The Importance of Lease Financing for Austrian Municipalities

The innovation of this paper is to use Central Credit Register (CCR) data to analyze and assess municipal (local government) leasing activities. Among other things, the analysis highlights the different accounting treatment of (real estate) lease transactions undertaken by local governments in their capacity as market producers and as nonmarket producers. The lease financing volume of municipalities totaled roughly EUR 1.1 billion, thus corresponding to 8.5% on average of total municipal exposures as reflected in the CCR. This aggregate figure masks considerable differences across individual municipalities, for which it is hard to find meaningful theoretical evidence. Those municipalities whose leasing deals have been subject to approval by provinces for the longest period tend to report lower lease shares. At the same time, there is little correlation between the credit quality of a municipality and its exposure to lease financing; evidently, credit quality checks are based on comparable criteria irrespective of the financing model of choice. Likewise, there is only a weak correlation between municipalities’ exposure to lease financing and their level of (residual) debt. More highly indebted local government units have not been found to be more inclined to shifting their portfolios to financing forms that do not push up the level of debt. These results suggest that municipalities thoroughly assess options of lease financing on a case-by-case basis as new borrowing needs arise, and that they have become less likely to go for lease financing ever since such deals have become subject to approval by the provincial governments, just like loans.