State of Connecticut

Notes to the Financial Statements

June 30, 2008

Note 16 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):

2009 $ 37,578
2010 29,540
2011 28,987
2012 29,111
2013 29,033
Thereafter 13,486
Total $ 167,735

Contingent revenues for the year ended June 30, 2008, were $1.0 million.

State as Lessee
Obligations under capital and operating leases as of June 30, 2008, were as follows (amounts in thousands):

Noncancelable Capital
Operating Leases Leases
2009 $ 74,687 $ 7,724
2010 65,805 7,728
2011 48,612 7,650
2012 31,685 7,300
2013 29,218 7,168
2014-2018 7,960 15,887
2019-2023 1,543 9,500
2024-2028 387 6,118
2029-2033 - 3,650
Total minimum lease payments $ 259,897 72,725
Less: Amount representing interest costs 20,977
Present value of minimum lease payments $ 51,748

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, 2008, were $74.7 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 $309 million at June 30, 2008.

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.