I am an Arizonan. I am angry.

I am Ian Kerr. I’m in my late 40s. I live in Phoenix, Arizona, with my wife, Birgit, and twin children, Max and Anna. Each is in 4th grade and attends the same public school in North Phoenix.

I was not born in Arizona, but my mother was. My family (mom, dad, brother and myself) moved to Arizona when I was 9, and apart from 6 years in the mid-1990s, I have lived in the state ever since. I attended nothing but public schools while growing up in Arizona and elsewhere. I have a Bachelors Degree from the University of Arizona, and a Postbaccalaureate Certificate from Arizona State University. All of the other college courses I’ve ever taken (apart from 3 online courses) were through the Maricopa Community College system.

My mother attended public schools in Arizona throughout her childhood. When she enrolled in what is now Northern Arizona University, she became the first member of her family to do so. She became her family’s first college graduate. Within a decade, her sister and mother also earned college degrees from NAU. All became teachers, serving in Arizona’s public schools for, collectively, about 80 years. At times, my mother’s income from teaching was the vast majority of the income supporting our family of four. My brother, an ASU graduate, teaches in a public school in Arizona, as does my best friend in the world. My father taught on-and-off at the community college level in Arizona. I attend a medium-small church in north Phoenix with less than 150 member families. There are at least 8 members who work in public schools, six being teachers.

Few people owe so much of who they are to Arizona’s public primary, secondary, and post-secondary schools than I. I would not be who, what, and where I am professionally and personally without those institutions.

I am angry because the institutions so important to my formation are being financially abandoned to the detriment of a state that, more than ever, needs them to be strong.

By every credible measure, Arizona’s public schools are underfunded relative to how other states see fit to fund theirs… to dire consequences.

Primary and secondary schools are having a hard time recruiting and retaining teachers. Many haven’t seen a pay raise since 2008. My son’s teachers for gifted math, gifted language arts, and his home room teacher all changed in the middle of the current school year. A friend who will be a principal at a new school next year spent much of this year flying around the country to recruit teachers.The district in which I live is relatively affluent, yet a standard class size for 4th grade in our district is 28 students.

Things are just as bleak at the post-secondary level. Arizona State University (all of its campuses put together), in the fiscal year just ended, received about 10% less support from Arizona taxpayers than just the Main campus of the University of New Mexico did from New Mexico’s taxpayers. ASU, all-told, is 3 times as big as UNM-Main.

The principal consequence – in-state tuition so high (twice as high in AZ as NM) many well-qualified Arizonans can’t take advantage of the strong universities close to home. In the three decades since my freshman year at the University of Arizona, general inflation has caused consumer prices to be about 2.2 times higher. U of A in-state tuition is 11 times higher than it was 30 years ago.

Year after year, proponents of education beg and plead with the legislature and the governor of the day to do right by our schools to little avail – and they’ve found ways to sidestep various school-funding ballot measures.   

I’m angry and I need to do something about this… for the sake of my children, my extended family, my friends in education, and for a state I care for a lot.

I have decided to start a group, which I hope will become a movement, called Citizens of Arizona for the Reform of Public Education Finance – C.A.R.P.E. Finance (pronounced CAR-pay as in the latin carpe diem – seize the day).

Its sole purpose is working for increased funding for all levels of public education in Arizona – adequate, sustainable, equitable long-term funding for all public schools, colleges and universities done in such a way that elected officials would have a hard time undoing it.

C.A.R.P.E. Finance is not yet mature enough or robust enough to take any action – for now, it will be a group that agrees schools need more funding (the “how” will come later, at the discretion of the group members).

Such a change would be great. I am under no illusion that it will be easy. Great things seldom are easily created and rarely created without the persistent optimism of many of their creators. On this topic, I choose persistent optimism. I choose to believe a large enough number of Arizonans believe as I do on this topic to make a difference.

Now, I ask you:

Do you want public education in Arizona to be adequately, sustainably, and equitably funded for the long-term? Are you willing to join a a grassroots movement committed to working toward that one goal and willing to participate in a little bit work from time to time to make it happen?

If so, C.A.R.P.E. Finance would be glad to have you. Message me and I’ll include you in our Facebook group (which is a Closed group). It’s free to join the Facebook group. At the moment, the group is not big enough to

Even if you like the goal and want to join the group and want to get others to join the group… there is a very specific reason I do NOT want you to LIKE and SHARE a link to this on Facebook or other Social Media. That reason will become clear once I reply to your request to join C.A.R.P.E. Finance.

The Fallacies of “How Much the Rich Pay”

 

A Wall Street Journal opinion piece makes a flawed attempt to rationalize Mitt Romney’s tax rate of "probably closer to the 15% rate than anything," as well as to rationalize the tax rates paid by wealthy people in general.

The first flaw in the logic of the article is the assertion that income taxes corporations pay from their own treasuries as a result of their own profits should be attributable to the corporations’ shareholders. By that logic, an investor in the top tax bracket who took long-term capital gains in the stock of a company subject to the highest corporate tax rate (35%) should have a tax of 44.75% attributed to that investor for that gain (the 35 cents on the dollar that the corporation paid “off the top” plus the 15% the shareholder paid on the “remaining 65 cents”
{15% x .65 = 9.75%; 9.75% + 35% = 44.75%}). This argument has limited merit for three reasons.

Reason One: the corporate taxes don’t come from out of the investors’ pocket.
Suppose Company A pays 35% taxes and Company B pays 10% taxes.
If Investor Z buys stock in Company A for $40 and sell it for $50, how is that different than buying Company B stock for $40 and selling it for $50? There’s no difference at all.  Company A can no more come back to Investor Z and say “I want $3.50 of your $10 gain to cover our taxes” than Company B can claim $1 from Investor Z for the same reason.

Reason Two: corporate taxes don’t reduce the return on an investment, they reduce the price of the investment.
The only 2 bottom-line reasons that give a company’s stock any value at all are expectations of:
   (1) the growth of the company’s net earnings.
   (2) the maintenance and growth of company’s dividend payout.
Both expectations are limited by the company’s tax burden.
Thus, when you buy a company’s stock, you demand that the price reflect this limitation. When you sell, the investor you sell it to also expects corporate taxes be “baked in” to the price.
Stockholders, especially the super-rich and their money managers, (who set and move the prices of all publicly-traded stocks) are acutely aware of how taxes effect various companies and they don’t trade any stocks without paying/receiving the right net-of-tax-effect price per share.

Reason Three: The CBO website, where the WSJ writer(s) got the statistics for the piece, even admits that there attributing corporate income taxes to corporations’ owners is a debatable practice. The statistical source says on Page 4 of their report summary:
   “Far less consensus exists about how to attribute corporate income taxes (and taxes on
   capital income generally) [than other forms of taxes]. … Over the long term, however, some
   models suggest that at least part of the burden falls on labor income.” [emphasis mine]
There are any number of ways a corporation a corporation could use its income if it weren’t taxed: pay its executives more, pay its rank-and-file more, build a rainy day fund, build a new factory, hire more people, or charge a lower price to customers. Why not attribute corporate tax effects to all these stakeholders?
The reason: it’s impossible.
At the end of the day, the CBO is tasked with attributing federal corporate income taxes to households using samples of income tax returns. From those samples, it’s pretty easy to identify people who sold stock in Company XYZ. It’s much harder to identify Company XYZ’s other stakeholders, like its customers or the workers that weren’t hired because the company had to pay taxes instead.
Even if all the stakeholders could be identified, how could you quantify the price each paid as a result of corporate taxes? A daunting task.
Thus, it is convenient for the CBO and others interested in economic statistics to attribute corporate taxes to households with capital gains. That doesn’t mean it makes a lot of economic sense, and it certainly doesn’t mean it makes moral sense.

The first flaw in the article plays into its second flaw: it distorts the overall tax burdens of all Americans, especially the rich.
The article asserts that the top 1% pays an average federal tax rate of about 30% (the CBO says 29.5%) inclusive of the attributed corporate income taxes. If you subtract attributed corporate income taxes, the average out-of-pocket federal tax rate by income bracket is as follows:

1st 20%	2nd 20%	3rd 20%	4th 20%	Top 20%	Top 10%	Top 5%	Top 1%
3.6%	10.1%	13.5%	16.3%	20.5%	21.0%	21.1%	20.7%

But that isn’t the whole story. The article fails to address the impact of state and local taxes on various income brackets. Fortunately, a report by the Institute on Taxation and Economic Policy does it for us. Here is the average state & local income tax burden by income bracket of non-elderly taxpayers (including elderly taxpayers causes undue distortions).

1st 20%	2nd 20%	3rd 20%	4th 20%	80%-95%	95%-99%	Top 1%
10.9%	9.9%	9.4%	8.5%	7.4%	6.7%	5.2%

The net effect is as follows (*since ITEP didn’t give me direct numbers on Top 20%, Top 10%, or Top 5%, I had to estimate them; I estimated conservatively):

Bracket	1st 20%	2nd 20%	3rd 20%	4th 20%	Top 20%*	Top 10%*	Top 5%*	Top 1%
Full Rate	14.5%	20.0%	22.9%	24.8%	27.0%	27.0%	26.9%	25.9%
Avg Pretax Income	18,400	42,500	64,500	94,100	264,700	394,500	611,200	1,873,000

Clearly, the average Top 1%-er pays a lower tax rate than the average Top 5%-er, 10%-er, or
20%-er, and many in the top 40%.

I include average pretax income (in 2007 dollars per CBO) to prove a point.

A line from the WSJ article: “No matter how many times Mr. [Warren] Buffett asserts it, secretaries… do not on average pay a higher tax rate or less in taxes than do CEOs.” 

Well, maybe not the garden-variety secretary, but executive assistants who work directly for Fortune 500 CEOs and top Hedge Fund Managers have lots of skills, put in longer hours than their bosses, and they get paid accordingly… usually $100k-$250k. This puts them squarely in the brackets that pay as high or higher taxes that their millionaire bosses.

C’mon WSJ, whatever your editorial board’s collective wisdom is about money, Warren Buffett knows more.

Arguing with Warren Buffett about money is sort of like arguing Stephen Hawking about science… or arguing with God about Heaven.

From Here To Sustainable… Part 4 (update)

 

I told you I was being conservative…

In part 4 of this post, I asserted a potential for 500,000 - 800,000 jobs due to aggressive implementation of solar power.

According to the USA’s 42nd President (beginning 2:50 in to the video below), I’m a little off…. by a factor of at least 3.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Courtesy: The Daily Show with Jon Stewart, November 8, 2011

From Here to Sustainability… Part 4

Economic Impact

I’m not an economist, but I am a common-sense accountant, so I believe I can take a conservative measure of the economic impact of this policy proposal. 

Consider the case study in Part 3. The policy allowed Mr. Jones to borrow about $39,275 more than he otherwise would have been able to. Furthermore the terms of the loan forced him to spend all of it, and then some (i.e. another $3,225 out of his pocket {for the moment}... plus another $5,500 out of his utility’s treasury). All told, it’s an injection of $48,000 directly into the economy that would not have occurred but for the long-term low-interest financing brought about by the policy. Over time, Mr. Jones would recover $7,500 in tax credits for installing the solar panels and geothermal heat pump[6] plus the net $106 per month in reduced cost of home ownership, plus an additional tax deduction for mortgage interest on the borrowed $39,275. At least some of these credits, deductions and savings will be further spent... another direct economic infusion.

Most economists believe in a multiplier effect... where direct spending is compounded as a result of the people and companies further spending at least a portion of the initial direct spending. Per Moody’s Economy, a multiplier of 1.59 is applicable to infrastructure projects (which this very-much is). Thus, just the direct $48,000 spend would lead to about $76,300. GDP resulting from the $7500 tax credit, the additional mortgage interest tax deduction (about $460/yr), and $106/month ($1,272/yr) home-ownership savings wouldn’t have as high a multiplier because the homeowner (a) wouldn’t be forced to spend it and (b) might have gone into personal debt for their out-of-pocket costs… yet an additional $4,000-$5,000 in GDP would be reasonable… for a total GDP boost in excess of $80,300.

The added benefit of all this new economic activity would be additional jobs that can’t be exported, particularly in the hard-hit construction industry. This proposal will be especially beneficial in areas of the country that have suffered the most due to the collapse of the housing market (where prospective users of renewable power are unlikely to be eligible for a conventional home equity loan), where electricity usage and/or electricity rates are high, and which benefit from an abundance of sun (California, Arizona, Southern Nevada, Florida). There is a substantial relationship between GDP growth and job growth... particularly when the GDP growth occurs in an industry where there is substantial excess capacity (like construction). In 2012, US GDP per employed person was about $105,500. So, for every Mr. Jones that can renovate his house, about 0.72 jobs is likely to be created. If there are one-million Mr. Jones that take advantage of this proposal... that’s 720,000 jobs, and $1.27 billion per year in additional discretionary income in the energy-saving households.

The reduced cost of home ownership should reduce the credit risk to the holders of these mortgages.

Fiscal Impact

The only Federal outlays that would be required under current law are (a) a 30% tax credit (through 2016) for Section 1122 improvements and (b) a mortgage interest deduction for interest upon the amounts financed. Those outlays almost certainly would be offset by Federal receipts resulting from the economic activity and reductions in Federal outlays for unemployment benefits and other welfare programs.

Suppose 1,000,000 “Mr. Jones projects” occurred as a result of the proposal (less than 2% of America’s single-family homes). The fiscal breakeven point would occur if the $48-billion worth of projects (a) yielded $80.3-billion in GDP growth {a very reasonable estimate}, (b) resulting in almost $11.65-billion in additional federal receipts {or about 14.5% the added GDP... currently federal receipts are about 15.5% of GDP} and (c) 720,000 new full-time non-exportable jobs {reasonable} resulting in 50,000 families no longer receiving Food Stamps assistance {also conservative}.  Should these projects result in higher GDP growth, higher federal receipts or additonal employment/further reductions in government benefits, enacting the proposal would reduce the national debt... perhaps by $1-to-$2-billion. If 1,000,000 projects occurred each year, the job gains would be permanent.

Historically, the price of solar panels has come down 20% each time worldwide usage of them doubles. I have not considered the economic or fiscal impact of any future price decreases, but, all things being equal, any further cost decreases would be fiscally positive.

Environmental Impact

The energy-related improvements in the Mr. Jones example would reduce his household’s grid-energy consumption from an average of 2,500 kilowatt hours per month to about 500 kilowatt hours per month... a reduction of about 2,000 kilowatt hours per month, or 24,000 kilowatt hours per year.
If electric utilities offset this reduced demand with a reduction in supply, this single project would prevent about 28,400 lbs of carbon dioxide pollution each year.[7]  If one million homes around the country received these results, this would reduce America’s annual carbon dioxide output by about 14.15 million metric tons.[8]  If all of the reduction in grid supply comes from shutting down coal-fired plants, the CO₂ reduction would be as much as 25.3 million metric tons. [9]

Now, lets dream a bit bigger. Suppose this program can achieve an average electrical-energy energy savings/renewable-energy production of just 13,000 kwh per household in 73.1-million US households (not quite 70% of all households and about 90% of single-family-home households). That would be around 950-billion kwh. Now, suppose the average street-legal vehicle in the USA were 8% more energy efficient[10] than today’s fleet {attainable}. With the amount of electricity saved in the households, you could power half of all American vehicles in all vehicle classes with electricity without generating any additional electricity from a coal, gas or nuclear power plants. These transportation changes would cut annual CO₂ emissions by 777 million metric tons[11]... more than ⅛ of what the US puts out in a year.

There is no magic bullet to solve America’s and the planet’s economic, energy, and environmental challenges. It will take great minds formulating great ideas and courage among our nations leaders to adopt them. The proposal I’ve put forth in these pages will help the US and the world on all of these fronts with no obvious downside.

Click Here to go back to Part 1, Part 2 or Part 3.

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[6] The extent of the tax credit depends upon the nature of the local incentive.

[7] Based upon the carbon footprint of Arizona’s fuel mix for electricity per carbonfund.org

[8] Based upon the carbon footprint of the USA’s fuel mix for electricity per carbonfund.org;

[9] 24 B kWh x {2.86 mt CO₂ / mt coal} ÷ {2,712 kWh / mt coal}.

[10] Not to be confused with fuel efficient. Fuel efficient = less fuel in the tank, battery etc. for the same work. Energy efficient = less power required at the axle to move people and cargo the same distance.

[11] 719 million from the conversion to electricity; 58 million from the remaining gas/diesel vehicles being more efficient.

From Here to Sustainability… Part 3

 

How It Would Work: A Case Study

Mr. Jones bought a house in Arizona in 2008 for $160,000 and financed it with $8,000 down and a 30-year-mortgage Fannie Mae-conforming of $152,000 with a principal, interest, and mortgage insurance payment of $1000 per month. His electric bill averages $310 per month and does not use natural gas. After 3 years, the mortgage balance is $148,000 but the house’s value is now just $120,000.

Mr. Jones decides he wants to refinance his house and do energy improvements. He considers the following improvements and gets estimates on each: additional insulation and a radiant barrier in the attic, Energy Star windows & patio door, an Energy Star hybrid-heat-pump water heater, solar panels, and a geothermal heat pump.

He hires an Energy Inspector to do a Home Energy Rating System (HERS) Audit of his home. It costs about $700. The audit finds the possible improvements to have the following energy-savings impact:

Item	Upgrade from	Cost Estimate	$ Saved / Mo
Attic Insulation to R38	R13	$2,000	$9
Radiant Barrier	None	$1,500	$7
Dual-Pane Low-e Glass Windows	Single Pane	$5,200	$41
Dual Pane Low-e Glass Patio Door	Single Pane	$1,000	$10
Hybrid Heat Pump Water Heater	Standard Electric W/H	$1,600	$28
5500w Solar Electric System...	None	$24,000	$125
...less Utility Payment		-$5,500
Geothermal Heat Pump	12 SEER Heat Pump	$12,000	$50

Then, Mr. Jones seeks a Streamline refinance loan with an EEM.
Since his payoff balance would be $148,000, the base loan amount would be $148,000.
The EEM limits would be as follows:

Weatherization	$8,880 (6% of $148k)
HVAC/WH	Same
Sec. 1122	$28,975 (95% of $30,500 [$24k + $12k - $5.5k])

Mr. Jones EEM plans call for::

Weatherization	$9,700
HVAC/WH	$1,600
Sec. 1122	$30,500

so the most Mr. Jones can borrow will be:

Payoff Balance	$148,000
Weatherization	$8,700 (really $8,880, but he elects to pay cash for the patio door)
HVAC/WH	$1,600
Sec. 1122	$28,975 (Mr. Jones must pay cash or charge the other $1,525)
Total	$187,275[5]

At a 4.75% interest rate, the principal, interest, and mortgage insurance payment would be about $1164, an increase of $164 per month.  However, Mr. Jones energy bills would go from $310 per month to $40. Since the cost of ownership would be reduced from $1310 to $1204 (a reduction of 8.1%), Mr. Jones would qualify for the loan.

From here, Mr. Jones would apply to his utility to receive the $5,500 utility credit for the solar panels he wants to put up. The utility will send him a confirmation letter indicating the date they will have funds available for his project OR (more likely) a letter indicating they’ve deferred the application to another funding cycle and when they’ll expect to send you a confirmation letter.

After and only after receiving the utility confirmation letter, Mr. Jones would need to apply for the refinance/EEM loan and get (a) good-90-day bids on the weatherization work and the water heater (b) commitments from these contractors that they could do the work within 60 days of the loan closing, (c) good-180-day bids on the solar panels and the geothermal heat pump and (d) commitments from these contractors that they can do the work within 150-days of loan closing.

At the time of closing, Mr. Jones original mortgage would be paid off and the funds for energy improvements would be put into an escrow account. At the time of closing, there are two work and payment timelines that must be observed: one for the Section 1122 improvements, and one for the rest.

The contractors for the solar energy improvements and the geothermal heat pump would be paid (a) Mr. Jones’ 5% share of the costs plus (b) an additional 45% of the project costs from the escrow accounts. The contractors would then have 180 days to complete this work. Final payment to these contractors would not occur until a third-party inspector verified to the lender and escrow company that the improvements were complete.

The weatherization and water-heating improvements would need to be completed within 90 days. These contractors would be paid in full at the time of completion. For this work, Mr. Jones could sign a statement certifying that the work has been done to his satisfaction.

In the end, Mr. Jones will have a lower-carbon-footprint home that’s more affordable and at least as comfortable as before he improved it.

See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.

Click Here to go back to Part 1 or Part 2

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[5] As a practical matter, the loan would have to be a bit larger (maybe $500-$1000) to cover the cost of proof-of-completion inspections and costs to cover additional administrative burdens.

From Here to Sustainability… Part 2

Energy Efficient Mortgages Exist Today… sort of.

Today, FHA, VA, Fannie Mae, and Freddie Mac each endorse the concept of promoting energy efficiency in the home and each mortgage backer has guidelines to “make financing energy efficiency less burdensome.”[1] However, none of the programs are terribly robust or well-promoted, and each agency/GSE/GOE has different EEM guidelines. The absence of a unified program makes energy-efficiency loans hard to promote and leaves a lot of room for confusion. A program with one set of rules and benefits to homeowners would be a blessing to owners, buyers, lenders, real estate agents, contractors, policymakers, the renewable energy industry and the environmental movement.

The Energy Efficient Mortgage programs of today appear to have been borne out of the 1970’s energy crisis. Their main thrust was help finance weatherization improvements. Now, I’m all for weatherization… putting solar panels on a poorly insulated, drafty house is just as stupid as putting a brand new racing engine in a leaky speedboat. But this isn’t the 1970’s… when solar panels were a long way from a cost-competitive energy solution. Now that unsubsidized solar power is cheaper than grid power in Hawaii, and lightly-subsidized solar trumps grid-power costs in parts of the Sun Belt, it’s time EEM programs made bigger improvements possible.

 

But… What If I’m Upside-Down?!?

No worries. There is ample precedent for government-backed mortgages to be refinanced when the borrower has negative equity.

For years, homeowners with FHA-backed & VA-backed loans have been able to  

(a) “Streamline refinance” their mortgage balances... that is, refinance their mortgage balances, with or without equity and no matter how far underwater they are, so long as they are not behind on their mortgage and the refinance causes their mortgage payment to drop 5% or more PLUS
 
(b) take a few thousand dollars cash out (around 5% of the home’s value) ONLY to pay for cost-saving energy efficiency improvements... usually weatherization (this is the FHA’s and VA’s current idea of an EEM).

As an added bonus… starting as early as mid-November 2011 and through the end of 2013, homeowners upside-down (even extremely upside-down) in most pre-2010 Fannie Mae-owned & Freddie Mac-owned loans will be allowed a strict no-cash-out refinance... but the current policy does not allow the homeowner to get additional funds for energy efficiency improvements.[2]

 

What a 21st Century EEM Standard Should Look Like

1. All Federally-backed mortgage programs, as well as mortgage GSEs and GOEs, should adopt the same “conforming loan” standards for Energy Efficient Mortgages... Including
   a. Both purchase-money and refinanced loans would be eligible.
   b. Refinancing of underwater mortgages, if taking advantage of the EEM program, would be allowed indefinitely and no matter how far one is upside-down.
2. Base loan limits (the amount financed to purchase or refinance the existing mortgage) would not change from the present limits.
3. EEM loan limits (i.e. the additional amount permitted to be borrowed for improvements) should be on the order of…
   a. $6k - $10k[3] for weatherization (including insulation, windows, etc.)
   b. $6k - $10k[3] for high-efficiency heating/ventilation/air-conditioning (HVAC)[4] and water heating
   c. Up to 95% of installed cost (net of any utility credit or state rebates) of any systems or devices eligible for a Residential Energy Efficient Property Credit under Section 1122 of the American Recovery and Reinvestment Act of 2009... including Solar Electric systems, Solar Hot Water Heaters, Wind Generators and Geothermal Heat Pumps.
4. Instead of qualifying for a Streamline refinance based upon minimum mortgage payment savings of 5%, one would qualify based upon a minimum cost-of-ownership savings (principal, interest, mortgage insurance, energy bills... but excluding property tax & homeowner’s insurance) of 5%.

See Part 3 of this post to see how a sample homeowner might benefit.

See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.

Click Here to go back to Part 1

 

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[1] http://www.resnet.us/ratings/mortgages

[2] http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf

[3] Not to exceed 6% of the home price (for purchases) or base loan amount (for refi’s)

[4] Not including geothermal heat pump

From Here to Sustainability… Part 1

America’s Most Important Renewable Energy Incentive Does Not Yet Exist

by Ian Kerr

My Solar Story… and Where Are the Sequels?

I’m a middle-class Arizona homeowner in a middle-class Phoenix-area neighborhood with a wife, twin 6-year-old children, and 28 solar panels on my roof. The 6580-watt-rated system is on course to generate enough electricity to pay for itself in about 7 years and last at least 18 years beyond the payback period.

I’ve taken advantage of Federal, state, and utility incentives in order to buy the photovoltaic (PV) system. All of these incentives are still available to all my neighbors. The benefits of these incentives are smaller now than a year ago… but still robust. Yet, I’m the only one in the neighborhood producing and using my own green energy.

Why am I alone? Well, despite the incentives, buying the system I now own came at an up-front cost of about $16,000… and I was in a position to pay cash. Middle-class families tend not to have that much money in the bank. Theoretically, my neighbors could take home equity loans, but this is Arizona, one of the epicenters of the housing-market collapse.  Lots of my neighbors are upside-down in our mortgages (including me). It’s quite the sad coincidence that many places where solar energy would do the most good are also places that almost certainly will take the longest to recover from the bursting of the housing bubble (Arizona, Nevada, California, Florida). Borrowing by other means (construction loans, credit cards) makes no sense because the high interest rates cause the payments to be so high that it would be cheaper to buy the electricity (or the payback wouldn’t occur soon enough to make it worthwhile).

Some companies offer leased PV systems… but you have to have excellent credit to qualify (usually a credit score of at least 700 or 720), and you have to agree to escalating lease payments (about 3.5% per year for the life of the lease… which fiercely blunts the payback and may even exceed the rate of inflation for electricity).  Furthermore, you’d have to overcome the uneasy feeling of, in effect, becoming a tenant (of the solar company) in your own house.

Clearly the difference between my PV system being a neighborhood solo act and being a part of a ZIP-code-wide solar symphony is low-cost financing of the up-front installation costs. Since solar panels are warrantied for 20-25 years and likely last much longer, low-cost long term financing would be both prudent and useful.

Clearly, a government program to facilitate some low-interest long-term loans would go a long way toward mass-adoption of green energy, but no one in Washington seems to want to talk about anything but creating jobs or reducing the Federal deficit.

Well, Washington, if that’s what you want… you’ve got it.

Job Creation, Deficit Reduction… And Sustainability

I propose a unified and robust Energy Efficient Mortgage (EEM) program.

It should be adopted by all major Federally-backed mortgage programs (FHA, VA, FmHA, etc.) and the guidelines of the mortgage-buying government-sponsored enterprises or government-owned enterprises (GSEs and GOEs like Fannie Mae, Freddie Mac, Ginnie Mae, etc.) should permit the purchase of such mortgages.

This program should allow Americans to buy a home or refinance an existing home AND borrow sufficient additional funds to install cost-effective energy-saving or renewable-energy-generating improvements to their homes… all within the same first mortgage.

Such loans should be considered “conforming loans” to the federal mortgage programs and the mortgage GSEs/GOEs even if the final loan amounts exceed the appraised values of the homes.

There is a precedent for such a program.  It exists today. See Part 2 of this post to contrast the current programs to my proposal.

See Part 3 of this post to see how a sample homeowner might benefit.

See Part 4 of this post to see how this might benefit the economy, the taxpayers, and the environment… perhaps hundreds of thousands of jobs, billions of dollars, and a sustainable future.