New Attitude

By Richard Carney, Leasing 2

A city in bankruptcy; how can this happen? City and county governments, like corporations, are dependent on fiscal management, planning and constant evaluation of revenues and expenses. Poor management and unexpected decreases in revenues or increases in expenses can be devastating especially if sustained over a long period. Decreases in revenue are particularly devastating because governments and businesses are usually slow to cut expenses.

Throughout the country many cities and counties have suffered deteriorating revenues due to the economy. Less tax revenues and grant revenue have challenged politicians to figure out how to balance their budgets while maintaining the services their residents are accustomed to receiving.

Some services, such as street sweeping, are being subcontracted out or brought in-house depending on the economics of each municipality. The same goes for sewer and garbage services. These changes are being driven by the desire to cut costs.

One option no one in the equipment sales business wants to hear is for governments to forego replacing or upgrading equipment. One heading in a recent municipal equipment newsletter read “No Budget, Budget Cut, What Budget?” This is the typically heard from municipal employees who would like new equipment but don’t have it in the budget.

Billions of dollars of equipment is purchased or financed by municipalities each year, including refuse trucks, containers, landfill compactors, vacuum trucks, grinders, construction equipment, street sweepers, fire trucks, energy management equipment, snow plows, modular buildings, computers and software, etc. A contraction in the purchasing habits of municipalities in this market has a direct effect on the U.S. economy. Most manufacturers of equipment used by municipalities are based here in the United States and have a substantial employee base.

In the past many governments have used their own funds for equipment purchases. But as budgets are cut, governments are either delaying purchases or reviewing financing options. Some fail to consider financing simply because they have always used their own funds. Many times department managers have limited budget information and only hear what funds are currently available for purchases. Financing is usually an afterthought or not considered at all unless introduced by the equipment sales person.

An equipment sales person can provide a great service by introducing the concept of lease financing and structure a lease to fit the customer’s current budget. Some local governments assume that they cannot use a lease because it is a long-term contract. Because lease financing for state and local government almost always includes an annual non-appropriations clause it is an approved type of financing for most local governments.  With the non-appropriation clause, the lease is, in effect, an annual contract for each budget year with the option to cancel if there is a non-appropriation for the equipment in a subsequent budget year.

Financing for large equipment purchases helps governments balance budgets. The cost of equipment can be spread out over its useful life versus having large purchases in various budget years. With financing leverage more needed equipment can be purchased with limited impact on the budget.

The only good aspect of a sluggish economy is the low cost of financing. Rates are at historic lows and have fallen more than 1.5 percent in the last three years. With rates hovering around 3 percent for the most part it is a very good time to lock in low-rate long-term financing for equipment. It becomes an even more compelling option as equipment prices rise. A 20- to 30-percent price increase over a few years would make a financing decision a very smart choice.

An additional financial benefit is the savings on maintenance costs with newer equipment. With the cost of fuel prices on the rise almost everything costs more these days. We hear over and over the reason for replacing equipment is due to rising maintenance costs and dependability issues. With already tight budgets no one wants to have unexpected maintenance issues on older equipment.
For refuse trucks in particular, there are “green benefits” to replacing old equipment, including reduced fuel consumption and compliance with recent emissions standards. Taking all of this into account, delaying an equipment purchase/acquisition decision could be very expensive and in the long run cost more than the interest cost incurred at today’s low rates.

Summary of all components affecting a financing decision:

a.) Historical low rates
b.) Equipment inflation
c.) Reduced maintenance costs
d.) Green benefits
e.) Balanced budget
f.) Purchasing power

It’s anyone’s guess how things will play out in the economy. Assuming it improves, demand for products and services will mean an increase in interest rates and prices on equipment will increase further. Hopefully, 2011 was a transition year and many municipalities have balanced their budgets and will be able to afford much-needed new equipment to help serve their residents.

Richard Carney of Leasing 2, Inc., is a commercial and municipal leasing veteran of over 20 years. Leasing 2 specializes in municipal leasing covering the public works, solid waste and public safety markets.