How does Lease-Purchase Financing complement a Pay-As-You Go Appropriations Methodology?
A basic tenet of debt management is to avoid unnecessary borrowing. By paying for capital expenses out of current revenues, public organizations can avoid interest charges and minimize the administrative chores associated with debt management. However, it may not always be feasible to finance large capital projects out of current revenues, or to undertake equipment upgrades and replacements if outlays do not occur on a predictable basis.

Lease-purchase financing provides a financing vehicle that enables a public organization to acquire equipment or fund capital projects by paying for them over time out of current expenses. Since lease payments are made out of the current fiscal period’s revenues, without obligation beyond the current fiscal period, a lease does not constitute “debt” for purposes of state constitutional and statutory provisions in a majority of states. The affect of utilizing lease-purchase financing under a pay-as-you-go appropriations methodology is that , without adversely impacting its’ debt capacity, a public organization retains financial flexibility in the event of a sudden revenue shortfall or an emergency spend requirement. Additionally, under a lease-purchase financing, a down payment, or every periodic lease payment, functions as a capital contribution and effectively builds up equity under a pay-as-you-go appropriation.