QECBs are taxable bonds issued by state or local governments that finance energy conservation projects. The federal government subsidizes QECBs through tax credits or direct payments equal to 70% of the applicable tax rate. QECBs must be issued for qualified conservation purposes and proceeds spent on eligible projects within three years. Issuers must comply with various IRS rules both at issuance and over the life of the bonds to maintain the federal subsidy.

1. ORNL’s 3rd Annual Southeast
Sustainability Summit
August 21, 2013
Qualified Energy Conservation Bonds
Public Finance Perspective
George Masterson
615-742-6263
gmasterson@bassberry.com

2. What are qualified energy
conservation bonds (QECBs)?
 QECBs are
− taxable bonds
− issued by a state or local governmental entity or
instrumentality
− partially subsidized by U.S. government if:
• proceeds finance specified types of energy conservation
projects and
• issuer meets other detailed Internal Revenue Code
requirements at time of issuance and during life of bonds

3. How does the federal subsidy for
QECBs work?
 Historically, federal government has used three approaches to
subsidizing state and local bonds
̶ Tax-exemption – bond investors accept a lower rate of interest
because interest is exempt from gross income for federal income
tax purposes
̶ Tax credits – bond investors accept a lower (or, in some cases,
zero) taxable rate of interest because ownership of bond carries tax
credits that can be applied against any federal tax liability
̶ Direct payments – bond investors receive a market, taxable rate of
interest and U.S. Treasury makes regular subsidy payments directly
to the issuer of the bonds on each interest payment date

4. How does the federal subsidy for
QECBs work? (continued)
 Tax-exemption – relevant to QECBs because most
projects that qualify for QECB financing also qualify
for financing with traditional tax-exempt bonds
 Tax credits – default subsidy method for QECBs
 Direct payments – may be elected by a QECB issuer
in lieu of tax credits

5. How does the federal subsidy for
QECBs work? (continued)
 Tax-credit mechanics
− holders of QECBs receive annual tax credits equal
to: 70% of “applicable tax rate” times principal
amount of bond
− “applicable tax rate”
• U.S. Treasury’s estimate of credit rate that will permit the
issuer to sell bonds at zero interest and no discount
• announced periodically by the U.S. Treasury at
https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm
• determined on the date issuer sells the bonds

6. How does the federal subsidy for
QECBs work? (continued)
 Direct payment mechanics
− issuer submits a form to the IRS prior to each
interest payment date
− receives a direct payment from the IRS equal to the
lesser of
• interest due on the bonds on that interest
payment date and
• 70% of the applicable tax rate with respect to
the bonds
− payments reduced by the Sequester

7. What requirements apply to QECBs at
issuance?
 State or local government issuer
 Issuer reasonably expects to:
− enter into a binding commitment with a third party to spend 10% of
proceeds within six months of issue date
− spend proceeds on “qualified conservation purposes” within three
years
 Issuer has allocation of a portion of the nationwide $3.2 billion
cap on the amount of QECBs that may be issued
 Maturity does not exceed the maximum term for QECBs
announced by the Treasury Department at time of issuance

8. What requirements apply to QECBs at
issuance? (continued)
 Issuer formally designates bonds as QECBs
 Issuer formally elects direct payment treatment as opposed to tax credit
(if desired)
 No more than a de minimis amount of original issue premium
 No more than 2% of proceeds used to pay costs of issuance
 No prohibited conflicts of interest

9. What requirements apply to QECBs at
issuance? (continued)
 Qualified conservation purposes include:
− capital expenditures that:
• reduce energy consumption in publicly-owned buildings
by at least 20%
• implement green community programs
• rural development including the production of electricity
from renewable energy sources
• renewable energy facilities
− mass commuting facilities
− demonstration projects and public education campaigns
− research facilities or grants relating to energy reduction and
efficiency and production of non-fossil fuels

10. What requirements apply to QECBs at
issuance? (continued)
 QECB allocation process
− nationwide: $3.2 billion of capacity
− Internal Revenue Code mandates allocation among
states and “large local governments” (i.e, cities and
counties with populations greater than 100,000)
− states and large local governments may re-allocate
their cap to other issuers

11. What requirements apply to QECB
during life of bonds?
 Davis Bacon prevailing wage rules apply
 Spending requirements
− three-year spending requirement
• basic requirement:
o 100% of “available project proceeds” spent on
qualified conservation purposes within three years OR
o unspent available project proceeds used to redeem
corresponding portion of bonds
• limits on reimbursement of prior expenditures and
refunding of other obligations

12. What requirements apply to QECB
during life of bonds? (continued)
 Arbitrage requirements
− For tax-exempt bonds, Internal Revenue Code prohibits, with
many exceptions, investment of bond proceeds at a yield that
is greater than yield on bonds
− For QECBs, tax-exempt bond arbitrage rules apply, with the
following exceptions:
• yield is net of direct payments received
• issuer permitted to establish a level-funded “sinking fund”
invested at yield no greater than a target yield announced
by U.S. Treasury immediately prior to issue date

13. What special rules apply to QECBs
that are “private activity bonds?”
 “Private activity bonds” = more than 10% of the
proceeds are used for private rather than
governmental projects AND more than 10% of the
debt service of which is from payments related to the
private use
 QECBs may be “private activity bonds” as long as
− all “qualified conservation purpose” expenditures are capital
expenditures
− no more than 30% of the volume cap allocation of any state or
large local government consists of private activity bonds, with
green community bonds NOT treated as private activity bonds

14. Summary
• QECBs benefit from significant federal
subsidy
• Detailed requirements to be met
̶ at issuance
̶ during life of QECBs