Does municipal leasing create balance sheet debt or expenses?

Municipal Bonds, Municipal Leases and Balance Sheet Debt.

Bonds and their associated “covenants,” almost always create a municipal obligation that is legally backed by the “full faith and credit” of your government.  That’s a bit of “legalese” that means your government is making an unconditional promise to pay the bond–up to and including raising taxes as required to do so.  (That is debt by definition, and it must be recorded as debt on the balance sheet)  This can get ugly if things don’t go as planned fiscally.

The vast majority of our municipal leases contain what is callednon-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 to pay a municipal lease are not available in any subsequent budget year, for any legal reason, the government entity has the legal prerogative to return the equipment to our bank and terminate the lease.

For most jurisdictions, this is the difference between a incurring debt and incurring an expense.

IMPORTANT NOTE:  *This is a very abbreviated explanation of a complicated question.  You should seek the the guidance of your own accounting, tax and legal counsel on such matters.

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1) This discussion above is intended as a non-technical/non-legal “overview” only.
2) First Capital Equipment Leasing Corp. (“FCELC”) acts for its own interest only. 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. FCELC is not recommending that you take an action with respect to the information contained on this page or this website. You should review and discuss anything presented herein with such independent financial, tax, legal and other advisors as you deem appropriate.