Energy Efficiency and Bond Ratings: An Interview with Tony Lehmann
The Regional Energy Office provides innovative financing solutions for cities to conduct energy efficiency and renewable energy projects. These projects are designed to save cities money on their energy bills every year, but we recently discovered that these investments were helping cities in other ways as well—energy investments can actually improve a city’s bond rating.
We first heard this from Councilman Brian Hartwell from the City of Madison Heights. He mentioned that their participation in energy efficiency projects with the Regional Energy Office contributed to the city’s enhanced bond rating with Standard and Poor’s (S&P). The City’s latest S&P report specifically states that “the general fund balance increased [due to] one-time revenues in the form of grants for energy upgrades.”
Why does this matter? Bonds are one of the main ways that cities raise revenue for capital projects, from roads to street lights to water and sewer systems. To get this funding, cities are required to establish a bond rating with a rating agency like S&P. The better the bond rating, the lower the interest rate that the city has to pay for bond financing.
We sat down with Tony Lehmann, finance director for the City of Huntington Woods, to talk about what Madison Heights’ recent S&P rating could mean for other member cities.
REO: Why do you think that bond agencies are looking at energy efficiency?
Lehmann: It’s emphatic, it’s measureable. They can see the results of it on the balance sheet. It also shows that we are moving forward. That’s what they’re concerned about. A bond is a multi-year thing, right? 15 years. 20 years. 25 years. Ok, so you’re fine today, but how about tomorrow? How about five years from now? Where are you going to be? What are you doing now to get yourself ready for five years from now?
Anyone would agree that energy management or helping commercial businesses or getting grant money in the door—that’s a big deal. That’s why dealing with the Regional Energy Office or other agencies like it that assist in doing that is a big deal.
REO: They’re really interested in your long-term prospects.
Lehmann: When S&P looks at this sort of thing they are concerned about the operation of the City in its totality. You can have all the money in the world and the management can be poor. S&P would take umbrage with that and will downgrade you because of that. When we’re talking about grant money or a city’s bond rating, the reality is that the more things you do, the more you can point to it in a comprehensive annual finance report.
In other words, including some of these forays into things like energy management, building management, helping commercial districts stay in the city—which obviously makes people want to operate businesses there—all of that has to do with that management piece.
REO: We heard from Madison Heights that S&P actually cited their energy efficiency work in their bond report. Do you think that other cities are going to have a similar experience? Does it surprise you at all?
Lehmann: It’s unremarkable to me that the bond rating would go up, not only because the fund balance is higher, but because when you are discussing this with Standard and Poor’s or other rating agencies, the first thing on the sheet is, “here are the initiatives we did this year…one of which is [an energy efficiency project].”
That’s why this is important: when you’re dealing with energy matters, with grant money, and with the initiatives that the city does, the rating agencies are very intrigued.
And, does it show up in our coffer? It does. In Huntington Woods I write this stuff in and I send this off to the rating agencies and there are sentences in the [comprehensive financial report] that directly point to the fact that well we’re doing this initiative at the library, we’re doing solar initiatives, we’re looking at other things that we’re doing and we’re involved with regional energy initiatives through the Regional Energy Office and so forth.
When they [S&P] get on the phone and talk to me about it, they may pick up on that and ask me a question about it. Are you working with other governmental agencies? What are the new initiatives that the City is doing? How does that pertain to the population being satisfied? How about the commercial district? And I’m ready with my answers. I say well, look on page 24 of the comprehensive annual financial report and there you will find what we’ve done this year.
REO: Would you say your involvement with the Regional Energy Office has helped with your bond rating?
Lehmann: Sure. One piece is the financial piece and the other piece is all the other stuff you are doing. Are you dealing with other organizations? Are you working with other governmental agencies? That kind of stuff shows that you’re managing things well.
That’s why this is important: when you’re dealing with energy matters, with grant money, and with the initiatives that the city does, the rating agencies are very intrigued. And that’s why the rating goes up. The rating goes up simply because you are not standing still. It shows that you’re moving forward. That’s what they’re concerned about.
What they don’t want to see happen is to have the city be an island. They don’t want to see everyone else looking at all of these different things going on and you as a city not doing anything.
Tony Lehmann has worked for the City of Huntington Woods for over 20 years. As the finance director, Mr. Lehmann was appointed by the city manager and is responsible for the general supervision of all City financial matters, including assisting in the preparation of the City budget. Mr. Lehmann serves on the Regional Energy Office’s Board of Directors.