Municipalities need fiscal funding clauses with a safety net
Government agencies do not often intend to break leases. In fact, a government agency must show that it has enough budgetary room for all of their lease payments.
Instead, a fiscal funding clause usually provides agencies with a safety net that eliminates the risk of being required to pay lease cancellation fees.
Example:
A government agency adds a fiscal funding clause in case of an economic downturn that shrinks the tax base. This could result in less money to allocate to the agency, so the fiscal funding clause protects them from being liable in case they can no longer raise enough revenues to cover the payment.
A government agency must determine the likelihood it uses the cancellation option in the fiscal funding clause to figure out how to record the lease on its financial statements.
If a government agency determines the chance of cancellation is “reasonably certain,” they must use the date they expect to exercise that option as the end of the lease term. Otherwise, they must use the existing lease end date.
What’s important here?
A fiscal funding clause eliminates the risk that a government agency will owe cancellation fees if it breaks a lease. For example, this protects municipalities from the risk of losing appropriations needed to make on their lease payments.
