BILL ANALYSIS Ó SB 436 Page 1 Date of Hearing: August 17, 2011 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair SB 436 (Kehoe) - As Amended: July 13, 2011 Policy Committee: Natural ResourcesVote:7-0 Local Government 7-0 Urgency: No State Mandated Local Program: No Reimbursable: No SUMMARY This bill allows a nonprofit organization or some types of special districts to hold title to and manage mitigation lands and to hold related management funds. FISCAL EFFECT 1)Potentially significant shift in the formal management and disposition of potentially tens to hundreds of millions of dollars from the state treasury to individual nonprofit organizations and certain special districts, to the extent that state agencies convey such funds in response to this bill. This shift may increase the amount of money earned on such funds; it also may expose the state to more risk of loss of those funds. 2)One-time costs ranging from $150,000 to $200,000 during 2011-12 and 2012-13 to the Department of Fish and Game (DFG) to develop regulations and standards. (Fish and Game Preservation Fund.) (DFG estimates startup costs to be $481,000 in the first 18 months following passage the bill. DFG, however, has been developing a pilot program for the management of mitigation funds by nonprofits. The work DFG has already put in developing the pilot program should limit the costs DFG realizes to develop regulations and standards for this bill.) 3)One-time costs of an unknown amount, but likely ranging from the tens of thousands to hundreds of thousands of dollars, in SB 436 Page 2 2012-13 to DFG to review the qualifications of nonprofits and special districts applying to hold and manage mitigation lands and related funds (Fish and Game Preservation Fund). (Actual costs will depend upon the number of entities applying to DFG and the complexity of the review required for each applicant. DFG estimates these costs at $511,000 during the second year of the program. As is the case with DFG's other startup costs, the costs of review applicants should be limited by the work DFG has already performed in development of its pilot project.) 4)Ongoing annual costs of an unknown amount, but likely in the hundreds of thousands of dollars, beginning in 2012-13 to DFG to review, process and, if accepted, administer requests to hold and manage mitigation lands and related funds (Fish and Game Preservation Fund). 5)Potential ongoing annual GF costs in the tens of thousands of dollars to the State Controller to oversee nonprofit organizations and special districts that hold funds for the management of mitigation lands. 6)Potential revenue, in the form of one-time stewardship payments and administrative endowments, of an unknown amount but presumably sufficient to cover most of DFG's and the controller's ongoing costs. SUMMARY (continued) Specifically, this bill: 1)Requires a local or state agency that requires the protection of land as mitigation for a proposed project to identify how the long-term stewardship of the land will be met, including by ensuring that funds set aside for the management of the land will generate revenue sufficient to cover annual stewardship costs of the land. 2)Authorizes a state or local agency to allow a nonprofit organization or limited categories of special districts to hold title to and manage land acquired as mitigation for a project and to hold funds dedicated for the long-term management of those lands. SB 436 Page 3 3)Requires a public agency to review the qualifications of a nonprofit or special district that may hold lands and funds. 4)Authorizes a public agency to contract with an independent third-party to review the qualifications of nonprofits and special districts and evaluate stewardship and management of mitigation lands and related funds. 5)Authorizes DFG to contract with the Controller for the evaluation of the qualifications of nonprofits and special districts. 6)Requires a nonprofit or special district that is to hold title to and manage mitigation lands and related funds on behalf of DFG to be certified by DFG as meeting certain qualifications and limits to 10 the number of such entities that DFG may certify. 7)Authorizes the Controller to oversee nonprofits and special districts that hold funds for the management of mitigation lands. 8)Authorizes a public agency (a) to require a nonprofit or special district that will hold mitigation land to establish an administrative endowment from project proponents to cover the costs of review of nonprofit or special district qualifications and oversight of management of lands and funds and (b) to require project proponents to provide a one-time payment to the holder of mitigation funds to cover stewardship costs for five years, while the endowment matures. 9)Requires funds to be returned to the public agency if the funds are misused or if the recipient ceases to exist or operate according to agreement. 10)Sunsets the bill's provisions as of January 1, 2022. COMMENTS 1)Rationale. Existing law clearly allows a state or local agency to transfer land or conservation easements to a nonprofit agency for management of the land or easement. Existing law however, does not explicitly state that a state or local agency also may transfer to the nonprofit funds, known as endowment funds, that are dedicated to the management SB 436 Page 4 of the property or easement. According to the author, because of this statutory silence, some state and local agencies are reluctant to transfer endowment funds to a nonprofit, even though doing so would simplify and streamline management of the land or easement. The author and the California Council of Land Trusts-the sponsor of this bill-contend that this bill would clarify state and local government authority, thereby resulting in greater transfer of endowments to nonprofits. 2)Background. State and local governments have the authority to issue permits to allow the development of land within their respective jurisdictions. In some cases, the state or local agency issuing the land development permit requires the applicant to transfer to the agency an interest in real property to mitigate any adverse impact upon natural resources caused by permitting the development. In many cases, the state or local agency does not want to hold or manage the mitigation property. State law expressly allows such a state or local agency to authorize certain categories of nonprofit organizations to hold title to and manage those mitigation properties. State law, however, does not explicitly authorize a state or local agency to transfer to a nonprofit agency endowment funds for the management of mitigation property, even if the state or local agency has transferred to the nonprofit the mitigation lands to which the endowment funds are dedicated. Despite this lack of explicit statutory authorization, Legislative Counsel concluded in 2006 that existing statute allows a state agency to authorize nonprofit organizations to hold and manage funds set aside for the purpose of long-term management of mitigation lands. Indeed, the bill's sponsor reports that it is common practice among some public agencies to transfer endowment funds to nonprofit agencies for the management of mitigation properties. DFG currently is developing a pilot program to allow a nonprofit to hold funds dedicated to the long-term management of mitigation lands also held and managed by the nonprofit. 3)Fish and Game Mitigation Accounts. Existing law requires funds received by DFG for management of mitigation lands to be deposited in the Fish and Game Mitigation and Protection Endowment Account or the Fish and Game Mitigation Expendable Funds Account, which are held in the State Special Deposit SB 436 Page 5 Fund. Interest generated on endowment funds deposited in the former account is to be made available to DFG, upon appropriation by the Legislature, to fund long-term management of habitat lands. Funds other than endowment funds received by DFG and deposited in the latter account are continuously appropriated to DFG for expenditure for management of lands set aside for mitigation. Recently, the endowment funds have produced a low rate of return, though the funds have been managed with very little risk. Some contend third parties, such as nonprofits and special districts, are free of restrictions faced by state agencies that limit their ability to manage the endowment funds and, therefore, could manage the endowment funds to generate more revenue than could the state. Such concern is accentuated by the case of 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. Bill proponents counter that existing law provides the Attorney General and DFG sufficient authority to ensure such mismanagement does not occur and that this bill enhances that authority. 4)Some Special Districts More Special Than Others. The bill refers to existing sections of code to define the types of special districts that may hold and manage mitigation lands and related funds. Based on the bill's code references, the special districts affected by this bill are any regional park district, regional park and open-space district or regional open-space district or a specific special district in Santa Clara County. However, there are other types of special districts, such as resource conservation districts, that manage mitigation lands. Should the bill treat all special districts equally? 5)Fourth Time's the Charm? Several bills have tried, unsuccessfully, to codify the mitigation land fund management provisions envisioned by this bill. AB 2916 (Assembly Water, Parks and Wildlife Committee, 2006) and SB 1011 (Hollingsworth, 2007) were held in Senate Appropriations. AB 444 (Caballero, 2009) was vetoed, the governor expressed SB 436 Page 6 concern with what he characterized as insufficient protections for the state's financial and environmental resources. AB 484 (Alejo), which contains provisions similar to SB 436, passed the Assembly 75-1 and appears to be a two-year bill. 6)Support . This bill is supported by the California Council of Land Trusts (sponsor), some conservation groups, and a long list of nonprofits of that type that this bill would authorize to hold and mange mitigation lands and related funds. 7)There is no formal opposition registered to this bill. Analysis Prepared by : Jay Dickenson / APPR. / (916) 319-2081