25088 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Rules and Regulations

DEPARTMENT OF TRANSPORTATION

Federal Transit Administration

49 CFR Part 639

[Docket No. FTA–96–1031]

RIN 2132–AA55

Capital Leases

AGENCY: Federal Transit Administration,

DOT.

ACTION: Final rule.

SUMMARY: This final rule amends

‘‘Capital Leases’’ to treat maintenance

costs under a commercial lease of a

capital asset as an eligible capital

expense. ‘‘Capital Leases’’ implements

section 308 of the Surface

Transportation and Uniform Relocation

Assistance Act of 1987, which allows

capital grants under the Federal transit

laws to be used for leasing facilities or

equipment if a lease is more cost

effective than purchase or construction

of such items. FTA believes that this

amendment is consistent with industry

practice and with recent Federal

initiatives to streamline federally

assisted procurement practices and to

ensure that Federal investment in the

nation’s transportation infrastructure is

properly protected.

EFFECTIVE DATE: June 17, 1996.

ADDRESS: United States Department of

Transportation, Central Dockets Office,

P–125, 400 Seventh Street, S.W.,

Washington, D.C. 20590.

FOR FURTHER INFORMATION CONTACT: Rita

Daguillard, Deputy Assistant Chief

Counsel, Office of Chief Counsel, (202)

366–1936, or Douglas Kerr, Office of

Program Guidance and Support, (202)

366–1656.

I. Supplementary Information

A. Background

Under 49 U.S.C. 5307, Federal funds

are provided to urbanized areas on the

basis of a statutory formula. These funds

are available for the acquisition or

construction of mass transportation

facilities and equipment (‘‘capital

assistance grants’’), as well as for

payment of a portion of the net

operating cost of mass transportation

facilities and equipment (‘‘operating

assistance grants’’).

Historically, Federal Transit

Administration (FTA) recipients had the

discretion to acquire capital assets by

long-term or short-term lease, but few

did so, since the significant portion of

the lease cost (as much as forty percent)

representing imputed interest was

ineligible for reimbursement under

Office of Management and Budget

(OMB) cost principles (OMB Circular

A–87, ‘‘Cost Principles for State, Local,

and Indian Tribal Governments’’).

In 1987, section 308 of the Surface

Transportation and Uniform Relocation

Assistance Act, Public Law 100–17

(STURAA), expressly authorized the use

of section 5307 capital assistance funds

to acquire facilities and equipment by

lease where leasing is more cost

effective than purchase or construction.

As explained in the accompanying

Senate Report, section 308

permits grantees to use [section 5307] grant

funds to lease major capital cost items such

as computers, maintenance of way and other

heavy equipment, maintenance of effort rail

equipment, radio equipment, bus garages,

property or structures for park and ride, and

other buildings or facilities used for mass

transit purposes. The Committee recognizes

that it is often more cost effective for grantees

to lease rather than purchase major capital

items. Leasing arrangements can also provide

transit authorities with flexibility that is

needed, for example, to maintain

technological advance in their

communications and computing equipment

or to adapt buildings and other facilities to

changing needs. By including this section,

the Committee intends to help grantees better

manage their operations and conduct longterm and short-term planning.

S. Rep. No. 3, 100th Cong., 1st Sess. 6

(1987).

On October 15, 1991, FTA issued 49

CFR Part 639 (56 FR 51786), which

implements section 308. The rule

provides that capital grants under

section 5307 may be used for leasing

facilities or equipment if leasing is more

cost effective than purchase or

construction of such items. Section

639.27 lists maintenance costs among

the factors that a recipient may consider

in making its cost-effectiveness

determination. Section 639.17, provides

that ‘‘only costs directly attributable to

making a capital asset available to the

lessee are eligible for capital assistance’’

and cites as examples finance charges

and ancillary costs such as delivery and

installation charges.

B. The Notice of Proposed Rulemaking

On January 31, 1996, FTA issued a

notice of proposed rulemaking (NPRM)

that would amend section 639.17 to

recognize maintenance costs as ‘‘costs

directly attributable to making a capital

asset available to the lessee.’’ In the

NPRM, FTA stated that this amendment

appeared to be consistent with common

industry practice and Federal

procurement streamlining measures.

The NPRM pointed out that in

reviewing the subject of capital leases,

particularly vehicle leases, FTA had

noted that maintenance and repair costs

are often an integral component of

standard commercial lease agreements

and that use of capital assistance for

such costs is expressly permitted under

section 5307. Many commercial vehicle

leases, for instance, state that the lessor

will provide all maintenance, repairs,

and replacement parts needed to keep

the capital asset in good operating

condition. These services are included

in the overall lease cost, rather than

being itemized as a separate charge. In

such cases, it is not feasible for lessees

to separate maintenance charges from

the overall lease cost. The NPRM stated

that requiring grantees to do so imposes

an accounting burden that is

inconsistent with Congress’ recognition

that leasing is often more cost effective

and with its intention in section 308 to

facilitate grantee operations.

The NPRM moreover noted that since

regular maintenance is necessary to

ensure the availability and adequate

functioning of a capital asset, FTA

believes that it is an essential and

inseparable element of the lease

agreement. Congress has expressly

recognized this relationship in allowing

capital assistance to be used to acquire

‘‘associated capital maintenance items’’

under section 5307(b)(1), where such

items would otherwise have to be

funded under the operating assistance

program. FTA therefore proposed to

recognize maintenance charges as

eligible capital costs under a

commercial lease directly attributable to

the lessee’s use of the asset within the

definition of section 639.17.

The NPRM pointed out that this

proposal is consistent with several

recent initiatives, including the

President’s National Performance

Review, Executive Order 12931 (Federal

Procurement Reform), and the Federal

Acquisition Streamlining Act of 1994

(FASA) (Pub. L. 103–355, 108 Stat. 3243

(October 13, 1994)), which direct

Federal agencies to remove

administrative burdens in procurement

processes. They encourage and facilitate

the procurement of commercially

available items by exempting agencies

from unnecessarily burdensome

government-unique certifications and

accounting requirements that add costs

and discourage companies from doing

business with them. Section 8203 of

FASA, for instance, requires that

agencies use uniform, simplified

contracts for the procurement of

commercial items and that they revise

all procurement procedures not required

by law to eliminate impediments to use

of such contracts. In the NPRM, FTA

stated that requiring its recipients to

account separately for maintenance

costs under a commercial lease is
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Rules and Regulations 25089

unnecessarily burdensome and makes

such leases more costly and

cumbersome to administer. Recognizing

these costs explicitly in section 639.17

should facilitate recipients’ acquisition

and maintenance of capital assets by

allowing them to enter into standard

commercial lease agreements more

easily and at less cost.

The NPRM stated that this proposal is

consistent with FTA’s recently issued

Circular 4220.1C (‘‘Third Party

Contracting Requirements,’’ October 1,

1995’’), which reduces FTA

requirements; provides grantees

increased flexibility in soliciting,

awarding, and administering contracts;

reduces FTA’s role in third party

procurement activity; and allows

recipients to use their own procurement

practices that reflect State or local laws,

provided that they conform to

applicable Federal law. FTA noted that

neither section 308 of the STURAA nor

the accompanying Senate Report

indicates that maintenance costs should

not be treated as eligible capital

expenses.

In the NPRM, FTA sought comment

on its proposal to recognize

maintenance costs as eligible capital

expenses under leasing agreements.

C. Comments on the NPRM

FTA received ten comments in

response to the NPRM: six from public

transit agencies, two from State

departments of transportation, one from

a metropolitan planning organization,

and one from an association

representing local mass transit systems.

All of the commenters strongly

supported FTA’s proposal to recognize

maintenance costs as eligible capital

expenses under leasing agreements.

They pointed out that the proposed

amendment would streamline the

procurement process for transit

managers and allow them to make

contractual arrangements consistent

with standard business practices. Two

commenters opined that in the current

climate of declining Federal operating

assistance, the ability to charge

maintenance costs as capital

expenditures would somewhat ease the

impact of these reductions. Overall, the

commenters agreed that the amendment

would be a positive step toward both

increased flexibility in the use of grant

funds and decreased administrative

burdens on grantees.

One commenter asked whether the

costs of maintaining shared elements of

a communications network could be

eligible capital expenses under the

amendment. The commenter noted that

the capital items mentioned in the

NPRM were for the exclusive use of the

lessee, e.g., bus garages, computers, etc.

Communications networks, on the other

hand, include both shared elements and

components that are used exclusively by

the lessee. Both, however, are

inseparable elements of the network,

and maintenance of both is essential to

its proper operation.

As the NPRM indicated, the proposed

amendment is intended to allow all

maintenance services included in the

overall lease cost of a capital item to be

treated as an eligible capital expense.

Therefore, any maintenance services

charged to a grantee’s capital lease

would be eligible, whether they are for

shared-use or exclusive-use segments of

a system. Moreover, sections 639.25 and

639.27 of the regulation provide that

estimated lease costs must be reasonable

based on conditions applicable to the

recipient, and that recipients are to use

maintenance costs as a criterion in

comparing leasing with purchasing or

constructing an asset. Therefore,

recipients may enter into leases of

communications networks only if their

share of the costs of maintaining

common elements is reasonable, and if

the cost of leasing, including the

maintenance services, is more

advantageous than purchase or

construction. To the extent that these

criteria are met, the cost of maintaining

common elements of a communications

or other network under a lease

agreement would be an eligible capital

expense.

One commenter recommended

extending the amendment to rural

transit services using Federal funds

under 49 U.S.C. 5311, since rural

systems play an integral role in State

transportation networks but lack

adequate maintenance resources. As

indicated above, under the OMB

Circular A–87 requirements that were in

effect at the time FTA’s leasing

regulation was initially promulgated,

the portion of the lease cost representing

imputed interest was ineligible for

reimbursement unless expressly

authorized by statute. Because section

308 of the STURAA applied specifically

to the use of section 5307 funds, the

leasing regulation covered only that

program. However, in a recent revision

of Circular A–87 (60 FR 26484, May 17,

1995), OMB changed its requirements to

allow the reimbursement of interest

payments under financing arrangements

such as lease agreements. Therefore,

specific statutory authorization is no

longer required to permit capital

reimbursement for the interest portion

of any federally funded lease.

Accordingly, 49 CFR Part 639 is now

applicable to all FTA programs.

One commenter suggested that FTA

allow all maintenance costs, including

those that are not part of a lease

agreement, to be treated as eligible

capital expenses. The commenter stated

that regular maintenance is necessary to

ensure the availability and adequate

functioning of all capital assets.

Therefore, even in instances where

maintenance expenses are paid

separately by a recipient under either a

lease or purchase arrangement,

reimbursement at the capital rate should

be allowed.

The commenter’s suggestion goes far

beyond the scope of this proposed

amendment, whose purpose is to

facilitate recipient’s entry into standard

commercial leases that include

maintenance and repair costs as integral

components. Moreover, as noted above,

neither section 308 of the STURAA nor

the accompanying Senate Report

indicates that maintenance costs should

not be treated as eligible capital

expenses under a lease arrangement.

FTA therefore believes that it has the

statutory authority necessary to amend

the regulation to allow the

reimbursement as capital expenses of

maintenance costs included in lease

payments. However, FTA does not at

the present time interpret its statutory

authority to permit maintenance costs

incurred outside of a lease agreement to

be treated as capital expenses. In order

to provide recipients with greater

flexibility in their use of grant funds,

FTA is considering seeking such

authorization, and will amend its grant

requirements accordingly at such time.

Another commenter noted that under

its Capital Cost of Contracting Policy

(FTA Circular 7010.1, December 5,

1986), FTA must approve all leases for

vanpool vehicles when section 5307

funds represent more than 35 percent of

the lease cost. The commenter proposed

that this requirement be eliminated in

the interest of streamlining the grant

process and removing administrative

burdens on acquisitions.

First, the Capital Cost of Contracting

Policy should not be confused with

capital leasing under 49 CFR 639. Under

the Capital Cost of Contracting Policy, a

recipient contracts with a private carrier

to provide mass transit service. The

percentage of the service representing

‘‘the capital consumed in the contract’’

may be paid for with capital funds.

Under the capital leasing rule,

recipients may acquire tangible assets

by lease, and all eligible lease costs may

be reimbursed as capital expenses.

Second, FTA has used industry studies

and other objective data to determine

which percentage of the service under a

Capital Cost of Contracting arrangement
25090 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Rules and Regulations

should be eligible for capital

reimbursement. Until it receives

information justifying another

percentage, it will not amend its Capital

Cost of Contracting Policy, and reserves

the right to review all contracts in

which reimbursement with section 5307

capital funds exceeds that percentage.

Five commenters remarked that the

language of section 639.17(b) as

currently written contradicts the intent

of the NPRM, since it could be

construed to disqualify maintenance

costs as eligible capital expenses.

Section 639.17(b) now provides that

‘‘the costs of materials, supplies and

services provided under the terms of the

lease may not be eligible for capital

assistance, if they would not be eligible

for capital assistance under a traditional

purchase or construction grant.’’

Maintenance costs have not been

eligible for capital assistance under a

traditional purchase or construction

grant, and section 639.17(b) could be

interpreted to preclude their

reimbursement at the capital level. The

commenters requested clarification of

section 639.17(b), and one

recommended revised language for that

section providing such clarification.

D. FTA’S Final Action

In keeping with the comments

received, FTA will amend section

639.17(a) to recognize maintenance

costs as eligible capital expenses under

a lease agreement. FTA believes that

this action removes a significant

impediment to capital leasing, and

provides flexibility that can foster

further innovations in the use of Federal

funds.

FTA is also revising section 639.17(b)

to define eligibility for capital assistance

in a manner that should not be

construed to eliminate maintenance

costs as an eligible capital expense.

II. Regulatory Impacts

A. Executive Order 12866

FTA has determined that this action

is not significant under Executive Order

12866 or the regulatory policies and

procedures of Department of

Transportation regulatory policies and

procedures. Since this final rule makes

only a technical amendment to current

regulatory language, it is anticipated

that the economic impact of this

rulemaking will be minimal; therefore, a

full regulatory evaluation is not

required.

B. Regulatory Flexibility Act

In accordance with 5 U.S.C. 603(a), as

added by the Regulatory Flexibility Act,

Pub. L. 96–354, FTA certifies that this

rule will not have a significant impact

on a substantial number of small entities

within the meaning of the Act.

C. Paperwork Reduction Act

This action does not contain a

collection of information requirement

for purposes of the Paperwork

Reduction Act of 1995.

D. Executive Order 12612

This action has been reviewed under

Executive Order 12612 on Federalism

and FTA has determined that it does not

have implications for principles of

federalism that warrant the preparation

of a Federalism Assessment. If

promulgated, this rule will not limit the

policy making or administrative

discretion of the States, nor will it

impose additional costs or burdens on

the States, nor will it affect the States’

abilities to discharge the traditional

governmental functions or otherwise

affect any aspect of State sovereignty.

III. List of Subjects in 49 CFR Part 639

Government contracts, Grant

programs—Transportation, Mass

transportation.

Accordingly, for the reasons described

in the Preamble of this document, FTA

is proposing to amend Title 49, Code of

Federal Regulations, Part 639 as follows:

PART 639—[AMENDED]

1. The authority citation for Part 639

is revised to read as follows:

Authority: 49 U.S.C. 5307; 49 CFR 1.51.

2. Section 639.17 is revised to read as

follows:

§ 639.17 Eligible lease costs.

(a) All costs directly attributable to

making a capital asset available to the

lessee are eligible for capital assistance,

including, but not limited to—

(1) Finance charges, including

interest;

(2) Ancillary costs such as delivery

and installation charges; and

(3) Maintenance costs.

(b) Any asset leased under this part

must be eligible for capital assistance

under a traditional purchase or

construction grant.

Issued on: May 13, 1996.

Gordon J. Linton,

Administrator.

[FR Doc. 96–12341 Filed 5–16–96; 8:45 am]

BILLING CODE 4910–57–U