Lease-Purchase Agreements for School Districts
May 22, 2018
Meeting Your School District’s Needs Within a Tight Budget: Don’t Forget About Lease-Purchase and Installment Contracts
Expensive personal property acquisitions can challenge even the most disciplined fiscal planners, especially when unanticipated or emergency expenses arise. Are you concerned your oldest buses won’t make it through next winter? Do you desperately need to replace your outdated computer or copier equipment? Does your budget dictate that these acquisition costs be spread over several years? If so, consider your options for lease-purchase and installment contracts.
When authorized by an affirmative vote of 2/3 of the members of the board of education – meaning five “yes” votes instead of a simple majority – the School Code permits school districts to obtain personal property by lease (with or without an option to purchase) or by purchase under an installment contract. Under either scenario, a District may spread acquisition costs (both principal and interest payments) over a period not to exceed 5 years. See 105 ILCS 5/10-22.25a.
What is Personal Property?
In general, personal property is anything a school district can acquire or own that is not real property, buildings, or building fixtures. Personal property is typically moveable and not affixed permanently to real estate. Buses, tractors, vehicles, copiers, computers, telecommunications equipment, and other portable equipment can, therefore, be acquired under this 5-year approach.
Who Will Finance a Lease-Purchase or Installment Contract for the District? Will It Be Expensive?
Many vendors of buses, copiers, and other equipment have their own financing departments (or are associated with financing companies) that work with governmental bodies to fund qualifying transactions. Frequently, the banks that maintain a school district’s funds and accounts will also be willing to enter into lease-purchase or installment contract arrangements with the district. In most instances, the lender will be motivated to structure the transaction in a way that exempts the interest income it receives from the district from federal taxation, so the rate paid by the district on the transaction should, at least in theory, be lower than prevailing “taxable” interest rates.
Are there any Extra Steps the District Should Anticipate?
As with any other contract, the school district needs to comply with all applicable procurement laws and board policies relating to the proposed acquisition. If the vendor desires to structure the transaction as a tax-exempt obligation, the district should anticipate and plan for several additional steps. For example:
- As a prerequisite to closing the transaction, most lenders will require an “Opinion of Counsel” from the district’s legal counsel to confirm that the acquisition was properly authorized by the district’s board of education and that the district has properly designated the transaction as a qualified tax-exempt obligation. If the board of education has not passed a resolution with proper “tax-exempt” designations, and/or if the proposed agreement does not properly reflect that designation, an opinion of counsel cannot issue, the transaction cannot close, and the board of education will need to take additional action at a later meeting. For these reasons, the district’s counsel should be notified of the potential transaction at the earliest stages of discussion so all transaction documents can be reviewed and, if necessary, revised before they are sent to the board of education for approval.
- Five members of the board of education must affirmatively vote to approve the transaction, and the meeting minutes should reflect a roll call vote to this effect. Particularly when a qualified tax-exempt obligation will be approved, the board of education will need to approve a formal resolution that properly classifies the agreement as a tax-exempt obligation, contains all contract documents that comprise the agreement, and delegates authority to the administration to take any other action needed to consummate the transaction.
- For “tax-exempt” transactions, the district will also need to report the transaction to the IRS in accordance with IRS regulations and forms designated for transactions of this nature.
Lease-purchase and installment contract arrangements are a great financing tool for acquiring expensive personal property for the district within budgetary constraints. Whether this type of transaction makes sense for a district will depend on the district’s particular financial situation and needs, but exploring this possibility can be an important part of any district’s fiscal policies and practices. If the transaction is anticipated to be structured as a tax-exempt obligation, the district should involve its legal counsel in the early stages of the transaction to avoid delays and minimize risk.