Counties are often faced with a decision about how to finance equipment or capital projects. Many counties have adopted a "pay-as-you-go" philosophy, which requires amassing significant reserves before authorizing a project.
Others have used lease financing as a technique, which provides quick access to funds. Still others prefer bonded indebtedness, which allows for long-term borrowing and larger project development.
Each of these techniques is appropriate in specific circumstances, and each carries with it advantages and disadvantages to the county.
Pay-as-you-go is used for small equipment purchases, small capital projects for which an identified revenue source has been secured, and for grant-funded projects where the share of costs to the county is smaller than the total project. For large projects and for recurring equipment purchases, pay-as-you-go may not provide the best use of the county resources.
Lease financing is most often used for equipment purchases and short-term capital projects. If the life expectancy of the equipment is 10 years or less, leasing provides the best alternative for financing. It provides quick access to funds, provides for discounted interest rates for master leasing, requires minimal paperwork by the county and minimal legal review by counsel, offers competitive, tax-exempt rates, and provides payment to vendors that may qualify the county for additional discounts.
Lease financing has some disadvantages as well. It requires a shorter pay-back schedule than a traditional bond issue. Usually, only essential equipment or capital improvements can be financed, leaving such items as recreational equipment and nonessential buildings without lease financing potential. Vendor leases are often more expensive than traditional bond issues.
Bond issues are usually reserved for larger projects or consolidation of a number of projects. Bonds are usually issued for periods longer than 10 years. Often, bonds require voter approval at the local level.
Bonds offer the advantage of providing financing for large capital projects, such as public buildings, roads, bridges and other bricks-and-mortar projects. Low, long-term, tax-exempt rates are available.
Counties usually gain a rating from one of the Wall Street rating firms, providing an assurance to bond buyers of the solvency of the county. Bonds provide for a longer payment schedule, which allows for additional leveraging of county resources. Bonds can also provide a solution to vendor financing by allowing refinancing of existing leases in combination with other capital projects.
Bonds also have disadvantages. The front-end costs of issuing bonds is significantly higher than lease financing. Legal costs, voter polling costs, trustee fees, document costs, rating costs and disclosure costs can be substantial. The timing of a bond issue may take months, whereas a lease financing may take days. Also, bonds commit future boards to indebtedness, whereas most leases are nonappropriation documents.
Each county anticipating a need for financing equipment and capital projects should take the time to examine the most appropriate vehicles for their specific needs. They should consult with their finance officer, treasurer and financial advisor prior to moving forward.
(Financial Services News was written by Steve
Swendiman, NACo Financial Services Center director.)
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