2014 Equipment Lease-Purchase Financing Guidelines
On behalf of the Maryland Board of Public Works, the State Treasurer determines the size, timing, and method to finance capital assets for Maryland State Agencies. Consequently, all lease procurement and the payment of debt service is managed by the State Treasurer's Office (STO).
Equipment should be "capital" in nature; that is, equipment should have a useful life at least as long as the financing term and the cost of the equipment should be material in amount. For example, a year's supply of printing cartridges for a network of computers might be material in cost but doesn't have a long enough life to quality as a capital asset. Likewise, it might be appropriate to finance a $100,000 power saw but not a $20 hand saw - even though in both cases the useful life might be longer than the financing term. The minimum amount that can be financed under this program is $10,000. All equipment financed under the Equipment Lease-Purchase Program is considered "Capital Equipment" and should be recorded as an addition to fixed assets.
Equipment should be "repossessable". Because the lease obligations are not general obligations of the State, the lease payments are subject to annual appropriations. For this reason, the equipment should be of a nature that the lender could "repossess" the equipment if the State doesn't make the payments. For example, a photocopier is "repossessable" but consulting fees are not.
The lease purchase financing of fiber optic and other wiring for voice, video and data communications systems is problematic because certain elements (conduits, tubes, optic fibers, wires) become fixtures and improvements to the real property. These items generally are not suitable for equipment lease-purchase financing by state agencies, although special provisions have been made in the past, for the Technology in Maryland Schools Program for the wiring installed in public schools. Other elements of wiring installations, called network peripherals, may be suitable for equipment lease-purchase financings. These include items such as switches, chassis, ports, memory, power supply, etc., that are not permanently installed, but are removable without loss of value or damage to the real property.
Equipment should be hard to "lose" or easily identifiable. Examples are large, heavy pieces of equipment like a printing press or items likely to have a serial number rather than small, light items like a flute or books.
|Generally acceptable||Generally not acceptable|
|Telecommunications hardware||Maintenance agreement|
|Laboratory equipment||Partial or progress payments|
Software - Limited to an amount equal to the hardware being financed.
2014 EQUIPMENT LEASE-PURCHASE FINANCING PROCEDURES
Background and General Information
Leases can have three-year, five-year, and ten-year terms. The determination of whether or not equipment can be financed over five years and ten years will be determined jointly by the State Treasurer's Office and the Lessor. Consolidated lease payments are made by the State Treasurer's Office to the Lessor semi-annually on January 1 and July 1.
The State is responsible for maintaining the equipment in good working condition at all times. The agency must notify the State Treasurer's Office of any change in the equipment use or location. This includes any equipment returned to the vendor for any reason. The State Treasurer's Office may periodically schedule visits to confirm that equipment financed under the lease program is under the control of the agency and at the locations identified by the agency(s).
STO will ask each agency if they will need a prepayment option on their lease prior to sending out an Invitation for Bid (IFB). A prepayment option would give an agency the right to payoff the lease prior to the 3 or 5 year maturity. If an agency chooses a prepayment option on a lease, there may be a penalty for early prepayment of that lease and the interest rates may be higher than a lease with a no prepayment option. If the agency does not select a prepayment option prior to the IFB, they will not be able to payoff the lease early.
All leases include a standard "termination for non-appropriation" clause. The Department of Budget and Management, however, covenants that the Governor's budgets will include a request for appropriations sufficient to make lease payments.
Summary of Lease-Purchase Financing
1. Notify the Debt Management
Division of the State Treasurer's Office in advance of items for
financing to ensure items qualify and financing is available.
2. Board of Public Works Approval.*
3. Submit documents by designated due date (see Financing Program Schedule):
a. cover letter - include
description of equipment, requested lease term, prepayment option,
agency contact person, and equipment location.
b. original invoices - (include serial numbers of items purchased) - send in six copies
c. Acceptance Certificate (Exhibit C) - six certificates with original signatures
d. Equipment Use Certificate (Exhibit D) - six certificates with original signatures
e. Acknowledgment and Certification as to Appropriation - seven with original signatures
f. Wire Transfer Request - if applicable or payment instructions
g. copy of purchase order
h. original signatures must be in blue ink (i.e., not black)
* In addition to any other requirement for Board of Public Works approval (e.g. the cost of the equipment being financed exceeds delegated procurement amounts), the purchase of any single item of equipment proposed to be financed using this lease-purchase agreement and with a purchase price equal to or exceeding $1,000,000, must be approved by the Board of Public Works for participation in the lease-purchase financing program.
Failure to meet the due date for the required paperwork will delay the financing of that item until the next financing date.
Procurement of Equipment
The procurement process for equipment to be financed by an equipment lease is the same as the procurement process for all equipment. The provisions of Division II of the State Finance and Procurement Article and COMAR 21 apply. The normal procedures of the appropriate procurement control agency are to be followed and all necessary procurement approvals are to be obtained. An approved Board of Public Works agenda item may evidence approval for procurement.
Participation in Transaction
All equipment to be financed through the Equipment Lease-Purchase Financing Agreement must be approved by the Department of Budget and Management and the State Treasurer's Office.
Charges and Lease Payments
The interest rate to be paid by the agency will depend upon market conditions at the time the Lessor provides the funds. The Lease rate will be the rate submitted by the winning bidder of the related IFB. A surcharge of 0.112% will be added to the lessor rates and charged by the State Treasurer's Office for expenses associated with the lease program (such as administration fees and tax counsel charges). This surcharge is subject to change.
Agency lease payments (including the 0.112% surcharge) will be made by an R*STARS transfer from the agency to the State Treasurer's Office; the Treasurer will make a consolidated lease payment to the Lessor on the due date. The R*STARS transfers will be executed by the State Treasurer's Office at the beginning of each fiscal year. Any lease financings that occur from June through November, of any given year, will be charged to the agency's R*STARS account at the time of financing. This will ensure that funds are available to the Treasurer to make the lease payments. The amount of the charge appears on the Equipment Amortization Schedule prepared and delivered by the Treasurer's Office to each agency, shortly after the financing date.
Agencies must include sufficient funds in their annual budget submission to fund anticipated lease payments; the Department of Budget and Management covenants that the Governor's budget submitted to the legislature includes a request for appropriations sufficient to cover the lease payments.
The Treasurer's staff will (1) assist the agency in the preparation and/or execution of all documents required for the financing, and (2) handle most related matters, on behalf of the agency, with the Lessor. To participate in the Equipment Lease Financing Program the agency must submit the following documents to STO on or before the lease request due date listed on the Financing Schedule:
1) Purchase Documents. These documents must include a copy of the purchase order or Board of Public Works agenda item, and an original vendor invoice clearly identifying the equipment. Invoices more than six months old will require special justification for lease-financing.
2) Acceptance Certificate. This form (Exhibit C - enclosed) certifies that the agency has accepted the equipment (accepted means it has been completely installed and is operating properly). This is a very important statement since the date of acceptance triggers the payment to the equipment vendor by the Lessor and the placement of a lien on the equipment. Six originals should be dated and signed by the agency head, the procurement officer, or the chief financial officer and submitted to the State Treasurer's Office.
3) Equipment Use Certificate. This form (Exhibit D - enclosed) is an inquiry from tax counsel verifying that the use of the equipment is, in fact, "governmental use". This form is also very important, because the equipment use affects the tax status of the financing. Six originals must be dated and signed by the agency head, the procurement officer, or the chief financial officer and submitted to the State Treasurer's Office.
4) Acknowledgment and Certification as to Appropriation. This form (example enclosed) acknowledges the agency's participation in the program and authorizes the State Treasurer's Office to charge the lease payments to the agency's accounting code (Agency Charge Account Information). The form also provides the Agency certification that funds are included in the agency's budget in an amount sufficient to cover the lease payments (evidenced by providing the appropriation code), funds are or will be requested to be appropriated for the following fiscal years, and appropriations committees of the General Assembly have not disapproved the procurement of the equipment being financed. Only one agency accounting code will be charged by this Office. The distribution of multiple agency accounting code charges will be the responsibility of the agency. It should be prepared by the agency; seven originals must be dated and signed by an agency head or chief financial officer and submitted to the State Treasurer's Office. The amount to be charged to the Agency will be the annual lease payment (plus the administrative surcharge).
5) Down Payment Documentation. If a down payment is required as part of the agency's procurement, evidence of the payment needs to be submitted to the State Treasurer's Office.
Equipment financed under this program is considered "capital equipment" and should be recorded as an addition to fixed assets.
Questions. Any questions concerning these procedures should be directed to Christian Lund State Treasurer's Office (410-260-6203) or email firstname.lastname@example.org.