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

SPONSOR Sandoval

DATE TYPED 3/2/03

HB 1074

SHORT TITLE Value of State Property to Be Inventoried

SB

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

Indeterminate

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

State Auditor (SA)

General Services Department (GSD)

Energy, Minerals, and Natural Resources (EMNRD)

SUMMARY

Synopsis of Bill

House Bill 1074 amends the state audit act Section 12-6-10 pertaining to the inventory of owned

equipment. Under HB 1074, all state and local agencies that have an annual audit (as required

by statute) would only be required to perform an annual inventory of equipment costing more

than five thousand dollars ($5,000), rather than one thousand dollars ($1,000), which is the cur-

rent statutory requirement.

Significant Issues

Title 1, Chapter 1, Part 2, SUB-Part 1 of the New Mexico administrative code requires all agen-

cies to perform an annual physical inventory of all fixed assets. Fixed assets are defined as any

property or equipment that has an initial value to an agency, whether in cash or trade value, of

more than one thousand dollars ($1,000). Fixed assets must be tagged, the physical location re-

corded, and the asset assigned to the fund and government entity that purchased the asset. If an

House Bill 1074 -- Page 2

asset is transferred, the accounting records need to be updated if the relocation affects a different

fund.

Advantages of Increasing Inventory Threshold from $1,000 to $5,000

By changing the definition of a fixed asset from property or equipment exceeding one thousand

dollars ($1,000) in value to property or equipment exceeding five thousand dollars ($5,000) in

value, the number of items requiring inventory will be reduced and the process of recording,

monitoring, and performing a physical inventory on fixed assets will be greatly simplified. At

the lower threshold of one thousand dollars ($1,000), many assets that may be well past their

useful lives and no longer in use will still have to be monitored and inventoried if they are not

disposed of. At the higher threshold of five thousand dollars ($5,000), assets will typically have

a longer useful life.

Many local governments have struggled to maintain fixed asset inventories, and as a result of

inadequate records have received “qualified” opinions on their financial statement audits. Rais-

ing the threshold will likely ease the task of maintaining adequate fixed asset inventories.

Disadvantages of Increasing Inventory Threshold from $1,000 to $5,000

Unless an agency maintains a separate inventory of items of value less than $5,000, GSD notes

that accountability for asset management will be decreased and their could be increased exposure

for asset loss or abuse. ENNRD notes that a lack of control over assets that are valued under

$5,000 (like many computers) may make it difficult to identify out dated equipment that needs to

be replaced and accountability of equipment that is replaced. The State Auditor notes that over

time it might make sense to increase the threshold due to inflation, but questions the need to in-

crease the limit by such as a large amount ($4,000) at this time.

FISCAL IMPLICATIONS

Indeterminate. The reduced administrative burden will save agencies staff time but if assets are

managed inefficiently it will cost the state in the long run. House Bill 1074 raises the state

threshold for capitalizing fixed assets to match federal rules. Agencies will no longer have to re-

duce charges to federal programs for purchases of equipment with an initial cost of five thousand

dollars ($5,000) or below. This should increase the recovery of federal dollars for agencies that

administer federal programs.

ADMINISTRATIVE IMPLICATIONS

The administrative burden of conducting yearly inventories for all equipment with an initial

value of greater than one thousand dollars ($1,000) will be greatly reduced as the requirement

for physical inventory is changed by House Bill 1074 to assets with a cost basis of above five

thousand dollars ($5,000).

House Bill 1074 -- Page 3

OTHER SUBSTANTIVE ISSUES

Asset Depreciation and Proprietary Fund Operations

DFA notes that assets purchased from proprietary funds are required to be depreciated. Proprie-

tary funds provide services to other government entities or the public and recover full costs in-

cluding depreciation through user charges. For example, the General Services Department

(GSD) provides numerous services to state agencies. Depreciation is incorporated into agency

assessments for information systems processing, printing services, telephone and data communi-

cation, and vehicle lease rates. House Bill 1074 will change the rate structures for these internal

services by requiring GSD to expense all equipment purchases of five thousand dollars ($5,000)

or below, rather than including depreciation costs over the useful life of the asset. This may

cause rates to fluctuate more from one year to the next since the cost based rates will now in-

clude more expenses and less depreciation for certain classes of equipment purchases. Charging

depreciation over the useful life of an asset tends to "smooth out" the rates, rather than incorpo-

rating the full cost of the asset in the rate calculations in the year the asset is purchased.

The federal government limits capital purchases charged to federal programs to the lesser of the

current state rule (over $1,000) or the federal rule (over $5,000). Therefore, all state purchases

of equipment of five thousand dollars ($5,000) or less cannot be charged to federal programs

unless otherwise approved. House Bill 1074 will allow conformity with current federal capitali-

zation rules and allow the state to charge more small capital purchases to federal programs, that

would otherwise have to be depreciated over the useful life of the asset.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

If House Bill 1074 is not enacted, the state will not be able to charge the cost of small equipment

purchases between one thousand dollars ($1,000) and five thousand dollars ($5,000) directly to

federal programs.

State agencies will continue to be required to perform yearly physical inventories of all equip-

ment with an initial value of more than one thousand dollars. ($1,000).

GGG/yr