State, local and tribal governments rely on a variety of equipment to deliver essential public services. So do fire districts and other government-related non-profit entities. They must regularly replace and upgrade equipment, and they must adjust the quantity and types of equipment they use as the needs of their communities change.
This year alone, state and local governments in the United States will spend $400 billion on fixed assets such as structures, equipment and software, according to IBISWorld estimates based on data from the Federal Reserve Bank of St. Louis. Rising state and local spending on infrastructure since the Bipartisan Infrastructure Law was passed ─ the largest two-year increase since 1979, according to the U.S. Department of the Treasury ─ is also worth noting because of the yellow iron machinery, trucks and other assets required for improvements.
When it comes to equipment spending, one question that government procurement leaders routinely ask themselves during the decision-making process is whether to acquire new or used assets. Which is the better public investment? “It depends,” says Dave Burr, Assistant Vice President of Baystone Government Finance. “While new equipment offers distinct advantages, used equipment can also benefit some communities. Each option has its pros and cons depending on a community’s needs, resources and the equipment required.”
Used Equipment Pros and Cons
“The sticker price for used equipment is less expensive and more affordable, so that is a consideration for governments and nonprofits on a tight budget,” Burr explains. As one example of this, he cited a large school district’s decision to acquire refurbished Apple laptops through a three-year, tax-exempt municipal lease financed by Baystone.
Additional benefits of used equipment can include lower insurance premiums, and faster delivery compared with certain categories of new equipment affected by supply chain slowdowns. On the other hand, used assets have a shorter remaining lifespan than new. Good-quality used equipment that is in high demand also can be difficult to source. What’s more, financing costs associated with acquiring used equipment tend to be higher than for new, offsetting some of the sticker-price savings.
New Equipment Pros and Cons
“New equipment has a longer useful lifespan, and borrowing can be extended over a longer finance term,” Burr says. “The interest rates are also more attractive. How much so depends on the age of the equipment.” Generally speaking, for aged equipment, the difference can be 5 to 25 basis points or more depending on the type of equipment.
New equipment also has a higher resale value when it is time for the government organization to dispose of the asset. It incurs lower maintenance costs and may be covered by warrantees. “Most organizations financing through Baystone favor new equipment for these reasons. They also understand that the process of acquiring equipment takes careful planning. Delivery for certain types of new equipment can take months and, in the case of specialty vehicles such as fire trucks, several years due to supply chain delays,” Burr adds.
Tax-Exempt Financing for New and Used Assets
Whether acquiring new or used equipment, many government organizations and non–profits prefer to finance their assets through tax-exempt municipal leases, for two key reasons. First, tax-exempt municipal leases offer rates averaging 30 percent lower than traditional commercial rates. Second, the financing is also a lease-purchase agreement, which means the government entity owns the equipment at the end of the lease term.
An organization must meet certain criteria for tax-exempt municipal financing. Qualified entities include states; political subdivisions, such as cities, towns, counties, and other municipalities; state entities, such as school districts; special-purpose districts, including fire, parks, utility and water; hospitals, agencies, authorities, boards and commissions. Volunteer fire departments are included if they complete IRS requirements to qualify for a tax-exempt rate. IRS Section 103 says an entity must possess one of these three “powers” to issue tax-exempt obligations: the power to tax; police power; and/or the power of eminent domain.
Equipment Financing Resources for Your Community
Baystone finances a variety of equipment and real property for communities across the United States. Any and all capital projects, equipment and property considered essential use are considered for financing. We work directly with government entities, qualified non–profits and the equipment vendors and brokers who also serve them. We offer tax-exempt municipal leases and other forms of financing through our parent company, KS StateBank.
The following are links to a few helpful resources on our website. You may also contact Dave Burr directly at email@example.com or by phone at 913-748-4628 with questions.
What types of equipment and real property does Baystone finance?
How do master lease programs streamline government equipment financing?
How are vendor payable accounts helping municipalities manage rising equipment prices and delays?