Avoiding the Debt Limitation with Lease Purchase Agreements

In Oklahoma there are very strict rules on local governments entering into debt. This is because they cannot use next years revenues to pay for the current years obligations. There is however a solution in the lease purchase statute. Below are details on the process and a link to the applicable statute.

Here are the requirements and rationale.

The Constitutional Debt Limitation at Article 10, Section 26, requires that a municipality fund all its expenditures for a fiscal year using the income and revenues of that fiscal year. Meder v. City of Oklahoma City, 1960 OK 87, 350 P.2d 916. “Debt” is a failure to fund a contract or claim at the time the municipality incurs the obligation by using revenues from the contemporaneous fiscal year. City of Del City v. Fraternal Order of Police, Lodge No. 114, 1993 OK 169, 869 P.2d 309.

1. If a municipality becomes obligated in any manner to pay out more money than the income it receives, it has incurred a debt. Fraternal Order of Police, Lodge No. 164 v. City of Choctaw, 1996 OK 78, 933 P.2d 261.
2. If a municipality becomes obligated in any manner to pay an amount in excess of the appropriation for that purpose, it has “become indebted.” Anadarko v. Fraternal Order of Police, Lodge 118, 1997 OK 14, 934 P.2d 328.
3. If a municipality becomes obligated in any manner to pay a claim or contract from the revenues of a future fiscal year, it has “become indebted.” City of Tulsa v. Public Employees Relations Board, 1990 OK 114, 845 P.2d 872.

Highlights of the Lease Purchase Statute – 62 OS 430.1 

• Authority to Rent/Lease:

• • The Governing Body can enter into a contract for a lease-purchase of personal property.
  • Payments must come from appropriations approved for the fiscal year.

• Lease-Purchase Contracts:

• • The agreement can extend beyond June 30 with mutual ratification for renewal.

• • • This is because the governing body cannot bind a future board appropriation.

• • Personal property (Vehicles) retain status as personal property, not real estate.

• Financial Obligations:

• • Lease-purchase contracts must not exceed the fiscal year’s revenue.
  • Title transfers to the local government after complete payment.

• Payment Regulations:

• • Payments for leases must come from specifically designated appropriations.
  • Appropriations for lease payments cannot be diverted for other purposes unless legally authorized.

• • • This is why each year the agreement should be re-ratified.

• Contract Termination:

• • Lease continuation required unless deemed unnecessary by resolution.
  • Written notice for termination must be sent 30 days prior with payment of all sums owed.
  • If the Governing Body doesn’t make a future appropriation for the Lease Purchase payment for the next year, the property reverts back and the Lease is terminated. Equipment must be returned in good condition, free of liens, and to a location designated by the vendor.

https://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=438909

Title 62. Public Finance
Rental of Real or Personal Property
Section 430.1 – Counties, Cities, Towns, and School Districts Authorized to Rent Equipment

1. The governing board of any county, city or town, or school district is authorized to rent on a monthly basis real or personal property as authorized by the governing board and to pay the rental charges thereon for usage during any fiscal period, or portion thereof, out of appropriations made and approved for such purposes for, or during, such fiscal year. Any such rental contract extending beyond June 30 of the fiscal year shall contain provisions for mutual ratification of renewal under the conditions provided in this section.
2. As used in this section, the term “personal property” shall include, but not be limited to:
3. Portable, or otherwise moveable, buildings and structures;
4. Prefabricated metal buildings and structures, along with necessary utility services for such buildings or structures;
5. Roofs placed over existing roof structures; provided, lease-purchase of retrofit metal roofs shall be awarded by competitive bids and the governing board of any county, city or town, or school district shall comply with the Public Competitive Bidding Act of 1974 where total payments of principle and interest provided by the lease-purchase contract are anticipated to exceed Twenty-five Thousand Dollars ($25,000.00); and
6. Other structures or property that can be disassembled after installation and removed without permanent physical damage to existing property.

Notwithstanding the provisions of Section 7 of Title 60 of the Oklahoma Statutes, such personal property shall retain its status as personal property and shall not be deemed to become attached to the real estate for the duration of the lease-purchase agreement.

1. It is the purpose of this section to authorize such governing boards to enter into lease and lease-purchase contracts but not to incur any obligation upon the part of their respective municipal or governmental subdivisions in excess of the income and revenue thereof provided for such purposes for the fiscal year in which the lease contract is effectively operative.
2. Any agreement to lease and purchase real or personal property, where title is to be acquired by the municipal or governmental subdivision, shall state the purchase price of the real or personal property so leased and in no event shall the lease be extended so as to cause payment of more than the stated purchase price of the real or personal property plus interest not to exceed ten percent (10%) simple interest on the unpaid balance due as of each payment date. When the purchase price plus interest has been paid, the property shall belong to the lessee and the lessor shall deliver a bill of sale to the property to the lessee. Any lease-purchase agreement may include an option to purchase, transfer and acquire title during the term of the lease upon payment of the balance of the agreed purchase price, and each agreement shall include a provision to transfer title to the lessee at the end of the completed lease term for nominal or no additional consideration.
3. The payment for the lease or rental of real or personal property shall be made only from annual and supplemental appropriations specifically designated for such purpose, and no appropriation for the purpose of paying rentals on real or personal property shall be transferred or diverted to any other purpose, except as may be authorized by the terms of the agreement or by law.
4. When any real or personal property has been leased or rented during any fiscal year under any contract which permits continuance of such rental for the remainder of the fiscal year, the renting or leasing thereof shall be continued for the remainder of the fiscal year unless the governing body renting or leasing the same, by proper resolution entered in the minutes of the governing body, shall certify that the continuance of such rental is unnecessary and contrary to the public interest. However, to affect a contract termination of lease or lease-purchase equipment, written notice shall be sent by certified mail to the vendor thirty (30) days prior to the termination of the contract. Such notice shall be accompanied by payment of all sums then owed up to the date of the termination of the contract and shall certify that the canceled equipment is not being replaced by equipment performing similar functions. All equipment covered by such contract termination shall be returned to the vendor at the expense of the governmental agency terminating such contract. Such equipment shall be returned in good condition to a location designated by the vendor and the equipment, when returned, shall be free of all liens and encumbrances. Satisfaction of all of the requirements of this section shall release the governmental agency terminating such contract from any further obligation to make any further payments to the vendor.

This is an overview, be sure to explore the topic thoroughly with your local legal representation and financial professionals.