Virginia Issues First QECBs for Mass Commuting

By Elizabeth Bellis and Cassandra Lovejoy

Although Qualified Energy Conservation Bonds (QECBs) have been used across the country for energy improvements, Virginia’s Spotsylvania County has issued what is believed to be the first set of QECBs for mass transit facilities. Located in the commuting corridor outside Washington, D.C., Spotslyvania County is building a new Virginia Railway Express (VRE) train station to be completed in December 2013. The new station, partially funded by $1.24 million in QECBs, represents the first VRE station in the county, and it is expected to serve 450 commuters daily during its first 6 months of operation.

This QECB issuance will be the first under the Internal Revenue Code provision allowing issuances for “mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting.”

Located approximately 65 miles southwest of Washington, D.C., Spotsylvania County is one of Virginia’s fastest growing communities. Despite its proximity to the nation’s capital, there is no public transportation in the county to bring residents into the city to work. The Fredericksburg VRE station, which is the closest stop for many Spotsylvania residents, does not have the parking capacity to serve the more than 900 county residents who rely on the VRE every day. According to Bonnie Jewell, Financial Analyst for the Spotsylvania County, Government “people from Spotsylvania are currently either driving to Fredericksburg or driving even farther north to commute to northern Virginia and D.C.”

To reduce car commuting by area residents, the county teamed up in 2010 with the VRE to extend its Fredericksburg train line to Spotsylvania and build a new station in the county with a parking lot to accommodate 1,000 cars. The county estimates that approximately half of the 900 current VRE commuters from Spotsylvania will use the new station when it opens in late 2013. The county will pay for the $20.4 million project using $1.24 million in QECBs, along with $3.8 million in general obligation bonds, $6.7 million in grant and revenue sharing funds from the state, $2.6 million in federal funding, and $6 million in other funding.

Project Funding:
$2,587,182 Federal Congestion Mitigation and Air Quality funding
$1,700,000 Virginia Department of Rail and Transportation grant
$5,000,000 Revenue Sharing from Virginia Dept. of Transportation
$1,240,000 2012 taxable QECBs (Spotsylvania issuance)
$3,785,000 2012 tax-exempt GO bonds (Spotsylvania issuance)
$6,110,800 Future Funding Likely future combinations of State revenue sharing and local funding

The QECBs were a pleasant surprise for Spotsylvania County officials, who were not familiar with the program prior to the state’s announcement that it had allocated $1.24 million to the county in June 2011. However, once they researched the program and determined the VRE project would qualify, the decision to issue the bonds was an easy one. “We just compared what we thought our debt service costs [would be] if we issued the $1.24 million in tax exempt [general obligation bonds] versus if we issued them as taxable QECBs, and when we factored in the credit that you get on the QECBs, we estimated an approximate $180,000 savings if we went the route of the QECBs…. Once we determined that there was going to be savings on the taxable route versus the tax exempt route that we normally go, it was a pretty easy decision to go the route of the QECBs.”

The County felt comfortable with the structure of the QECBs because it had issued Build America Bonds (BABs) in the past and was familiar with the process of submitting tax-reimbursement claims to the federal government. QECBs do require more frequent paper submissions to the Internal Revenue Service, but the process has been manageable. In fact, Jewell’s only complaint about the QECBs was the small size of the allowance. She indicated that the County had more trouble than usual finding buyers for the bonds because the amount was so small. In addition, she said the County would have been less likely to use QECBs if they were the only bonds being issued. “Bundling [QECBs with other bonds] was probably the only way we were going to do QECBs because $1.24 million is such a small amount,” she said.

The small size of the allocation does minimize at least one possible challenge facing QECB issuers, however. Earlier this fall, the Office of Management and Budget released a report noting cuts to already issued QECBs and BABs should Congress not reach agreement on the sequestration budget cuts by January 2013. “That will impact us if implemented,” said Jewell. “I estimated our federal subsidy on the QECBs would be decreased by approximately $35,000 over the life of the bonds…. It’ll be much more difficult to manage a loss on the BABs.” She noted that the sequestration could cut an estimated $1.5 million of subsidies on the Spotsylvania BABs.

Overall, Spotsylvania County has been pleased with the QECB process. “I would say it was a good experience,” Jewell said. “We didn’t experience a lot of added trouble or work.” She also encouraged other communities interested in funding energy conservation projects to consider the QECB program: “I think that they should just check into it. If we hadn’t started checking into this, we really wouldn’t have known anything about the program.”