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

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

SPONSOR Smith

DATE TYPED 3/2/05

HB

SHORT TITLE

MINIMUM NMFA TRANSACTION RATE OF

RETURN

SB 708

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

-$400.0

Similar Recurring Low-Income Mu-

nicipalities

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

Department of Transportation (DOT)

The New Mexico Finance Authority (MFA)

Public Education Department (PED)

SUMMARY

Synopsis of Bill

Senate Bill 708 establishes a minimum rate of return on loans made or securities invested by the

New Mexico Finance Authority with governmental gross receipts tax revenue or from the pro-

ceeds of bonds issued by the authority. The bill states that the rate earned on both loans and se-

curities shall not be less than the sum of:

(1) the weighted average interest rate of the most recently issued series of bonds of the

authority; and

(2) a rate sufficient to recover the direct costs of the authority and a reasonable allocation

of the authority's other administrative, origination and servicing costs;

Senate Bill 708 -- Page 2

Significant Issues

MFA provided the following comments for Senate Bill 708

•

Senate Bill 708 would increase borrowing costs to qualified entities as they would not re-

ceive any disadvantaged rates from the NMFA and would require the Finance Authority

to charge an administrative fee in addition to market interest rates.

•

Currently, NMFA is able to set PPRF (Public Project Revolving Fund) (see PED discus-

sion for background) interest rates that include an administrative fee and fix the interest

rate for 90 days. NMFA sets its interest rates based upon prevailing tax-exempt rates and

gives all borrowers AAA-interest rates. In addition, based upon an entity’s Median

Household Income (MHI), all or a portion of a borrower’s loan may be at interest rates as

low as 0 percent.

•

As of December 31, 2004 the NMFA has made approximately 420 PPRF loans with 235

of those receiving some portion at disadvantaged rates. These 420 transactions total ap-

proximately $599 million while the disadvantaged portion is approximately $26 million.

Senate Bill 708 negatively impacts NMFA’s ability to fulfill its legislative mandate by providing

low cost financing that benefits local governments who face the task of providing increased ser-

vices with falling revenues. Additionally, the bill negates the efficiencies of a coordinated plan-

ning and financing agency for local and state governments for which NMFA was created.

The DOT highlighted the following issues:

•

The bill’s provisions could possibly increase the amount of investment earnings on

NMDOT GRIP bond proceeds and NMDOT debt service set-asides.

•

The NMDOT may be subject to rebatable arbitrage due to excess earnings on bond pro-

ceeds. This could be contrary to IRS arbitrage rules that discourage or prohibit excess in-

vestment earnings on tax exempt bond proceeds.

•

The third issue could involve the amount of issuance costs paid by the NMDOT to the

NMFA for future bond issues.

PED notes that the PPRF was created in 1992 as a revolving loan fund to provide low-cost fi-

nancing for capital projects to eligible entities including public school districts. PPRF financing

provides borrowers with access to AAA-insured, tax-exempt rates. PPRF can provide better-

than-market rates for some borrowers. The demand for PPRF funding has increased signifi-

cantly. This type of funding assists public school districts by providing another avenue for sell-

ing their Local General Obligation Bonds, especially to those in rural communities that have a

MHI less than 75 percent.

FISCAL IMPLICATIONS

The total estimated fiscal impact is roughly -$400 thousand to low-income municipalities. Based

on information provided by the MFA, approximately 43 entities qualify for a 0 percent loan (en-

Senate Bill 708 -- Page 3

tities with less than 75 percent of state MHI) and about 31 entities qualify for a 3 percent loan

(entities with MHI between 75 and 90 percent of state MHI). Assuming a market rate of 4 per-

cent and assuming that the qualifying entities borrow at least $200 thousand each year, the total

loss in savings would be approximately $400 thousand ($200 thousand times (4.00%-0.00%),

times 43 entities is approximately $344 thousand) plus ($200 thousand times (4.00%-3.00%),

times 31 entities is approximately $62 thousand), for a sum of $400 thousand.

The fiscal impact will vary year to year depending on current market conditions, the existing

borrowing costs and administrative and transaction fees of the MFA.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Bill 708 conflicts with House Bill 95 and Senate Bill 152, which authorize financing pro-

jects from the PPRF as entities may not be able to afford the potentially higher rates.

OPJ/rs:yr