MUNICIPAL LEASE OR INSTALLMENT PURCHASE CONTRACT;
WHICH IS IT AND HOW DOES IT WORK?
By Joe Frank, Esq.
Fire Commissioners are continually challenged to do more with less. They are called upon to
operate a unit of local government with a limited budget. They are asked by the fire district’s
administrative staff, its fire department and the community which it serves to fund a variety of
programs, to purchase new equipment and repair and replace existing equipment. They must react to
unfunded mandates sent down by the federal government and the state legislature.
Equipment and apparatus continues to evolve. Over the years new technology has improved the
equipment and apparatus, but no one has come up with an invention to keep its costs down. Every year
Fire Commissioners are confronted with new and improved equipment which is more expensive.
This expensive equipment and apparatus can be purchased with operating funds, reserve funds, and
different types of public borrowing mechanisms. In recent years the installment purchase contract has
become a very popular method of purchasing expensive equipment and apparatus for fire districts with
small budgets and fire districts with larger budgets which have seen their ability to develop and utilize
reserve funds erode with new budget pressures.
Clearly, there is an aversion to solving the dilemma by bonding the purchase of equipment and
apparatus. Some Boards will resort to an issuance of bonds to purchase equipment and apparatus, but
many go in search of an alternative.
Enter the apparatus vendor …
Many Fire Commissioners attend trade shows and speak with vendor representatives. These
representatives suggest the installment purchase contract or the creatively named “municipal lease” as
an acquisition method. Some even offer the “true municipal lease”. What are these documents and
what do they mean for your fire district?
Vendors are always in a rush. They want a quick transaction. They want to sell equipment and
apparatus. They always have a discount available for a quick deal. Fire district officials find themselves
confronted with the dreaded price increases that are scheduled for the coming weeks or months.
They are counselled by sales personnel to, “Order your equipment or truck now and get the discount”,
or “Order your equipment now and avoid the price increase.”
It is left to the Fire Commissioner to find a way to make the “technical stuff” you have to accomplish as a
Fire Commissioner in a fire district to complete the purchase get expedited. The little things like
competitive bidding, evaluations of financing alternatives, counsel review of documents and preparation
of documents, and the holding of mandatory referenda must be expedited if your fire district is take
advantage of this opportunity.
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The most important thing you can do when confronted with these new documents and new purchasing
methods is to take a deep breath, hand them to your fire district counsel and ask that he or she review
them.
Most importantly, take a time out and slow down the vendor’s clock.
If you let the vendor set the clock, you are bound to make a mistake.
You might be surprised to learn that in most instances a “municipal lease” or “true municipal lease” is
actually an installment purchase contract.
In most cases Fire Commissioners do not want to spend fire district funds to rent equipment and
apparatus. They want to pay sums of money over time under circumstances where their fire district
becomes the owner of the apparatus or the equipment at the completion of the transaction’s payment
schedule.
If you sign a two year lease to rent an apartment for $1,000.00 per month, you understand that twenty
four months later you will have paid $24,000.00, and you must vacate the apartment because the
landlord rather than you owns the apartment. The lease will have some technical language, but you
understand the basic concepts. You pay rent. If you damage the apartment you pay for the damage. At
the end of the lease you own nothing.
On the other hand, the equipment or apparatus vendor will submit a document to you with complicated
provisions and your first thought is to skip the small print and read the top of the document. It says
“municipal lease” so it must be a lease.
A lease is not a purchase so you do not have to competitively bid the lease. Well that certainly sounds
easier. Of course, that rule only applies when the contract is truly a lease and the fire district will be
renting the equipment and returning it at the end of the lease.
The vendor tells you that the contract has a provision in it so that you own the property/ equipment
after making all the payments. Well that is certainly intriguing.
However, remember that when someone tells you something that sounds too good to be true, that it is
probably not true.
This is not true.
The vendor knows you do not want to go through a complicated process.
He or she knows you want to own the equipment or apparatus after you make all the payments.
Enter your attorney with a dose of reality and to make this all become real complicated for you …
Please keep in mind that the purpose of this article is to explain the differences between leases and
installment purchase contracts and the rules that apply to installment purchase contracts. It is perfectly
legal for a Board of Fire Commissioners to decide to lease rather than purchase apparatus [a fire district,
“May purchase or lease apparatus and equipment for the extinguishment and the prevention of fires and
for the purposes of emergency rescue and first aid and fire police squads.” Town Law § 176 [McKinney].
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These agreements tend to be installment purchase contracts. You make a series of payments over time
and after you make all of the payments you either own the equipment or apparatus or must make an
additional payment that is less than the fair market value of the equipment or apparatus at the end of
the series of payments. There is an interest component to the series of payments because you are
purchasing the equipment or apparatus over time, and someone is paying the manufacturer upfront to
purchase the equipment or apparatus and sell it to you over time.
This is an installment purchase contract and it is governed by General Municipal Law §109-b. This
statute sets some rather strict rules for a Board of Fire Commissioners when it wishes to utilize an
installment purchase contract to purchase equipment or apparatus. Certain provisions of that statute
appear in the following paragraphs in italics.
The statute uses the following definition: “Installment purchase contract” shall mean any lease purchase
agreement, installment sales agreement or other similar agreement providing for periodic payments
between a corporation, person or other entity and a political subdivision which has as its purpose the
financing of equipment, machinery or apparatus.
In order to approve an installment purchase contract for a fire district the Board of Fire Commissioners
must approve the contract by resolution at a Board meeting.
That resolution is subject to a mandatory referendum which means that before the decision of the
Board is effective the registered voters of the fire district must approve a proposition authorizing the
transaction at the annual fire district election or at a special fire district election.
The term of the contract or number of years over which the payments are spread cannot exceed the
period of probable usefulness prescribed by section 11.00 of the local finance law for the equipment,
machinery or apparatus being financed under the installment purchase contract
The installment purchase contract must also separately state the principal and interest component of the
periodic payments to be made thereunder. The total of all periodic payments which include both
principal and interest components made by the political subdivision during each year throughout the
term of the installment purchase contract shall be substantially level or falling.
There is an interest component of the periodic payments and it must be specified in the agreement.
The requirement that the periodic payments must be level or falling means that the contract cannot
have a “balloon” or large payment at the end of the contract term. In private business installment
purchase contracts may be set up so that the periodic payments are artificially low in the beginning and
a large payment is paid at the end. This cannot be agreed to by a fire district as a purchaser in an
installment purchase contract under applicable law..
The installment purchase contract must contain a non-appropriation clause; “This contract shall be
deemed executory only to the extent of monies appropriated and available for the purpose of the
contract, and no liability on account thereof shall be incurred by the political subdivision beyond the
amount of such monies. The installment purchase contract is not a general obligation of (insert name of
political subdivision(s)). Neither the full faith and credit nor the taxing power of (insert name of political
subdivision(s)) are pledged to the payment of any amount due or to become due under such installment
purchase contract. It is understood that neither this contract nor any representation by any public
employee or officer creates any legal or moral obligation to appropriate or make monies available for
the purpose of the contract.”
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The periodic payments under an installment purchase contract are operating expenses. They are paid
each year with operating funds from the fire district budget. They cannot be paid with capital reserve
funds because they are an operating rather than capital expense.
The fact that the periodic payments are operating expenses means that the fire district annual spending
limitation provided for under Town Law §176 (18) may be impacted by the payment. For this reason it is
usually recommended that the resolution which the Board of Fire Commissioners adopts subject to
mandatory referendum to approve the installment purchase contract includes a provision whereby the
Board seeks permission to exceed the Town Law §176 (18) annual spending limitation by an amount
equal to the annual periodic payment under the contract. This request for permission to exceed the
Town Law §176 (18) annual spending limitation by an amount equal to the annual periodic payment
under the contract should also appear in the text of the proposition that the voters are presented with
at the annual or special election.
These contracts only have limited fire district debt implications;
The aggregate amount of unpaid periodic payments, excluding interest, to be made under any
outstanding installment purchase contract shall be deemed to be existing indebtedness for the purpose
of determining the power of any political subdivision to contract indebtedness under section 104.00 of
the local finance law. No political subdivision shall enter into any installment purchase contract if the
amount of unpaid periodic payments, excluding interest, proposed to be made under such installment
purchase contract and those outstanding, together with the amount of outstanding indebtedness, would
exceed one hundred fifteen percent of the limit prescribed by such section 104.00 or if the total amount
of such payments, excluding interest, under such proposed contract and those outstanding would exceed
forty percent of such limit.
The fire district can avoid future payments by not appropriating money in a future year’s budget and
avoid further liability on the contract. If the Board elects to non-appropriate the periodic payment in a
future year’s budget it simply returns the equipment or apparatus and liability for the future periodic
payments ends.
Competitive bidding rules [General Municipal Law §103] and purchase and procurement rules [General
Municipal Law §104-b] apply to installment purchase contracts;
Installment purchase contracts for equipment, machinery or apparatus shall constitute purchase
contracts for public bidding purposes and shall be subject to public bidding requirements to the extent
applicable by law. For purposes of determining whether the cost of the equipment, machinery or
apparatus exceeds the monetary threshold fixed in section one hundred three of this article, the cost of
the equipment, machinery or apparatus, exclusive of the cost of financing, shall be considered. If the
equipment, machinery or apparatus is to be financed by a party other than the party submitting the bid,
the bid specifications may provide that the political subdivision may assign its right to purchase to a third
party without the necessity of approval by the other party to the contract. Nothing herein shall preclude
a political subdivision from advertising for bids in the alternative with and without financing.
The statute provides that the Office of the State Comptroller shall adopt regulations to govern the
procedures to be followed when fire districts and other local governments enter into installment
purchase contracts. One critical aspect of the regulations adopted by the Office of the State Comptroller
relates to the requirement that a fire district conduct an evaluation of its financing alternatives before
approving an installment purchase contract;
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No governing board shall adopt a resolution authorizing an installment purchase contract unless an
evaluation of financing alternatives has been prepared in connection therewith. Such evaluation shall set
forth the financing alternatives considered and the criteria used to evaluate these alternatives. The
evaluation shall also contain written documentation substantiating the estimates required to be included
in the evaluation pursuant to this section. At a minimum, the evaluation of financing alternatives shall
contain the following:
(a) a statement indicating the estimated cost of each capital improvement to be financed, exclusive of
the cost of financing;
(b) a statement indicating whether the proposed capital improvements may be financed with
indebtedness issued under the Local Finance Law and if not, the specific reasons why such financing is
not authorized;
(c) if the capital improvements may be financed with indebtedness, a statement indicating the estimated
total cost of the capital improvements, inclusive of the cost of financing, if financed pursuant to the Local
Finance Law;
(d) a statement indicating the estimated total cost of the proposed capital improvements, inclusive of the
cost of financing, if financed pursuant to an installment purchase contract;
(e) a comparison of the estimated total costs required by subdivisions (c) and (d) of this section; and
(f) a recommendation as to whether it is in the best interests of the political subdivision to finance the
capital improvements pursuant to the Local Finance Law or pursuant to an installment purchase contract
and the specific reasons for such recommendation. Section 39.2. Evaluation of financing alternatives, 2
NY ADC 39.2.
It must be referenced in the installment purchase contract approval resolution;
Any resolution authorizing a political subdivision to utilize an installment purchase contract to finance
capital improvements shall refer to the evaluation of financing alternatives and, after taking into account
such evaluation, set forth the specific reasons why the governing board has determined that it is in the
best interests of the political subdivision to finance the capital improvements pursuant to an installment
purchase contract. The evaluation of financing alternatives shall be maintained by the political
subdivision as a public record and be filed with the resolution to which it pertains. Section 39.3. Adoption
of resolution authorizing an installment purchase contract, 2 NY ADC 39.3.
The Comptroller’s regulations permit vendor and non-vendor financing;
(a) If the governing board of the political subdivision determines that it is in the best interests of the
political subdivision to select a bid, offer or proposal, as the case may be, inclusive of the cost of
financing, the governing board shall adopt a resolution authorizing the political subdivision to enter into
an installment purchase contract with the successful bidder or offeror making a bid or offer inclusive of
the cost of financing.
(b) If the governing board determines that it is in the best interests of the political subdivision to select a
bid, offer or proposal, as the case may be, exclusive of the cost of financing, it shall adopt a resolution
requiring the capital improvement to be procured from the successful party making a bid, offer or
proposal, exclusive of the cost of financing, and directing that nonvendor financing be obtained pursuant
to either section 39.6, 39.7 or 39.8 of this Part. Such resolution shall also authorize the political
subdivision to enter into an installment purchase contract with any party selected to provide the
financing or, if certificates of participation are to be issued, with a party acting on behalf of the holders
of the certificates of participation. The resolution may also delegate to the chief fiscal officer the power
to cause certificates of participation to be sold pursuant to section 39.6 or 39.7 of this Part.
(c) Any resolution adopted pursuant to this section must include a statement that execution of the
installment purchase contract will not cause the political subdivision to exceed the limits prescribed by
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paragraph c of subdivision 6 of section 109-b of the General Municipal Law. Section 39.5. Procurement
of vendor and non-vendor financing, 2 NY ADC 39.5
The fire district’s annual report to the Comptroller must report on an installment purchase contracts
entered into;
The political subdivision shall include in its annual report filed with the State Comptroller in accordance
with section 31 of the General Municipal Law such information as the Comptroller may require for all
installment purchase contracts and certificates of participation that are issued in connection with such
installment purchase contracts, including the amount and date of all certificates of participation sold at
private sale. Section 39.10. Report to the State Comptroller, 2 NY ADC 39.10.
Clearly, an installment purchase contract is a complicated transaction that enables fire districts to
purchase equipment or apparatus over a period of time. It involves a series of legal and financial
determinations. It requires voter approval. Many Boards opt for installment purchase contracts over
bonding a purchase of equipment or apparatus based upon the misguided belief that the installment
purchase contract is a much simpler and faster way to achieve the objective of acquiring the equipment
or apparatus. In reality, installment purchase contracts are complicated transactions and many technical
rules apply.
The same Board that would not enter into discussions to issue bonds without first retaining the services
of specialized bond counsel and a financial advisory firm may not give a second thought to retaining the
services of those vital consultants when it considers an installment purchase contract.
Hopefully, this article will assist Boards in recognizing the advantages of retaining the services
specialized bond counsel and a financial advisory firm when it decides to consider the installment
purchase contract alternative.
The vendor at the trade show will tell you it is a quick painless process. It is not. It is a complicated
transaction that takes several months to complete.
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