puts the city’s ratepayers on the hook to pay it back over 20 years.

“We’re pledging the revenue of our utilities to pay these back,” said Marlene Feist, spokeswoman for the city’s utilities department.

Cooley stressed Condon’s pledge to keep utility rate increases at no more than 2.9 percent every year.

Restraining the growth of utility rates is just one of the many pieces in a large puzzle to maintain support for the city’s plan, from ratepayers to legislators. Feist said all of that trust and buy-in is important, especially considering the city’s next step of asking the state government for the next financial piece: $60 million.

“When the citizens of Spokane demonstrate their willingness to be a partner on this – which is really what we’re asking in part with the street levy – that shows commitment,” she said. “How committed is the city? Well, the city just sold $200 million worth of revenue bonds. We’re in. We’re in for a penny, we’re in for a pound, right? We are in. All of those things demonstrate commitment and all of those pieces of information provide data points for the governor, for the Legislature, the Department of Ecology when we’re making this request.”