Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance

committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports

if they are used for other purposes.

Current FIRs (in HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).

Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and

attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.

F I S C A L I M P A C T R E P O R T

SPONSOR Lujan, B

DATE TYPED 02/16/05 HB HJR 9/aHGAC

SHORT TITLE Building Lease Agreements for State, CA

SB

ANALYST Ford

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See Narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SJR 7

SOURCES OF INFORMATION

LFC Files

Responses Received From

Administrative Office of the Courts (AOC)

Attorney General (AGO)

Corrections Department (CD)

Energy, Minerals and Natural Resources Department (EMNRD)

General Services Department (GSD)

New Mexico Finance Authority (NMFA)

Public Education Department (PED)

FOR THE CAPITOL BUILDINGS PLANNING COMMISSION

SUMMARY

Synopsis of HGUAC Amendment

The House Government and Urban Affairs Committee Amendment specifically provides that a

lease purchase agreement that results in the build-up of equity is allowable. It authorizes a fi-

nancing agreement entered into by the state for the leasing of a building or other real property

with an option to purchase for a price that is reduced according to the payments made by the

state pursuant to the financing agreement.

House Joint Resolution 9/aHGUAC -- Page 2

Synopsis of Original Bill

House Joint Resolution 9 proposes to amend the New Mexico constitution to allow the state to

enter into lease-purchase agreements as long as there is no legal obligation for the state to con-

tinue the lease or purchase the property and the lease agreement provides that the lease shall be

terminated if sufficient appropriations are not made. The proposed amendment is subject to

voter approval.

Significant Issues

When the state enters into a lease-purchase agreement, it can create debt not only by incurring a

legal obligation to purchase the property, but also by creating an equitable obligation to purchase

the property. As the state makes lease payments, it is building equity which it would lose in the

event that the lease-purchase agreement was terminated.

The Supreme Court addressed this issue in Montano v Gabaldon, 108 N.M. 94, 766 P.2d 1328

(1989) which dealt with county debt. The court wrote, “we are of the opinion that once the

County accepted this lease, it would be obligated to continue making rental payments in order to

protect a growing equitable interest in the facility, as well as to protect the County’s interest in

the title to County land. This is the type of future economic commitment that requires the ar-

rangement be approved by the voters.”

It is unclear whether the resolution actually addresses the issue of an equitable obligation created

by lease-purchase agreements. (See “Technical Issues” below).

GSD, NMFA, EMNRD and PED all note that allowing the state to enter into lease-purchase

agreements could result in cost savings. According to GSD, as of February 2005, the state

spends $42.5 million annually on 430 leases. The state could cut operating costs by moving

from leased to state-owned buildings.

PED notes that charter schools in particular stand to benefit from the proposed change. Charter

schools incur an estimated $5.2 million in lease expenses to secure classroom facilities. The pas-

sage of the resolution may allow charter schools to enter into lease-purchase agreements for

these facilities. However, the department also notes that the resolution does not require lease-

purchase agreements for public schools to be approved by the PED or the Public Schools Financ-

ing Authority. The department feels that all leases should be approved prior to occupancy to en-

sure that facilities meet the statewide standards.

NMFA notes that this change would allow it to purchase or construct buildings and then lease

them back to the state for the amount necessary to cover costs and debt service. This would save

the state money because NMFA would not include a profit factor in its lease as would a private

owner. NMFA also notes that it can issue bonds based on the lease payments from those build-

ings and can grant mortgages on such buildings.

FISCAL IMPLICATIONS

If approved by the voters, the resolution could result in indeterminate cost savings to the state

through reduced operating costs. However, it could also result in the creation of financial obliga-

tions to the state, which would reduce the flexibility of future legislatures to establish spending

House Joint Resolution 9/aHGUAC -- Page 3

priorities.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Joint Resolution 7 proposes to amend the New Mexico constitution to allow the qualified

electors of a school district to approve lease-purchase agreements for charter school facilities and

excepting those agreements from the debt limitation of the school district.

TECHNICAL ISSUES

NMFA suggests that the following amendment would better meet the goals of the legislation by

specifically allowing lease-purchase agreements that result in the build up of equity.

On page 2, lines 12-22, rewrite subsection B to read:

B. For the purposes of this section and Article 4, Section 29 of the constitution of New

Mexico, a financing agreement entered into by the state for the leasing of a building or

other real property with an option to purchase for a price that is reduced according to the

payments made by the state pursuant to the financing agreement is not a debt if there is

no legal obligation for the state to continue the agreement from year to year or to pur-

chase the building or real property.

NMFA’s suggested amendment removes the language regarding sufficient appropriations be-

cause, it argues, this is existing law.

EF/lg