Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2007 BASIC FINANCIAL STATEMENTS - Notes To Financial Statements - Note 15 Capital and Operating Leases

State of Connecticut

Notes to the Financial Statements

June 30, 2007

Note 15 Capital and Operating Leases

State as Lessor
The State leases building space, land, and equipment to private individuals. The minimum future lease revenues for the next five years and thereafter are as follows (amounts in thousands):

2008 $ 44,498
2009 35,567
2010 29,667
2011 30,272
2012 30,367
Thereafter 19,227
Total $ 189,598

Contingent revenues for the year ended June 30, 2007, were $1.6 million.

State as Lessee
Obligations under capital and operating leases as of June 30, 2007, were as follows (amounts in thousands):

Noncancelable Capital
Operating Leases Leases
2008 $ 64,882 $ 7,855
2009 53,564 7,598
2010 48,639 7,602
2011 37,570 7,523
2012 23,920 7,174
2013-2017 23,076 20,150
2018-2022 442 11,179
2023-2027 386 6,124
2028-2032 - 4,870
Total minimum lease payments $ 252,479 80,075
Less: Amount representing interest costs 23,831
Present value of minimum lease payments $ 56,244

Minimum capital lease payments were discounted using an interest rate of approximately 6 percent.

Rental payments on noncancelable operating leases charged to expenses during the year ended June 30, 2007, was $46.7 million.

Lease/Lease Back Transaction
On September 30, 2003 the State executed a U.S. Lease-to-Service Contract of Rolling Stock Agreement (Agreement) whereby the state entered into a head lease of certain rolling stock consisting of rail coaches and locomotives to statutory trusts established for the benefit of three equity investors. Simultaneously, the State executed sublease agreements to lease back the rolling stock in order to allow the State to have continued use of the property. The terms of the head leases are for periods ranging from 40 years to 67 years, expiring through March 2071, while the subleases have terms ranging from 18 years to 28 years, expiring through January 2032. At the end of the respective sublease terms, the State will have the option to purchase the statutory trusts’ interest in the rolling stock for an aggregate fixed price.

Proceeds from the prepayment of the head lease rents were paid to debt payment undertakers and custodians in amounts sufficient, together with investment earning thereon, to provide for all future obligations of the State under the sublease agreements and the end of lease term purchase options. Although it is remote that the State will be required to make any additional payments under the sublease, the State is and shall remain liable for all of its obligations under the subleases. The aggregate remaining commitment under the subleases totaled approximately $322 million at June 30, 2007.

The State is obligated to insure and maintain the rolling stock. In addition, if an equity investor suffers a loss of tax deductions or incurs additional taxable income as a result of certain circumstances, as defined in the Agreement, then the State must indemnify the equity investor for the additional tax incurred, including interest and penalties thereon. The State has the right to terminate the sublease early under certain circumstances and upon payment of a termination value to the equity investors. If the State chooses early termination, then the termination value would be paid from funds available from the debt payment undertakers and the custodians, and if such amounts are insufficient, then the State would be required to pay the difference.