Municipal CFO Series: Lou Hoffman, Albuquerque

Lou Hoffman is the Director of the Department of Finance and Administrative Services for the City of Albuquerque. His department includes 300 employees and a budget of $74 million, and provides internal services including accounting, budget, information technology, purchasing, office services, real property, risk management, cash management, and investments and citywide fleet services. He holds a Bachelor of Science and a Masters in Business Administration from the University of New Mexico.

The City of Albuquerque has implemented some successful sustainability programs, including solar on parking facilities, cool roof installation, and thin film solar panels. How did the city finance these programs and what were the challenges in the process of implementation?

The projects at the airport were made possible mainly because of heavily subsidized federal grants. In addition, Lenovo Energy Conservation Initiatives allowed us to use some of their money for solar panels. We continue to expand that, with preparations now on the two-acre site of a major power source, which will power back to the grid to reduce our costs at the airport.

Our major obstacles here are more technical in nature. Some of the systems did not work to begin with, were not properly engineered or installed. With any technology, the country needs to build a base of talent to go out and do that work. As far as other systems, they are working fine. All in all, I think it has been a pretty successful operation.

Albuquerque councilors have long aimed to make the city a leader in energy conservation. However, in December 2011, councilors narrowly agreed to adopt a less stringent code to foster economic development in the city. How does Albuquerque reconcile economic growth with environmental well being?

The problem was that the policy was adopted for one time. It was very aggressive, very expensive, and really unsupportable. It was done primarily by the previous mayor named Martin Chavez. He was trying to, frankly, create a constituency among people who are environmentally orientated.

The previous mayor insisted, for example, the city use E85 biofuels. The problem was that with E85, you get worse mileage compared to unleaded gas. In 2010, the EPA mileage book shows that unleaded gas gets 18 miles per gallon whereas E85 gets 14 miles per gallon. When our administration came to govern, we adopted a plan that established an algebraic relationship between these two fuels. We only started using E85 when it was at least 40 cents less than unleaded gas.

Our economy is flat. We really do not have any catalyst right now. So, I think what the councilors did was basically back-up to what was essentially a national standard as opposed to this artificially-sound-but-cannot-be-done standard.

Is being a leader in energy conservation still a long-term goal for Albuquerque?

I am not sure that it will be a long-term goal. It is not a high priority right now, although certainly we do have money heavily invested in the city’s energy conservation. For instance, we have been replacing incandescent light with LEDs. That is the first payoff. If you change all your lights, it makes a big difference and saves a lot of money. But most of our decisions in the administration right now are based on economic considerations.

We have been making decisions based on the economics. While it will be better if we can do something for the environment too, it is not our primary objective. In the good times like 2005 and 2006, when the City of Albuquerque was growing at six or seven percent per year, you could afford to do things like that. But now you have shorter-term problems, and you need to fix them and balance your budget first.

There is also a lot of emphasis on renewables in Albuquerque’s sustainability projects.  How does the city encourage renewable energy investment in Albuquerque?

Some of the greatest potential we have right now for renewable energy in New Mexico is with sunshine and wind. Our major obstacle is building a large amount of wind farms. If we could do that, we would get several megawatts of capacity in New Mexico.

But that still has an intermittency problem to it. The only thing you can do to deal with that is to try to find two types of systems, dependent on perhaps different cycles. Certainly if you put wind and solar together, you are likely to have wind at night when you would not have the other. Particularly in the summer time, much of America is peak-loaded during three to five in the afternoon. So you potentially have both of them together when you have peak load, maybe not a sustainable amount of output, but some more common average amount of output for the night.

Dynamic systems like pump water are probably the most practical to store energy, but we do not have water in New Mexico. In addition to pumping water to higher elevations using wind or photo electric power sources, another simple tactic could be the use of electrical power from such systems to generate hydrogen that could be stored under pressure using hydrolysis. This fuel could then drive turbines during the night. In general any form of storage would need to be simple in order to be reliable. Some inefficiency could be tolerated as long as there was an ample source of surplus sun or wind during the periods of the storage of either potential or chemical energy.

What are some of the recent innovations in financing infrastructure in the city of Albuquerque?

Indirectly, the most innovative thing we are doing right now to generate more money not directly for infrastructure, but to make it possible to spend more money on infrastructure, is actually hedging fuel costs. I go once or twice a year into the futures market and buy futures agreements, based on the futures market projections for fuels at a particular time. We have been pretty successful in identifying the low points for markets. So in the last two years, we have saved over a million and a half dollars on the cost of fuels. Like any system, there is some variability, but if you calculate, the variance of the costs of gas right now is about 25 percent at the maximum. All the work I have been trying to do is to make sure that our average costs are less than the average costs in the market.

The model is perfectly replicable for other cities. A city with triple-A ratings and $600 million dollars in the bank is considered to have good credit. So it is simply a technical matter, and frankly not that difficult once you understand the basics. But when you go into a swap, both parties take equal risk and they both agree to keep each other at hold regardless of the outcome. This is why credit rating is so important. Because if things turn upside down, you have to make a termination payment and it could be millions of dollars.