Equipment Leasing in 2012

Public safety expenditures are of perennial importance, and the coming year should see more of the same. Municipal entities have pushed traditional lifetimes of fire and rescue trucks through extended maintenance. Yet increasingly, new cruisers, trucks, and rescue vans will be a focus, particularly for large entities with sizeable public safety departments. Additionally, advanced communications technology is finally being made available for state and local public safety applications, where major improvements have lagged for half a decade. An investment in 9-1-1 call centers and interdepartmental communications technology will likely be forthcoming. These communications improvements require substantial investment in the short term, but may save over the time of the lease through operational improvements.

Due to this advantage, it is not solely public safety communications and technology that may see an increase in investment this year. Administrative information technology improvements offer long-term cost savings to large and small entities, though with substantial investment upfront. Deferred for several years, building out data retention and transmission infrastructure may have an increasingly significant impact on an entity's efficient cost savings. Municipal leaders may be taking a cue from the private sector. A recent survey of private company CFOs conducted by TD Bank illustrated a willingness to invest in technology improvements in order to save through operational efficiency in the long run. It's likely that municipal leadership also understands the benefit of committing to larger outlay now (in this space) to save money over the long term.

In a similar vein, the coming year may see an increase in RFPs proposing school equipment upgrades, particularly in technology. In addition to administrative efficiencies offered by improved computer systems, there is also an increased drive to update classroom technology for students' benefit. Digital blackboards, research workstations, redesigned libraries and student computers will all be end-goals of proposals we see in the coming year. Lower property tax revenues hit school districts particularly hard, but this area of investment is typically high among a municipality's priorities.

Much like public safety vehicle fleets, many municipalities' public transit fleet equipment has been pushed beyond its traditional lifespan. In many communities, ridership is at historically high levels, yet agencies threaten service cuts along with deferred maintenance and lack of a sufficient rolling stock. Repair programs may postpone major expenditures for a few years, but eventually outpace the cost of purchasing vehicles that cost less to maintain. Fleet technology is advancing, and the old diesel buses of the past are being replaced by compressed natural gas or hybrid-electric equipment. Like the other sectors, these newer technologies will save money over a long period, but require a significant upfront investment.

Return of the Big Fish

For the past decade, there has been an increasing divide in the leasing behavior of small municipal entities versus large ones. It is the smaller entities that have recently been more active, submitting RFPs regularly and engaging in more frequent leasing arrangements with lenders. Though seemingly paradoxical given their smaller and uncertain budget, it is limited size that allowed more flexibility. Smaller entities have fewer commitments, thus allowing equipment investment to expand where and when needed, rather than being deferred outright. With smaller fleets and fewer needs, these entities have less complex leasing scheduling and typically submit RFPs on an as-needed basis. The economic uncertainty hasn't affected financing RFPs much and will likely stay the course for 2012.

Large entities, in contrast, have seen major purchasing schedule changes over the last several years. Given the complex financial interplay within a large municipality, these entities were more directly affected by liquidity crisis between 2008 and 2011, and modified equipment leasing as a result. A typical strategy saw an extension of lease times, with entities electing to increase maintenance costs in the short term rather than commit to a major lease package. It seems this attitude has been shifting since October of last year. Part of this is due to necessity: Equipment has a lifespan and can be maintained only so long until the cost becomes prohibitive. In the wake of the foreclosure crisis and with expectations of decreasing tax revenues, larger municipalities may be realizing a “new normal,” adjusting their budgetary plans for an austere period ahead.

The Importance of Leadership

The time is right for the larger entities to re-enter the market, and more activity is likely here in 2012. More generally, RFPs will increase as entities of all sizes “have to” replace aging equipment, regardless of the state of their revenue flow. Interestingly, the quality of entities as borrowers is not determined by geography or property values, but rather by good management. Financial diligence in the public sector at the local level is of utmost importance, and a trait that is difficult to ascertain at the ballot box. Prudent deployment of cash reserves and hesitance to over-commit to long-term financial payments for projects will aid struggling municipalities whose leasing needs have come to the forefront.

Despite the increased needs of municipalities of all sizes, the lending market will continue see tight competition in the coming year. Banks have stabilized over the last few years as the municipal leasing market has matured, so distinctions between lenders may be subtle, but no less crucial for winning business. Since lending terms have standardized, municipalities' requests for proposal focus on interest rates and fees charged, but pricing competition will not lessen. The number of RFPs will go up in 2012, but so will the number of bidders and typically that with the lowest qualified pricing will win the transactions. A lender's success through next year will depend on research and diligent responses to RFPs. Bidding and winning the right transactions, rather than the majority of them, will prove to be the difference-maker in the municipal lease market. As in other lines of business, success is often a question of leadership and organization. In 2012, and indeed for all years, it is the best financially managed, and best-led, organizations that will rise to the top in the municipal lease market.

Thomas B. Howard, Jr. is Director of Government Finance at TD Bank Equipment Finance. He has been in the equipment finance and specialty lending industry for more than 35 years and has held numerous senior management level positions. He is also a CPA and is court accepted as an expert witness for leasing'industry-related cases. He can be reached at [email protected].

State and local governments in the United States have had a tough slog for the last five years. In December, The Washington Post cited a survey conducted by the National League of Cities that observed, “The fiscal condition of cities continues to weaken. Cities are continuing to cut personnel, infrastructure investments and key services.” See www.washingtonpost.com/business/economy/falling-home-values-mean-budget-crunches-for-cities/2011/12/14/gIQAwWmtHP_story.html. Even in boom times, these entities have uncertain revenue streams that can make long-range planning difficult. Property tax rates vary under inconsistent political priorities, and mandated expenditures from the state capitol snowball into unsupported burdens at the local level. At any point in the cycle, successful equipment leasing thrives on establishing relationships with well-managed municipal entities. Budget uncertainty and November's major election loom over the market's outlook for the coming year. The current, challenging state of municipal finance in many areas of the country only reinforces the importance of discerning the right transactions to bid for and which partnerships to engage.

As we enter 2012, the hyper-competitive nature of municipal lease financing, paired with borrowers' significant financial challenges, demands creative thinking and savvy leadership from lenders as well as borrowers. The current environment's significant macroeconomic concerns exacerbate traditional budgetary strains. In many communities, property values continue to stagnate and local tax assessments are beginning to follow these lower values. Anticipated revenues in the coming years are adjusted lower, furthering the budgetary stress. Additionally, municipal leadership varies among entities as the tension of long-range planning and fiscal responsibility is balanced against short-term needs and political expedience. There is an important, and oftentimes overlooked, role for lenders in easing municipal clients' uncertainty through strategic financial planning to the extent possible. Mapping payments and projects' efficacy for the long-term is typically advisable, regardless of the revenue cycle and macroeconomic climate.

Despite the uncertain environment for both lenders and municipal borrowers, it is worth noting several areas where we may see expenditures trend in the coming year. Perhaps surprisingly, the fourth quarter of 2011 saw an increased number of requests for proposal come across our desks, as municipalities, especially smaller ones, felt pressed to take action on equipment leasing. For some areas, this uptick may continue in 2012 due to political demand in the run-up to November's election. Or, as is more likely, a piece of municipal equipment's use has already been extended years beyond a typical lifetime and mere repairs and maintenance are no longer satisfactory solutions.

Public safety expenditures are of perennial importance, and the coming year should see more of the same. Municipal entities have pushed traditional lifetimes of fire and rescue trucks through extended maintenance. Yet increasingly, new cruisers, trucks, and rescue vans will be a focus, particularly for large entities with sizeable public safety departments. Additionally, advanced communications technology is finally being made available for state and local public safety applications, where major improvements have lagged for half a decade. An investment in 9-1-1 call centers and interdepartmental communications technology will likely be forthcoming. These communications improvements require substantial investment in the short term, but may save over the time of the lease through operational improvements.

Due to this advantage, it is not solely public safety communications and technology that may see an increase in investment this year. Administrative information technology improvements offer long-term cost savings to large and small entities, though with substantial investment upfront. Deferred for several years, building out data retention and transmission infrastructure may have an increasingly significant impact on an entity's efficient cost savings. Municipal leaders may be taking a cue from the private sector. A recent survey of private company CFOs conducted by TD Bank illustrated a willingness to invest in technology improvements in order to save through operational efficiency in the long run. It's likely that municipal leadership also understands the benefit of committing to larger outlay now (in this space) to save money over the long term.

In a similar vein, the coming year may see an increase in RFPs proposing school equipment upgrades, particularly in technology. In addition to administrative efficiencies offered by improved computer systems, there is also an increased drive to update classroom technology for students' benefit. Digital blackboards, research workstations, redesigned libraries and student computers will all be end-goals of proposals we see in the coming year. Lower property tax revenues hit school districts particularly hard, but this area of investment is typically high among a municipality's priorities.

Much like public safety vehicle fleets, many municipalities' public transit fleet equipment has been pushed beyond its traditional lifespan. In many communities, ridership is at historically high levels, yet agencies threaten service cuts along with deferred maintenance and lack of a sufficient rolling stock. Repair programs may postpone major expenditures for a few years, but eventually outpace the cost of purchasing vehicles that cost less to maintain. Fleet technology is advancing, and the old diesel buses of the past are being replaced by compressed natural gas or hybrid-electric equipment. Like the other sectors, these newer technologies will save money over a long period, but require a significant upfront investment.

Return of the Big Fish

For the past decade, there has been an increasing divide in the leasing behavior of small municipal entities versus large ones. It is the smaller entities that have recently been more active, submitting RFPs regularly and engaging in more frequent leasing arrangements with lenders. Though seemingly paradoxical given their smaller and uncertain budget, it is limited size that allowed more flexibility. Smaller entities have fewer commitments, thus allowing equipment investment to expand where and when needed, rather than being deferred outright. With smaller fleets and fewer needs, these entities have less complex leasing scheduling and typically submit RFPs on an as-needed basis. The economic uncertainty hasn't affected financing RFPs much and will likely stay the course for 2012.

Large entities, in contrast, have seen major purchasing schedule changes over the last several years. Given the complex financial interplay within a large municipality, these entities were more directly affected by liquidity crisis between 2008 and 2011, and modified equipment leasing as a result. A typical strategy saw an extension of lease times, with entities electing to increase maintenance costs in the short term rather than commit to a major lease package. It seems this attitude has been shifting since October of last year. Part of this is due to necessity: Equipment has a lifespan and can be maintained only so long until the cost becomes prohibitive. In the wake of the foreclosure crisis and with expectations of decreasing tax revenues, larger municipalities may be realizing a “new normal,” adjusting their budgetary plans for an austere period ahead.

The Importance of Leadership

The time is right for the larger entities to re-enter the market, and more activity is likely here in 2012. More generally, RFPs will increase as entities of all sizes “have to” replace aging equipment, regardless of the state of their revenue flow. Interestingly, the quality of entities as borrowers is not determined by geography or property values, but rather by good management. Financial diligence in the public sector at the local level is of utmost importance, and a trait that is difficult to ascertain at the ballot box. Prudent deployment of cash reserves and hesitance to over-commit to long-term financial payments for projects will aid struggling municipalities whose leasing needs have come to the forefront.

Despite the increased needs of municipalities of all sizes, the lending market will continue see tight competition in the coming year. Banks have stabilized over the last few years as the municipal leasing market has matured, so distinctions between lenders may be subtle, but no less crucial for winning business. Since lending terms have standardized, municipalities' requests for proposal focus on interest rates and fees charged, but pricing competition will not lessen. The number of RFPs will go up in 2012, but so will the number of bidders and typically that with the lowest qualified pricing will win the transactions. A lender's success through next year will depend on research and diligent responses to RFPs. Bidding and winning the right transactions, rather than the majority of them, will prove to be the difference-maker in the municipal lease market. As in other lines of business, success is often a question of leadership and organization. In 2012, and indeed for all years, it is the best financially managed, and best-led, organizations that will rise to the top in the municipal lease market.

Thomas B. Howard, Jr. is Director of Government Finance at TD Bank Equipment Finance. He has been in the equipment finance and specialty lending industry for more than 35 years and has held numerous senior management level positions. He is also a CPA and is court accepted as an expert witness for leasing'industry-related cases. He can be reached at [email protected].