Borrowing the Benefits: Equipment Leasing at Boston Schools

EDF Climate Corps fellow | September 6, 2012

Fellow: Britta Victor, 2012 EDF Climate Corps fellow at Boston Public Schools, MEM candidate at Duke University Nicholas School of the Environment

Organization: Boston Public Schools

Opportunity: 125 Boston school buildings, all associated municipal buildings and the minds of 57,000 students 

Summary: With a limited capital budget, Boston Public Schools needs a new way to pay for the energy efficiency measures that could it save serious energy dollars. I worked on a new plan to use an equipment lease to acquire energy efficiency measures, and to use the resulting savings to make the lease payments. Using this technique in just five of its schools, Boston could save more than $2 million.

Though Boston, like most cities, is strapped for cash, it strives to be a leader in sustainability. Case in point: Mayor Thomas M. Menino has set an ambitious goal to reduce greenhouse gas emissions 25% by 2020, but the city's strained budget makes it difficult to upgrade aging, inefficient school buildings – the facilities that could be models of efficiency for future sustainability leaders.

Part of the problem is that Boston budgets are planned far in advance, forcing energy efficiency measures to "get in line" for capital funding. Grants are an alternative solution, but funds are limited.

Equipment Leasing
To fund energy efficiency at Boston Public Schools, I turned to a third funding source – the operations budget. Boston buys much-needed equipment with operating dollars through "equipment leasing," a practice that I am adapting to pay for energy efficiency investments that could save the school system more than $2 million.

Boston already purchases fire trucks, school buses, computers and more through equipment leasing, which is like leasing a car. The city pays a finance company in semi-annual installments toward the total cost of the equipment, gradually paying the full price within a set term. The difference is that Boston, as a public entity, doesn't pay taxes on the lease.

Boston, however, has never used equipment leasing to improve energy efficiency. And because efficiency is less urgent than, say, fire trucks, it is reluctant to take on the financial risk.

The Financial Advantage
I am showing Boston that the risk is negligible – the city could completely pay its equipment leasing bills with the money it saves on its energy bills.

Furthermore, Boston could secure a performance guarantee by hiring an Energy Service Company (ESCO). After identifying the best efficiency projects, ESCOs acquire and install the necessary equipment to implement them. If BPS doesn’t save as much energy as the ESCO predicts, the ESCO will pay the difference. The ESCO profits by claiming a share of their client’s energy cost savings over time.

Why finance through an ESCO?
In addition to identifying and implementing energy efficiency projects, ESCOs commonly finance them. But to cover the entire project cost upfront, ESCOs must borrow money, and unlike schools, they have to pay taxes on their loans.

By acquiring its own financing, Boston schools avoid the taxes. Though companies may be better off sticking with ESCO financing, equipment leasing is ideal for tax-exempt public entities like cities and schools.

Opportunity for Scale
My plan is to start small, with a lease covering equipment for about five schools. If it is successful, equipment leasing could become standard practice for financing energy efficiency projects for the school system. It may even be a model for the entire city. By my calculations, the five schools could save over $2 million, and Boston has 125 schools, and many other municipal buildings.

EDF Climate Corps places specially trained MBA and MPA students in companies, cities and universities to develop practical, actionable energy efficiency plans. Sign up to receive emails about EDF Climate Corps, including regular blog posts by our fellows. You can also visit our Facebook page or follow us on Twitter to get regular updates about this project.