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.

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

SPONSOR SFC

ORIGINAL DATE

LAST UPDATED

2/25/07

3/16/07 HB

SHORT TITLE

Economic Development and Loan Guarantees

SB CS/1130/aSFC/aSF1

ANALYST Francis

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

30,000.0

Non-Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($0.1)

Recurring General Fund

* See Narrative – Future impact is $30 million reduction of gross receipts tax

revenues

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to HB1190.

SOURCES OF INFORMATION

LFC Files

Responses Received From (reporting on HB1190 a similar bill)

New Mexico Finance Authority (NMFA)

Economic Development Department (EDD)

SUMMARY

Synopsis of SFl Amendment

The committee substitute for Senate Bill 1130 as amended was amended on the Senate Floor to

include a provision that an applicant under this program will waive state and federal

confidentiality laws and provide information to the state Board of Finance, the Legislative

CS/Senate Bill 1130/aSFC/aSFl1 – Page

2

Finance Committee and the NM Finance Authority Oversight Committee. That information

shall include the identities and net worth of stockholders holding more than five percent of the

applicant entity and the net worth of the applicant entity.

Synopsis of SFC amendment

The amendment limits the state and local gross receipts attributable to the project to 75 percent

and the compensating tax to 60 percent. The amendment also requires the local government to

forego 75 percent of the local gross receipts taxes and those will be distributed into the fund.

Synopsis of Original Bill

The Senate Finance Committee substitute for Senate Bill 1130 amends the Statewide Economic

Development Act (SWEDA) to provide a vehicle to guarantee loan bonds for projects authorized

pursuant to SWEDA. The substitute appropriates $30 million from the general fund to be used to

guarantee loans that will be replaced as gross receipts tax revenues are deposited in a special

account that can guarantee the loans.

Under the proposed language a special account is established within the economic development

revolving loan fund that is funded by a contingent appropriation from the general fund operating

reserve and distributions of gross receipts tax revenues from projects receiving loans. At the

beginning of a project, there will be insufficient GRT revenue from the project to adequately

guarantee the bond or loan so a contingent appropriation is made in the amount sufficient to

provide this guarantee. As GRT is deposited in the fund, the contingent appropriation decreases

until there is a sufficient balance to guarantee all outstanding loans. The maximum amount of

outstanding loans is $30 million.

NMFA must provide the amount of guarantee and amount of contingent liability for any project

guaranteed under this program and the project must be approved by the legislature and

authorized by law. The project also must be reviewed by the Legislative Finance Committee and

the NMFA Oversight Committee. This provision is discussed in more detail in Technical Issues

below.

This substitute removes SIC from the mechanism and relies on the contingent appropriation for

the guarantee. Under current law, the guarantee is provided by an appropriation from the

legislature. NMFA received an appropriation of $10 million in 2005 and has reported that they

have almost reached capacity. They have requested an additional $30 million for the fund.

Presumably the structure proposed by the substitute will mean that NMFA will no longer rely on

appropriations from the legislature.

A temporary provision of SFC substitute for SB 1130 allows NMFA to immediately guarantee a

loan for tilapia aquaculture and hydroponic vegetable production project developed by the NM

Tilapia Corporation. The bond for this project cannot exceed $30 million.

EDD (in response to SB1130 original):

This project is an expansion of a New Mexico based company that will be a full scale

tilapia food processing facility. The proceeds would be used for buildings, land and

infrastructure for the tilapia processing facility. The project would still have to approved

by the NMFA board under the SWEDFA act. NMFA would provide the due diligence to

CS/Senate Bill 1130/aSFC/aSFl1 – Page

3

the NMFA board and the economic development department would provide the cost-

benefit analysis and determine the economic development benefits as required under

SWEDFA.

There is no effective date so if enacted the effective date would be June 15

th

, 2007. Any project,

including the project proposed here, would still require NMFA, State Board of Finance, LFC and

NMFA Oversight Committee approval and/or review.

FISCAL IMPLICATIONS

The contingent appropriation of $30 million contained in this bill is a NON-RECURRING

expense to the GENERAL FUND. This appropriation comes from the operating reserve, which

has a balance of $359 million as of the end of FY06 and is projected to have an ending balance

of $70.9 million at the end of FY07. While it is unclear in the language, this appropriation will

become essentially untouchable since it will be a legal guarantee on an issued bond.

The appropriation amount does not actually get expended except in the case of default on a bond

by an NMFA project. The amount of the “booked" appropriation would show up on the general

fund financial summary as a cost to the general fund in FY07 and then each year some share of

gross receipts revenues attributed to the project will replace the amount. Below is an example of

how the appropriation might look in the LFC general fund financial summary. The FY08

positive entry represents 75 percent of the tax revenue generated by the first year of the project

which offsets the appropriation. This is not revenue however but a decreased appropriation the

distinction being subtle. The gross receipts tax revenue goes to a special account at NMFA that

eventually will completely replace the contingent appropriation.

EXAMPLE OF HOW THE CONTINGENT APPROPRIATION WILL BE ACCOUNTED

FOR IN THE GENERAL FUND FINANCIAL SUMMARY:

Actual Estimated Estimated

FY2006 FY2007 FY2008

OPERATING RESERVE

Beginning balance

330.1

359.2

40.9

Appropriations

(1.7)

(10.1)

(1.5)

SWEDA Loan Guarantee

-

(30.0)

0.9

Transfer to ACF

-

(40.0)

-

Transfers from/to appropriation account

152.0

(238.2)

13.6

Transfers to Tax Stabilization Reserve (3)

(121.3)

-

-

Ending balance

359.2

40.9

53.8

The local governments in Hidalgo County will be required to distribute 75 percent of the local

option gross receipts to the loan guarantee account. Since local governments rely on gross

receipts taxes more than the state this could have a significant impact for these governments.

Hidalgo County only collects about $250 thousand in gross receipts tax annually and if this

project is the scale that is considered they will likely have significant trouble providing enhanced

or additional services without the additional taxes.

Currently, NMFA relies on appropriations from the legislature to guarantee the EDRF program.

CS/Senate Bill 1130/aSFC/aSFl1 – Page

4

In 2005, the legislature appropriated $10 million to NMFA to start this program and guarantee

projects. This is referred to as the Smart Money program and NMFA is seeking $30 million this

year of funding. It is not clear if this will legislation will mean that NMFA will no longer need

appropriations.

TECHNICAL ISSUES

The Office of the Attorney General reports that provisions regarding legislative interim

committee oversight may be “an impermissible delegation of authority to a subcommittee."

Legislative Council Service indicated that this may be permissible since it is similar to budget

adjustment request review delegated to the LFC. The AG feels that the BAR authority is

somewhat protected due to the procedures and policies (e.g. deadlines and specific scope) that

are established governing BAR authority. No such provisions exist for this legislation.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 2, the general appropriations act, has already been passed by both houses and

combined with the capital outlay plan, including SB710, SB611, and SB867, the FY08 reserve

level is 10 percent. The executive and the legislature have indicated that this target must be met

to provide adequate reserves for the future. This contingent appropriation would change the

FY08 reserves to fall below the 10 percent level.

House bill 1190 is a duplicate of the original SB1130 and also includes the Tilapia project.

Senate Bill 1152 is contingent on the passage of SB1130 or HB1190 and contains an

appropriation for $25 million for a solar facility. As proposed, this substitute does not contain an

appropriation for this project and with the maximum set at $30 million for loan guarantees

cannot include this project.

SIGNIFICANT ISSUES

In the particular case of the tilapia processing facility, which is a temporary provision in the

substitute and is also included in the current HB1190 language, the legislature would appropriate

$30 million from the operating reserve contingent on any default by the processor. NMFA

would place a project revenue bond with investors the proceeds of which would go to pay for

land, buildings or infrastructure for the processor. The NM Tilapia Corporation would pay the

holders of the bonds according to the bond indenture. As they progress, presumably they will

begin paying gross receipts taxes which will be diverted to the special account. As GRT is

deposited into the special account, the contingent appropriation decreases until there is sufficient

funds in the account to guarantee the bond. If the bond defaults, the special account will make

payments to the investors who hold the bond.

At this time, little is known about the NM Tilapia Corporation. There is a company in Hidalgo

County called AmeriCulture which produces tilapia fry (like tadpoles) to growers and

researchers already and presumably this operation will be connected in some way. While

economic development is badly needed in that part of the state, $30 million is an enormous

amount of state money put at risk for a single project. To justify this investment, particularly

with an emergency clause, more information is required about the credit worthiness of the

project participants, the other investors lined up, and a market analysis of tilapia production that

CS/Senate Bill 1130/aSFC/aSFl1 – Page

5

confirms the long term viability of a project of this size. Such a study could be amended as a

requirement of this loan guarantee.

Information Regarding Tilapia and Aquaculture

NMSU Circular 543 on Aquaculture (http://cahe.nmsu.edu/pubs/_circulars/circ543.html)

Tilapia are similar in appearance to bluegill. Tilapia were imported from Africa to many

parts of the world. Production of tilapia is centered in the southern U.S., the Caribbean,

and Central America. In the U.S., tilapia also are cultured in colder climates using indoor

recirculating systems or geothermal spring water.

Tilapia are a warm water fish. They are disease resistant, tolerant of poor water quality,

and grow well in most aquaculture systems. Culture methods ranging from open ponds to

cages to water recirculating systems have been used to rear tilapia successfully. Tilapia

also have been cultured successfully in saline water.

Tilapia will reproduce in most aquaculture systems. Reproduction is both a benefit and a

hindrance to production of this species. It is a benefit because fingerling production is

simplified. It is a hindrance because tilapia spawn frequently. The high spawning

frequency slows growth and the increased fish mass due to the fry in the culture unit

leads to stunting in the population.

Markets for tilapia are growing worldwide. U.S. tilapia production in 1991 was

approximately 9 million pounds and has increased steadily since that time. Producer

markets are available in niche markets or, if production is large enough, in larger outlets.

Southwest Technology Development Institute

(

http://geoheat.oit.edu/bulletin/bull23-4/art2.pdf

)

Geothermal Aquaculture

The AmeriCulture Fish Farm at Cotton City in southwest New Mexico raises tilapia from

eggs produced on site. AmeriCulture markets and sells a disease free Tilapia fry to

growers and researchers nationwide for grow out to full size. Tilapia is a fish that is

growing in popularity for its taste. In recent years, local Red Lobster seafood restaurants

have added Tilapia to the menu. Geothermal offers several advantages for fish culture.

For instance, AmeriCulture is heated at much lower costs than fossil fuels with a down

hole heat exchanger installed in a 400-ft depth well. Many species have accelerated

growth rates in warm water. In addition, the geothermal water can be used as a growth

medium; thereby, adding to the agriculture receipts in the state without consumptive use

of valuable freshwater supply.

ALTERNATIVES

As this project has not come before any committee in the interim, a possible alternative or

amendment would be to require EDD or NMFA to conduct a feasibility study on the project that

includes a market analysis of the tilapia industry. Either agency then should report to an

appropriate interim committee for recommendations for the 2008 legislative session.

Another possible safeguard would be to require a certain match of private investment to the loan

guarantee amount. For example, the State Investment Council does not invest more than 10

percent of the amount available for NM program private investment in any one company and

CS/Senate Bill 1130/aSFC/aSFl1 – Page

6

cannot own more than 51 percent of a company (with exceptions for bankruptcy).

SIC NM Program Investment Policy:

[SIC can only invest in] New Mexico companies that are receiving equity investments in

conjunction with qualified investors or have received equity investments from qualified

investors who have signed a cooperative investment agreement with the SIC. A

“cooperative investment agreement" is defined as an agreement between the SIC and co-

investor(s) that, at a minimum, includes a statement by the co-investor(s) acknowledging

that they are parties with “demonstrated abilities and relationships in making investments

in new, emerging or expanding businesses" as required in Section 7-27-5.15(E)(1)

NMSA 1978". The agreement may be in the form of a term sheet, stock subscription

agreement, participation agreement or other form of document.

NF/nt