BILL ANALYSIS                                                                                                                                                                                                    Ó





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          |                                                                 |
          |         SENATE COMMITTEE ON NATURAL RESOURCES AND WATER         |
          |                   Senator Fran Pavley, Chair                    |
          |                    2011-2012 Regular Session                    |
          |                                                                 |
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          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;
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                 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;
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                 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 
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          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 
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          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 
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          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): 
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           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
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          Solano Land Trust
          Trust for Public Land
          Wildlife Heritage Foundation
          League of California Community Foundations

          OPPOSITION
          None Received








































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