BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 436 (Kehoe) Hearing Date: 05/16/2011 Amended: 05/02/2011 Consultant: Mark McKenzie Policy Vote: NR&W 9-0; G&F 9-0 _________________________________________________________________ ____ BILL SUMMARY: SB 436 would authorize state and local agencies to transfer any funds set aside for long-term management of land acquired as environmental mitigation related to a development project, if the interest in the land is transferred to a qualified nonprofit organization (land trust). The bill would also authorize a state or local agency to provide funds to a land trust to acquire land or easements that satisfy the agency's mitigation obligations. The bill's provisions would sunset on January 1, 2022. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Mitigation fund shift unknown, potentially significant future shift Special* of funds from state to nonprofit organizations DFG review and ongoing $200-$300 $300-$400 $400-$500 General/ monitoring (potentially partially offset by administrative Special** endowments, as specified. See staff comments) ____________ * Special Deposit Fund in the PMIA ** Fish and Game Preservation Fund or General Fund _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. Existing law allows the state and local governments to impose conditions on developers during the permitting process to mitigate the environmental impact of a development project, which may include the transfer property to the public entity for SB 436 (Kehoe) Page 1 preservation purposes to offset the conversion of other property for a development purpose. Rather than owning and maintaining these lands, existing law authorizes the public entity to turn the property over to nonprofit groups to manage the land, such as public land trusts that meet specified qualifications. State and local officials are required to review the qualifications of nonprofits prior to transferring title to the property. While existing law authorizes a state or local agency to transfer land or conservation easements to a nonprofit entity to manage the property, there is no explicit authority to also transfer any corresponding endowment funds that are dedicated for management of the property. Despite this lack of explicit statutory authority, Legislative Counsel has opined that the authority to manage a real property interest that a state or local public agency may grant to a nonprofit organization includes both the authority to control and direct ongoing duties related to the direct protection or stewardship of that real property interest and the authority to control or direct funds set aside for those purposes. SB 436 would provide explicit authority for a state or local public agency to convey any corresponding endowment funds to a land trust when mitigation land or easements are transferred to that entity. This bill would also authorize a state or local agency to provide funds to a nonprofit organization to acquire mitigation lands or easements, if that public agency is required to protect an interest in real property to mitigate environmental impacts related to its own project. The public agency would be required to determine that a nonprofit has the capacity to effectively manage the mitigation funds and achieve a reasonable investment return, utilizes generally accepted accounting practices, and has adopted an investment policy consistent with the Uniform Management of Institutional Funds Act. The public agency may require an annual report detailing the management and condition of the property and accompanying funds. Any funds would revert to the state or local agency if the nonprofit ceases to operate, dissolves, goes bankrupt, or fails to perform its duties. Staff notes a concern that funds that may have been improperly spent would be unrecoverable. SB 436 would also authorize the public agency to contract with or designate an independent third party to conduct preliminary review of a nonprofit's qualifications and ongoing monitoring and evaluations. Lastly, a public agency would be authorized to SB 436 (Kehoe) Page 2 require an additional administrative endowment from a project proponent responsible for mitigation of impacts for costs associated with preliminary review of qualifications and ongoing oversight. The public agency may also require a project proponent to provide a separate account to provide for initial management costs while an endowment matures. To the extent that DFG shifts deposits of mitigation funds from the State Treasury to nonprofit organizations pursuant to the provisions of this bill, the Fish and Game Endowment and Expendable Funds in the Special Deposit Fund of the PMIA would see reductions in revenues and corresponding interest revenues. There would also presumably be a corresponding reduction in DFG workload associated with the management of the mitigation lands and funds. Staff notes, however, that DFG would have the new responsibility of negotiating and reviewing agreements and monitoring the activities of nonprofits' activities related to the management of these lands and endowment funds. DFG would also need to adopt regulations to establish requirements and procedures related to the management of the funds. DFG indicates that initial program startup, including establishing standards and guidelines, a tracking system, an initiating a process for due diligence reviews of applicants would require startup costs of approximately $1.17 million for the equivalent of a half-year's work by an attorney, an accountant and an investment officer, two-year's work by staff environmental scientists and program analysts, plus management staff time. Staff notes that these costs are likely excessive, considering DFG has been performing due diligence reviews of third party endowment holders for over a year and likely has established processes that would be substantially similar to those required by this bill. As such, staff estimates DFG one-time costs of $200,000 to $300,000 to adopt a full regulations package and initiate processes for preliminary review and ongoing oversight of third party managers. DFG indicates that ongoing staff costs would be approximately $1.25 million to process requests, review proposals, establish and manage contracts, and establish a statewide tracking system. DFG identifies the same staff indicated above would be necessary to manage the program, and indicates that annual costs would be expected to triple by year seven as more endowment holders participate in the program. Staff estimates that actual ongoing costs are unknown and would depend upon the number of proposals SB 436 (Kehoe) Page 3 it receives, approves, and manages. These costs could initially be approximately $200,000 to $300,000 if DFG reviewed and approved 25 or fewer applications, and these costs could increase to over $1 million per year after several years as demand for the program increases and more projects and third parties are approved and monitored annually. Staff notes, however, that these costs could be partially offset to the extent DFG required project sponsors to provide an additional administrative endowment to cover costs associated with preliminary review and ongoing oversight, as authorized in the bill. It is unclear whether it is feasible to assume that a project sponsor could provide additional endowment funds. Staff notes that funds transferred to a nonprofit entity would not be subject to the same restrictions and requirements imposed on public agencies in the investment of public funds, which may affect risk and returns associated with nonprofits' investments. State-managed funds are generally more secure and pose less risk, but may not achieve yields of a private sector third party manager. While the third party approach may generate higher yields, there is less security and more risk, which may jeopardize the long term viability of mitigation and management responsibilities. Recent exceptional economic pressures highlight third-party risk. One example of such risk is the recent collapse of the Environmental Trust, an organization holding endowments for state and federal mitigation. As a result of financial mismanagement, the organization filed for bankruptcy and DFG was forced to accept 11 mitigation properties with insufficient endowment funds for continued land management. Existing law requires funds received by the Department of Fish and Game (DFG) for management of mitigation lands to be deposited in the Fish and Game Mitigation and Protection Endowment Principal Account or the Fish and Game Mitigation and Protection Expendable Funds Account, which are part of the Special Deposit Fund within the State's Pooled Money Investment Account (PMIA). The interest earned on endowment funds is to be used, upon appropriation by the Legislature, to fund long-term management of mitigation lands. SB 1538 (Steinberg), Chapter 411 of 2008, authorizes these funds to be moved to another account within the State Treasury system to allow longer-term investments, with the goal of increasing earnings over time, as determined by DFG. That bill also authorizes DFG to retain appropriate investment advisors acceptable to the State SB 436 (Kehoe) Page 4 Treasurer's Office to develop and maintain an investment strategy. Staff notes that various limitations on the investment of funds and the short-term nature of the PMIA have resulted in a relatively low average rate of return (annual interest rates of 1.4% to 4.5% over the last five years). The lower the rate earned on these funds, the higher the initial principal endowment costs for project proponents and less money available for land management activities. As a result of the authority provided by SB 1538, DFG reports that it can now achieve a rate of return comparable to third parties under a reasonable risk scenario. This relatively new approach addresses some of the concerns that SB 634 seeks to address, providing a reasonable and competitive rate of return without the need for additional DFG staff to conduct due diligence review and monitoring of third party endowment holders. This bill is substantially similar to AB 444 (Caballero), which was vetoed by the Governor in 2009 with the following statement: Although I am support of this bill's efforts 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. I am directing the Department of Fish and Game to work with the author and interested parties toward developing an alternative that provides sufficient protections for the financial and environmental resources subject to third-party agreements. DFG has since implemented a pilot project that would give applicants two options for the management of endowment funds required under a California Endangered Species Act incidental take permit. The two options recommended by DFG would be to either: a) have the funds held in the State Deposit Fund; or, b) have the funds held and managed by a single third party endowment manager as an alternative to the State Deposit Fund. The single third party endowment manager proposed by DGF to manage CESA endowment funds is the National Fish and Wildlife Foundation.