Interest in tax-exempt equipment financing is strong as cities, counties, school districts, fire districts and other government agencies have to stretch tighter budgets, said Evan Howe, director of Baystone Government Finance. The business provides financing options for dealers and vendors that sell equipment to states, cities, counties, fire districts, and school districts in all 50 states and works directly with governments, non-profits, and tribal entities.
Local governments are facing budget constraints amid increased service demands, reduced revenues and underfunded state and federal mandates. And state budgets are not immune despite notable surpluses: nearly half of Americans live in states that reported short-term budget gaps or potential long-term deficits in 2023, according to The Pew Charitable Trusts.
“Tax-exempt municipal leases ease equipment financing for governments and non-profits in any economy, but they are especially attractive when there are budget concerns,” Howe explained. “These lease-purchase agreements have become a popular alternative to using cash, operating leases or bonds to acquire essential equipment or to purchase or improve real property.”
How municipal leases work
With a municipal lease agreement, also known as a tax-exempt lease agreement, a political subdivision can use appropriated annual revenues to make payments for essential-use equipment. Each state has its own requirements. As a result, Baystone, a division of KS StateBank, has specific, legally reviewed contracts for all 50 states in order to facilitate municipal leases.
Most municipal leases include a non-appropriation clause that allows the lessee to terminate the agreement at the end of the current appropriation period without further obligation or penalty. This is done only in cases where the lessee was unable to obtain funding for future payment obligations on the lease.
Municipal lease benefits
“Equipment dealers and lenders interested in expanding their government business work with Baystone for tax-exempt leases, municipal financing expertise and private-label programs,” Howe said.
For the customer ─ qualified government agencies and non-profits ─ municipal leases offer several benefits in addition to the non-appropriation clause, he added. Customers can preserve their capital dollars for use in other projects where leasing is not an option. Because the interest earned is exempt from Federal Income Tax, actual rates may be as much as 30% lower than taxable rates.
The leases can also incorporate flexible structuring including deferred payments to meet the customer’s budget needs. The cost of the asset is spread out over its useful life. Additionally, voter approval is not required, nor are tax increases to constituents in most jurisdictions.
Eligible equipment
Many categories of equipment, vehicles and real property are financed through municipal leases. The assets must be used for essential, traditional government purposes, and the type of equipment allowed varies by state law and entity type. Equipment commonly financed under municipal leases includes fire apparatuses, ambulances, police vehicles, school buses, sewer trucks, snowplows, computers, construction equipment and energy-efficient projects.
“Baystone will consider financing any equipment, vehicle or real property deemed essential use. In fact, we are responding to increased requests involving EV (electric vehicle) charging stations and infrastructure, and also modular buildings,” Howe said.
While equipment delivery delays have improved from recent years, Baystone also provides escrow accounts to enable the transaction to be documented before delivery. This locks in a rate for the customer and guarantees the financing is in place upon delivery.
Qualified customers
The basic rule is that states or political subdivisions of states (cities, counties, townships, etc.) qualify for tax-exempt leasing. This also includes school districts and many special purpose districts (such as fire, parks, utility and water). City and county hospitals, state agencies, special authorities and certain public purpose boards also qualify. The basic law behind this is IRS Code Section 103, which defines political subdivisions as having one or more of the three basic powers: power to tax; power of eminent domain; and police power.
Howe said Baystone also works with volunteer fire departments and can offer them tax-exempt financing in certain circumstances, such as if they are purchasing a fire truck or improving or rebuilding their fire house. All they have to do is complete the IRS requirements to qualify for a tax-exempt rate.
Baystone finances additional equipment at tax-exempt rates for any regular fire department. This includes SCBA (self-contained breathing apparatus), turnout gear and rescue tools as well as ambulances and other emergency gear, he added.
The lender fields many questions about municipal financing and provides answers to frequently asked questions on its website Resources page.
Resources:
Baystone Government Finance Website
