Traditionally, municipalities have viewed vehicle ownership as less expensive than leasing. "We pay cash and re-sell the vehicles when we're done," says Alan Hadley, fleet manager for the city of Fairfield, OH. "Our finance director has done a lot of work showing that leasing is more expensive."

Stephen Dorsey agrees. "We leased years ago, but we don't now," says Dorsey, fleet manager for the City of Oceanside, CA. "It's cheaper to buy outright if we have the funds, and the city has had the funds recently. We don't have to pay interest on the lease."

But some municipal fleets have begun realizing benefits from short-term leasing and tax-exempt lease-purchase agreements for vehicles and equipment.

Lease-Purchase Programs Prevent Initial Capital Outlay

For the City of San Diego, CA,a Master Lease program has several advantages, according to a city report on the program. First, it allows the city to coordinate payments for essential acquisitions to meet budget restrictions. Second, it allows the city to spread costs over the useful life of the vehicles and equipment. And third, the city can acquire equipment at current costs rather than at escalated costs when cash might be available later. The program also allows the city to obtain competitive interest rates, according to the report.

Under the program, the vehicles are titled to the city, with the funding company as lienholder. Then the city makes payments to the finance company, taking between three and seven years to pay in full, depending on the useful life of the equipment. Every year, the city goes out to bid to find out which company oilers the lowest interest rate. The city has used funding from companies such as GE Capital and Associates Commercial.

Daro Quiring, deputy director of the equipment division for the City of San Diego, said city financial troubles about five years ago forced the city to divert motor equipment dollars to other areas.

"The Master Lease program has been very beneficial to us," Quiring said. "It allowed us to use a small amount of money to buy a lot of vehicles."

Municipalities Also Use Traditional Leasing

The City of Elmira, NY leases vehicles for similar budgetary reasons. "We mostly buy the vehicles because we keep them forever," said John Cantrell, fleet maintenance supervisor for the city. But the city hasn't bought many vehicles for awhile.

"We recently had a $1 million renovation to our parking garage, but now we can't afford new vehicles," said Cantrell, who oversees about 200 vehicles and about 648 other pieces of equipment. He said the average pickup truck in his fleet is 15 to 20 years old. "I have a fleet full of 15-year-old Fords, GMs, and Chryslers," he said. "Unfortunately, that's common among municipalities."

But about a year ago, different departmental changes forced the city to hire two extra undercover police officers. The city leased two Chevrolet Luminas through a New York state leasing agreement. In three years, the city will turn the vehicles in or have the option to buy.

Municipality of Anchorage Developing Lease Package

Ron Collins, fleet administrative officer for Municipality of Anchorage, AK, says the municipality currently only leases vehicles as a "piggyback" off a state lease. That means occasionally the state will lease vehicles and all of the state's political subdivisions can participate in the bid.

But Collins says he is currently working on a lease package for used vehicles, the municipality will be renting some vehicles for under six months, and will be leasing mid-size sedans, pickup trucks, and sport/utility vehicles.

Leasing prevents a department from having to spend a lot of money at once, and the lease comes out of the operational budget of each department that leases vehicles.

"We have a lot of temporary employees," Collins said. "Trying to maintain a fleet with people coming in and out is not easy. People come on board before you get the funds to buy a vehicle. Leasing will allow us to pick up vehicles for a few months."

Collins says he will put the lease to bid among leasing companies, finance companies, and dealerships. "We'll ask what they charge for a three-month rent, six-month rent, and one-year lease," Collins said.

EVs: Cities Have No Choice But to Lease

Some municipalities are leasing alternative-fuel vehicles, since most are only offered as leased vehicles and not for sale.

The City of Los Angeles currently has two EV-1s from General Motors on lease, and also has one Toyota RAV4 electric vehicle on lease, says Brian Smith, automotive engineer for the City of Los Angeles.

Smith says the city leases through municipal improvement corporations, which he says are "quasi-government agencies that sell tax-free bonds. "Basically, it's the city leasing from itself, then it pays off the bonds to own the property," Smith said.

Walter Burnett, building and maintenance superintendent for the City of Beverly Hills, CA, says the city is in the process of leasing six RAV4 electric vehicles.

Lease/Purchases Usually Come From Small Orders

Paul Rau, manager of municipal finance for Ford Credit Commercial Lending Services, says he can recall a state government coming to Ford Credit to lease about 350 vehicles.

But Rau says a majority of Ford Credit's business is from small orders, such as when a municipality needs only a few vehicles. Rau says Ford Credit's customers include states, municipalities, counties, and other governmental political subdivisions.

"Tax-exempt municipal financing and leasing is growing because it provides small and medium-size municipalities with the ability to acquire equipment without having to get approval on bond issues, which is how they usually get funding," Rau said. "With our municipal finance program, we work to place them into a structured municipal lease/purchase program, and they make payments over a period of time. The funding comes out of general funds, and not bond issues. Tax-exempt leasing has grown, especially among the smaller locales, as they've become acquainted with this type of financing. They're comfortable with it, it's cost-efficient for them, they're getting tax-exempt money without a lot of effort on their part, so they avoid a lot of the larger costs that go along with bond issues. That, plus interest rates have been pretty good. That has helped fuel the growth of the market."

Rau was asked about municipalities that are prohibited from borrowing money beyond the current fiscal year. These municipalities must run on year-to-year contracts, but Rau said the contracts are structured with a non-appropriation clause, which permits municipalities to get out of the lease contract if they don't have the funding.

"In this case we're supporting them with equipment the city has to have - such as a fire truck, police car, or ambulance - to run the business of the city," Rau said. "So we're comfortable they're going to appropriate funds each year for those items. If funds are not appropriated in subsequent years, the municipality would not be technically obligated to continue the contract."

Rau said another trend is for states or municipalities to ask for a line of credit.