B.1.3.3 Certificates of Participation/Leases

A financing lease provides a public agency with an alternative to voter authorized debt to finance capital assets over a multi year period (see Section 3.3.2.1 Lease Revenue Bonds and Certificates of Participation). Tax exempt leasing for purposes of this discussion often involves the sale of Certificates of Participation (COPs) in the municipal market. A tax exempt lease may be used to finance any property that the public agency has the statutory authorization to lease. As a general matter, only land and depreciable property may be leased. Generally, the leased property is a capital asset to be used by the public agency in its own operations. Any lease by a public agency must be in furtherance of a proper public purpose. School districts execute lease purchase agreements and COPs, to finance not only minor equipment procurements, but also the construction or acquisition costs of major capital projects, such as school facilities.

A properly structured lease does not create a “debt” subject to the voter approval requirements of the California Constitution. See Section 1.2.4.3 Lease Exception (the “Offner-Dean” Lease Exception). Although a lease is not a “debt,” a district should treat the schedule of lease payments as it would the repayment schedule of principal and interest on any loan, bond, or debt obligation.

Districts use COPs to finance a construction project or to leverage an existing unencumbered school facility to raise funds to complete other projects, known as an asset transfer (see Section 3.6.3 Certificates of Participation).203 For a complete discussion of the policy considerations for leases and COPs, see Guidelines for Leases and Certification of Participation (CDIAC 1993).