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 








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          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 








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          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 








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          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 








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          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.