[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Proposed Rules]
[Pages 3532-3533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1830]




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Part II





Department of Transportation





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Federal Transit Administration



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49 CFR Part 639



Capital Leases; Proposed Rule

  Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 / 
Proposed Rules  

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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: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend ``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 proposal 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.

DATES: Comments must be submitted by April 1, 1996.

ADDRESSES: United States Department of Transportation, Central Dockets 
Office, PL-401, 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.

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 have 
had the discretion to acquire capital assets by long-term or short-term 
lease, but few have done 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 Grants 
to State and Local 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 F.R. 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. Proposed Amendment

    In reviewing the subject of capital leases, particularly vehicle 
leases, FTA has 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. 
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.
    Moreover, 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 
proposes 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.
    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. FTA believes that requiring its recipients to account 
separately for maintenance costs under a commercial lease is 
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.
    Moreover, this proposal is consistent with FTA's recently issued 
Circular 4220.1C (``Third Party Contracting Requirements,'' October 1, 
1995), which 

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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 notes that neither 
section 308 of the STURAA nor the accompanying Senate Report indicates 
that maintenance costs should not be treated as eligible capital 
expenses.
    Accordingly, consistent with common industry practice and Federal 
procurement streamlining measures, FTA proposes to amend 49 CFR 639.17 
to recognize maintenance costs as ``costs directly attributable to 
making a capital asset available to the lessee.''

C. Request for Comments

    FTA seeks comment on its proposal to recognize maintenance costs as 
eligible capital expenses under leasing agreements.

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 1980, 44 
U.S.C. 3501, et seq.

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.

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 on 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) The cost 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.

    Issued on: January 26, 1996.
Gordon J. Linton,
Administrator.
[FR Doc. 96-1830 Filed 1-30-96; 8:45 am]
BILLING CODE 4910-57-U