Leasing by State and Local Governments (Updated)

State and local governments use leasing to acquire assets necessary to provide public services.. The interest in leasing by state and local governments is the result of a number of economic and legal factors, including:

• 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 include ambulances, computers, and office machinery;
• Governments may use leasing as an alternative to bond financing;
• 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, leasing is an important alternative to traditional sources of capital financing.

Recommended Policy

The GFOA opposes changes in federal tax laws that will raise the cost of leasing equipment and real property by state and local governments and governmental agencies, above the costs paid by private firms for the same equipment, or which place governments at a greater competitive disadvantage than already exists. Of particular concern, is any legislation that will adversely affect traditional leasing arrangements entered into by the majority of state and local governments.

Additionally, Congress should not act in a manner that could have negative economic effects at the local and state levels by increasing costs, without providing appropriate funding to offset these losses.

We oppose legislation to place further restrictions on proper uses of leasing for equipment or real property used by state and local governments, and believe that Congress should distinguish between proper uses and those where real abuses are found to exist.

Lastly, the GFOA opposes setting a retroactive date of enactment and believes that transactions substantially underway, but short of a binding contract, should have the opportunity to be completed.

• Publication date: March 2004