Certificates of Participation (COPs) are tax-exempt bonds issued by state entities usually secured with revenue from an equipment or facility lease. COPs enable governmental entities to finance capital projects without technically issuing long-term debt. This can be advantageous, as the issuance of long-term debt is commonly subject to voter approval and other state constitutional and statutory requirements.
A purpose-formed state entity issues tax-exempt bonds with maturities that match the lease term of assets that are purchased by the state entity with the proceeds from the bond issue. In the case of transit assets, the state entity then leases the equipment to one or more transit agencies. The underlying lease or installation sale agreement furnishes the revenue stream necessary to secure the bond. The resulting lease payments, most often made with a combination of formula grant funds and local matching share, are then "passed through" to the bondholders by the state entity.
COPs have been used primarily for transit investments, as transit operations often rely on capital equipment, such as rolling stock, buses, or depots that are well suited to lease agreements. Although they are perhaps less commonly used for road projects, COPs may also present creative financing options for certain highway related investments, such as automated toll collection or ITS equipment.
The COP process usually begins when a transit agency has ordered vehicles or contracted for a facility, which a finance corporation undertakes to pay for and complete. The assets are then leased to the transit provider at terms sufficient to repay the bondholders. The Federal grants that were committed to the original purchase are thus no longer needed for that purchase, allowing the transit system to reprogram the funds for other projects and accelerate their completion.
One of the most recent developments in transit finance is the ability to promise the use of future Federal transit formula grants as partial security for the leases underlying COPs. While it is not possible to pledge such funds formally (doing so would compromise the tax-exempt status of the debt), providers of commercial credit have viewed such promises as enhancing the creditworthiness of the overall transaction, primarily based on the transit system's record of grant receipts over the years. It is possible for the interest expense associated with lease payments to be reimbursed by Federal grants at the 80 percent matching level. The framework for implementing Federally-funded COP transactions derives from FTA's Final Rule on Capital Leases (49 CFR 639, October 15, 1991; amended December 10, 1998).
How Transit COPs are Structured (pdf)
Excerpted from the Transit Cooperative Research Program's "Report on Innovative Financing Techniques for Transit Agencies," Legal Research Digest, (August 1999).
FTA's Final Rule on Capital Leases (pdf)
This final rule implements changes enacted by TEA-21, which allows all FTA capital investment grant funds (49 U.S.C. 5309) to be used for leasing facilities and equipment if a lease is more cost effective than purchase or construction. Before the enactment of TEA-21, recipients were permitted to lease assets only with funds received from FTA urbanized area formula grants (49 U.S.C. 5307). This rule amends FTA's leasing regulation to extend this option to all FTA funds, to the extent a recipient meets all other regulatory requirements.
Case study: The Sacramento Regional Transit District (pdf)
Issued $32.44 million in COPs. Excerpted from the Transit Cooperative Research Program's "Report on Innovative Financing Techniques for Transit Agencies," Legal Research Digest, (August 1999).
Case study: Culver City, CA and the California Transit Finance Corporation (pdf)
Issued $9.66 million in COPs. Excerpted from the Transit Cooperative Research Program's "Report on Innovative Financing Techniques for Transit Agencies," Legal Research Digest, (August 1999).