Tax-Exempt Equipment Leases Helping States, Localities with Budget Shortfalls

State and local governments are facing widescale reductions in tax revenue from the economic and social effects of Covid‐19, while at the same time bearing the brunt of pandemic‐related costs. They are also dealing with increased funding challenges as some of their previous bank sources pull back from government financing. Given these new realities, an important question is being asked by municipalities across the country: how can we continue to acquire the essential equipment needed to keep our communities running?

Tax‐exempt municipal leases, also known as lease‐purchase agreements, will prove the answer for many. The benefits of tax‐exempt lease purchase financing are plenty. However, two considerable benefits include the fact that tax‐exempt municipal leases do not require upfront cash outlays, and they offer much lower financing rates than traditional commercial leases and loans – a difference of multiple percentage points in some cases.

Our company specializes in tax‐exempt equipment finance and works directly with governments and equipment finance organizations to help communities acquire the equipment they need. Recently, we have seen an uptick in demand for certain types of assets that are essential “in the now” for municipalities to address issues related to the pandemic, from equipment and vehicles used by first responders, to technology that supports the increased need for remote learning in school districts. All the while, equipment that was in demand before the pandemic continues to be important, including body cameras for police officers as calls for more transparency continue, and “yellow iron” equipment for construction and infrastructure projects underway. Adequately addressing these needs requires state and local governments to assess both the resources they have on hand, and that which they need to acquire.

While many municipalities had substantial cash reserves before the pandemic, the full economic effect of Covid‐19 is still unknown. Any relief the federal government may deliver will alleviate, not eliminate, budget shortfalls. Most state and local governments will be wary of spending down their cash reserves in these uncertain times. It’s far better to preserve cash for needs that cannot be financed as cost‐effectively.

Undoubtedly, municipalities will put some equipment acquisitions on hold as part of their cost‐cutting measures, but other needs simply cannot be postponed.

The Equipment Leasing and Finance Association’s recent Washington Report noted an expectation that significant fiscal strain on states will continue this year and into 2021. “With an inability to run a deficit, states will either need to dramatically reduce spending or get assistance from the federal government,” the report said.

Just how bad could it get? Politico cited figures from the Center on Budget and Policy Priorities in May that estimated state budget shortfalls could climb as high as 10 percent in fiscal 2020 and 25 percent in fiscal 2021. Tax hikes, federal relief and cost containment will be a salve but no remedy.

“Moody’s Investors Service said last month that budget gaps are likely to occur even if states cut funding to local governments, increase taxes and receive more federal aid. After the 2008 financial crisis, Moody’s noted, states did all three — but still had to cut budgets on average 3.8 percent in fiscal 2009 and 5.7 percentin fiscal 2010,” Politico reported.

Localities also have a rough road ahead. A study released by the National Association of Counties estimates a $144 billion impact nationwide through fiscal year 2021, including $114 billion in lost revenue and $30 billion in additional expenditures. “County expenditures are increasing dramatically as we pour additional funding into health and hospital systems, justice and public safety services, human services, technology infrastructure and education,” the report said.

Leasing options should become more attractive for state and local government essential equipment needs in the current climate as municipalities look to preserve cash on hand.

States, cities, towns, counties and other municipalities qualify for tax‐exempt leasing. So do their school districts and special purpose districts such as fire, parks, utility and water, and volunteer fire departments. Both personal property and real property can be financed on a municipal lease, including a long list of assets ranging from computers to recreational equipment.

While some municipalities may prefer to acquire such equipment through a tradition bond issuance, in many scenarios a lease purchase is the more attractive option. This is because a lease purchase can be entered into without external issuance costs associated with a bond – i.e., bond counsel fees – and without the need of voter approval as a lease purchase is not considered a debt of the municipality because of the non‐appropriation clause.

While some large banks have been withdrawing from municipal financing in recent weeks, we remain committed to funding municipal transactions of all sizes, including smaller ticket transactions.

Over the last 30 years our motto has been “Together We Keep Communities Running.” We know the challenges our localities are facing and we are committed to our motto today more than ever. It is important for those of us in equipment finance to help communities acquire the essential equipment needed to continue providing the vital services we all rely on.