What resources do local governments, organizations, and institutions have for obtaining financial assistance in the nascent yet growingly critical realm of clean energy financing? In the state of Illinois, the Illinois Finance Authority (IFA) serves a bifurcated role in facilitating financing transactions associated with clean energy and other mission-based organizations. The IFA wears one hat as a traditional conduit lender issuing bonds on behalf of organizations, and secondly as a Climate Bank since its designation in 2021. Part of the IFA’s role as a Climate Bank entails providing financing options through federal grants received under the Bipartisan Infrastructure Law and the Inflation Reduction Act. The critical function of the IFA is that it offers low-interest rate loans typically unavailable in private markets.
Many IFA grants are now jeopardized by President Trump’s sweeping federal freeze mandates from earlier this year. The order drafted by the Office of Management and Budget mandated freezes across trillions of dollars in federal grants. Although the initial decision was subsequently rescinded in response to a legal and public backlash, these developments upended the lending sector. For the non-profit sector working with the IFA, it meant disruptions and uncertainty across a range of climate-related projects.
Private markets tend to shy away from lending to non-profit organizations. Non-profit organizations are characterized by highly variable and inconstant revenue. Funding can derive from a proliferation of different channels, ranging from private equity, angel investing, and grants. These streams of income are not steady. They are often one-time lump sum payments rather than projectable cash flows. From a lender’s perspective, it means higher default risks. Consequently, organizations often must pay exorbitantly high interest rates to compensate the lender for taking on these uncertainties. Further, construction projects for universities or religious organizations serve a single and specific use. Lenders heavily discount valuations on these assets because there might be difficulties in finding a new buyer or user. Thus, the Illinois Finance Authority fills the gap where profit-seeking or risk-averse lenders are unwilling to loan to mission-based organizations.
In the absence of the IFA’s presence as a Climate Bank, state-wide projects aimed at mitigating climate change will stagnate. Between 2022 and 2023, the IFA deployed $627 million in capital, including $361 million through the State Revolving Fund with the Illinois Environmental Protection Agency in projects strengthening public water quality infrastructure improvements. Additionally, a significant portion of this capital was implemented to benefit disadvantaged communities. While the Climate Bank provides financing that directly improves the prospects of clean energy implementation, there are other societal implications as well. As climate change increasingly and disproportionately affects disadvantaged communities, the IFA strives to alleviate these disparities.
The bond-issuing function of the IFA remains largely unchanged as a result of Trump’s defunding threats. However, the organization’s role as a Climate Bank, particularly in utilizing federal grants for financing alternatives like revolving loans, direct loans, and bridge loans, depends on fluid access to funds sourced from federal legislation. Blocked access to these grants hinders state-wide progress in executing projects that address climate-related threats.