How
does Lease-Purchase Financing differ from Long
Term Bond Financing?
A bond financing is an exercise of a public organization's authority
to incur debt. Unlike a bond issuance, in most states, a lease-purchase
financing is not considered to be debt for state law purposes and
voter approval is not necessary to authorize the transaction. With
a bond financing, the borrower pledges a designated revenue source,
such as property taxes or user charges, and obligates itself to
raise revenues to the extent necessary to pay debt service. Usually
there is no such obligation supporting a lease-purchase agreement.
The public organization agrees only to budget and appropriate payments
from available revenue sources each year.
Both bond financing and lease-purchase financing provide a public
organization with the opportunity to own and use an asset immediately.
However, under a bond financing payments are distributed through
the Bond’s maturity, and not necessarily over an asset's
useful life. Under a lease-purchase financing, payments are typically
evenly distributed over an asset's useful life.
Transaction costs also differ for each type of obligation (as illustrated
in the Chart below) – under a bond financing, transaction
cost can range from 1.5% to 3% of the total financing. Under a
lease-purchase financing, transaction costs are minimal if at all.
The following
chart highlights the differences between
a public offering and a lease financing.
|
How
does General Obligation Bond Financing differ from
Municipal Lease Financing?
In a typical general obligation financing, the issuer of the general
obligation bonds covenants and agrees in accordance with applicable
state law to levy and collect ad valorem property taxes, without
limit as to rate or amount, in an amount sufficient to pay principal
and interest on the bonded indebtedness when due. In many states,
the state constitution or statutes will impose a covenant to levy
taxes without limitation as to rate or amount to secure a public
organization’s general obligation indebtedness. The effect
of these contractual, constitutional and statutory requirements is
to create a highly secure payment source for general obligation indebtedness.
In contrast, a municipal lease financing is based upon the agreement
of the public organization to make lease payments, which is subject
to appropriations renewal or termination at the option of the public
organization. The lease payments are made from monies appropriated
at the beginning of each fiscal period from the public organization’s
general, operating, capital improvement or revenue enterprise funds.
In some states, lease financing may in fact be a long-term financing
for a specified period of time without being subject to annual renewal
or termination at the option of the public organization (abatement
obligations). In California and Indiana, for example, a lease financing
may be payable from amounts budgeted and appropriated each year for
the entire multi-year term of the lease so long as the beneficial
use and enjoyment of the leased property is substantially available
to the public organization.
How does Revenue
Bond Financing differ from Municipal Lease
Financing?
In a typical revenue bond financing, a revenue-producing property
(such as a water, sewer or electric system) generates revenues that
are used to pay the operating expenses for the property and debt
service on the obligations incurred to finance the acquisition and
construction of the facility. The facilities financed with lease
financing frequently are not revenue-producing (such as a city hall,
fire station, jail facilities, etc.). Consequently, a lease financing
is generally not specifically supported by revenues generated through
the operation of the financed facility, but is repaid through the
fiscal appropriations process from the public organization’s
general, operating or capital improvement funds or other legally
available funds. Alternatively, if the leased facility is revenue-producing,
the revenues may be used as a “special fund” source of
payment instead of or to supplement the public organization’s
tax revenues or other funds thereby reducing the use of tax revenues
or other funds, subject to applicable state law. In many states,
revenue bonds may be secured by a “pledge” of revenues
of the revenue producing facility, but those revenues may not be “pledged” to
make lease payments (even though they may be used as a source to
make lease payments).
Combining
Long Term Bond Financing with Municipal Lease
Financing
The various financing methods discussed above are not mutually exclusive.
They can be used in combination to finance the construction and build
out of public projects. For example, a municipality might decide
to use revenue bonds to finance the construction of a new public
multi-level paring facility for its central business district, general
obligation bonds to construct a new major thoroughfare that will
benefit the entire community, special assessment or special service
area bonds to construct decorative street lighting, sidewalks and
to fund street improvements, and installment purchase contracts to
finance the purchase of a new street sweeper, new parking meters,
and crosswalk signaling devices at mid-block pedestrian crossings
on its busiest downtown streets. Such a combination allows a municipality
to pass on the various costs of the project to those who will benefit
from each.
|
