[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Rules and Regulations]
[Pages 25088-25090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12341]




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Part III





Department of Transportation





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Federal Transit Administration



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49 CFR Part 639



Capital Leases; Final Rule

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

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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.

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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 long-term 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

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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

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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:


Sec. 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