## Facts

- The Valencia County Board of County Commissioners approved a lease with an option to purchase for a new county jail to be built on county-owned land by a private corporation.
- The agreement required the county to make semiannual payments labeled as rent over a 20-year term.
- Construction was financed through certificates of participation sold to private investors to fund approximately $3.1 million in costs.
- The private contractor held title to the project (land, improvements, and fixtures) unless and until the county exercised the purchase option; if the county made all scheduled payments, ownership would transfer at the end of the term.
- The county could exercise an option to purchase during the term by paying amounts set out in an amortization schedule.
- The lease included a nonappropriation clause permitting termination if the county chose not to appropriate funds in a future fiscal year.
- County voters had twice rejected referenda to finance a new jail, and the lease was not submitted for voter approval.
- A county commissioner filed a declaratory judgment action alleging the arrangement violated the state constitutional requirement of voter approval before a county incurs indebtedness to erect public buildings.
- The district court granted summary judgment for the defendants, concluding the lease did not create unconstitutional debt; the plaintiff appealed.

## Issues

1. Whether a 20-year lease-purchase arrangement for a county jail, with amortized payments and transfer of ownership after completion of payments, creates “indebtedness” requiring voter approval under the state constitution.
2. Whether a nonappropriation clause prevents such an agreement from constituting constitutional debt.

## Decision

- The New Mexico Supreme Court reversed the summary judgment for defendants.
- The court held the agreement created “indebtedness” within the meaning of the state constitutional debt limitation for public buildings.
- Because the arrangement was not approved by the voters, it violated the constitutional requirement of voter approval.

## Legal Principles

- Constitutional “indebtedness” is determined by the transaction’s economic substance, not by labels such as “lease” or “rent.”
- A long-term arrangement that functions as an installment purchase for a public building—particularly where payments follow an amortization schedule and ownership transfers upon completion of payments—constitutes constitutional debt.
- A nonappropriation clause does not automatically eliminate indebtedness where the structure creates practical and economic pressure to continue payments and builds an equitable interest that would be forfeited upon termination.
- Constitutional debt limits aimed at preserving voter control over major public financial commitments cannot be avoided through financing devices that are the functional equivalent of bonded indebtedness.

## Conclusion

A county’s long-term lease-purchase financing for a jail, structured to amortize construction costs and culminate in ownership transfer, creates constitutional indebtedness requiring voter approval, and a nonappropriation clause does not defeat that classification when the deal effectively commits the county to a multi-year purchase.


Montano v. Gabaldon, 766 P.2d 1328 (N.M. 1989)