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3. Wouldn’t long-term capital leases solve the problem by spreading the cost over many years?

No. Long-term capital leases are a financing tool, not a budget tool. The budget issue is not how to finance expenditures. Budgets are a tool for allocating limited resources. Do we want to use $2 billion to construct a new FBI building, to construct four regional office buildings costing $500 million apiece, to pay for several thousand education grants, or to provide improved medical care to veterans? In order to make efficient decisions, we need to compare the full costs and benefits of each use of resources, whether they are financed by paying taxes immediately, by borrowing and repaying the debt using future taxes, or by shifting the financing off-budget via a long-term lease. We incur the cost up-front, when the resources are used, regardless of how they are financed. The budget needs to reflect the true up-front cost at the time decisions are made so that decision makers have the information and the incentive to make efficient choices when cost can be controlled.

For this reason, the budgetary cost of a long-term financing like a lease-purchase is the discounted present value of the lease payments over the lease term. In almost all cases, long-term leases are a financing mechanism that pushes cash payments out into the future but impose an immediate liability on the Government for full payment of all rent. The leased asset is financed by the private developer, but the lease imposes a legally-binding requirement for the Government to fully reimburse the private developer for the principal and interest on his financing. The true cost of the lease, therefore, is not the cash payment in any year of the lease; it is the value in today’s dollars of the entire stream of the rent payments under the lease. That’s the accurate measure of cost to include in the budget, not the financing payments.

Second, ownership is always a cheaper method than renting to meet a long-term need because Treasury can always finance at a lower rate. A budget system that encourages a higher cost option is inherently inefficient and sub-optimal.

Third, leasing imposes a hidden “tax” on discretionary appropriations because rent has to cover the private lessor’s financing, unlike direct ownership, where the financing costs are paid by Treasury, not by the agency that purchases the asset. This “tax” adds significantly to the amount of funding needed to pay for capital needs, leaving less room under the discretionary caps for ongoing programs and operations. For a $500 million project financed at 5% over 15 years, this “tax” would increase the cost to discretionary appropriations by $223 million (45%).

Category: What Is The Problem?

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