Leasing is a key ingredient in a formula for satisfying the fiscal appetites of school districts struggling to keep their fleets current in a time of continuing financial hardship, according to an industry analyst during a recent STN Webinar.
The leasing ingredient is one of several that Tim Ammon of the TransPar Group of Companies said comprises a sound funding mechanism to support a measured replacement process that will keep students safe and school districts financially afloat while they upgrade their aging bus fleets.
Ammon said leasing has been given unfair baggage when it could be the lifeline needed by many financially strapped school districts. “When we talk about leasing, people tend to freak out because they say it is bad debt,” Ammon said. “I think in many instances it is absolutely not bad debt. In fact, it is decidedly more fiscally responsible to look at leasing than it is to use cash.
“My rationale is we know the operating benefits of starting with a well-structured replacement plan, and leasing is a mechanism that can get us to those operating benefits, particularly if we’ve fallen behind in our replacement structure.”
Ammon, the chief business development officer for TransPar, made his comments during an Oct. 17 live presentation to 105 school transportation professionals who attended a webinar hosted by School Transportation News. The free webinar, titled Capital Conundrum: How do You Afford New School Buses in Times of Austerity? and available on demand, examined creative alternatives to traditional avenues of funding school bus purchases.
Ammon told the group that aging bus fleets in some cases are getting “dramatically” older.
“We worked with one state where there was a shocking increase in the average age of the fleet over a three-year period because they could not find an alternative to the strict cash purchase of assets. So, they kept getting further behind,” he said. “Despite what we’ve seen as a financial recovery across most of the country, we still see a number of states and school districts where budgets are being cut or frozen. And when we think about the process of addressing the budget it’s easier to cut big numbers than small numbers.”
Ammon expressed concern that school districts are considering whether they can get by without vehicle replacements. He said school districts must address the process of replacement planning to determine what buses they need and then come up with an alternative funding plan.
“Knowing what you need doesn’t do you any good if you can’t actually get what you need,” he said.
Ammon used charts and graphs to demonstrate that school districts can keep transportation costs within attainable limits by using total cost of ownership as a guide. He said the total cost of ownership should include the age of the bus and the total number of miles driven before replacement, and the replacement plans should be based on individual buses to avoid large purchases. "Dependence upon cash appropriations may make the startup costs for a replacement plan prohibitive for the first several years,” he added.
“(Cash) is overwhelmingly the most common approach to financing in school districts,” Ammon said. “I would argue that it may not be the best method for most school districts.”
Ammon demonstrated that over a three-year period, TransPar acquired $6.3 million with $3.3 million in appropriations for a client. He said they received all the benefits of approximately a third of the fleet being replaced for a sixth of the cost.
“That is a benefit that I think many people forget about when they talk about the nominal interest charges that particularly public entities pay associated with things like municipal leasing,” he said. “So, for us, we are strong advocates for districts considering the use of leasing, particularly if you are behind, because it provides for a great catch-up benefit.”
Ammon also demonstrated that cash becomes the most expensive out of pocket mechanism over a 10-year period to finance bus purchases. “I think most people would be surprised by that,” he said. “In addition, it is probably the most difficult because you have funding segregated for capital and operating. So, our ability to use an alternative such as . . . leasing to identify these replacement costs as operating costs makes it more likely that we can achieve the funding levels that we need.”
The strength of using the leasing option, Ammon said, is that capital spending becomes part of the operations budget.
“Replacement is not a capital problem,” he said. “It’s an operational problem.”