Finance board looks to change leasing rules
Updated 4:02 pm, Tuesday, August 26, 2014
The Board of Finance is seeking to have more control over the financial decisions of the town and the New Canaan Public Schools.
In an Aug. 12 meeting, the board agreed to establish new budget guidelines to set capital expenses apart from operating expenses, as well as to decide the best ways to finance such projects.
The discussion began after Finance Director Dawn Norton asked the board to consider the benefits of leasing as a means to finance capital projects.
Board member Jim Kucharczyk, who was "delighted" that the issue was raised, said the Board of Education has overused leasing.
"I think the issue is that the Board of Ed has historically taken advantage of leasing equipment to treat it as an operating expense as opposed to a capital investment. ... so it comes up every year," Kucharczyk said. "They lease $50,000 vehicles and call it an operating expense, they lease $2 million in copiers and call it an operating expense, we lease $1 million in computers and call it an operating expense."
Consequently, Kucharczyk said, the town inherits a multi-year obligation to fund such leases, which often last four years. Although boards of education in Connecticut may expend funds appropriated to them at their own discretion, requests for capital expenses in New Canaan are now handled separately from the operating budget's request.
"This is really where we need to take a fresh look at how we're going to describe operating versus capital," Kucharczyk said.
Kucharczyk will be working with Norton to develop a document concerning capital and operating expenses and related financing.
According to Budget Director Jennifer Charneski, the Board of Education's technology equipment leases are classified as capital, but its vehicles and copiers are not.
"I think that a lot of the actual cost is hidden in the lease," Norton said, noting that leases sometimes have a higher cost to the town.
Nancy Harris, New Canaan Public Schools' interim director of finance and operations, said the district's vehicle leases are for special education. She noted, however, that those are "lease purchases," which means the district eventually buys the vehicles after the lease expires. When it comes to copiers, the leases are regular and last for thee or four years.
"In the technology world, you don't necessarily want to own your old equipment," Harris said, noting that copiers have multi-functions and their features often are upgraded. "I would never see that as a candidate for purchase simply because it's a technology that proves you don't want to own the equipment."
The district soon is retiring three special education vehicles and is planning to lease new ones as soon as next year. To make a full purchase of those vehicles as a capital investment, according to Harris, would cost more earlier.
"We would need significantly more money up front in order to replace those three vehicles," she said.
The discussion comes less than a year after the town's Finance Department set new criteria for capital purchases. A capital investment now has to be a tangible physical asset or infrastructure improvement, have a cost greater than $5,000 and a useful life greater than three years. The initial purchase of a software system also could be characterized as a capital expense.
Through the new process, town departments and the Board of Education now have to lay out a five-year capital expenditures plan and are expected to submit their capital requests by the fall.
Board of Finance members, however, feel that more needs to be done when it comes to capital financing. Several board members said they need to be involved in the decision-making process much earlier and that they should be the ones to determine the best financing methods for town and Board of Education capital projects.
"If it's operating, it's one year, that's all we're on the hook for. If it's more than one year, we should be insisting that we approach this as a capital item," Kucharczyk said.
First Selectman Robert Mallozzi, who also is the Board of Finance chairman, said the value of leasing or not leasing equipment or vehicles may change significantly.
"Leasing had us a little bit confused over the years about what the true cost is," Mallozzi said. "I've been here for four years and for four years, it has come to us as `we're going to lease this equipment.' I'm not saying that is right or wrong, but I think we should be the ones that determine how that financing is put in place."
Harris agreed that "it's not a question of right or wrong," saying it's merely a financing choice.
"It's not a better way of doing business, it's a different way of doing business," she said. "Those who make those decisions have to be prepared to fund the changes."
Harris added that leasing helps "smooth" costs over a multi-year period. "Shifting from one more model to another requires a commitment from all parties to create some initial up-front funding, which might not be there," she said.
Board of Finance member Robert Spangler said such debate is an example of how the town and the Board of Education can consolidate services.
"This is the kind of stuff that crosses over," he said. "This is where we're going to find efficiencies between the town and the Board of Ed -- on these capital items."
Despite some disagreement, the Board of Education and the town are looking into ways to consolidate noneducational services to find cost efficiencies.
Spangler said bundling town and Board of Education leases could result in savings.
Board of Education Chairman Hazel Hobbs and Vice Chairman Scott Gress did not return calls for comment.
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