Leasing by State and Local Governments

State and local governments use lease financing to acquire assets necessary to provide public services and rehabilitate older and historic public structures. The growth and interest in leasing by state and local governments are the result of a number of economic and legal factors.

  • Leasing often is a suitable and economic method of financing capital assets that are too expensive to fund from just one fiscal period, but have useful lives too short to justify the issuance of long-term bonds. Examples are ambulances, computers, and office machinery.
  • Governments may use leasing as an alternative to bond financing because of high interest rates, the difficulty of timely referenda on bond issues for essential facilities, or because legal debt limits have been reached.
  • Governments that are hard-pressed fiscally may have to use leasing to replace equipment and acquire other capital assets in order to spread scarce resources because it may be more economical than other methods of financing.
  • The need that a government has for a capital asset may be temporary, or rapid changes in technology may make ownership of equipment impractical.
  • Leasing offers a method for privatizing public services and fostering public-private cooperation.

As a result, lease financing is an important alternative to traditional sources of capital financing.

The Government Finance Officers Association (GFOA) opposes legislation to place blanket restrictions on all lease financing for equipment or real property used by state and local governments. We submit that distinctions should be made which separate out proper uses and those situations in which abuses are claimed to exist. Unfortunately, proposed legislation makes no distinction and would adversely affect all financing.

GFOA is concerned over the combined use of tax-exempt financing and accelerated depreciation in the refinancing by sale and leaseback of assets already owned by a state or local government when no rehabilation is made to the property. It does not oppose legislation to restrict those transactions. However, GFOA opposes the imposition of an extended depreciation schedule when:

  • new equipment is acquired by lease or existing equipment is rehabilitated after it has been sold to private parties and leased back, and
  • real property is sold and leased back by a state and local government and the property is substantially rehabilitated or constructed.

Restrictions on the use of the investment tax credit (ITC) for public rehabilitation projects are opposed by GFOA, regardless of whether tax-exempt financing is used to finance the projects, because it was Congress' expressed intent in extending the ITC to tax-exempt entities to encourage such renovation. Further, the Association opposes any change in the current accelerated depreciation schedule for real property when tax-exempt financing is not used to finance the acquisition of the property.

The GFOA hereby goes on record against changes in federal tax laws that will raise the cost of leasing equipment by governments over the amount paid by a private firm for the same equipment and place governments at a competitive disadvantage. The GFOA supports a transition rule that will allow projects substantially underway, but short of a binding contract, the opportunity to be finalized.

Adopted: April 17, 1984