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

SPONSOR Robinson

ORIGINAL DATE

LAST UPDATED

2/23/07

3/05/07 HB

SHORT TITLE Media Arts and Entertainment Department Act

SB 1186/aSJC

ANALYST Earnest

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

$500.0

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Senate Bill 1186 relates to House Bill 529, House Bill 757, Senate Bill 802, and Senate Bill 525.

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($146.0)

($5,576.0) Recurring General Fund

* See Narrative for

Out-year Impacts

(Parenthesis ( ) Indicate Revenue Decreases)

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$500.0

$500.0 Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Economic Development Department (EDD)

Taxation and Revenue Department (TRD)

State Investment Council (SIC)

Senate Bill 1186/aSJC – Page

2

SUMMARY

Synopsis of SJC Amendment

The Senate Judiciary Committee amendment makes technical and other clarifying changes to the

language of the bill.

Synopsis of Original Bill

Senate Bill 1186 creates a new sub-cabinet level department to consolidate state functions to

develop a media arts and entertainment industry in New Mexico. An executive director would

lead the department, which is composed of three divisions and six bureaus.

The bill sets the film production tax credit at 25 percent permanently, allows companies that

claim the federal new markets tax credit to take the full 25 percent NM credit, and increases the

credit to 30 percent for productions where 75 percent of their key “below the line" hires are NM

residents, that are covered by collective bargaining agreement, and the key hires are members of

the local union.

1

The bill creates a new fund in the state treasury for the film museum.

The bill would transfer all functions, personnel, appropriations, money, obligations, and other

property from the NM Film Division of the Economic Development Department and from NM

Film Museum and its board of trustees from the Cultural Affairs Department to the new Media

Arms and Entertainment Department.

Section 16 amends the State Investment Council (SIC) film loan program. Current statute allows

the SIC to make investments, or ‘buy’, up to 2/3 ownership of a movie as an investment vehicle.

The change in section C (6) lowers that amount to 1/3, thus requiring filmmakers to come up

with 2/3 of their financing from other co-investors.

The bill appropriates $500 thousand to the DFA to establish the department.

FISCAL IMPLICATIONS

The fiscal impact is significant, especially in FY09 and beyond. The FY08 impact is limited to

the addition of an extra 5 percent on the wages paid to “keys" if the film meets certain

employment criteria. Using wage estimates from the NM Film office, the additional 5 percent

credit results in a $230 thousand revenue impact in FY08. The bill will make the 25 percent

credit permanent, resulting in a $5.6 million revenue impact in FY09 and an $11.4 million

impact in FY10.

Total qualified expenditures approved for the film production tax credit were $75 million in tax

year 2006. A total of $3.5 million in credit-related refunds were paid in FY 2006. So far in FY

2007, a total of $4.6 million in credit-related refunds have been paid. The estimates assume the

following:

1

“Below the line" payroll consists of those employees who do not have a participation interest in a project.

Typically, lead actors, directors, writers and producers are excluded.

Senate Bill 1186/aSJC – Page

3

•

Qualified expenditures will increase to $133 million in tax year 2007.

•

Taxpayers will continue to delay their refund claims for a considerable period, with 33

percent claimed in the same year the credit is approved, 33 percent the following year and

the remaining 33 percent in the second year following the approval.

Source: TRD and LFC analysis

The bill also makes an appropriation of $500 thousand, which is a recurring expense to the

general fund. Any unexpended or unencumbered balance remaining at the end of fiscal year

2008 shall revert to the general fund.

Continuing Appropriations language

Section 20 of this bill creates a new fund and provides for continuing appropriations. The LFC

has concerns with including continuing appropriation language in the statutory provisions for

newly created funds, as earmarking reduces the ability of the legislature to establish spending

priorities.

SIGNIFICANT ISSUES

The new department, headed by an executive director, would be organized into three divisions

and six bureaus, as follows:

A.

Administrative Services Division

B.

Film Division

a.

Production Services Bureau

Film Production Tax Credit: Senate Bill 1186

(thousands of dollars)

2007

2008 2009 2010

Assumptions:

Total Qualified expenditures by tax year

133,000 146,300 160,930 177,023

Present law:

Credit rate

25.0%

25.0% 20.0%

20.0%

Film Production credit approved by tax year

(33,250) (36,575) (32,186) (35,405)

Credits claimed by year from approval

33%

33%

33%

0%

Film Production credit claimed by fiscal year

(17,160) (23,042) (33,664) (34,375)

SB 1186:

Credit rate

25.0%

25.0% 25.0%

25.0%

Increased credit for NM keys

(210)

(231) (254) (280)

Increased credit due to making 25% credit

permanent

(8,047) (8,851)

Film Production credit approved by tax year

(33,460) (36,806) (48,533) (53,386)

Credit s claimed by year from approval

33%

33%

33%

0%

Film Production credit claimed by fiscal year

(17,229) (23,188) (39,204) (45,779)

Impacts of SB 1186

(69)

(146) (5,576) (11,444)

Senate Bill 1186/aSJC – Page

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b.

NM Filmmakers Bureau

c.

Film Museum Bureau

C.

General Media Arts and Entertainment Division

a.

Corporate services, games, animation bureau, digital imaging technologies bureau

b.

Music bureau; and

c.

Media Arts education Division

All divisions would be headed by directors exempt from the state personnel act.

The FY07 operating budget for the Film Division of EDD includes about $800 thousand and

authorization of 12 FTE. Including the Film Office, the Film Museum, and the FTE and

appropriations contained in this bill, the new department would have a budget of about $1.5

million and employ at least 19 people. Two boards – “Governor’s Council on Film and Media

Industries" and the Board of Trustees of the NM Film Museum – would advise the new

department.

According to the Film Office, this act is in reaction to the rapid growth and expansion of New

Mexico’s film industry and the emergence of digital media (animation, visual effects, games, and

applications of digital media into the medical and security fields) in the state. The Film Office

also states that “the act addresses the need to secure and service digital media companies that are

currently shopping for the ideal domestic headquarters for their operations and are leaning

towards New Mexico. Expertise and resources are needed to maximize these opportunities."

The Film Office, however, does not address why a new department is needed to cultivate this

expertise and recruit these companies.

The growth of the film industry in the state is due largely to the 25 percent film production tax

credit and the diligent services provided by the Film Office to production companies. In the first

quarter of FY07, the state approved $5.7 million in tax refunds to production companies. At that

rate, the state will likely return to companies more than $24 million from the general fund. Other

subsidies the state provides to the industry include wage reimbursement for employees through

the Job Training Incentive Program (JTIP) and zero-interest loans from the State Investment

Council. The state has also invested more than $16 million in capital outlay appropriations for

media production education programs at New Mexico’s colleges and universities.

There is strong potential for significant growth of the digital media industry in the state. The

Mesa del Sol development group and the state attracted Culver Studios to expand into New

Mexico. Their new facilities – Albuquerque Studios – in conjunction with state incentives may

help attract digital media companies and post-production facilities to the development.

SIC indicates that it has never made a direct equity investment in a film project, due almost

entirely to the significant amount of risk involved in this asset class. The SIC, under guidance

from its film advisor, has thus far invested or committed to invest in 20 films using an

investment structure where the SIC grants loans of up to $15 million per project, accepting profit

participation in lieu of interest. These loans are all guaranteed to return their principal to the SIC

with an irrevocable letter of credit from an A-rated bank or equivalent corporate guarantee.

SIC:

The current investment loan structure is essentially a very-low risk investment in what many

consider a high risk vehicle. If the SIC were to make direct equity investments in a film or

Senate Bill 1186/aSJC – Page

5

TV project, there is no buffer to reduce the SIC’s risk, and this may well not qualify under

Uniform Prudent Investor Act, which governs all investments made by the SIC.

The bill also makes the following change to section C (6), adding “…The state investment

officer shall consider economic development return to the state of local area in approving the

investment."

The SIC’s position is that this language is overly vague in its intention and direction.

Currently, as allowed under statute, Private Equity Investment Advisory Committee and

State Investment Council members already consider the number of jobs, New Mexicans

hired, projected budget, expenditures in NM, etc. when voting to approve a loan to a film/TV

project, though those economic impact factors are secondary to the overall quality of the

investment and its potential for return. This new language would require members to take

this economic benefit into account, and possibly hold it at a higher level of importance than

they do presently. The SIC also interprets this language to add extra weight to productions in

rural locales, as referenced by “the state of local area", in weighing their investment

decision. Obviously a film production coming to a rural corner of New Mexico will have

greater impact on a community in comparison to a production’s arrival in Albuquerque,

which has become more commonplace. The language, as stated, may simply be too

subjective to influence a production’s location choices or the subsequent Council’s vote. The

SIC is also unclear on how or by who, this impact would be defined for the Council.

PERFORMANCE IMPLICATIONS

The New Mexico Film Office has exceeded the performance measures every year for four years.

The office tracks worker days, economic impact and number of productions, and has already

exceeded its FY07 performance targets in the first six months of the year:

•

Worker days are 97,803, well over the target of 75,000; and

•

Economic impact* is stated at $200 million, exceeding the FY07 target of $140 million.

*Economic impact is calculated by multiplying company expenditures by three – an

approximation that EDD believes to be an industry standard.

ADMINISTRATIVE IMPLICATIONS

EDD notes that the workload created by the large number of film productions coming into the

state requires a disproportionate percentage of EDD’s marketing, administrative services and

legal staff resources. EDD’s Public Information Officer is not currently handling the New

Mexico Film Office’s massive amount of press inquiries, press releases, or press opportunities.

This function has been incorporated into NMFO’s staff responsibilities (who do not have the

expertise or time to handle this important element.) Creating this new agency would take the

burden off of EDD to handle these administrative needs.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Bill 1186 relates to Senate Bill 525 and House Bill 529, in the creation of a new

department. SB 1186 relates to House Bill 757 and Senate Bill 802 in its tax provision.

Senate Bill 1186/aSJC – Page

6

TECHNICAL ISSUES

TRD raises several technical issues and suggestions, as included in related bills.

Allowing credit only once for each activity:

Present law is ambiguous about whether the tax credit can be claimed by more than one

taxpayer for the same qualified activities. House Bill 757 as amended contains language

intended to help clarify that the credit cannot be taken by two different taxpayers for the

same qualified activity. Administration of this statute would be simplified if this bill

would adopt the same language. The remaining problem is how should credits be

allocated between two otherwise eligible taxpayers for expenditures related to the same

services. For example, one film production company could provide services to another

film production company in such a way that both companies would otherwise be eligible

for the credit for their expenditures. As amended, the statute does not specify which

company has the priority in claiming the credits. This could lead to disputes and

litigation. One possible solution would be to stipulate in the statute that the company

selling the services is the one entitled to the credit, for example:

“In the case of direct production expenditures in which one eligible film production

company is purchasing services from another eligible film production company, where

the selling company is eligible to claim a credit for expenditures undertaken to provide

the services being sold, only the seller may claim the credit, and the buyer’s eligible

expenditures must be reduced by the amount of expenditures for which credit could be

claimed by the seller."

This language could be added to Section 7-2F-1(A)(1) after the amendment already

proposed, and also to 7-2F-1(A)(2) on postproduction expenditures.

Applicability provisions:

Income tax provisions usually need an applicability clause to clarify which activities

qualify for the changed treatment proposed in the bill. Applicability language should be

added to this bill, for example, “Provisions of the bill are applicable to tax years

beginning on or after January 1, 2007.

Proof of residency:

New paragraph K of Section 1 of the bill would require proof of residency on the part of

the keys employed by a production. The bill does not clarify how long a key would have

to be a resident to qualify.

Anti-“Double-Dip":

Present law is silent about whether the Film Production Tax Credit can be claimed for

expenditures that are also eligible for other tax incentives. Other incentives that might be

claimed include Industrial Revenue Bond financing, the High-Wage Jobs Tax Credit, the

Technology Jobs Tax Credit and others. The combined effects of multiple incentives

may result in a subsidy that is much greater than that provided by any one section of

statute. In order to limit the use of multiple subsidies for the same expenditures, the Film

Production Tax Credit statute should be amended to state that “this credit is not available

with respect to any expenditure for which the taxpayer claims any other tax credits.

Senate Bill 1186/aSJC – Page

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ALTERNATIVES

Instead of creating a new department, the Legislature could give more authority and resources to

the existing film office of the Economic Development Department, which is the principal

business recruitment and retention arm of the state.

BE/nt