Opinion Number

Dear Mr. Theriot:

You requested an Attorney General's opinion regarding capital leases. You indicate that the Iberville Parish School Board has approved the use of a capital lease to finance work performed on Dorseyville Elementary School, but did not seek Bond Commission approval of the lease. You question under what circumstances a capital lease must receive Bond Commission approval. You indicate the you are especially interested in our interpretation of R.S. 39:1410.60C(1).

For accounting purposes, leases fall into one of two categories: capital leases and operating leases. Capital leases are considered financing transactions, while operating leases are not. The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 13 Accounting forLeases (SFAS 13). SFAS 13 establishes the standards for the financial accounting and reporting for leases. Under SFAS 13, if a lease meets one or more of the following four criteria, the lease is classified as a capital lease; otherwise, it is an operating lease:

1. The lease transfers ownership of the property to the lessee by the end of the lease term;

2. The lease contains a bargain purchase option;

3. The lease term is equal to 75 percent or more of the estimated economic life of the lease property;

4. The present value of the rents equals or exceeds 90 percent of the fair value of the leased property.

The distinction between capital and operating leases is important for accounting purposes, but Title 39 of the Louisiana Revised Statutes doesn't differentiate between the two. R.S. 39:1410.60(A) requires political subdivisions to obtain State Bond Commission approval in order to borrow money, incur debt, or to issue bonds, or other evidences of debt, or to pledge uncollected taxes or revenues for the payment thereof, *Page 2
where they are authorized by the constitution or laws of the state so to do. R.S. 39:1410.60(C)(1) provides:

C. (1) As used in this Section, the term "debt" or "evidence of debt" shall not include a lease of a movable or an installment purchase agreement financing the purchase of a movable if the lease or installment purchase agreement contains a nonappropriation clause, and does not contain an anti-substitution or penalty clause; provided that if such lease or installment purchase agreement is entered into in conjunction with the issuance of bonds, notes, certificates, or other obligations which would otherwise be required to be approved by the State Bond Commission, State Bond Commission approval of such financing transaction shall continue to be required.

As can be seen, certain leases are not included in the term "debt" or "evidence of debt" for purposes of § 1410.60. It is our opinion that any lease of a moveable, including a capital lease, which contains a non-appropriation clause, and does not contain an anti-substitution or penalty clause, does not require Bond Commission approval.

Trusting this adequately responds to your request, we remain

Yours very truly,

CHARLES C. FOTI, JR.

ATTORNEY GENERAL

BY:__________________________

KENNETH L. ROCHE, III

Assistant Attorney General