| by Faisal Khan, Michael Graham and Project Six

In Chicago, even a project as seemingly regimented and painless as making government buildings energy efficient has become an opportunity for opaque financing deals and political calculations—all at taxpayers’ expense.

Project Six has uncovered how a public/private partnership program called the Infrastructure Trust put millions of dollars’ worth of city property at risk by using it as collateral to finance expensive energy upgrades to city buildings.

Through the Infrastructure Trust, the city also overpaid millions in labor and overhead costs for minor efficiency retrofits made to city-owned buildings.

Chicago’s Infrastructure Trust is a program that was intended to make the city “green” and save tax dollars, but it ended up overspending tax dollars on questionable building upgrades and putting city property at risk of being repossessed by private banks, all largely outside of the public’s and City Council’s knowledge.


The Infrastructure Trust

With much fanfare, Mayor Rahm Emanuel established the Chicago Infrastructure Trust in 2012 [i] to try to affordably upgrade Chicago buildings and city infrastructure such as roads, water, sewer and electric systems.

The trust was formed as a private nonprofit organization that would be funded partially by Chicago tax dollars. [ii]

Mayor Emanuel even included former President Bill Clinton in the program’s announcement, and the Infrastructure Trust’s website included a picture of the mayor and former president together. [iii] Clinton described the trust as “a classic example of what works in the modern world. You take business, labor, government, all the players together, and you make something together.”

The Chicago Infrastructure Trust website homepage with former President Bill Clinton alongside Mayor Rahm Emanuel.

The Infrastructure Trust program was sold to Chicagoans as an inventive way to finance large city projects without requiring tax hikes or borrowing through municipal bonds. The trust would seek out private financing for projects and have more freedom than traditional city departments to upgrade and improve city property and buildings.

With Chicago’s budget crisis, the public/private partnership was intended to save the city money by allowing it to make improvements and upgrades to Chicago’s buildings, roads and properties without having to pay the high interest rates associated with the city’s consistently falling credit rating. Former President Clinton even heralded the trust as “the nearest thing we can get to a free lunch.”

The first initiative announced for the Chicago Infrastructure Trust was known as the Retrofit One project.

When announced, Retrofit One was envisioned as a massive energy efficiency program. The trust was expected to raise somewhere between $200 million and $225 million to refurbish more than 1,000 city-owned buildings with the hopes of saving more than $20 million a year in energy bills. [iv] The project was also expected to create 2,000 construction jobs. [v]

In theory, the Retrofit One project sounded like a win-win: Chicago would receive millions of dollars in energy efficiency upgrades without having to spend any extra tax dollars. The private investors would then be paid back from the savings the city would receive on its energy bills for a specified amount of time.

Things did not go as planned.

The Retrofit One program spent close to $19 million to install less than $10 million [vi] worth of efficiency upgrades in 60 city-owned buildings while putting major portions of some of Chicago’s most valuable publicly owned buildings in financial limbo. [vii] The city, meanwhile, is unlikely to realize any actual savings on its energy bill for at least 15 years, if ever.


How the Retrofit One project was financed

To fund the Retrofit One project, the Infrastructure Trust secured a $13.5 million private loan from Bank of America. [viii] The loan has a 4.95 percent interest rate over a 15-year term. The total interest cost to taxpayers for the loan is approximately $5 million. [ix]

But this loan had many aspects that potentially put tax dollars and public property at risk of being misspent or wasted.

First, in order for Bank of America to issue the loan, the infrastructure trust was required to provide physical collateral for the deal [x] —similar to a private citizen being required to use their personal car as collateral for a home loan.

The Infrastructure Trust used all the new equipment installed under the Retrofit One program as collateral for the loan to Bank of America. This means, if the Infrastructure Trust defaulted on the loan, Bank of America has the right to enter city buildings such as Harold Washington Library, the Chicago Cultural Center or the Police Training Academy and repossess all of the new energy-saving equipment. Light fixtures, window and door fittings, heating, ventilation and cooling (HVAC) systems could all potentially be repossessed in the event of a default. [xi]

Second, because of the length of the loan and the payment structure, the city is unlikely to see much if any actual savings from the Retrofit One program.

The energy companies that installed the energy upgrades guaranteed the city approximately $1.4 million per year in savings on their energy bills. However, those savings go to Bank of America to pay off the original loan. [xii]

The first energy bill savings the city will be allowed to keep will occur only after the end of the 15-year loan term. At that time, all of the efficiency upgrades will be at least 15 years out of date.

The city is also prohibited from changing or upgrading any of the equipment before the 15-year loan term is up without written consent from Bank of America. [xiii] Which means the city very likely could lose opportunities to lower its energy bill by utilizing newer and more efficient technology between now and the expiration of the loan.

Third, the loan contract names many potentially risky requirements the city must meet, including:

  • Bank of America is entitled to repossess all of the new energy equipment being installed if the City Council fails to allocate funds to make the loan payments. Meaning, if Chicago would ever fail to pass a city budget—as the State of Illinois currently has failed to do—and city bills are not paid on time, then the loan could be considered in default. [xiv]
  • The city must abide by all of the Retrofit One conditions created by the energy companies as part of the cost-saving guarantee. These include items such as keeping the lights on only during specified work hours or mandating minimum air conditioning and maximum heating temperatures. The city also cannot change the occupancy or use of any of the affected buildings during the 15-year loan term. [xv]
  • The city is prohibited from modifying or altering any of the energy efficiency upgrades during the 15-year loan term without permission from the Infrastructure Trust and/or Bank of America, even if the modification could save more on energy costs. [xvi]

Considering the overall cost of the project and the significant problems with how it all was financed, the city likely could have saved millions by simply paying for the project out of the general fund. In February of this year, the mayor and aldermen heavily debated how to spend the $15 million left over from the mayor’s failed property tax rebate program. [xvii] Projects costing much more than the retrofit program’s $13.5 million price tag are regularly passed by City Council and paid for—transparently—from the city’s budget. [xviii]


Questioning the liens

The promise of the Infrastructure Trust included many lofty goals, but putting millions of dollars’ worth of city property on lien to a private bank was not one of them.

More troubling for taxpayers is the way officials from the Infrastructure Trust bent the truth to assure aldermen and taxpayers that no tax dollars or city property were at risk.

During a Chicago Finance Committee meeting on July 27, 2015, aldermen questioned Chicago’s Chief Financial Officer Carole Brown about the details of the Infrastructure Trust’s finances. Questions from Alderman Jason Ervin (28th Ward) and Alderman David Moore (17th Ward) drove directly to many of the problems with the trust’s financing:

[xix]

This is misleading at best, because in the event of a default, Bank of America would have the right to take all of the lighting and heating fixtures from numerous city buildings.

[xx]

All retrofitted energy equipment in the 60 buildings included in this program is currently on lien. While the Infrastructure Trust is the technical “owner” of the equipment, it is all installed in city-owned buildings. There is no public record after this committee meeting of Brown clarifying Alderman David Moore’s questions on the liens.

There are many aspects of the retrofit project that could create logistical and structural nightmares for major city buildings. Relying on technicalities to avoid answering important questions is an irresponsible way to sell and operate any government program—especially a program heralded as a revolutionary new benchmark for government operations.


What was upgraded by Retrofit One?

In addition to the onerous terms of the Bank of America loan financing the project, there is also ample evidence that the Retrofit One project itself significantly overspent tax dollars on work that could have been completed by existing city employees for a fraction of the cost.

In total, the Retrofit One program installed 115 energy conservation measures (ECMs) in 60 city-owned buildings. There are 11 categories of energy conservation measures [xxi]:

  • Retro-Commission Existing Energy Control Systems: This generally involves changing the temperature settings on a heating/air-conditioning control system to new maximum and minimum temperatures. The city paid more than $500,000 to retro-commission 10 buildings’ air temperature control devices.
  • Lighting Retrofit: Lighting projects generally involved “re-lamping” and “retrofitting.” Re-lamping is simply changing the light bulbs. Re-lamping appears to have made up the majority of the lighting retrofit projects. Bulbs were generally replaced with the same type of bulb, but at a lower wattage. For example, at the Chicago Cultural Center, approximately 650 of the 32-watt fluorescent lights were replaced with 25-watt fluorescent lights.

Light retrofitting, which was considerably more rare, involved changing existing fixtures to accommodate different types of bulbs.

Twenty-five city-owned buildings received lighting retrofits. The city paid approximately $2 million for lighting retrofit projects.

  • Lighting Occupancy Sensors: This involved installing occupancy sensors so that lights automatically turn off when a room is unoccupied. Six of these projects were undertaken, for a cost of approximately $800,000.
  • Steam Trap Repairs: This involved replacing the steam traps in steam-based heating systems. Three steam trap projects were undertaken, for an approximate cost of $80,000.
  • Existing HVAC Systems Refurbish/Upgrade: This generally involves resetting a building’s temperature control system to the new temperature standards. Ten buildings received this type of upgrade, for a cost of slightly under $500,000.
  • Demand Control Ventilation: This is an automated system that adjusts the ventilation of buildings. For example, the Central District Office for the Water Department received a demand control ventilation system for its garage, which opens the ventilation system only when vehicles are running inside the garage. A demand control ventilation system was installed in four buildings, for a cost of slightly more than $500,000.
  • Energy Control Upgrades: This involves upgrading a building’s already-existing automation system. Essentially, the computer that runs a building’s heating, cooling and air ventilation is either replaced or upgraded. Twenty-one buildings received this upgrade, for a total cost of $2.2 million.
  • New Building Automation: This involves installing a new building automation system, which automates a building’s heating, cooling and air ventilation. Nine buildings received this upgrade, for a cost of $2.3 million.
  • Building Weatherization: This involves putting weatherization strips around doors and windows. The city paid approximately $325,000 to have 21 buildings weather-stripped.
  • Major HVAC Upgrades: Three buildings received this upgrade, although this represents the largest category by total cost, coming in at just under $2.5 million. These projects involve major work on building HVAC units. Approximately $2 million of the major HVAC upgrades was for a new water chilling system for City Hall.
  • Miscellaneous: Three projects fit into this category, which focuses on building specific upgrades, such as installing chemical water treatment systems. The total cost for these projects was under $50,000.

There were drastic differences in the cost of materials versus labor for the Retrofit One project that could have been completed by existing city maintenance employees.

Two of the most common jobs from the retrofit program involved replacing light bulbs, and laying down weather strips on building doors and/or windows. In total, these two job categories cost $2.2 million. [xxii]

The two electric companies that completed these jobs, Ameresco and Schneider Electric, estimated the total material costs for these two project types at $830,753. [xxiii] However, the city paid more than $1.4 million to have the light bulbs put in and the weather strips laid down by electric company workers or contractors. This is work that could have easily been completed by existing city maintenance employees.


Harold Washington Library

The Harold Washington Library retrofit is an example of much of the potential waste involved with the Retrofit One program as a whole.

the Harold Washington Library in Chicago.

The energy company Ameresco projected that retrofitting Harold Washington Library would be one of the most cost-effective Retrofit One jobs they would work on. The energy savings was projected to cover the cost of the building’s total retrofit after approximately four years. Ameresco projected that 11 of the 36 building projects they were involved with would recoup their costs in 10 years or less. [xxiv]

The city paid $913,076 for Harold Washington Library’s upgrades. [xxv]

The specific upgrades made to Harold Washington Library include [xxvi]:

Retro-Commissioning Existing Mechanical Systems—Ameresco tested and reprogrammed the temperature control system to new standards (heating average of 72 degrees and cooling average of 74 degrees). Ameresco also retro-commissioned the chilled water system, air-handling system and variable air volume units.

The city paid a total of $136,520 for this work, according to Ameresco. The materials and equipment cost $24,703; the labor and overhead cost $111,817.

Lighting Retrofit—Harold Washington Library’s lighting retrofit consisted of replacing approximately 10,000 light bulbs. The majority of these replacements exchanged 32-watt fluorescent lights for 25-watt fluorescent lights.

Two lighting fixtures were “retrofitted,” which involved replacing a T-12 fluorescent lighting fixture with a T-8 fluorescent fixture.

The city paid Ameresco $650,622 to replace these light bulbs. Ameresco listed the materials and equipment for this project at $275,767, which appears to be full retail price for the new bulbs. The remaining $374,855 was labor and other overhead.

Paying an energy company or contractors a quarter of a million dollars to replace fluorescent light bulbs is a clear example of waste when the city employs maintenance workers perfectly capable of replacing light bulbs. [xxvii]

Building Weatherization—Ameresco placed weather stripping on 28 of Harold Washington Library’s exterior doors.

The city paid $11,727 for this job. The materials cost $1,693, with the remaining $10,034 being labor and overhead costs. This is another job that could have been performed by existing city employees.


Modernizing Chicago the most effective way

Being “green” while trying to save taxpayer money is a laudable goal. Using opaque financing to fund a program that wastes millions of tax dollars and risks city property is not.

Chicago’s Infrastructure Trust was sold as a creative and modern way to finance desperately needed improvements for the city’s skeletal system. The programs promised to create new partnerships for the city and its business partners. But when it was pushed through City Council in 2012, many critics warned about the potential for a program that would operate outside of transparency laws while working toward largely immeasurable tax savings.

Unfortunately, many of those fears have proven true.

Taxpayers deserve answers to what beloved city buildings are potentially in financial limbo and how the deal that put them there was allowed to move forward largely unchallenged.

While the Infrastructure Trust represents a program that could potentially have improved the city on multiple fronts, it is a program that has risked more than it improved and potentially cost more than it saved.

If the city is able to responsibly, economically and transparently finance a project through private financing, then it should be a viable option. But Chicago’s elected officials should never allow a city project to waste tax dollars while operating largely in secret.

The Infrastructure Trust shows: There is no such thing as a free lunch.

 

 


Endnotes

[i]        https://www.civicfed.org/civic-federation/blog/chicago-city-council-approves-infrastructure-trust

[ii]       Ordinance SO2012-1366, passed 4/24/2012.

[iii]      See Evidence Packet 4, Pg. 3.

[iv]       http://chicago.cbslocal.com/2012/03/01/emanuel-clinton-announce-200m-investment-in-city-buildings

[v]        http://www.dailyherald.com/article/20120301/news/703019724

[vi]       This estimate comes from including only costs for materials and labor, while excluding other costs, such as overhead and other various fees.

[vii]      See Evidence Packet 1, Pg. 13, 18, 22.

[viii]     The loan was comprised of three separate notes, A, B and C, with principal balances of $6,796,758, $2,691,054 and $3,99,464, respectively.

[ix]       See Evidence Packet 1, Pg. 10-12.

[x]        See Evidence Packet 2, Pg. 8 and Pg. 23.

[xi]       See Evidence Packet 1, Pg. 13-26.

[xii]      See Evidence Packet 2, Pg. 54 (Section 8.1).

[xiii]     See Evidence Packet 2, Pg. 51 (Section 4.10).

[xiv]     See Evidence Packet 2, Pg. 55 (Section 9.6).

[xv]      See Evidence Packet 2, Pg. 57(Section 11.1(d)-(e)).

[xvi]     See Evidence Packet 2, Pg. 51 (Section 4.10).

[xvii]    https://thesecretsix.com/2017/02/01/how-mayor-emanuel-turned-turned-cash-for-property-tax-rebates-into-a-slush-fund

[xviii]   http://www.chicagoreader.com/chicago/city-council-aldermen-daley-spent-pension-money/Content?oid=13115134

[xix]     See Evidence Packet 3, Pg. 18.

[xx]      See Evidence Packet 3, Pg. 18.

[xxi]     This information comes from the Retrofit Summary, viewable at Evidence Packet 4, Pg. 1-2, as well as from the detailed project descriptions viewable at Evidence Packet 4, Pg. 4-48 and Pg. 62-94.

[xxii]    See Evidence Packet 4, Pg. 1-2.

[xxiii]   See Evidence Packet 4, Pg. 50 (Ameresco) and Pg. 96 (Schneider Electric).

[xxiv]    See Evidence Packet 4, Pg. 54-61.

[xxv]     See Evidence Packet 4, Pg. 1-2.

[xxvi]    See Evidence Packet 4, Pg. 14-15.

[xxvii]   http://chicago.cbslocal.com/2011/07/12/how-many-city-workers-does-it-take-to-change-a-light-bulb

Evidence

Project Six evidence packet 1 - Infrastructure Trust Retrofit One loan documents

The loan terms and payment schedule for all loans included in the Retrofit One project.

Project Six evidence packet 2 - Infrastructure Trust Retrofit One loan contracts

Full loan contracts and signatures for all loans included in the Retrofit One project.

Project Six evidence packet 3 - Infrastructure Trust City Council committee meeting minutes

Meeting minutes from the Chicago City Council Committee on Finance meeting on July 27, 2015

Project Six evidence packet 4 - Infrastructure Trust Retrofit One project details

Descriptions of all work included in the Retrofit One project

Project Six evidence spreadsheet - Infrastructure Trust financial data

All costs and payments associated with the Infrastructure Trust