Equipment Leasing Gains Popularity

(from Maine Townsman, April 2007)
By Liz Chapman, Freelance Writer

As budgets tighten and operating costs expand, a growing number of Maine municipalities are choosing to lease-purchase major public works equipment and vehicles rather than the traditional pay-as-you-go policy still practiced in most small towns across the state.

Although more expensive than bonding, the lease-purchase option has been popular for more than a decade as towns increasingly struggle to pay for both big-ticket items and infrastructure improvements without draining reserves and surplus.

And that was before LD 1 kicked in and set annual limits on property tax increases. And long before the soaring energy and road repair costs of recent years stretched available money even thinner.

In many Maine communities, trying to save up for a $200,000 loader or a $300,000 plow truck can be almost impossible without increasing local taxes, according to municipal officials. In the cities and larger towns, councils often choose to bond for large projects in addition to putting away money each year for smaller equipment and vehicle replacement.

Some small towns, meanwhile, are making the transition from the Yankee principle of paying cash to agreeing to lease-purchase. And then there are towns like Woodstock in western Maine, home to about 1,400 residents, which approved a combination of the two.

“There is still a strong desire here to own what we have,” said longtime Woodstock Town Manager Vern Maxfield. “Lease-purchasing bothers some people, but it’s definitely a new era” as younger voters, less concerned about amortizing big investments, begin to make town meeting decisions.

The town’s experience with leasing is limited, trying it for the first time in 2000 when the town needed a new backhoe. Last year, when the six-year lease term expired, some town meeting voters were glad to be rid of the lease deal and strongly opposed doing it again, Maxfield said.

In the end, though, voters struck a funding compromise for a new bucket loader, agreeing to pay 60 percent of the cost with upfront cash and finance the balance for $20,000 a year for four years.

“To get the needed equipment without having to increase property taxes, they were willing to borrow 40 percent,” Maxfield said.

Maxfield said a former selectmen suggested at town meeting last month that it was time for Woodstock to increase its annual equipment reserve from $50,000 to as high as $70,000, beginning next year.

“That was very much supported,” Maxfield said.

According to Maxfield, Woodstock residents over the past 15 years have bought two fire trucks at $200,000 apiece, with cash, and built and then expanded the town garage/fire station, again with cash.

The town also has a surplus of $400,000 on a municipal budget of about $700,000 and hasn’t borrowed money for cash flow for 18 years.

‘ Smart Way to Finance’

Two hundred miles south, in the growing service center community of Saco, the situation is much different. Officials are being even more aggressive than in the past to lease-purchase rather than buy, in part because of the LD 1 budget limits, according to Finance Director Lisa Parker.

Parker said the limits are forcing towns to consider draining reserves and surplus and raiding capital improvement accounts to shift the money to operations.

“Major cuts to capital accounts have been needed to somewhat comply with LD 1,” Parker said.

LD 1 limits also compelled Saco officials last year to ask voters to borrow $5.4 million for public works investment, ranging from drainage projects to road paving, Parker said, to free up money for operational costs.

Parker said she recommends that Saco increase its lease-purchasing contracts as the city decreases its long-term debt. In fact, in the past three municipal budgets, the city has leased all equipment with a price tag of $50,000 or more.

“It’s a very smart way to finance” very expensive equipment, she said.

Parker agrees that while leasing is more expensive than bonding – always the cheapest way to go – there are distinct advantages to the municipality, including stabilizing the annual budget. For a municipality like Saco, with a population of about 18,000, it would not be possible to set aside enough money each year to pay cash every time the city needs a major piece of road equipment.

“That would be millions and millions of dollars a year,” she said.

Pay-As-You-Go

But for a rural community the size of Dexter, with less than 3,700 residents, history and tradition – and financial management – dictate the town pay-as-it-goes.

“We do not lease. We have the money in reserve accounts,” said Public Works Director Michael Delaware, who has been with the Dexter department 30 years. “Our council is on record as not liking to pay interest.”

Neither, Delaware said, does the town bond for major purchases. “It’s always cash,” he said, noting that the town did recently approve a $250,000 bond for damn repairs, in part because of the unknown cost and in part because it’s a one-time expense.

Delaware said he recently bought a $200,000 loader. Cash only, of course.

“We just save up for it and then buy it,” he said, predicting that policy would not soon change in Dexter.

Parker said towns like Dexter are “golden” because they had the foresight to establish reserve accounts long ago. Towns that want to do that post-LD 1 will have to make that first-year infusion of new money, which could stir controversy as it triggers the override provision of the LD 1 law.

Advantages Are Real

By far, the greatest advantage to leasing for municipalities is the flexibility and ease in which they can obtain and pay off the lease, according to Richard Ranaghan, senior vice president of public finance for Gorham Savings Bank.

Ranaghan said the trend seems to be headed toward leasing, but that even in some of Maine’s larger communities, it’s hard to convince some people that there is any advantage to borrowing over paying cash.

The growth in municipal leasing can be tied directly to the hefty increase in cost for major equipment and the increase in the number of roads that need to be built, paved and plowed to accommodate population gains and new development.

“It’s a very simple and quick way to finance equipment,” Ranaghan said. “Municipalities really like the flexibility it gives them.”

For example, if a town needs a piece of equipment in September because another piece was unexpectedly out of service, the community would have to wait until the spring to seek a bond, call a special town meeting or referendum, or go without.

By lease-purchasing, the town gets the equipment and title at signing, which takes about two weeks, and pays about $2,500 in interest over 10 years on a $50,000 lease. The lease payments also do not count as debt, Ranaghan said.

Most leases are for five to eight years, he said, and many communities make an extra payment a year to pay off the lease early.

A municipality can also give the equipment back within the first three years with no questions asked, Ranaghan said, though that’s only happened (to him) once in 20 years.

Another benefit is a town’s ability to pay off the lease sooner than the term of the lease, without penalty, which is not possible when bonding.

Some towns use one-time windfalls to pay off leases early, he said, and then sign a new lease for the next piece of equipment that needs replacement.

“The useful life is always longer than the finance period,” Ranaghan said. “We never want to find a municipality paying for a piece of equipment that’s worn out.”

Level Costs and Modern Equipment

In Greene in central Maine, that’s not likely to happen. Town Manager and Road Commissioner Charles Noonan has been advocating lease-purchasing since his days as manager in Jay 20 years ago. Today, he remains convinced the benefits far outdistance the drawbacks.

“Once you set up a (lease-purchase) program, you are able to sustain your equipment costs at a certain level without having a large influx of expense at any one time to the citizenry,” Noonan said, while at the same time having the most modern and efficient equipment on the market.

Other benefits, Noonan said, include lower maintenance costs for public works, timely availability of parts and a good return when trading in the equipment.

Noonan and selectmen have been up-front with town meeting voters. This year, for instance, voters agreed to lease-purchase a front-end loader now that the lease on the backhoe has been paid. By the time the loader is paid off, it will be time for a new backhoe, he said.

“I made it clear at this year’s town meeting that after making the payments on the loader, I would be coming back and asking for a new backhoe,” Noonan said.

Ranaghan said many communities look at leasing public works equipment in the same way they lease many other pieces of equipment, including telephone systems, photocopiers, computers and portable classrooms.