California public agencies have two primary tools for financing capital assets: municipal bonds and tax-exempt lease-purchase agreements. Both structures use tax-exempt interest rates, both serve public purposes, and both require careful legal documentation. But they are not interchangeable.
Choosing the wrong structure can cost a district months in delay, tens of thousands in unnecessary fees, or years of political friction. This article provides a direct comparison so business officers, board members, and facilities directors can make an informed decision.
Side-by-Side Comparison
| Factor | Municipal Bond | Tax-Exempt Lease-Purchase |
|---|---|---|
| Voter Approval | Required (55% for school facilities under Prop 39) | Not required; board vote only |
| Time to Close | 3 to 6 months | 2 to 4 weeks |
| Issuance Cost | 1.5% to 3.5% of par (underwriter, bond counsel, rating agency, trustee) | 1% to 2% (broker/facilitation fee; no underwriter or rating) |
| Minimum Size | $5 million+ (below this, costs dominate) | $250,000+ (efficient at small scale) |
| Debt Impact | Long-term debt on balance sheet; affects debt capacity | Annual appropriation; GASB 87 lease liability but no voter debt |
| Interest Rate | Typically lower by 25 to 75 basis points for strong credits | Slightly higher; priced for appropriation risk |
| Typical Terms | 15 to 30 years for facilities; 10 to 20 years for bundled capital | 3 to 10 years for equipment; 15 to 20 years for real property |
When Bonds Make Sense
Municipal bonds are the right tool for large, multi-purpose capital programs where voter buy-in is either already secured or politically achievable. Bonds make sense when:
- The project exceeds $10 million and bundles facilities, technology, and equipment into a single program.
- The agency has strong voter support and can clear the 55% threshold for school facilities or two-thirds threshold for general obligation bonds.
- The district wants to lock in 20- to 30-year fixed rates for permanent infrastructure like new buildings, gyms, or solar canopies.
- The financing is part of a broader capital campaign that includes state matching funds (like the School Facility Fees Act) requiring bond issuance.
Bonds also carry lower all-in interest costs for highly rated issuers. A AAA-rated California school district with strong assessed value growth can issue bonds at rates 25 to 75 basis points below what lease-purchase funders would charge for the same credit. On a $50 million issuance over 25 years, that spread equals real money.
The tradeoff is time and complexity. A bond issuance requires an underwriter, bond counsel, a rating agency (usually), a trustee, and public disclosure through EMMA. For a district that needs buses on the road by next school year, that timeline is prohibitive.
When Lease-Purchase Wins
Tax-exempt lease-purchase is the better tool for discrete asset acquisitions that need to move quickly. Lease-purchase wins when:
- The board needs to approve and close within 30 to 60 days to meet vendor delivery schedules.
- The project is too small for bond economics ($250,000 to $5 million).
- The district wants to avoid a voter campaign, which can cost $50,000 to $200,000 and consume staff time for months.
- The asset has a 5- to 10-year useful life that matches a shorter financing term, avoiding long-term obligation for short-lived equipment.
- The district needs to preserve voter-approved debt capacity for future facility construction.
Lease-purchase is also more flexible on structure. A bond must be sized and sold in full at closing. A lease-purchase can accommodate progress payments, milestone draws, and even early prepayment without the make-whole calculations common in bond indentures.
GASB 87 Implications
GASB Statement 87, effective for most California agencies by now, requires governments to recognize lease liabilities and right-to-use assets on their statement of net position. This means a tax-exempt lease-purchase is no longer "off balance sheet" in the way it once was.
However, the GASB 87 liability is still different from bonded debt. It does not carry the same constitutional debt limit implications in California, and it does not require voter approval. The annual appropriation language in the lease remains the controlling legal feature, and the accounting treatment under GASB 87 does not convert the lease into general obligation debt.
Business officers should work with their auditors to ensure proper GASB 87 disclosure, but the practical reality is that lease-purchase still preserves voter debt capacity and avoids the political process required for bonds.
California-Specific Considerations
California adds layers that agencies in other states do not face. Proposition 13 limits property taxes and requires voter approval for general obligation debt. Proposition 39 lowered the voter threshold for school facilities bonds to 55%, but it still requires an election, a campaign, and months of preparation.
Annual appropriation language is not optional in California. It is constitutionally required for any municipal lease that does not go to voters. The documents must clearly state that the agency's obligation is limited to the current fiscal year and is contingent on future appropriations.
California also imposes specific prevailing wage requirements on publicly funded construction. If a lease-purchase finances construction work (as opposed to off-the-shelf equipment), the district must ensure the contractor pays prevailing wage. This is not a financing issue per se, but it affects total project cost and must be modeled into the lease payment.
For most California school districts looking at equipment in the $500,000 to $5 million range, lease-purchase offers the speed, flexibility, and lower transaction costs that bonds cannot match. For transformative facility programs measured in tens of millions, bonds remain the gold standard.
