SENATE BILL REPORT

EHB 1794

BYRepresentatives H. Sommers, Schoon and Bristow; by request of State Treasurer

Modifying the state's ability to enter into contracts for the purchase of real or personal property.

House Committe on Capital Facilities & Financing

Senate Committee on Ways & Means

Senate Hearing Date(s):March 30, 1989

Majority Report:  Do pass.

      Signed by Senators McDonald, Chairman; Craswell, Vice Chairman; Amondson, Bluechel, Cantu, Gaspard, Johnson, Lee, Newhouse, Niemi, Owen, Saling, Smith, Talmadge.

Senate Staff:Steve Jones (786-7440)

                  March 31, 1989

AS REPORTED BY COMMITTEE ON WAYS & MEANS, MARCH 30, 1989

BACKGROUND:

Lease/purchase contracts are a way for state agencies to finance equipment such as computers, telephone systems, and motor vehicles on an installment basis using their current operating budget.  Lease/purchase contracts can also be used in the acquisition of real property, including buildings, over an extended period of years.  However, the emphasis in all lease/purchase transactions is making the installment payments from the current operating budget.

The distinction that is usually made between bonded indebtedness and lease/purchase obligations is that bonds are approved in such a way as to bind future legislatures to make funds available to repay the debt, while lease/purchase obligations are considered a current expense.  The payments on bonds are usually considered general obligations of the state and payment is secured or guaranteed by the general taxing authority of the state.  Payments on lease/purchase contracts are not guaranteed by the state and are secured by the equipment or building purchased by the contract.  In effect, if the state fails to make payment on the lease/purchase contract the lessor would take possession of the equipment or real estate.  The theory is that the current character of the obligation gives the Legislature the opportunity to review the continuing payments and elect not to appropriate for the installment payments.  However, this financing instrument is an obligation and termination would be a serious act.

In the absence of specific legislative authority for this type of financing in Washington, state agencies, with the aid of equipment vendors, banks, and finance companies, have used this device to make major equipment purchases.  However, this activity has been fragmented and proper financial reporting and accountability has not been established.  There is no legislative and public oversight of lease/purchase financing. No coordination exists to insure compliance with federal or state regulations, or that proper budget authority has been obtained.

SUMMARY:

The purpose of this act is to confirm the authority of state agencies to enter into financing contracts for the acquisition of real and personal property where the contracts provide payments over a term of more than one year but less than 30 years.  Such financing contracts are exempted from the definition of debt in the computation of the statutory and constitutional debt limits.  State agencies are authorized to issue certificates of participation or other types of financing structures subject to the approval of the State Finance Committee.  The State Finance Committee must approve all financing contracts with the exception of those secured by revenues from the operation of nonappropriated state university facilities (i.e., dormitories and dining halls).  The Legislature must approve all such contracts for the purchase of buildings and land.  The State Finance Committee may also consolidate existing and new financing contracts into a master contract and make rules for the issuance of financing contracts.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

Senate Committee - Testified: Tim Ker, Deputy State Treasurer