Municipal Leasing vs. Bond Issues Analysis

Characteristics of Municipal Lease Purchase Financing
  • Voter approval not needed. Funding comes from annual operating budget. Non-appropriation clause provides cancellation provision if future funds are not available.
  • A Lease APR compares favorable with Bond Issues when issuance costs and staff time are taken into consideration.
  • Proves effective for terms under 10 years and less than $10 million.
  • Lease documentation is simpler and the process moves faster. Staff time and soft costs are minimized.
  • No additional fees or reporting requirements.
  • Leases renew on a year-to-year basis and are dependent upon annual operating budget for funding; thus are not considered debt. Keeps future bond alternatives open.
  • Early buyout options are available.
  • Finance only what is needed.
  • Provides ability to terminate without penalty if funding is not available.
  • Expected useful life of leased property matches the term of the lease
Characteristics of Bond Financing
  • Need voter approval.
  • Risk loss of referendum.
  • Cost of election and advertising.
  • Issuance cost will be high and measurably affects true borrowing rates.
  • Appropriate for large issues and for long terms to lock in low rates.
  • Bond issuance process is slow, consumes staff time and incurs hidden expenses and overhead costs.
  • Costs continue after bonds are sold. Trustee fees Compliance reports Footnote disclosure and added audit fees Periodic rating agency reviews and fees
  • Restricts future bond issues because of covenant restraints.
  • Generally will have call provisions with prepayment penalties after a period of time.
  • Bond issues may not exactly match capital needs
  • Excess bond processes may end up in general fund and earn less than the borrowing rate or general balance of cash needed.
  • Commits the municipal entity to fixed payments regardless of local economy cycles.
  • Bond term may exceed useful life of equipment.