Tax-Exempt Financing for a New England Town

Public Works Equipment Attained with Municipal Lease

The constant need to replace and upgrade large equipment such as snow plows, school buses and fire engines places significant pressure on the finances of state and municipal budgets—and the tax sources that fund them. Baystone Government Finance can relieve some of the financial burden of maintaining modern equipment fleets through the use of tax-exempt municipal leases and escrow accounts, as demonstrated in this recent example.

Baystone is a member of the Massachusetts Higher Education Consortium (MHEC), a leading purchasing consortium for educators and municipalities in New England. In 2022, Baystone submitted the winning bid through MHEC to finance equipment needed for road construction, maintenance and snow removal in a New England town. The equipment included heavy-duty Chevrolet trucks, an Elgin street sweeper and a Toro mower.

Town officials were able to finance the essential equipment through a tax-exempt municipal lease. Municipal leases are lease purchase agreements that offer a lower rate and other benefits for qualified state, local and tribal government organizations. The town official responsible for procurement noted that a municipal lease spanning three to five years can be used to “stretch” government funding. It can enable a municipality to afford newer, more efficient equipment right when it is needed, with a longer lifespan. It also includes a provision for the town to own the equipment at the end of the lease.

The town achieved additional economies by taking advantage of Baystone escrow accounts. This has become an increasingly attractive option given rising equipment prices, higher interest rates and continued delivery delays for certain types of machinery. Baystone professionals estimate the town enjoyed an interest rate almost 1% below the market average and saved thousands of dollars by using an escrow account. The municipality was able to lock in equipment prices and interest rates in September 2022, and the escrow account was used to pay vendors as they delivered the equipment in the summer of 2023.

Master Lease Programs for Government

Should the locality require more equipment during its lease term, town officials can also consider leveraging their existing contract through Baystone’s “master lease” terms. This is included in tax-exempt municipal leases to streamline the process of acquiring additional equipment.

Experts in Government Funding

Baystone has decades of specialized government financing experience supported by an in-house legal team, nationwide funding and state-specific contracts meeting each jurisdiction’s requirements. All are backed by the resources of KS StateBank.

That expertise and efficiency have been evident to the official who oversees procurement for the New England town. Working with Baystone, he said, has been a smooth, straightforward process to date.

Who qualifies for municipal leases?

A tax-exempt municipal lease is a type of lease-purchase agreement available to qualified organizations. According to the IRS Section 103, an entity must possess one of three “powers” in order to issue tax-exempt obligations: the power to tax, police power and/or the power of eminent domain.

Tax-exempt municipal leases are a financing option available to a variety of state, local and tribal organizations and political subdivisions. Qualified entities can include cities, towns, counties, school districts, special purpose districts (fire, parks, utility, water, etc.), hospitals, state agencies, authorities, boards and commissions.

Equipment covered under a municipal lease must be used for essential, traditional government purposes, and the type of equipment allowed varies by state law and entity type. Examples of equipment commonly financed under municipal leases include fire apparatuses, ambulances, police vehicles and gear, school buses, sewer and recycling utility trucks, snow plows, computers, construction equipment and newer assets used in energy-efficiency projects.

There are many reasons qualified organizations use municipal leases when financing. They can benefit from lower rates since the financing is tax exempt. They can spread the cost of equipment over its useful life, preserving cashflow upfront that, in turn, can be used for other projects where leasing is not an option. Municipal leases can also incorporate flexible structuring to meet an organization’s budget and timing needs. For more information, visit the Frequently Asked Questions (FAQs) section of our resources page.

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