I recently read a study of the auto loan industry that was posted at supermoney.com. It reported that Americans bought 17.3 million vehicles in 2018. Auto companies and their suppliers are responsible for 3 percent of the U.S. gross domestic product. In short, it is the nation’s largest manufacturing sector, not to mention employer.
These levels of production are largely possible thanks to loans, and not just for new cars. Although you may expect only new cars to be financed, 54 percent of used cars were also obtained via a loan or lease. This dependence on financing is nothing new. These percentages have barely changed in the last eight years, according to the study.
Then why do school districts typically opt to buy school buses versus financing or leasing? Many transportation directors I’ve spoken with say it’s about the capital budget versus the operating budget.
Others tell me it’s a use-it-or-lose-it situation regarding their budgetary funds or based on how bond ratings work. Contractors tell me financing and leasing are about capital management. Is the answer all of the above?
Greg Jackson, executive director of transportation at the fast-growing Jefferson County Public Schools in Colorado, said there is some apprehension about leasing school buses in his district. What happens after the lease is completed? What are the costs that school transportation budgets will incur after the leases end?
He explained that JeffCo did lease new school buses in the past, but when the five-year term ended, the school board decided to purchase the 150 leased school buses outright. The decision, he added, put transportation “in a tight spot,” since the board then reallocated transportation’s capital budget after determining that other areas needed the money more.
“We had no choice but to keep running the older buses,” Jackson added. “We saw our maintenance and parts costs skyrocket over time as the fleet aged, which impacted our operational budget.”
To get back on track, Jackson’s team had to prepare a presentation that showed the district’s chief financial officer why the funds were, in fact, necessary for student transportation. It worked, and the department now receives $2.1 million annually for its capital budget.
Many other school districts aren’t as fortunate, which makes leasing and financing attractive alternatives. “With interest rates at historic lows, many of our customers are now considering financing or leasing as part of their fleet acquisition strategy,” observed Trace Heider, general manager at Longhorn Bus Sales. “School district growth and expansion are moving really fast in Texas. The increasing demands of a growing student population create a short term need to expand the fleet size quickly. We have partners in place that can help get the needed financing to our customers quickly.”
Heider added that a short-term lease of three to five years will significantly minimize a district’s operational maintenance expenses. “It’s a huge saving,” he concluded.
Apple Bus Company is a contractor that is based in Kansas City that operates 1,800 school buses in eight states. Company President Mike Oyster shared that 70 percent of the fleet is financed, while the company owns the remaining 30 percent.
“Depending on the situation, we use different financial strategies when purchasing school buses,” he said, adding that he typically opts for a traditional eight-year term. “Low-interest rates are attractive right now for financing new equipment, plus we enjoy a business tax credit of accelerated depreciation. As a business, helping free up capital to fuel growth is important to us. Plus, I’m seeing the price of new buses outpace the rate of inflation right now.”
Paul Lauria, president of fleet management consulting firm Mercury and Associates, added that he’s convinced that these alternative financing methods allow many owners to modernize their fleets when they might not otherwise do so.
It comes down to understanding the true vehicle lifecycle cost of your fleet. “A fleet of properly replaced vehicles is cheaper than one with improperly replaced vehicles,” he told writer Eric Woolson in this month’s special report, which starts on page 18.
No matter what decision you make for your company or school district, consider all of the financial options that are available to you that meet your unique situation.
Editor’s Note: Reprinted from the October 2019 Publisher’s Corner.