GFOA of the US & Canada

Washington Update: Leasing

Within the President’s FY05 budget, there is a proposal to end so-called Sale-in-lease-out (SILO) – or sale/leaseback – arrangements used by tax-indifferent parties, including all public-sector entities. A vast majority of the proposal is aimed to end SILO transactions done with overseas partners, such as when a U.S. taxpayer enters into a sale-leaseback arrangement with a foreign asset (e.g., a transit system in Germany). According to the U.S. tax code, both an overseas entity and any tax-exempt organizations, as well local and state governments, are deemed a “tax-indifferent party.”

However, this proposal and the subsequent legislation are far reaching in scope, infringing on the depreciation and investment regulations that dictate how the private sector may enter into leasing arrangements with the public sector.

The Senate has adopted an amendment encompassing the Administration’s proposal. The amendment is pending incorporation into S. 1637, the Jumpstart Our Business Strength Act (JOBS). The House Ways & Means Committee is expected to introduce similar, although perhaps not as encompassing, legislation on leasing in the very near future.

GFOA has met numerous times this year with administration, Senate, and House staff to indicate our concern over the proposal, and the negative economic impact that it would have to local and state governments. We are also working closely with our colleagues in the public sector on this matter, including the National League of Cities and the National Association of Counties.

While the proposal intends to end all types of SILO transactions, and affect the private-sector entities that serve as the lessors, it has the potential consequence of adding costs to local and state governments who lease everything from dump trucks to essential homeland security technology systems. Specific concerns include:

• The proposal contains five new requirements that would have to be satisfied on nearly every lease with the public sector. The requirement of greatest concern to local governments is that for all leases, the lessor would need to maintain a 20 percent equity investment throughout the time of the lease. This requirement, due to the need for a higher return on equity than on debt, will add costs to every type of lease, including 911-operations equipment, real estate, MRI machines, buses, and copiers.

• The proposal gives the Treasury Secretary unfettered discretion to continually revise regulations pertaining to leasing arrangements with the public sector. This proposal circumvents the legislative process, undermines financial certainty, and by negatively impacting all participants in the leasing industry, will impose new costs on the public sector.

• Greater clarity is needed in the legislative language to avoid substantial uncertainty with the regulations that would cause lessors to take a conservative course of action to protect their investments, and thus charge the lessee more. This especially applies to the language regarding the restrictions on funds maintained by the lessee to pay the lease.

• When the five requirements noted in the legislation are not met, the proposal would also result in a significant increase in the lessors’ accounting burdens because each individual asset would have to be accounted for to determine the amount of income and deductions in order to apply the new rules. Thus, the lessor would have to separately track income and deductions from each leased property (e.g., each car within a fleet of cars; each computer within an entire office of computers). By forcing an asset to be accounted for individually rather than as a whole, the increased amount of paperwork and time necessary to administer each piece of leased property would add costs to the lessor’s cost and would ultimately lead to higher costs to the public sector entity.
  

• For leases of computer software and high-tech “qualified technology” equipment of more than 5 years, the proposal would reduce the available depreciation deductions exclusively when this property is leased to the public sector. As a result of this loss of accelerated depreciation, the cost of leasing this type property will increase because the lessor will need to charge the local government more to maintain its return on its investment.
  

• The proposal contains a retroactive effective date, which has halted sale-leaseback transactions that were pending approval by the US Department of Transportation, beginning in mid-November. Sale leasebacks have provided an economic benefit to many governmental entities, particularly for transit equipment and facilities, and have been authorized by the U.S. Department of Transportation for over a decade. Denying the ability of these currently legal transactions to move forward creates substantial budgetary problems for these jurisdictions.
  

For more information, please contact Susan Gaffney at 202-393-8020 x209, or Email.

Link to Treasury’s Explanation of the President’s Leasing Proposal (pp. 124-128): http://www.ustreas.gov/offices/tax-policy/library/bluebk04.pdf

Link to the Joint Committee on Taxation’s Explanation and Analysis of Leasing Proposal (pp. 280-291 of the document itself): http://www.house.gov/jct/s-3-04.pdf