Financing Information Technology Investments: The Strategy of Leasing.

• Author: Salverda, Lauri P.
• Position: Statistical Data Included

This article describes the benefits of information technology leasing for governmental entities and highlights the different leasing structures available.

Through its many different structures, information technology leasing can be beneficial to any governmental entity that is acquiring or replacing technology equipment. For those governments that are permitted by law to enter into a lease or lease purchase contract, leasing provides a number of benefits over the direct purchase of equipment. Taxable or tax-exempt, operating or capital lease, flexible structures allow a governmental entity to choose the type of lease which meets both its financial and technological goals.

Benefits of Leasing

Information technology (IT) leasing, like other types of leasing, has grown rapidly over the past decade. A critical factor in its growth is the rapid rate of change in technology. By the time a government purchases IT equipment, it already may be outdated. With IT companies often releasing upgraded or "next-generation" models several times a year, ownership can be impractical. To address this issue, banks and large corporations have begun to cater to this market by providing leasing options for governmental entities.

Typically, the largest benefit of a lease program is the ability of the government to acquire updated technology more rapidly than if it relies on cash acquisitions. Not only can upgrades be made on a more rapid basis through various refresh programs, the governmental entity can stay on top of the ever-changing technology curve.

As with any governmental purchase, it is also less costly to finance an acquisition on a tax-exempt basis versus paying cash. In lieu of utilizing reserves to purchase equipment, a governmental entity can invest those balances. By borrowing funds at tax-exempt interest rates, the governmental entity has the opportunity to earn approximately 2 to 3 percent in excess of the financing rate depending on current market conditions.

By entering into a lease transaction, a governmental entity can purchase a greater volume of information technology equipment at any given time. The funds allocated for technology purchases on an annual basis can be used as future lease payments to expedite equipment purchases. The capital allocation of future years to purchase equipment, such as additional computers, can be applied to future lease payments. The benefit of this is twofold. First, by purchasing a larger volume at one time...