Banks & Bonds. The laws in most localities generally make it impossible for state, county & municipal governments to borrow (incur balance sheet debt ) that extends over multiple fiscal years. The current governing body rarely has the legal authority to bind a future governing body into making lease or loan payment from a future budget.
Due to these budget constraints, the unique and non-traditional paperwork, the extremely low-interest-rate yields, the required non-appropriation language, and commensurate risks to the financial institution (lender), municipal leasing is something of a financial specialty area. For many bankers, municipal leasing simply isn’t their “cup of tea.”
Bonds are also low-interest but are very complicated legal documents. (read: expensive, time-consuming, loaded with legal, issuance and compliance costs and a measure of interest rate risk). Bonds are generally reserved for the largest 7-8 figure, 15-25 year projects like sewers, highways, and bridges.
Unlike a municipal lease, bonds are backed by “the full faith and credit” of the municipality. Bonds create balance sheet debt, and that matters. If the municipal budget falls short for any reason, the municipal borrower will be required to raise taxes as necessary from every taxpayer to cover the bond payments. Politically, it can get really ugly. Not so, with municipal leases.
There are VAST DIFFERENCES between a municipal lease that includes non-appropriation provisions and bonds that create municipal debt.
Do you have questions about Leasing vs. Bonds vs. Bank financing?
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(On your phone? Click to call! Press x-22 for Govt. Lease vs. Bond Questions)
1) The discussion above is intended as a non-technical/non-legal “overview.” 2) First Capital Equipment Leasing Corporation (“FCELC”) does not act as a municipal advisor, municipal financial consultant, fiduciary, or agent to any person or entity under Section 15B of the Securities Exchange Act of 1934, the municipal advisor rules of the SEC, or otherwise. You should review and discuss anything presented here with such independent financial, tax, legal or other advisors as you deem appropriate.