ORLANDO, Fla. - Louisiana Treasurer Mary Landrieu and other state debt managers charged last week that lease financing has become a bad habit.
"I don't know where this road is going to end," Ms. Landrieu told a conference here, "but it's definitely going to all crash around us sometime soon."
Not all the speakers at the National Association of State Treasurers gathering agreed with Ms. Landrieu, but many had something to say about the financings and the explosive growth in their use.
Robert Tucker, a Moody's Investors Service vice president, told members of the State Debt Management Network that the agency rated a record 375 lease issues worth $12 billion in 1991. Most of those, he said, were not submitted to voters or restricted by the issuer's constitutional statutory debt limitations.
The industry started out in the early 1980s with less than $1 billion yearly volume.
To Ms. Landrieu, the situation resembles that "of a family that wants a $100,000 house but can only afford a $50,000 house," so it goes out and leases an expensive home and furnishings that it otherwise could not afford.
She said that in Louisiana, where leasing is legal but so far has not been used extensively, "We have a lot of pressure at the gate, and I'm not opening it until I'm out."
Ms. Landrieu also argued that the leasing binge is inherently deceptive. The financings, while designed to avoid the voters and debt limits, are largely treated as binding long-term obligations by issuers, investors, and rating agencies.
"That almost gets to the heart of democracy," she said. "Laws are set so people can vote on whether or not they want" to borrow for capital projects. "It is a very dangerous undermining of the whole democracy," she said.
But Leonard Rice, a partner with the law firm of Dorsey & Witney in Minneapolis, said that for the most part leasing has not been abused by issuers. "People are not trying to get themselves in trouble," he said.
The facts don't support the analogy of a couple going out and buying themselves into bankruptcy. There's no example of that with respect to public leasing."
"Everybody believes in democracy he added, "but it's a fact of life that people aren't going to vote every time a police car" needs to be financed.
Jack Yost, executive vice president of Dougherty, Dawkins, Strand & Bigelow Inc., a Minneapolis broker-dealer, said leasing started out and has continued largely for financing small purchases. Items such as police cars and fire trucks are too expensive to pay in cash but too minor to present to the voters, he said.
Mr. Yost added that leasing also has been used at times to finance court-ordered projects such as jails, which-must be built even though voters have disapproved bonds for the project.
Ms. Landrieu responded that the Initial Idea of using leases for small equipment purchases was "sound." But, she added, "When you take this and extend it to real estate and everything else, that's where I see problems developing."
Peggy Ingison, a fiscal analyst with the Minnesota Senate's Finance Committee, said the widening use of leasing is troublesome because it enables elected officials to avoid confronting voters with difficult decisions over how to use a state's scarce resources. Such a policy, she commented, can perpetuate and exacerbate a state's financial problems.
"Referendums are there because the people need to face the issue of
scarce resources, she said. "But
they're never forced to make those decisions because of leasing."
While rating agencies recognize the legal right of an issuer to cancel payment on a lease, one state official complained that any attempt to do so would be treated as a default and most likely would result in a downgrading, perhaps even of the issuer's general obligation debt.
Emphasizing this point, Mr. Tucker of Moody's said his agency's "expectation is that payment will always be on time and in full."
That comment led the state official to say it was a charade to assert that lease securities legally are not debt because the issuer has no obligation to pay. "If it smells like debt and looks like debt, it's debt," he said.
A Louisiana official said municipal elections sometimes produce new management and dramatically different priorities, and the municipality should be able to exercise its legal right to cancel a lease if a project has lost its usefulness.
Mr. Tucker said that while such a move would be perfectly legal, it would have troubling ramifications for the municipality and the entire lease industry.
"It would hurt the whole market." he said, significantly driving up the interest rates all issuers pay on lease securities as investors perceived a greater risk of similar nonpayments in the future.
Lease contracts give most investors the right to repossess leased facilities the event of nonpayment. But that provides little comfort to either investors or insurance agencies, said Mr. Tucker and Mary Wright Benner, a vice president with Financial Guaranty Insurance Co. Investors really only want to see the payments flowing, Ms. Benner added.
Larry Singer, former public finance director of New Jersey. said the state officials' gripes about lease securities should not be taken too seriously.
Regardless of their personal views, most state debt managers will go ahead and use lease-backed certificates of participation when it makes sense to do so, he said.
"COPS are a tool that everyone needs from time to time."
Mr. Singer compared the leasing controversy to the national debate over abortion. He noted that Vice President Quayle. a vocal opponent of abortion, for example, has admitted he might support his daughter if she ever needed one.
"In spite of all the moralizing. leasing is there, and using it becomes a moot point the moment you need it," he said.
