Municipal Bonds, Municipal Leases, and Balance Sheet Debt. Bonds and their associated “covenants” create municipal obligations that are legally backed by the “full faith and credit” of your government. That’s a bit of “legalese,” which means your government is making an unconditional promise to pay–including raising taxes to do so in the event of a budget shortfall. (That is debt by definition, and it must be recorded as debt on the balance sheet) This can get unpleasant for taxpayers if things don’t go as planned fiscally.
The vast majority of our municipal leases contain what is called “non-appropriation of funds” language. Non-appropriation (aka “funding out”) language makes the payment of the lease subject to the availability of funds in each budget year.
If the funds are not available in any subsequent budget year, for any legal reason, the government entity has the legal prerogative to return the equipment and terminate the municipal lease.
For most jurisdictions, this is the difference between taking on debt and incurring an expense.
IMPORTANT NOTE: *This is a very abbreviated explanation of a complicated question. You should seek the guidance of your own accounting, tax, and legal counsel on such matters.
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1) The discussion above is intended as a non-technical/non-legal “overview” only. 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 pursuant to Section 15B of the Securities Exchange Act of 1934 and the municipal advisor rules of the SEC. You should review and discuss anything presented herein with such independent financial, tax, legal, and other advisors as you deem appropriate.