WASHINGTON -- The municipal lease market will continue to grow despite higher interest rates and voter revolts against long-term debt obligations, said the incoming chairman of the board of the Association of Governmental Leasing & Finance.

"If the interest rates continue to rise, [the certificates of participation lease] market will continue to be a little depressed," but that won't have the same impact on equipment lease deals because municipalities will continue to need to replace aging equipment, said Neal E. Skiver, vice president at LaSalle National Bank in Santa Fe, N.M.

Skiver, who begins his one-year term as chairman at the leasing group's fall meeting outside San Diego this week, said COPs are "much more interest rate sensitive" than the traditional equipment lease because they are structured like a municipal bond and because the overall public finance market has slowed down with the rise of interest rates.

However, the only thing that could slow the growth of the municipal lease market is "substantial legislative changes or substantial credit deterioration in the form of defaults or losses that would lead conservative investors, like banks, out of the market," he said. "But, right now we don't see anything on the horizon," Skiver said.

Two highly publicized and controversial lease deals, as well as taxpayer revolts against long-term debt spending in many states, have forced market participants, from the ratings agencies to issuers and investors, to take a closer look at every potential deal, Skiver said.

The public outcry against further government spending has had little effect on the lease market because in many states the structure of a municipal lease keeps it from being considered long-term debt, he said.

Colorado, however, is another story. A few years ago Colorado voters adopted a provision that greatly restricted state spending and debt issuance. The so-called "Proposition 1" wasn't designed to cut off municipal leases, but it made many issuers uncomfortable with doing business in the state, Skiver said.

In Florida and California, controversy over two lease deals led to greater oversight in the market. "It was definitely a wake-up call for investors involved in the municipal marketplace because it showed that there are other aspects to our industry other than the fact that there are low default risks," Skiver said.

"Those issues [in Brevard County, Fla., and Contra Costa County, Calif.] caused everyone to pay a little more attention to the types of financings they were doing" and the political mood of the community where the financing was taking place, he said.

"Nobody really got hurt directly, monetarily [by those deals]. There's nobody out there licking their wounds from municipal leases, but everybody realized, `yes, there is risk out there,'" Skiver said.

In Brevard County, Fla., the county borrowed to build a municipal office building. But when word got out about the expense and location of the building, the citizens demanded a referendum on whether to continue appropriating the lease. In the end the building was financed. In California, the Richmond Unified School District defaulted on a municipal lease that was used to finance operating costs, rather than capital projects. A California superior court ruling required the school district to pay $9.8 million to settle the lease dispute.

"Whatever constricting of the industry that increased voter oversight might cause, it will be offset by continued education and understanding of the lease product," Skivet said. "The continued tightening of capital budgets by municipalities in every state will cause them to look for new and creative methods to acquire the things that they need to provide."

Municipalities may turn to lease financing to update office technology, such as heating and cooling systems, in municipal buildings, instead of the basic procurement process that has been at the heart of the traditional lease, he said.

"It's an expansion of the market by product. The city that did their last financing for all their police cars, their emergency response system, and their phone system with municipal leases are already comfortable with municipal leasing and now they're using it to expand it to areas that are non-traditional to finance," Skiver said.

As part of the effort to help the lease market grow, the association is working to provide more service to the municipalities instead of focusing solely on the public finance side, Skiver said.

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