Public Sector Financing Vehicles

The following is a list of general financing vehicles available for the public sector, with brief descriptions of each:

1. A federal lease is a financing alternative for federal government entities. The federal government usually provides the terms and conditions of their financing transactions and customarily contains termination-for-convenience clauses, which provides the ability to cancel the lease.

2. A General Obligation (GO) Bond is the traditional municipal bond vehicle. These bonds are backed by the full faith and credit of the state or local government. Unlike revenue bonds, repayment is not tied to user fees or other income derived from the use of the financed facility.

3. A Private Activity Bond is a municipal bond vehicle that allows for private ownership. While such bonds are similar to GO Bonds in that they are backed by the full faith and credit of the state or local government, repayment is tied to user fees or other income derived from the use of the financed facility. Also, the private investor must obtain enough volume cap to cover the total amount of the tax-exempt bonds required. Volume cap is available each year and is allocated by the municipality amongst its various constituent needs, such as schools, low-income housing, waste management, etc. Thus, the politics of obtaining volume cap are not insignificant.

4. A municipal lease is a conditional sales type contract packaged in the form of a lease, which is available only to municipalities, states, counties, and certain special authorities. Tax-exempt interest accrues to the lessor, resulting in financing rates that are lower than conventional commercial lease rates. Since the lease structure can direct operating funds into capital purchases, a municipal lease provides a cost-effective alternative to floating a bond issue. Unlike a conventional lease, which is non-cancelable for the lease term, a municipal lease is usually subject to an annual approval of a budget appropriation clause to provide for the continuance of lease payment. This appropriations clause typically allows the municipality to return the leased asset to the lessor without penalty prior to the end of the lease term should funding become unavailable. The essential nature of the equipment is the lessor's protection against this termination provision (e.g., chillers installed in a municipal facility).

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