timation of the volume of leasing less than Unlike typical operating leases, tax-ex- straightforward. Estimation using muempt leases are in essence long-term sales nicipal annual reports is likely to provide contracts. The arrangement typically calls reliable data only if the municipality for periodic installment payment of the strictly follows Generally Accepted Acpurchase price and interest. The interest counting Principles (GAAP) which repayments are federally tax exempt so long quire the capitalization of such leases.' A as the agreement is structured as a sale, source of such cities is those cities wini.e., the principal amount is an obliga- ning a Certificate of Conformance from tion of the city under Section 103 of the the Government Finance Officer's AssoInternal Revenue Code. The municipality ciation (GFOA). The certificate is awarded acquires title to the property when the full only to those cities whose financials conpurchase price has been paid. Because form strictly to GAAP. Cities winning most state laws do not allow lease-pur- certificates with year-ends covering a onechase debt obligations being subject to debt year period (years ending 9/30/82 to 8/ limitations, typical tax-exempt leases have 31/83) were selected. Lack of data on cernon-appropriation clauses. Such clauses tain variables for some of the smaller Citprovide that the lease payments are only ies and inability to obtain some of the anpaid subject to an annual appropriation. nual reports resulted in a sample size of Thus, the clause acts to avoid the lease 225 from 41 states. being legally classified as debt. Since the Statistics on leasing for these cities is agreements can be terminated, lessors shown in Table 1. In total, capital leases protect themselves by charging interest amounted to $573 million for the 225 citrates higher than for comparable general ies, an amount consisting of seven perobligations.' cent of total debt for these cities on avLarge tax-exempt leases are usually fi- erage. The highest total volume of leases nanced by a number of investors who buy comes from cities having populations be,, certificates of participation. Usually in tween 10,000 and 99,999 ($168 million) and $5,000 increments, the certificates entitle between 100,000 and 499,999 ($188 milthe investor to receive periodic payments lion). Leasing per capita is highest for the of principal and interest. They are usu- 10,000 to 99,999 population cities, and is ally underwritten by a brokerage firm and lowest for cities under 10,000 population marketed like a municipal bond. Smaller and over 1 million. The statistics tend to *VisitingProfessor,CaliforniaInstitute of Tech- indicate that (for the sample) leasing is a nology,Pasadena,CA91125