Finding consensus among fire chiefs can be a very difficult task, but there's one solid fact on which we all should agree, regardless of where we live or work: Finding money to ensure the delivery of adequate fire protection is extremely difficult.

One of the most difficult aspects of my role as a volunteer fire chief involved the creation of a solid capital budget. I was assisted in this task by a board of fire commissioners who liked to look ahead. During the late 1980s and early 1990s, they had a set-aside fund for future apparatus purchases, which allowed us to buy a rescue vehicle with cash back in 1991. However, the cost of equipment has outstripped our ability to pay cash for the "big-ticket" items.

Financing methods The battle for a piece of the budget pie is a matter of continuing interagency warfare. We're all caught between the rock of fiscal responsibility and the hard place of competing professional interests. Whether it's the police chief, the head of the sanitation department or the head librarian, they're all looking at your budget for their dollars.

A critical element in our annual budget comes from the big-ticket items, such as stations, apparatus and other fleet-related items. These are the things that cost a lot and are expected to last a number of years. There are a number of options for funding such purchases.

You can pay cash, but this is something you must decide now to prepare for that new aerial in 2005, and chances are that you'll still need a little supplemental help in the end. However, monies that are properly invested can bring in a helpful stream of interest.

Bonding and borrowing are also forms of financing that have been used. [Ed: See "Bonds 101," Sept. 1997, available at .] These two tools usually fall within a government-set limit. In this way, officials won't borrow more money than they can reasonably be expected to pay back. The limit is usually some percentage of the total value of the taxable properties in a community.

Of course, no matter how they're financed, budgets don't always cover everything. There are those sudden needs caused by accidents, natural disasters or sudden programmatic imperatives from the mayor and council, requiring you to buy expensive items on short notice. This requires a flexibility not usually found in standard government financing schemes.

In light of this fact, let me offer another way to finance future apparatus, equipment and real property acquisitions. They can be leased, just like many of us lease our family cars.

The basics of leasing It's important to note that there's a difference between the true lease of a vehicle and the lease/purchase of a vehicle. You must make your choice at the very beginning of the process, after which you're bound by the rules of the lease or lease/purchase, depending on which you've chosen.

So just what is a lease? In its simplest terms, it's a rental agreement. In consideration of money paid, you're allowed to use an item for a definite period of time. At the end of that period, the item is returned to its owner. An example could be the leasing of an office in an office complex: You don't want to buy the office, you merely want to lease the space for a given period of time. At the end of the lease, you may move to a new facility or negotiate a new lease arrangement.

The lease/purchase, as its name implies, involves some form of purchase at the end of the lease period. For example, I currently drive a 1999 GMC Yukon sport utility vehicle, which I've leased for three years from Wells Fargo in Phoenix. As part of my lease, I'm limited to 22,000 miles of driving per year. If I exceed that amount, I'll have to pay $o.10 per mile for every mile over 66,000. If I want to keep the car, I already know that it will be available to me on Oct. 19, 2002, for a fee of $22,000.

A municipal lease is a financing tool that allows governmental entities to acquire essential equipment and to complete necessary projects at low, tax-exempt interest rates. With lease/purchase, there's ownership in the asset. The municipal lease is also sometimes called an installment sales contract or lease with option to purchase.

The equipment or project being lease financed is titled in the name of the governmental entity, and payments are composed of principal and interest. With each payment, the governmental entity's equity in the equipment or project being financed grows.

In addition, the lease agreement is structured as a series of one-year renewable obligations, subject to the governmental entity's ability to appropriate funds for the continuation of the lease payments. Because of this provision, payments are considered a current expense of the lessee and not a debt obligation. If enough funds aren't available for payment, the agreement ends and the asset is returned to the lessor.

Municipal managers use lease/purchase financing contracts to efficiently manage cash flows. They provide the opportunity to own and use an asset immediately, while distributing the payments over the asset's useful life. A lease can be an important element of a capital-improvement program by offering the opportunity to preserve cash for other projects where lease/purchase isn't an option. It also allows purchasers to standardize on new equipment all at once instead of phasing in new items over the years.

Equipment leases are relatively simple to complete and allow the municipal entity to implement buying decisions quickly. In comparison, bond issues are much more costly and far more complex and time-consuming. Typically, lease/purchase agreements don't require high legal fees, underwriting costs, voter approval, printing expenses, broker commissions or bond attorneys.

Many times lease/purchase financing can even be cheaper than paying cash, as cash payments may encourage the municipal entity to delay purchases, allowing inflation to outpace the traditional savings of paying in cash.

Benefits and drawbacks The choice of lease or lease/purchase is one that you must make. You can find help with this choice through a number of different mechanisms. There are certain pluses involved in leasing:

* You can maintain a newer fleet.

* You can create an expense budget item for lease payments.

* You won't have to mortgage the future.

* Your costs will remain constant through the period of the lease.

* If the item isn't working well at the end of the lease, you can simply say goodbye.

There are also aspects that could be perceived as negatives:

* You may never own the equipment or structure.

* You're reminded once a month when the check is sent that you're beholden to someone else for your equipment.

* People often don't take good care of things they don't own.

* If payments are defaulted, possession of the apparatus, equipment or structure goes back to the owner.

Often a fire department will go to an independent financial group for guidance on how to proceed with leasing. Sometimes manufacturers work with financial organizations to provide leasing services for their products. In either case, there are a number of positive reasons to lease:

* Minimal out-of-pocket expenses.

* Initial transaction can be accomplished in a short time period.

* Lease is based on ability to pay.

* Lease can be structured to purchase item at end of lease.

* Item can be returned and traded for a newer model at end of lease.

Although leasing affords the possibility of keeping a newer fleet in service, the organization should understand that if a particular piece of equipment is paid off and working well, the money formerly used for its lease can be set aside for future use. In this way, a lease can create breathing room for future growth.

Non-profit versus tax-exempt In the world of leasing, there are some important legal provisions that are often overlooked and can cause trouble if not properly handled. For example, if a volunteer fire department wants to use some form of a lease, it must be recognized as a tax-exempt organization by the Internal Revenue Service.

Now for a short history lesson. Many volunteer fire departments began their organizational lives as member corporations, an older form of incorporation that was used in many states before World War II. In the '70s, changes in the laws did away with this type of corporation, but many volunteer organizations were grandfathered as not-for-profit corporations.

However, not-for-profit status doesn't guarantee that an organization is tax-exempt. If it's to be regarded as tax-exempt, it must be registered as such with the irs. This isn't as simple as it sounds, because there are no actual forms supplied by the irs.

The irs also has certain rules and regulations that volunteer fire departments must follow to use tax-exempt lease/purchase rates. For example, a volunteer fire department must be organized and operated to provide firefighting services in an area within a municipality that's not provided with any other firefighting services, except on an emergency basis or under a cooperative agreement, such as a mutual-aid pact. Also, the volunteer fire department must be required to furnish firefighting services to the area under a written agreement with the municipality.

In addition, no volunteer fire department obligation will qualify as tax-exempt unless its issuance as a tax-exempt obligation is first approved by the elected officials of the municipality following a public hearing, of which reasonable advance notice is given in accordance with Section 147(f) of the irs Code.

Here's a short list, provided by Judy Rosich, vice president of the Baystone Financial Group, Littleton, Colo., of what a fire department must do to qualify for tax-exempt leasing through their firm. These are specific to Baystone Financial Group and may vary for other leasing entities.

* The department must possess a written agreement to provide firefighting services with a city, town or county.

* The department should be the only provider of firefighting services in their area or have been providing firefighting services to the area continuously since 1981.

If a fire department is qualified by the above-listed criteria, it must then comply with the following steps:

* Publish a notice in a local publication and have a meeting no less than 14 days later to allow anyone opposed to the purchase an opportunity to be heard.

* Submit a resolution of approval signed by an authority of the governing body for which the volunteer fire department provides firefighting services.

* Forward a copy of the department's charter or article of incorporation.

* Forward a copy of the department's agreement with the city, town or county to provide firefighting services, if available.

It's critical to ensure that your volunteer fire department complies with the irs Code's "public notice" and "approval of an elected official" provisions. This must be done to receive tax-exempt financing. The irs is very clear on how these rules must be followed; unfortunately, not all leasing companies inform their clients. If these regulations aren't followed properly, your volunteer fire department can be subject to fines and penalties.

Volunteer organizations must also remain continually mindful of two very important facts:

* Tax-exempt organizations must be recognized as such by the irs.

* Tax-exempt organizations must file an annual return with the irs.

Another important point to remember is that tax-exempt financing can be used by tax-exempt organizations only for new stations and/or new apparatus. However, regular leasing and financing is available for other items, such as computer hardware and software and communications infrastructure.

So how much does tax-exempt status really save you? As of this writing, the current tax-exempt rates for both lease and lease/purchase agreements are in the range of 4% to 7%. Most true leasing rates, on the other hand, are typically calculated at prime (currently 7.75%) plus a factor added by the leasing company.

Most fire chiefs are familiar with bonding, borrowing and budgeting. But if they're to remain flexible in meeting future fire protection needs, they should add an understanding of leasing to their modus operandi. In this way, they'll be better prepared to handle any fiscal eventuality.