Comparative Information – Lease Purchase Financing vs. Bond 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.