September 7, 2023


The IRA and Public Schools

Green investment for school infrastructure

Public school buildings in the United States are crumbling. National school infrastructure received a D+ rating from the American Society of Civil Engineers in 2021, and in more serious cases, learning environments have become toxic. Given the segregated and unequal nature of public schooling, building quality is closely tied to racial and class-based inequalities, with schools in lower-income communities confronting the most serious health and safety consequences. In addition to these unsafe working environments for teachers and students, a recent study by scholars at the Harvard School of Education found that schools are one of the largest consumers of energy within the US public sector, consuming energy equivalent to eighteen coal-fired power plants or fifteen million cars each year. This is both costly and necessitates involving schools within the broader project of decarbonization. 

Indeed, schools are an essential arena for the Biden administration’s new green industrial policies. While a cottage industry has formed around assessing whether Biden’s industrial policies—specifically the Inflation Reduction Act (IRA)—are commensurate to the scale of the problems they set out to address, it’s imperative to survey how IRA programs might look on the ground if applied to their fullest strength. How would IRA programs affect public education finance—specifically school facilities and infrastructure? And how would these financial flows challenge the present state of educational inequality and segregation?

Perhaps because the American Rescue Plan—the Biden administration’s pandemic relief package—included $122 billion in funding for schools, the IRA was not billed as a piece of education legislation, nor did schools take center stage in either the negotiating process or messaging around the policy. But the IRA holds major implications for public schools. While details on these policies are still forthcoming, I examine how two IRA flagship programs—the direct pay Investment Tax Credit (ITC) and the Greenhouse Gas Reduction Fund (GGRF)—could function within existing public-school infrastructure projects. A report from Aspen Institute’s education arm summarizes thirteen policies in the IRA that school districts could benefit from, of which the ITC and GGRF stand out for their novelty and impacts.

The ITC has been likened to a mail-in rebate for green investment and production; it could provide public schools up to 60 percent reimbursement for qualifying projects. Due to its tax credit structure, the ITC could provide trillions in such reimbursements, while other IRA programs open to schools are more limited in amount. Likewise, the GGRF has been called the country’s first green bank, with the potential to restructure credit flows for infrastructure projects and open up new avenues for financing. Such programs have never before been available to school districts. 

I study these programs’ hypothetical implications for two different case studies: a green bond sold by the School District of Philadelphia (SDP) in 2021 and a net zero elementary school renovation in Manchester, Connecticut. These two districts are instructive as they represent the disparities between school districts in the United States: the former is a large, poor city serving a diverse working class population in a state with constrained financing for schools. The latter is a smaller town serving a less diverse population, in a state which has historically been more generous in its school facilities financing and more progressive in its consideration of school buildings’ carbon emissions. The ITC and GGRF, along with a bevy of other programs, could contribute to the broader decarbonization effort of districts across a diverse set of public schools. But due to the fragmented nature of schools and districts, the financial mechanisms of the IRA threaten to reproduce underlying inequalities.

Philadelphia’s green bond

The School District of Philadelphia—which serves the diverse working class of one of America’s poorest big cities—needs to improve and modernize its facilities, with costs estimated conservatively in the range of $5 billion. The IRA could help facilitate this process, lowering costs for green projects in school buildings. Despite its infrastructural weaknesses, SDP has a track record of investing in energy-efficient facilities. In 2021, the district sold a bond worth $370 million, $60 million of which was set aside for green projects. Green bond revenues are dedicated to environmentally-friendly projects, widely understood. Their popularity has soared in recent years, with the Climate Bond Initiative reporting that more green bonds were sold in the first quarter of 2021 than all of 2015 combined. 

School districts must bid for construction contracts, with strict laws regulating this process. In order to prevent corruption and inside-dealing, a district must take the lowest reasonable bid. But with green projects in Pennsylvania, the state-level Guaranteed Energy Savings Act (GESA) provides some flexibility in the contracting process. GESA resembles a green procurement law that allows institutions like school districts to insert clauses into their contract that make it easier to bid and complete projects that reduce energy usage, thus incentivizing what tend to be more expensive green infrastructures. Rather than the lowest bidder, a GESA project can go to the greenest, perhaps increasing costs but reducing emissions in the long run.

SDP needs billions to modernize its large, aging, and decrepit plant. In 2020, the district infamously settled with Lea DiRusso, an elementary school teacher, for $850,000, after she was diagnosed with mesothelioma developed at Meredith Elementary school (which the district has since knocked down and is rebuilding, partly funded through GESA projects). Philly’s 2021 green bond statement reported that the city had been working on GESA projects since at least 2016. $60 million from the 2021 bonds are going towards the first group of these projects, called GESA-1. An addendum to the bond statement lists the kinds of projects the green bonds will finance and where, including HVAC modernization, recommissioned energy management systems, intelligent lighting systems, and building insulation at eight of the district’s 300 buildings. 

Applied to the project of greening the district’s buildings, the IRA could cover more than half of all costs. Direct pay tax credits for both green infrastructure investment and green energy production could be channeled to geothermal heat pumps replacing gas boilers, dynamic glass for exterior windows, electric school buses, and potential savings on LED lighting. The law updates an existing tax deduction for private firms who contract with school districts to implement more efficient LED lighting. The new tax credit for private firms covers $5 per square foot of lighting if the project reduces energy usage by 50 percent; that number could increase if the district produces clean energy rather than only creating efficiencies. The savings, however, go to the contractors. 

The 2021 bond statement reported that Johnson Controls International (JCI) would be the main contractor for its green projects. JCI is a buildings maintenance firm with whom the district did $8.6 million of work in 2020. In 2016, the company moved its base of operations from the United States to Ireland to take advantage of lower corporate tax rates, thereby avoiding $150 million of US taxes per year. Even Hillary Clinton called the move outrageous. If IRA programs were applied to the 2021 green bond, any district savings from tax credits would be in its contract with JCI or a similar company. To the extent that the IRA encourages more green infrastructure projects and incentivizes a school district to take on more than it normally might, the flows of resources would go to contractors, who likely employ non-unionized workforces.

The ITC and GGRF do not stop at investment and production incentives, they also influence financing structures and revenue flows, which affect how districts like Philadelphia borrow from the municipal bond market. The IRA capitalizes green banks through the GGRF, and Philadelphia’s school district stands to save millions of dollars each year on debt service through this policy. Since 2005, the SDP has spent on average $3.1 million in bonding costs per year; in 2021 alone, it spent $17.8 million. On average, the district has paid 4.68 percent interest on its bonds, costing $11.15 million per year. The GGRF could offer significant resources to the Philadelphia Green Capital Corporation (PGCC), the city’s new green bank, a nonprofit entity operated by the city government that works with private and public institutions to structure credit flows for low emissions infrastructure projects. According to their advocates, green banks deploy public resources to galvanize green investment, ensuring that both private lenders and public borrowers get good deals on loans. One of the most significant limitations of green banks is their under-capitalization, leading to relatively low volume of project financing. The GGRF is supposed to address this shortcoming by capitalizing existing green bank programs. By going to the PGCC instead of the municipal bond market, the district stands to save $15 million a year on average on costs of issuance and interest payments.

Two-thirds of school districts nationwide participate in these costly, traditional borrowing schemes; the others are located in states whose governments go to the municipal bond market to borrow for school infrastructure in the absence of any national program. In 2021, the district paid private financial counsel Eckhert Seamans $714,414.85 for legal services and Phoenix Capital Management LLC $656,207.38 for financial consulting for green bonds. In addition to the credit rating agencies, several banks were involved: Siebert Williams Shank & Co, LLC; AmeriVet Securities; Barclays; Bank of America Securities, LLC; PNC Capital Markets; Ramirez & CO; and RBC Capital. Siebert Williams Shank gained the most, taking an underwriter’s discount on the bond, for an amount still undisclosed due to hidden reporting practices. The high 5 percent interest rate on the 2021 bond contributed to its expense for the district. The GGRF has the chance to intervene in this dynamic. 

With more muscular capitalization for Philadelphia’s green bank, the district could avoid contracting with Eckert, Phoenix, or Siebert, paying fees, and worrying about punitive interest rates or credit ratings. The green bank, newly capitalized, could negotiate a lower interest rate, and even no interest rate, halting the municipal bond market’s power over the public school district. The IRA has the ability to redirect these financial flows away from asset managers and private investors and towards the district, creating both savings and a paradigm shift in how the revenue and capital expenditure process works.

Manchester’s zero emissions school

Buckley Elementary, built in 1952, is now Connecticut’s first zero emissions school. A predominantly white and high-income suburb of New Haven, Manchester hired CMTA, a company that specializes in net zero renovations, for the project. They describe their work in the school: 

A roof-mounted solar photovoltaic array to offset the building’s utility demand. The 360kW roof-mounted solar array will generate enough energy annually to meet all of the building’s energy demands… [the project] will utilize a whole building blower door pressure test to validate the tightness of construction, as well as thermal scanning/imaging. Enhanced roof and wall insulation, appropriate use of glazing, demand control ventilation, geothermal heating and cooling, and photovoltaic arrays are all components for this renovated facility. This high-performance building will exceed code minimum requirements and will supply outside air directly from the dedicated outside air unit to the individual spaces to maximize effectiveness. Demand control ventilation strategies will be implemented to regulate ventilation air throughout the building, based on occupancy and carbon dioxide levels.

Manchester Schools’ director of communication Jim Farrell documented the details of the Buckley net-zero project as it happened, along with other facilities projects in the district. Farrell tells of Gene DeJoannis, a retired engineer and environmentalist who has been a central force advocating for net zero emissions in the district’s school buildings. DeJoannis states the case very clearly, “Schools last a long time, so the extra care we take now will pay dividends for many years.” Farrell reported that town officials have had to bump up costs by 5 percent, or $3.8 million, to reach net zero targets. Ultimately, “[t]he district and town are committed to this goal. Local taxpayers are expected to be responsible for $47 million of the total cost after state reimbursement and other factors.” Part of that reimbursement comes from the state’s energy utility “Eversource’s Energy Conscious Blueprint program,” which “offers incentives to offset costs for energy modeling and installing more efficient equipment.” Ultimately, the Connecticut Office of School Construction Grant and Review process will reimburse the town for two-thirds of the cost of the project. 

The ITC and other IRA programs would support these reimbursements, offering financing for local and state programs so that other districts could follow suit. Many of these reimbursements would flow to CMTA, part of the Legence network of “sustainable builders”—private construction and maintenance companies branded more green than not. Legence is a company within BlackStone’s portfolio, and if Manchester’s Buckley project were an IRA project, CMTA-Legence-Blackstone could benefit from ITC reimbursements.

Although Connecticut founded the county’s first Green Bank in 2015, the institution hasn’t been a decisive part of the Buckley project, most likely due to low capitalization. Farrell mentions that “in yet another sustainability initiative, the town is working with partners including Connecticut Green Bank to install photovoltaic panels atop nine buildings (including seven schools) at no cost to the community, but bringing an estimated $3 million in energy savings over 20 years.” With the IRA, Manchester recoups those extra expenses on the net-zero energy usage over that period. Such strategies could become more common and robust in districts across the country through IRA financing.

In addition to the ITC, the GGRF could also play a role. In 2016, a city referendum, a result of the “School Modernization and Reinvestment Team Revisited” in 2012, led the city to sell $93 million in bonds. Manchester has decided to borrow each year in $15 million increments for these and related municipal projects. Each time they borrow from the municipal bond market they face similar fees, discounts, and interest to those described in Philadelphia. Manchester banks with FHN Financial Capital Markets, consults with Shipman & Goodwin as bond counsel, in addition to paying for credit ratings. Manchester and other municipalities would save millions if the GGRF capitalized the state’s historic green bank, which could secure lower fees and interest rates.

Infrastructures and inequalities

Manchester and Philadelphia are just two of over 10,000 school districts across the United States. The physical infrastructure of schools is determined by historic resource inequities as well as a complex mix of local, state, and federal policies, leaving certain districts better equipped than others to address the climate crisis. IRA programs must navigate this convoluted and uneven financing system. Manchester’s borrowing costs, for example, are much lower than Philadelphia’s, and the district faces less exposure to the bond market’s harms because of Connecticut’s more generous facilities programs. The IRA would not be able to equalize the costs faced by each district, and it would likely direct revenue to private conglomerates at the forefront of green infrastructure like BlackStone and JCI . Nevertheless, the IRA would reconstitute the means of financing these projects, capitalizing green banks, and thus challenging the municipal bond market’s monopoly on credit for school facilities. While the IRA is unlikely to eliminate inequalities between districts, it may lessen them by providing greater access to financing.

In the debates around the 2021–2022 budget reconciliation process, two promising proposals—ultimately blocked—had the potential to unlock a greater transformation in public infrastructure: a Green New Deal for Schools (GNDS) and a National Investment Authority (NIA). The GNDS was a creative and generous policy for the moment, offering more than a trillion dollars in grants for the physical and social infrastructure of public schools. In addition to monies for ventilation and windows, the policy supported curriculum development and prioritized unionized labor. The policy’s Climate Capital Facilities Grants, for example, offered $446 billion over ten years for green retrofits in all K-12 schools, prioritizing the lowest-income schools in the first three years. These targeted measures would have led to a more even implementation and distribution of funds.

The IRA programs could be considered vestiges of these more muscular dreams, and they are perhaps the best opportunity to clean and green public schools. But they are not nearly enough. The GNDS and NIA offer a more expansive vision of green industrial policy for economic and social justice, with the potential to directly confront the challenges of a fragmented and segregated schooling system. Public school buildings are a crucial part of the project. 

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