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

SPONSOR Sanchez, M.

ORIGINAL DATE

LAST UPDATED

2/28/07

3/7/07 HB

SHORT TITLE Economic Development Project and Loans

SB 1152/aSPAC

ANALYST Francis

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

($879.0)

Recurring

Severance Tax

Permanent Fund

($8.4) Recurring (Increasing) General Fund

* SEE NARRATIVE

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to HB1190, SB1130, SB1119

Relates to HB253, SB463

SOURCES OF INFORMATION

LFC Files

Responses Received From

New Mexico Finance Authority (NMFA)

Economic Development Department (EDD)

SUMMARY

Synopsis of SPAC Amendment

The Senate Public Affairs Committee amended Senate Bill 1152 by including language that

guarantees payments to creditors other than New Mexico Finance Authority to protect a project

from default.

Synopsis of Bill

Senate Bill 1152 authorizes a loan guarantee of $25 million to guarantee a project revenue bond

used to finance Ausra, Inc, for a 50 megawatt solar thermal electric plant in New Mexico. The

loan guarantee uses a program that is being proposed by House bill 1190, Senate Bill 1130 and

Senate Bill 1119 and therefore is contingent on one of these pieces of legislation becoming law.

Senate Bill 1152 – Page

2

The authorization expires July 1, 2010, if no bond has been issued.

Synopsis of HOUSE BILL 1190 (contingent legislation):

House Bill 1190 amends the Statewide Economic Development Finance Act (SWEDFA) to

allow the New Mexico Finance Administration (NMFA) to issue bonds to guarantee project

revenue bonds issued for economic development. These loan guarantee bonds can only be sold

to the State Investment Council (SIC), which will purchase them as part of their severance tax

permanent fund investments. The maximum amount of outstanding bonds is capped at $100

million.

The economic development revolving fund bonds (“EDRF bonds") would need to be authorized

by law and approved by the state Board of Finance (BOF) as well as reviewed by the Legislative

Finance Committee and the NMFA Oversight Committee. The duration of the bonds will be the

same as the project revenue bond they are guaranteeing.

The EDRF bonds will be paid off from an account within the Economic Development Revolving

Fund (EDRF) that consists of payments on the underlying project revenue bonds that come from

the project or other sources and a distribution from net gross receipt tax collections. If the

project payments are insufficient to cover the EDRF bond payments owed to EDRF bond holders

(i.e. SIC) than a distribution from net gross receipts taxes (GRT) will be made to the EDRF. The

GRT distributions will be made along with any other distributions required for debt service

payments and prior to any other distributions.

NMFA has provided a flow chart of how the EDRF bonds would work:

Interest only pa yments for life of

guarante e: State GRT pa ys

differential between interest earned

on bond proceeds and interest due on

bonds

SIC (purchased as severance tax

permanent fund investment)

Bond Proceeds deposited into

Economic Development Revolving

Fund in a segregated account for

benefit of New Mexico Tilapia

bondholders in the event of default

NMFA – (Statewide Economic

Development Finance Act)

Unknown Bond Purchasers

Interest only pa yments for life of

guarante e: State GRT pa ys

differential between interest earned

on bond proceeds and interest due on

bonds

SIC (purchased as severance tax

permanent fund investment)

Bond Proceeds deposited into

Economic Development Revolving

Fund in a segregated account for

benefit of New Mexico Tilapia

bondholders in the event of default

NMFA – (Statewide Economic

Development Finance Act)

Unknown Bond Purchasers

Source: NMFA

Senate Bill 1152 – Page

3

FISCAL IMPLICATIONS

The bills that establish this loan guarantee program would require NMFA to approve the

program and do the due diligence necessary for the Smart Money program and the State

Investment Council (SIC) to purchase the bonds. SB1152 satisfies the requirement that the loan

guarantee for a project is specifically authorized by law. The board of finance would still need to

approve the project.

The financing set up by HB1190 and other bills would require a gross receipts tax distribution to

pay SIC should there not be enough generated by the project. This fiscal impact is difficult to

determine.

If the SIC purchased the bonds, they would likely be receiving a lower rate than they normally

would require since the bonds would be considered “differential rate" investments. Assuming

the coupon rate on the bond for this project is 3 percent, the differential is their historic rate of

8.5 percent less 3 percent or 5.5 percent. If the bond’s maturity were 10 years, the fiscal impact

to the severance tax permanent fund would be $879 thousand per year. Changing the balance of

the STPF decreases the distribution to the general fund. The distribution is based on 4.7 percent

of 102 % of a five year average of the fund’s ending balance. This will increase to $42 thousand

by FY11.

SIGNIFICANT ISSUES

Ausra, Inc, is a new company relocated from Australia, formerly called Solar Heat and Power,

backed by Silicon Valley venture capitalists Kleiner Perkins. Typically, venture capitalists invest

in a company and take an equity stake but with the HTRC amendment, there may be a different

financing structure that is in part or in whole guaranteed by the state. NMFA reports that they

and the Legislative Finance Committee will still have to review and approve any plan which

affords a measure of protection.

Ausra plans to build a 50 to 100 megawatt solar thermal power plant and are negotiating with

PNM for a power purchase agreement, according to representatives from Ausra. A power

purchase agreement is critical to a successful renewable energy power plant. The technology

Ausra plans on using is touted to be much more cost effective than traditional parabolic

technology because of the smaller footprint and cheaper components, particularly the glass for

the mirrors.

NMFA has not participated in a project bond of this size. The bill for authorizing NMFA

projects (HB253) limits their participation to $5 million per project, or one-fifth of the amount

proposed here.

Smart Money Program (reported in FIR for HB253 2007 Session):

Laws 2003, Chapter 349, enacted the Statewide Economic Development Finance Act authorizing

creation of a Statewide Economic Development Finance Program (Smart Money), creation of the

economic development revolving fund, and authorizing NMFA to issue certain Economic

Development Bonds and make loan participation and loan guarantees on behalf of entities

engaged in qualifying economic development projects. The fund was not initially capitalized.

However, Laws of 2005, Chapter 347, appropriated $10 million for the “Smart Money" loan

participation program to capitalize the economic development revolving fund. The 2006

Senate Bill 1152 – Page

4

Legislature authorized 48 projects to potentially receive financial assistance from the economic

development revolving fund. To date, NMFA has obligated $4.3 million for business attraction,

retention and expansion projects in Alamogordo, Albuquerque and Raton. The NMFA indicates

it has ten additional projects in line for the remaining funds totaling $5.7 million.

The NMFA will leverage the capital by partnering with private banks and institutions so that

loans from the fund finance no more than 49 percent of a total project. The program is designed

to match the risk-need with appropriate financing arrangements. In a rural area, for example,

local lenders may be constrained by legal lending limits and out-of-area lenders may be

uncomfortable with the location. Regardless of the reason, the program will bridge the gap and

give businesses in all areas of the state access to affordable capital. Some projects may only

need introductions to lenders while others may need direct guarantees.

The NMFA will estimate the overall economic impact of each project by analyzing the long-term

economic diversification, the increase in revenue to the state, job creation, and geographical

location to determine priority of funded projects. EDD expects the economic impact of the

original $10 million appropriation to create one thousand jobs, $75 million in new plant and

equipment, $420 million in new wages and salaries over the next decade, and $50 million in

added state income and gross receipts taxes

ADMINISTRATIVE IMPLICATIONS

Economic Development Department has reported that they already have an oversight function

with NMFA related to economic development projects and this would fit within that framework.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Bill 1119 establishes a framework to guarantee loans under SWEDA. Senate Bill 1130

and House Bill 1190 establish the same framework but include a project authorization of $30

million for a tilapia factory.

Senate Bill 463 amends the existing renewable energy production credit in the corporate income

tax act and includes the credit in the income tax act. The existing credit of one cent per kilowatt

hour (kWh) of electricity produced by renewable energy sources is limited to wind and biomass

energy sources while a new more expansive credit is allowed for electricity produced by solar

energy sources.

NF/mt