By Larry Jones
July 12, 2004

Speaking at the June 25 plenary session, Ken Kies, managing director of federal policy at Clark Consulting in Washington, told mayors that the House and Senate have approved separate bills that will impose substantial new restrictions on sale-leaseback financing. This will adversely affect the ability of municipalities to raise much needed capital for infrastructure needs.

For almost two decades, state and local governments have used sale-leaseback financing to help raise capital to pay for infrastructure and other public needs. They have done so by selling major infrastructure property (such as a subway system) for a temporary period to an investor (such as a bank) who agrees to lease the property back to the city. During the term of the lease, the investor gets to depreciate the property and receives a tax deduction. The city gets millions form the investor (between 3 and 5 percent of the value of the property) that can be used to expand or improve the infrastructure property, or for other public service needs. And at the end of the lease, ownership of the property reverts back to the government.

In the last four years, Kies explained that cities and other tax-exempt organizations nation-wide have received billions of dollars from these transactions to address infrastructure needs. However, last November the Treasury Department criticized sale-leaseback financing as abusive transactions and later sent a letter to federal agencies recommending that no new transactions be approved. Since that time none have been approved. Even the 15 transactions pending before the Federal Transit Administration, which were submitted before the Treasury letter was issued, have not been approved.

In response to criticism, both houses of Congress passed proposals restricting the use of sale- leaseback financing. Kies told mayors that Treasury Secretary John Snow reported that the federal government loses $10 in revenue for every dollar that state and local governments, and other tax-exempt entities received from sale-leaseback financing. However, Kies pointed out that Clark Consulting conducted a study, which found different results. He said Clark Consulting's study, which was later confirmed by the Joint Committee on Taxation, "shows that for every $10 that these transactions cost the federal government, $10 in capital goes to cities and other tax-exempt organizations." He explained, "This is certainly not the first time the federal government has been wrong."

Kies told mayors that the Senate version of the bill (S. 1637) would raise $40 billion in new taxes by imposing new restrictions on sale-leaseback transactions targeted to cities and other tax- exempt organizations. The House version of the bill (H.R. 4520) would raise $20 billion. The House bill is effective for leases entered into after March 12, 2004 and it would grandfather pending transactions. In contrast, Kies said the Senate version is retroactive and would apply to transactions after November 18, 2003, and it would not grandfather any pending transactions.

In summary, Kies told mayors that he is working with the Conference and a large coalition of stakeholders in Washington (DC) to modify the House version of the bill to limit the number of transactions to an amount not to exceed $10 billion per year. "We believe that would cut in half the number of transactions that were previously done. But it would still leave sale-leaseback financing as an effective tool for cities to raise capital to fund the much needed infrastructure demands," he said.