BILL ANALYSIS Ó ----------------------------------------------------------------- | | | SENATE COMMITTEE ON NATURAL RESOURCES AND WATER | | Senator Fran Pavley, Chair | | 2011-2012 Regular Session | | | ----------------------------------------------------------------- BILL NO: SB 1094 HEARING DATE: April 10, 2012 AUTHOR: Kehoe URGENCY: Yes VERSION: April 9, 2012 CONSULTANT: Katharine Moore DUAL REFERRAL: Governance and FinanceFISCAL: Yes 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 proponent to transfer interest in real property (either fee title or easements), and funds for the management of the property in perpetuity to the agency in order to mitigate for the impact the development will have on natural or cultural resources. In general, agencies prefer not to hold the mitigation lands or easements, and non-profits, local open-space districts or other local governments are asked to hold the land and accompanying endowments. As an example, California land trusts hold endowments for mitigation projects that range from $750,000 to slightly more than $60 million per organization. In 2009, AB 444 (Caballero) sought to, in part, clarify existing law regarding the role of non-profits in holding mitigation lands and associated endowments. Governor Schwarzenegger vetoed AB 444 citing concern over safeguards to assure endowments were managed appropriately. Last year, SB 436 (Kehoe, c. 590, statutes of 2011) explicitly established and expanded upon a number of standards and requirements for mitigation agreements with respect to both the entities allowed to hold the mitigation lands or easements and those allowed to hold the associated endowments (Government Code (GOV) §§ 65965 - 65968). The provisions of SB 436 included: Specified standards that endowment holders must meet; Specified requirements for the holding, managing, and investing of the endowment as well as disbursements from the endowment and other funds; 1 Assurances that endowment management is consistent with other state laws; Creation of a link between the endowment holder and the owner of the land or easement - critical for the long-term management of both the endowment and property; Reporting requirements to the permitting entity about the endowment, while removing state oversight of the approval and review process for endowment holders; Identification of certain exceptions for eligibility for holding the endowments (e.g. for-profit entities, pursuant to long-standing law); and A sunset date in 10 years (January 1, 2022) to provide the opportunity for the Legislature to revisit the matter. The final floor votes for SB 436 were 77 - 0 and 38 - 0 in the Assembly and Senate, respectively. PROPOSED LAW This bill would clarify and expand upon SB 436. Specifically, this bill would: State legislative intent that an endowment set aside for and dedicated to the long-term stewardship of a property be managed, invested and disbursed by qualified entities that are California-based, qualified to do business in California and meet the specified requirements; Restrict the definition of "endowment" to mean permanently restricted funds; Define the "National Fish and Wildlife Foundation" and allow it to hold endowment funds where the mitigation land is held or managed by a federal agency, and where the mitigation land is conveyed to satisfy the requirements of both a federal and a state permit and the federal agency and holder of the mitigation property agree; Require that the National Fish and Wildlife Foundation provide an annual report to the legislature, as specified, should it hold endowment funds as part of these mitigation agreements; Define "community foundation" and add community foundations to the list of entities able to hold endowment funds for mitigation lands, even if the foundation does not hold the mitigation property in specified circumstances; Define "government entity" and add government entities to the list of those subject to the the chapter (GOV §§ 65965 - 65968); Require that no party to a mitigation agreement may waive or exempt any requirement of the chapter; 2 Require that no state or local agency shall require as a condition of obtaining approval that a preferred or exclusively named entity be chosen as the holder of the endowment; Specifically establish the criteria required to be considered "qualified" pursuant to the legislative intent language and remove the requirement that the state or local agency exercise due diligence in evaluating the holder of the endowment; Permit endowment funds to be held temporarily in escrow until December 31, 2012, after which the funds should be transferred to the entity that will permanently hold the endowment; and Make additional technical and clarifying changes to the code, including requiring non-profits holding endowments to use accounting practices promulgated by the Financial Accounting Standards Board; allowing elected officials to administer endowments where a state or local agency is protecting or enhancing its own property; with respect to how endowments are held for National Communities Conservation Plans and Safe Harbor Plans; and with respect to one-time fees used to defray costs associated with setting-up and administering the initial mitigation agreement. ARGUMENTS IN SUPPORT According to the California Council of Land Trusts, "many diverse stakeholders worked for several years to establish strong laws and protections for holding, managing, investing and disbursing mitigation endowment funds. Ý?] In 2011 and after years of work and education, SB 436 was chaptered and provided a very strong law for mitigation endowments." Further, California "has a vital and continuing interest in ensuring that the mitigation endowment funds being set aside pursuant to the issuance of state permits are well-managed by experienced and competent organizations, are permanently restricted and dedicated to the mitigation property they were created for, are not consolidated into a single vast holding that is inherently risky, and that the funds are transparent so that the public can track them." A joint letter from 12 land trusts and foundations supports SB 1094 which "maintains strong protections for mitigation endowments and continues to maintain a strong link between the mitigation land and the permanent funding for these lands." "Throughout California, there are more than 120 nonprofit land 3 trusts working in local communities to conserve special lands and waters. We are often regarded as the premier partner of the state in acting as stewards in perpetuity for many of our state's more magnificent natural treasures. And we are accountable to the state, and more importantly, to the public, to perform this task to the best of Ýour] ability." "We applaud the provision Ý?] that requires that community foundations must meet all the standards and requirements that are critical to long-term endowment management, such as the funds held as permanently restricted funds. Community foundations have a strong local presence and accountability as well as a solid reputation for financial management." "However, long-term stewardship requires a dedicated investment for these purposes" and state "it is essential that the funding is dedicated solely to the long-term management of each property." The League of California Community Foundations adds that "community foundations represent a key element of California's philanthropic landscape. Ý?] Many of our members have forged strong partnerships with environmental project proponents, land trusts and landowners located within their respective communities to hold and manage endowments attached to specific long-term mitigation properties. Ý?] SB 1094 recognizes a qualified community foundation as an eligible manager of the endowment when the project proponent, land trust or other landowner and community foundation all agree." They continue that passage of SB 1094 would "allow these partnerships to continue and, at the same time, ensure that all qualified endowment holders of long-term mitigation properties meet and maintain strong fiduciary standards and requirements for prudently managing these endowments." COMMENTS Temporary restricted funds are not the same as permanently restricted funds. The Financial Accounting Standards Board requires non-profit organizations to classify their net assets into three categories depending upon whether there are donor-imposed restrictions on the assets. These three categories are: (1) unrestricted net assets (2) temporary restricted net assets, and (3) permanently restricted net assets. Not surprisingly, "unrestricted" are net assets that have no donor-imposed restrictions. Temporary restricted assets have been restricted by a donor for either a specific purpose(s) , time period(s) or event(s). When the restriction is 4 satisfied, the funds may be used to support operations in the current operating period. Permanently restricted funds are just that - the donor has restricted them in perpetuity. These are endowments and the income, dividends, interest and capital gains may be used for operations. However, the principal is restricted in perpetuity and may not be utilized to support operations with very limited exception. Chasing returns and lands to be managed for perpetuity . Investment return is inherently related to risk. As returns increase, the riskiness of the investment is also, in all likelihood, increasing. A diverse and well-managed investment portfolio will contain investments of varying return (and thus risk) and should be designed with the performance goals and time horizon of the investor in mind. Endowments to support conservation lands and easements must be invested with a risk profile appropriate for the principal of the endowment to last in perpetuity. Permanently restricted funds are required to be managed in this manner. Further, investment diversity for all of these endowments as a whole includes diversity in investment advisors and managers overall. Each individual endowment, however, does not need to be held by a "diversified pool" (Amendment 1). The National Fish and Wildlife Foundation. The National Fish and Wildlife Foundation (NFWF) is a non-profit 501(c)(3) organization chartered by Congress in 1984. It is not a federal agency, although the Department of Fish and Game says it is subject to congressional oversight, and the funds it manages do not appear to have a federal guarantee. Its principal purpose is to administer donations and funds in support of U.S. Fish and Wildlife Service programs and conservation activities in the United States. It has a variety of partnerships with individuals, foundations, other non-profits, corporations and government agencies serving its conservation focus. According to its 2009 IRS Form 990 - required of all 501(c)(3) organizations - it held $32 million in unrestricted net assets, $49 million in temporary restricted assets and no permanently restricted assets. In December 2010, the Department of Fish and Game (DFG) entered into a mitigation land endowment pilot program which allowed NFWF to hold the endowments for long-term management of California Endangered Species Act mitigation lands. For the duration of the pilot program (now completed), funds could be deposited with DFG or NFWF only. DFG believes the pilot program was successful and the Natural Resources Agency is interested in 5 continuing the relationship with NFWF. Under the short duration of the program, 12 project proponents entered into agreements with DFG and NFWF, and deposited a total of $15 million now held by NFWF. There is a technical amendment for consistency which matches the conditions needed for NFWF to hold endowments to those for community foundations (Amendment 2). Community foundations already manage permanently restricted funds - some on behalf of land trusts through mitigation agreements . Members of the League of California Community Foundations manage more than $2.6 billion in permanently restricted funds and hold about $7 billion in assets overall, according to the league. Approximately $80 million is in funds dedicated for environmental causes in California, and community foundations serve the entire state. Thirty league members adhere to the strict National Standards for U.S. Community Foundations - a requirement of SB 1094 - and comply with all local, state and federal laws mandating their work and management of the endowment funds held. Many members have established on-going relationships with owners and managers of long-term mitigation properties. Community foundations already manage endowment funds on behalf of land trusts. For example, the San Francisco Foundation manages three endowments on behalf of the Land Trust of Santa Cruz County of which two are in support of different conservation easements. The San Francisco Foundation also will receive funds from a recent settlement negotiated between a group of developers and the City of Oakley. The $7 - 8 million received will be used to purchase conservation easements over the next 7 - 10 years. Community foundations also hold and manage endowments to acquire and maintain a green belt around the City of San Luis Obispo. Government entity . A government entity is any state agency, office, officer, department, division, bureau, board, and commission, and any city, county, or city and county. As defined, government entities have already been participating in the mitigation agreements of interest to this bill (for example, the San Francisco Public Utilities Commission). Contents of mitigation agreements. In order to safeguard the mitigation agreement, including the endowments intended to support the mitigation lands in perpetuity, SB 1094 explicitly specifies that no part of the statute governing the creation and management of mitigation agreements may be waived by any signatory to the agreement. Potential pitfalls of nonprofits- The Environmental Trust (TET): 6 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 the California Council of Land Trust- is not typical or consistent with standard land trust practices, including using its endowment principal to pay for operating 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. This bill is a work-in-progress. The author continues to meet with stakeholders who, for example, have on-going interests in mitigation agreements and manage mitigation lands. The Committee may wish to direct Committee staff to continue working with the author's office on issues relevant to the jurisdiction of the Committee. SUGGESTED AMENDMENTS AMENDMENT 1 Page 3, line 1 - 7, inclusive, and replace with: " SECTION 1. It is the intent of the Legislature, and in the best interest of the public, that there is available a diversified pool of eligible entities that are qualified to do business in California, based in California, and that meet the requirements of this chapter to hold, manage, invest, and disburse endowment funds in furtherance of the long-term stewardship of the property set aside for mitigation purposes. AMENDMENT 2 Page 12, line 9: delete "of the holder of the mitigation property" and replace with "of the project proponent and the holder of the mitigation property or conservation easement." SUPPORT California Council of Land Trusts (sponsor) Big Sur Land Trust Center for Natural Lands Management Land Trust of Santa Cruz County Mendocino Land Trust Ojai Valley Land Conservancy Peninsula Open Space Trust Redwood Coast Land Conservancy Rocky Mountain Elk Foundation Sierra Foothill Conservancy 7 Solano Land Trust Trust for Public Land Wildlife Heritage Foundation League of California Community Foundations OPPOSITION None Received 8