Municipal Spending Cutback Seen in Dip of Lease Finance
By KATE BERRY
Staff Reporter
One indication that local governments and municipalities are financially strapped due to the current budget crisis is a cutback in lease purchase financing, which is often used as an alternative to bond financing to fund minor capital projects.
Many government agencies, from retail water districts to elementary schools, are forgoing equipment like fire trucks and school buses that normally are financed using municipal leases.
“Public agencies are simply putting off capital acquisitions and projects,” said Bill Morton, president of Municipal Finance Corp., a Calabasas firm that specializes in tax-exempt financing for public agencies and non-profits.
Morton said the volume of lease-purchase financing, estimated at $8 billion nationwide, has fallen recently in California because of the budget crisis.
The financings, which often are put together by community-based banks, typically range from $25,000 for a copy machine to $4 million for a 20-year lease to construct a building.
Experts in the field say the decline in municipal leases is due to the fact city officials don’t want to deplete their general funds because of budget constraints.
“We’ve seen a drop in the new money issuance because cities and school districts are concerned about their operating budgets,” Morton said.
Nevertheless, municipal leases are attracting increased interest from larger banks that view the transactions as solid financings that produce tax-exempt interest income.
Municipal Finance Corp., which has been in business since 1977, has not had a default in 26 years.
Recently Bank of America, Union Bank of California and Wells Fargo & Co. have all actively targeted government agencies as potential areas for growth.
“We’re in a time right now of reinventing government,” said Donna Hodgson, senior vice president and manager of Union Bank of California’s government services and not-for-profit division. “You have to look at the restructuring of everything because of the fiscal obligations of states and cities.”
Union Bank of California works with 18 of the state’s 58 counties and underwrites tax-exempt loans of $10 million or less. Most of its business comes from Indian tribes.
Ontario-based Citizens Business Bank, with 33 branches statewide, launched a government services division last year that now does about $25 million in municipal leases.
“We do consider it a growth market for us,” said Linn Wiley, the bank’s president and chief executive, who deals with 40 to 50 government agencies.
Municipal leases are similar to car leases in that the bank essentially buys and owns the asset and leases it back to a municipality. At the end of the lease, or anytime before it, the municipality buys the asset.
Finance directors at government agencies have put a stop to any bond issuances particularly after Standard & Poor’s cut the credit rating last month of California general obligation bonds by three notches to triple-B, which is just above junk bond status.
Political turmoil over the $99 billion budget signed into law this month by Gov. Gray Davis and the recall election scheduled for October have put the state’s financial situation in a tenuous position. With the expectation that the state will try to issue as much as $10 billion in general obligation bonds to cover a $38 billion deficit, local officials are waiting on the sidelines.
Riverside County Treasurer Paul McDonnell said leased-back financing has become a larger part of the fiscal equation for counties because of Proposition 13, the cap on real estate taxes that California voters enacted by referendum in 1978, which restricted money flowing to local governments.
Because governments have to receive voter approval to borrow, one way to get around the restrictions is to issue what is known as certificates of participation essentially a lease that is sold like a bond through underwriters.
“What most government entities are doing in terms of financing is leased-back financing,” said McDonnell, a former bond underwriter with RBC Dain Rauscher. “Because of Prop. 13 you can’t incur debt that goes beyond the fiscal year but there are various exceptions that allow entities to enter into large capital leases and the underlying certificate is a lease.”
The County of Riverside has a $50 million lease-line through Bank of America.
Still other government agencies are showing their financial strength by relying strictly on cash.
The city of Cerritos, which has a $123 million budget, recently built a new $50 million library that was paid in cash from its general fund.
“We don’t have a reason to borrow money,” said Becky Lingad, the city’s finance director.
