Lease or Pay Cash

Sometimes we overlook just how inexpensive municipal, tax-exempt leasing really is - especially as compared to personal or automobile loans that we are all familiar with. By providing for tax-exempt financing, the government has made it very inexpensive for political subdivisions to borrow money - perhaps so inexpensive that it becomes hard to justify spending cash when you can use a municipal, tax-exempt lease to acquire new assets.

Commercial businesses and individuals borrow at much higher rates than they can earn in an investment account. This reality rightfully leads businesses and citizens to pay cash when they can. The benefit to them is the spread between their borrowing rate and their investment return rate. A reasonable estimate might be an 8% borrowing rate less a 3% investing return equaling a five percentage point savings spread.

Local governments are different in that their borrowing rates are "tax-exempt". The exemption provides for a much lower cost of borrowing than businesses and citizens incur. The spread between government borrowing and their investment yield is much lower. A reasonable estimate might be a 5% borrowing rate less a 3% investing return equaling a two percentage point savings spread.

The narrowing of the savings for paying cash reduces the motivation. If your agency is thinking about acquiring new equipment, please keep this principle in mind. Equipment is easy to lease. Perhaps it makes sense to lease your equipment and keep your cash to enhance your operational flexibility or for projects and events that are difficult to obtain financing for.