BILL ANALYSIS Ó
-----------------------------------------------------------------
| |
| SENATE COMMITTEE ON NATURAL RESOURCES AND WATER |
| Senator Fran Pavley, Chair |
| 2011-2012 Regular Session |
| |
-----------------------------------------------------------------
BILL NO: SB 436 HEARING DATE: April 26, 2011
AUTHOR: Kehoe URGENCY: No
VERSION: March 24, 2011 CONSULTANT: Marie Liu
DUAL REFERRAL: Government and FinanceFISCAL: No
SUBJECT: Land use: mitigation lands: nonprofit organizations.
BACKGROUND AND EXISTING LAW
When state or local agencies approve land use projects, they can
require the project applicant to transfer interest in real
property (either fee title or easements) to the agency in order
to mitigate the impact that the development will have on natural
resources. The Department of Fish and Game (DFG) frequently
requires such mitigations. A state or local public agency may
also require itself to protect lands in order to mitigate
impacts caused by its own project. Under Section 65965 of the
Government Code, a state or local agency may authorize a
nonprofit organization to hold title and to manage the
mitigation lands. Eligible nonprofit organizations must be a
501(c)(3) organization under the Internal Revenue Code whose
principal purpose is the protection or stewardship of natural
land or natural, cultural, or historic resources.
The project applicant may also be required to provide funds to
finance the management of lands provided for mitigation in
perpetuity, also known as an endowment. Under Section 13014 of
the Fish and Game Code, such mitigation funds are deposited in
the Fish and Game Mitigation and Protection Endowment Principal
Account (account). The account is held in the Special Deposit
Fund and invested with the Pooled Money Investment Account.
Interest generated on endowment funds in the account is
available to DFG, upon appropriation by the Legislature, for
long-term management, enhancement, and enforcement activities on
habitat lands in a manner consistent with the underlying
mitigation agreement.
The Uniform Management of Institutional Funds Act (Part 7
1
(commencing with Section 18501) of Division 9 of the Probate
Code) establishes management and investment guidelines for funds
that are held by individuals, organizations, or governmental
agencies (institutions) for charitable purposes. The act
requires that the funds must be invested with consideration to
the general economic conditions, the possible effect of
inflation or deflation, the needs that the funds are to finance,
the need for portfolio diversification, and the need to preserve
the fund's capital.
PROPOSED LAW
This bill would allow nonprofits who are holding title and
managing mitigation lands on behalf of a state or local agency
to also hold, manage, invest, and use the associated mitigation
funds. Specifically, this bill would:
Require the state or local agency to determine that such
a nonprofit meets all of the following requirements:
o The nonprofit has the capacity to hold and
manage mitigation funds, including the ability achieve
reasonable rates of return on the investment of the
funds.
o The nonprofit uses "generally accepted
accounting practices."
o The nonprofit has adopted an investment policy
that is consistent with the Uniform Management of
Institutional Funds Act.
Allow the state or local agency to contract with an
independent third party to review the qualifications of the
nonprofit to manage the mitigation lands and associated
funds and to review the nonprofit's performance in managing
the mitigation lands and funds.
Allow the state or local agency to require an
administrative endowment from the project applicant that
will be used to review and provide oversight over a
nonprofit that may hold mitigation lands and funds.
Allow a state or local agency to identify priority areas
for mitigation for the purposes of consolidating mitigating
areas.
Allow mitigation funds to be used in existing
conservation programs of the Wildlife Conservation Board,
Department of Parks and Recreation, Department of
Conservation, and any state conservancy.
Allow a state or local agency to provide funds to a
nonprofit organization to acquire appropriate mitigation
lands, when the agency is mitigating for its own project.
Prohibit a state or local agency from conveying
mitigation funds to a nonprofit that are currently held by
2
the state as of January 1, 2012.
ARGUMENTS IN SUPPORT
The California Council of Land Trusts (CCLT), the sponsor of the
bill, states, "One key component of the win-win partnership
between nonprofit land trusts and public agencies is the
management of mitigation lands. In recent years, numerous local,
state, and federal agencies have turned to land trusts to be the
long-term holders and managers of mitigation projects?However,
long-term stewardship requires a dedicated investment for these
purposes- an endowment that perpetually replenishes itself
through interest earned on principal. These endowments are
attached to the mitigation projects, but are not necessarily
conveyed from the project proponent to the nonprofit charged
with preserving these mitigation lands. In some cases, the
public agency chooses to hold the endowment although it does not
hold the land or the associated stewardship responsibility. This
often creates challenges in sustaining a healthy endowment that
range from reimbursement delays to reasonable rates of return."
"SB 436 simply authorizes nonprofits to hold and manage the
endowments associated with the land they are accepting. By doing
so, the state takes an important step in strengthening
public-private partnerships which are increasingly becoming a
critical tool for moving California forward. Additionally, SB
436 enables a system that will allow for improved financial
management of mitigation endowments and access to these funds by
the holders of the properties."
ARGUMENTS IN OPPOSITION
None received.
COMMENTS
Multiple past legislative attempts to allow nonprofits to hold
endowment funds: In 2006, the Assembly Water , Parks, and
Wildlife Committee authored AB 2916 which allowed DFG to enter
into agreements with nonprofits for the management,
administration, investment, and distribution of mitigation
endowment funds. The nonprofit would have been required to meet
certain qualifications, to report annually to DFG on the status
and management of the endowment, and to be audited annually by
the Department of Finance. AB 2916 was passed by this committee
but was held on suspense by Senate Appropriations. SB 1011
(Hollingsworth) in 2007 had a similar intent, also passed this
committee and was also held on suspense by Senate
Appropriations.
3
Most recently, in 2009, both houses of the Legislature passed AB
444 (Caballero). This bill contains some of the language in AB
444, specifically the qualification requirements for a nonprofit
that is to hold mitigation funds. AB 444 was vetoed by Governor
Schwarzenegger who stated in his veto message, "Although I am
supportive of this bill's effort to allow non-governmental
entities to manage funds set aside for the long-term management
of lands and easements, authorizing them to hold funds without
adequate fiscal assurances, as this bill would provide, is
unacceptable."
Does this bill change the law or simply clarify existing law?
Legislative Counsel's written opinion, requested by the Assembly
Water, Parks and Wildlife Committee in 2006, stated that
existing Government Code Section 65965, which this bill would
amend, already allows the state to authorize nonprofit
organizations to hold and manage funds set aside for the purpose
of long term management of mitigation lands. Counsel concluded
that the authority to "manage"
property under the existing language of Section 69565 implicitly
includes the authority to control and direct funds set aside for
those management purposes. Therefore, in Legislative Counsel's
opinion, existing law already allows a state agency, including
DFG, to enter into an agreement authorizing a nonprofit
organization to hold and manage mitigation funds set aside for
the long term management of the property. Nevertheless, the lack
of express authorization in the statute, and the lack of clarity
in the existing codes has led to reluctance on the part of some
state agencies, most notably DFG, to allow third parties to hold
and manage mitigation funds. DFG has additionally expressed
concern that it does not have the financial expertise to oversee
nonprofits holding endowment accounts.
Potential pitfalls of nonprofits- The Environmental Trust (TET):
This San Diego-based nonprofit was the first land trust in the
nation to declare bankruptcy in March 2005. TET had been using a
number of aggressive practices that- according to CCLT- is not
typical or consistent with standard land trust practices,
including using its endowment principal to pay for management
costs and failing to secure adequate endowments. When TET went
bankrupt, the state became financially responsible for the
on-going management of the mitigation lands that were once held
by TET.
While the experience with TET may be considered an anomaly, the
committee may wish to recognize that there are nevertheless some
liabilities associated with allowing a nonprofit to manage
4
endowment funds. This bill seeks to minimize these liabilities
by establishing requirements regarding the nonprofit's ability
to hold and manage funds. To further protect the state or local
agency, the committee may wish to add a provisions to this bill
that would: (1) Require the nonprofit to report to the state or
local agency regarding the management and condition of the
mitigation lands and funds; (2) Allow the mitigation funds to
revert to the state or local agency should the nonprofit
dissolve, cease to operate, become bankrupt or insolvent, or
fail to perform its duties; (3) Allow the state or local agency,
to require project proponents to also provide a separate account
that will provide for initial management costs while the
endowment matures. ÝSee amendment 1]
DFG recently began a related pilot program: In December 2010,
DFG initiated a one-year endowment pilot program that would
essentially allow endowments for the management of mitigation
lands required in California Endangered Species Act permits to
be held by DFG or the National Fish and Wildlife Foundation
(NFWF) which is a 501(c)(3) nonprofit created by Congress for
the conservation and restoration of native wildlife and
habitats. NFWF would be required to report to DFG on the fund
activity and to limit investment strategy aggressiveness. DFG
would retain oversight over the account and the management of
the mitigation lands. The program would also establish
"buffering mechanisms," including the establishment of an
"enhancement account" which funds land management costs while
the endowment is given time to sufficiently mature. This pilot
program has been criticized by some members of the Legislature
and other stakeholders for limiting the pilot program to one
nonprofit. While the pilot program is currently set to be one
year only, in reality, the program will need to be in place for
a number of years to be able to truly evaluate DFG's and NFWF's
effectiveness in holding endowment accounts. The committee may
wish to note that this bill does not currently contain an
automatic review of the bill's performance, and may wish to add
a sunset date. ÝSee amendment 2]
The committee may wish to also note that this pilot program is
limited mostly to endowments received for mitigations under the
California Endangered Species Act. This bill, on the other hand,
would broadly apply to all mitigation lands and endowments, not
just those required by DFG.
Other issues : This bill, while mainly focused on allowing
nonprofits to hold endowment accounts, also proposes to add
language regarding identifying priority areas for mitigation and
5
the use of mitigation funds in existing conservation programs.
While both these issues may have merit, the bill only proposes
minor contributions to arguably large issues beyond the main
focus on the bill. The committee may wish to delete these
sections so that the Legislature can address these issues more
comprehensively in another bill. ÝSee amendment 3]
Also, the committee may wish to clarify that a state or local
agency may adopt guidelines regarding nonprofit management of
mitigation lands and funds and that these guidelines may include
guidelines established by qualified entities. ÝSee amendment 4]
Related current legislation: AB 484 (Alejo, 2011) would also
amend the same section of the Government Code to allow
nonprofits to hold endowment accounts. Recent amendments add
reporting, auditing, and reversion language, similar to the
amendments suggested for this bill. However, AB 484 does not
include qualification requirements for the nonprofits.
SUGGESTED AMENDMENTS
AMENDMENT 1
On page 4, after line 18, insert:
(1) The state or local public agency may require the nonprofit
organization to submit a report not more than every 12 months
and for a specified number of years, that details the management
and condition of the property or easement and the accompanying
funds. The mitigation or funding agreement shall specify the
reporting due dates and elements of the report.
(2) The funds of a nonprofit organization holding funds for the
long-term management of property shall revert to the state or
local public agency which required the mitigation if the
nonprofit organization does any of the following:
(1) Ceases operation
(2) Is dissolved
(3) Becomes bankrupt or insolvent
(4) Fails to perform its duties for any reason, as determined by
the state or local public agency.
(3) The state or local public agency may also require project
proponents to provide a separate account that will provide for
initial management costs while the endowment matures.
AMENDMENT 2
Add a sunset date of January 1, 2022.
AMENDMENT 3
6
On page 5, starting on line 38, delete subdivision (j)
inclusively.
On page 6, delete lines 8-14 inclusively.
AMENDMENT 4
On page 4, line 38, delete "process or it may utilize" and
insert "process, which may include"
SUPPORT
California Council of Land Trusts (sponsor)
Amargosa Conservancy
American Land Conservancy
American River Conservancy
Bay Area Open Space Council
Bay Area Ridge Trail Council
Big Sur Land Trust
Bolsa Chica Land Trust
Catalina Island Conservancy
Center for Natural Lands Management
Eastern Sierra Land Trust
Lake County Land Trust
Land Conservancy of San Luis Obispo County
Land Trust for Santa Barbara County
Land Trust of Santa Cruz County
Lassen Land and Trails Trust
Marin Agricultural Land Trust
Mendocino Land Trust
Mountain Meadows Conservancy
7
Pacific Forest Trust
Palos Verdes Peninsula Land Conservancy
Placer Land Trust
Redwood Coast Land Conservancy
Sacramento Valley Conservancy
San Joaquin River Parkway and Conservation Trust
Save Mount Diablo
Sequoia Riverlands Trust
Sierra-Cascade Land Trust Council
Solano Land Trust
Southern California Open Space Council
Transition Habitat Conservancy
Wildlife Heritage Foundation
OPPOSITION
None Received
8