Buying or leasing, the answer depends on your city
It’s going to happen eventually: The vehicles composing your fleet are going to cost you more than they are worth, meaning the replacement cycle begins anew. Fleet managers have long used the economic theory of vehicle replacement to determine where capital and operating costs cross, thus finding the optimum economic point for replacement. Once that point is reached, cities will need to lay out their options for financing in addition to whether or not they will buy or lease their new vehicles or pieces of equipment. Both routes off er different advantages.
Chris Mayhew, with National Cooperative Leasing, noted leasing can be a sound fleet acquisition strategy. “Of course each municipality is different and each will need to look at its current vehicle cycling timetable, but in most cases, leasing offers a debt instrument for municipalities to leverage cash to close the backlog of vehicles that require replacing.”
Leasing is a viable option for any fleet vehicle, Mayhew added. “Any fleet vehicle that is on the road, or for that matter, any other essential use equipment needed by the municipality is ideal for leasing or municipal lease purchase. At NCL, we help municipalities acquire everything from equipment to servers to artificial turf. Leasing is a means to leverage cash on hand to greatly increase the purchase power for the municipality.”
Perhaps one of the greatest advantages of leasing is the range of options available to municipalities, such as a terminal rent adjustment clause, fair market value leases, operating lease and more. However, with so many options, Mayhew advised, “There are many different types of leases and working with an experienced municipal leasing organization that has experience with state regulations is important.”
The municipal funding company handling the financing will be able to work with the agency to determine which of these leasing options work best and meet the city’s economic goals.
“The tax-exempt municipal lease is a purchase option for municipalities and is very popular for all essential-use equipment, including fleet vehicles,” Mayhew said. “A tax-exempt lease is a debt instrument like a bond, but the interest incurred is tax exempt. This offers the agency a lower rate, and there is no voter referendum required.”
As for another benefit of tax-exempt leasing, Mayhew said, “While leasing is forbidden in some state bylaws, this municipal-only funding option can be used in every state. The key ingredient for this funding is the ‘non-appropriation clause’ that gives government jurisdiction the flexibility of canceling the contract at the end of any fiscal year if funds are not appropriated and return the vehicle.”
Tax-exempt municipal leasing came in handy for the city of Lancaster, Pa., with Mayhew noting the city was faced with a lower tax revenue base and a constrained budget, which forced it to extend the life of its passenger vehicles and trucks.
“The city was looking for a funding option that would allow it to replace a greater number of vehicles and eliminate the rising maintenance costs from older vehicles,” Mayhew said. “Through the National Joint Powers Alliance contract, Lancaster came to NCL for advice. We found that utilizing a tax-exempt municipal lease option increased the buying power of its current budget to purchase 10 vehicles instead of the original five they were planning on. The procurement process was fast, easy and efficient with no requirement for the city to get voter approval.”
Another way to get the most bang for one’s buck — while also meeting any state requirement — is to open the way for competition. Mayhew pointed out, “Just like purchasing equipment from a cooperative contract, many agencies now are requesting that the leasing they choose also be competitively bid. This way they can rest assure that both the equipment and the financing are competitively bid and meet state requirements for procurement.”
Buying, of course, remains a tried-and-true option, with Mayhew stating, “It comes down to the analysis on the total cost of ownership. For some agencies, it makes sense to buy equipment that they want to keep for a longer period of time, and they do not want any of the possible restrictions for mileage or hourly use. They can rotate the equipment from high-end users to lower-end users as it ages. Once the vehicle has seen its full user rotation schedule, it can be sold.”
