Another Tool: Municipal Leasing

Carolyn "Charlie" McNeill
Vice President
Environmental Equipment Financing
1st Source Bank
Fort Wayne, Indiana

The difference between a successfully completed task and a failure is, in many cases, determined by the tools you are given to work with. Given a tool box without a hammer, or a saw, it takes the workman a lot more time, energy, and imagination to build a house. The end result will be lacking in quality. Many department heads in public works are in a similar position. They are given the task of providing vital services to the community without the equipment needed to properly perform the job.

The reason for the lack of equipment replacement is always the same. There is not enough money. An excellent fleet management program can be derailed by the problem of money, costing the community and that department more to limp along with inadequate tools. The need to fix the financial problem dictates that a financial tool is needed in your tool box. This tool has to be easily explained, financially sound, and fit within the budgetary and debt cap constraints. It has to make sense, providing the funds without breaking the budget. It has to fit into scheduled replacement and provide flexibility.

The most common tool is the reserve account that attempts to build up funds for a purchase over the years. This tool's effectiveness depends upon a lot of factors outside a department head's control, like inflation, or the reduction in funds to the reserve when money gets tight.

Bonds for equipment purchases are available, but only for large dollar amounts. Bonds are subject to letting, hearings, and underwriting and legal fees. There is normally a lot of time spent securing a bond if it is a viable large dollar expenditure. This tool is not for smaller purchases, and is normally used for big capital improvements.

A municipal lease purchase allows a municipality to acquire equipment without a large initial cost. A lease rate may initially appear slightly higher than a bond rate, but given the upfront costs, a lease purchase may provide a lower net cost. A lease purchase gives the municipality manageable payments over time. Unlike a consumer lease, there are no mileage or hours restrictions on the equipment. A municipal lease purchase is simply a finance contract with annual non-appropriations language and a $1.00 option to purchase.

What is non-appropriations language? It is language in the contract that allows the municipality to terminate the lease at the end of any fiscal year if they cannot appropriate the funds to make the payments. This language generally allows a municipality to avoid the contract being considered long-term debt and does not need to be considered when meeting statutory restrictions on such debt. Be warned, there is probably language in the contract that also states that you may not terminate the contract if you just want to replace it with similar equipment. This language is why the lender will mandate that the equipment be "essential use."

In a lease purchase, the municipality maintains title to the equipment, and gains equity in that equipment with every payment. The lease terms are generally between 3-10 years. This allows fleet management to budget funds on the useful life of the equipment, and plan for using it as a viable, price-reducing trade-in. The best trade-in amounts are given for equipment that still retains "useful life," so plan carefully.

Municipal lease purchases can make the job of budgeting easier. Many municipalities report that they can plan at the end of the lease to be able to trade in the equipment for at least 20% of the original sales price. This allows them to enter into another lease purchase contract on the new replacement piece at or even below the payments they had before. Again, the key is to replace the equipment before it becomes worthless and hard to dispose of.

Proper fleet management reduces costs. This is a proven fact, and many studies and analyses exist showing the benefits of replacing equipment on a regular basis before repair costs and downtime become a problem. There are also the intangible benefits of better service to the community, happier employees, basically giving the workers the proper tools to do the job properly. A municipal lease purchase appears to be the right financial tool with flexibility, low cost, minimal time and hassle, to use with a planned fleet management program.

Municipal Lease Purchase Financing is available to any governmental entity that has at least one of three powers: Power of Eminent Domain, Policing Powers, or Taxing Powers. It is not restricted to just cities and towns.

Qualifying agencies may obtain lease purchase financing by requesting equipment suppliers include a lease option in their bids. Most banks and other financial institutions are willing to give quotations and bids when asked.

The author is happy to provide a free municipal leasing booklet to those interested in learning more about this financial tool.

Carolyn "Charlie" McNeill is Vice President of 1st Source Bank in Fort Wayne, Indiana. A native of northeastern Indiana, Charlie specializes in municipal leasing with the bank's Environmental Equipment Financing Group. She has been with the bank since July of 2000, and brings over 20 years of lending experience with CIT, Newcourt Financial, Circle Business Credit, and Wolfe Financial. She is a member of APWA, SWANA, NSWMA, and the Indiana Association of Cities and Towns. Charlie can be reached by phone at (260) 490-9014 or e-mail at mcneillc@1stsource.com. 1st Source Bank is FDIC insured and headquartered in South Bend, Indiana.