[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]
[[Page 25087]]
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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
[[Page 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
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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
