BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 1094                     HEARING:  4/25/12
          AUTHOR:  Kehoe                        FISCAL:  Yes
          VERSION: 4/19/12                      TAX LEVY:  No
          CONSULTANT:  Lui                      

                   MITIGATION OF LAND USE DECISIONS (URGENCY)
          

           Makes several changes to state laws governing conservation 
                                   easements.


                                   Background 

           When cities and counties approve land use projects, they 
          can require builders to set aside resource land or 
          easements to mitigate the conversion of other property to 
          development.  Public agencies may impose mitigation 
          conditions to offset the effects of other agencies' public 
          works projects.  Rather than own and manage the mitigation 
          land or the easements themselves, public agencies can turn 
          over the property interests to nonprofit organizations that 
          meet statutory criteria (SB 2746, Blakeslee, 2006; AB 1246, 
          Blakeslee, 2007).

          In addition to requiring project sponsors to set aside 
          resource lands for mitigation purposes, sometimes public 
          agencies also require applicants to set aside money, known 
          as an endowment, to pay for managing the land or easements. 
           A 2006 Legislative Counsel opinion explained that the 2006 
          Blakeslee bill allows the State Department of Fish and Game 
          to authorize a nonprofit corporation to hold and manage 
          funds for the operation and maintenance of the resource 
          lands or easements.  In 2010, the State Department of Fish 
          and Game set up a one-year pilot program with the National 
          Fish and Wildlife Foundation.  The Foundation will hold and 
          manage the mitigation lands which the Department required 
          when issuing permits under the California Endangered 
          Species Act.

          Last year, Governor Brown signed SB 436 (Kehoe), which 
          authorizes a state or local agency to allow a qualified and 
          approved nonprofit organization or special district to hold 
          property and long-term endowments to mitigate adverse 




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          impacts to natural resources caused by a permitted 
          development project.  Governmental entities, community 
          foundations, and some water districts and utility 
          commissions want a similar authorization.  Additionally, 
          when federal and state agencies share mitigation lands 
          federal agencies and the nonprofit or entity it appoints to 
          manage the endowment are subject to SB 436's reporting and 
          accountability provisions.  The U.S. Fish and Wildlife 
          Service and NFWF want the flexibility to separate the 
          endowment holder from the owner of the land or easement.  


                                   Proposed Law  

          I.  Conservation easement accounting.  State law requires 
          that any conservation easement created as a component of 
          satisfying a local or state mitigation requirement must be 
          held in perpetuity.  If a state or local agency authorizes 
          a governmental entity, special district, or nonprofit 
          organization to hold property to mitigate adverse impacts 
          of a project or facility, the agency may require an 
          administrative endowment from the project proponent, as a 
          one-time payment for reasonable costs associated with 
          reviewing qualifications, approving holders, and regular 
          oversight of compliance and performance. 

          SB 1094 provides that the endowment must be calculated to 
          include a principal amount that, when managed and invested, 
          is reasonably anticipated to cover the annual stewardship 
          costs of the property in perpetuity.

          If a nonprofit corporation holds the endowment, SB 1094 
          requires the nonprofit to utilize generally accepted 
          accounting practices promulgated by the Financial 
          Accounting Standards Board.

          SB 1094 repeals the term "administrative endowment" and 
          replaces it with "one-time fee."  SB 1094 clarifies that 
          the one-time fee cannot exceed the reasonable costs of the 
          agency in reviewing qualifications of potential holders of 
          the property, approving those holders, and any regular 
          oversight over those holders to ensure that the holders are 
          complying with all applicable laws.  The one-time fee must 
          be held, managed, and invested to produce an annual revenue 
          sufficient to cover the costs of reviewing qualifications, 
          approving holders, and ongoing oversight.





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          II.  Land-money.  If a conservation easement is created as 
          a component to satisfy a local or state mitigation 
          requirement, state law requires that endowments must be 
          held by the agency, special district, or nonprofit 
          organization that requires the mitigation, with the 
          following exceptions:
                 Endowments are held by an entity other that the 
               state or holder of the mitigation property, as of 
               January 1, 2012;
                 Endowments are held by another entity pursuant to 
               the terms of a natural community conservation plan; 
                or  , 
                 If existing law prohibits the holder of the 
               mitigation property to hold the endowment, including 
               for-profit entities. 

          SB 1094 adds exceptions to this requirement: 
                 If the project proponent and the holder of the 
               mitigation property or conservation easement agree 
               that a community foundation should hold the endowment.
                 If the mitigation property is held or managed by a 
               federal agency, the agency may hold the endowment 
               itself or designate a qualified entity, including a 
               community foundation or NFWF, to hold the endowment. 
                 If the same mitigation property is required to be 
               conveyed pursuant to both a federal and state permit, 
               and the federal agency directs that a community 
               foundation or NFWF should hold the endowment with the 
               agreement of the project proponent and the holder of 
               the mitigation property or conservation easement.

          III.  Endowment funds.  To qualify to hold endowment funds, 
          state law requires that the holder of an endowment must 
          certify to the project proponent, or the holder of the 
          mitigation property or a conservation easement, that it 
          meets  all  of the following requirements: 
                 The holder has the capacity to effectively manage 
               the mitigation funds.
                 The holder has the capacity to achieve reasonable 
               rates of return on the investment of those funds 
               similar to those of other prudent investors.
                 The holder utilizes generally accepted accounting 
               practices as promulgated by either:
                  o         The Financial Accounting Standards Board 
                    for nonprofit organizations,  or  





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                  o         The Governmental Accounting Standards 
                    Board for public agencies.
                 The holder will be able to ensure that funds are 
               accounted for, and tied to, a specific property.
                 If the holder is a nonprofit organization, a 
               community foundation, or the National Fish and 
               Wildlife Foundation, it has an investment policy that 
               is consistent with the Uniform Prudent Management of 
               Institutional Funds Act. 
          
          SB 1094 requires an entity, which holds an endowment but is 
          exempted from holding the land, to meet all these 
          qualifications and requirements for holding, managing, 
          investing, and disbursing the endowment funds.
          
          IV.  Natural community conservation plans (NCCPs).  SB 1094 
          provides that in order for NCCPs to apply to the exception, 
          on or before January 1, 2012, a NCCP or safe harbor 
          agreement must be at a recognized initial, interim, or 
          final stage as reflected in the completion of planning 
          agreements, framework plans, subarea plans, implementing 
          agreements, or other documents that are part of the 
          recognized NCCP process. 

          V.  Preferred entity.  SB 1094 prohibits a state or local 
          agency from requiring, as a condition of obtaining any 
          permit, clearance, agreement, or mitigation approval from 
          the state or local agency, a preferred or exclusively named 
          entity by the state or local agency be named as the entity 
          to hold, manage, invest, and disburse the funds in 
          furtherance of the long-term stewardship of the property 
          for which the funds were set aside.
          VI.  National Fish and Wildlife Foundation.   SB 1094 
          defines the National Fish and Wildlife Foundation (NFWF) 
          and authorizes NFWF to hold endowment funds separate from 
          the governmental entity special district, or nonprofit 
          organization that holds the property when mitigation 
          property is conveyed to a federal and state permit and the 
          federal agency and holder of the mitigation property agree. 

          
          If NFWF holds endowment funds to satisfy a local or state 
          mitigation requirement, SB 1094 requires NFWF to provide, 
          no later than July 1, 2013, and annually thereafter, a 
          report to the Legislature with all of the following:
                 An audited financial statement for the previous 





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               financial year that states the organization's 
               investment policy, return objectives and other items 
               required by generally accepted accounting principles 
               related to endowment management by nonprofit 
               corporations.
                 A list of all mitigation properties where the 
               National Fish and Wildlife Foundation is the holder of 
               the endowment.
                 For each endowment identified by NFWF, the 
               following items shall be provided in the report:
                  o         Beginning of year balance;
                  o         Contributions;
                  o         Investment earnings or losses;
                  o         Grants;
                  o         Program expenses;
                  o         Administrative expenses;
                  o         End of year balance;
                  o         The estimated percentage of the year-end 
                    balance held as a board-designated endowment or 
                    quasi-endowment, held as a permanent endowment, 
                    and held as a term endowment;  and  , 
                  o         Endowment funds not in the possession of 
                    the organization that are held and administered 
                    for the organization by unrelated organizations, 
                    or related organizations.
          The required reporting must be submitted as a printed copy 
          to both the Legislative Counsel and the Secretary of the 
          Senate, and as an electronic copy to the Chief Clerk of the 
          Assembly.

          SB 1094 requires that a community foundation or the 
          National Fish and Wildlife Foundation's investment policy 
          be consistent with the Uniform Prudent Management of 
          Institutional Funds Act (pg. 13) 

          VII.  Governmental entity.  SB 1094 defines governmental 
          entity as any state agency, office, officer, department, 
          division, bureau, board, and commission, and any city, 
          county, or city and county.

           SB 1094 extends to a governmental entity similar 
          provisions to those authorized in SB 436 for nonprofits and 
          special districts.  These include:
                 A requirement that, if it holds an endowment, 
               moneys to acquire land or easements, or moneys for 
               initial stewardship costs, a governmental entity must 





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               provide the local or state agency with an annual 
               fiscal report that contains at least the same 
               information as required by Internal Revenue Service 
               Form 990 regarding the funds.
                 It is subject to a local agency's third party 
               review about its qualifications to hold and manage the 
               accompanying funds endowment, set aside for long-term 
               stewardship of the property, and its qualification to 
               effectively manage and steward natural land or 
               resources. 
                 Authorization to contract with a community 
               foundation at any time to hold, manage, and invest the 
               endowment for a mitigation property and disbursing 
               payments to the holder of the mitigation property 
               consistent with the fund agreement.
                  If a state or local agency requires a project 
               proponent to transfer property to mitigate any adverse 
               impact upon natural resources caused by permitting the 
               development of a project or facility, the agency may 
               authorize a governmental entity, special district, a 
               nonprofit organization, a for-profit entity, a person, 
               or another entity to hold title to and manage that 
               property.
          
          VIII.  Community foundation.  SB 1094 defines community 
          foundation as any community foundation the meets all of the 
          following requirements:
                 Is a tax-exempt 501(c)(3) organization;
                 Is qualified to do business in the state;
                 Is a "qualified organization" as defined in the 
               Internal Revenue Code;  and  , 
                 Has complied with the National Standards for U.S. 
               Community Foundations as determined by the Community 
               Foundations.  

          SB 1094 adds community foundations to the list of entities 
          that are able to hold endowment funds for mitigation lands, 
          even if the foundation does not hold the mitigation 
          property.  Community foundations are:
                 Authorized to hold endowment funds for mitigation 
               lands;
                 Required to provide the local or state agency with 
               an annual fiscal report that contains at least the 
               same information as required by Internal Revenue 
               Service Form 990, if it holds endowment funds, moneys 
               to acquire land or easements, or moneys for initial 





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               stewardship costs;
                 Subject to a local agency's third party review 
               about its qualifications to hold and manage the 
               accompanying funds endowment, set aside for long-term 
               stewardship of the property;  and  , 
                 Exempt from the land-money linkage, if the same 
               mitigation property is required to be conveyed to both 
               a federal and state permit, and the federal agency 
               directs that a community foundation to hold the 
               endowment with the agreement of the holder of the 
               mitigation property.

          SB 1094 provides that a governmental entity, special 
          district, or nonprofit organization may contract with a 
          community foundation at any time to hold, manage, and 
          invest the endowment for a mitigation property and 
          disbursing payments to the holder of the mitigation 
          property consistent with the fund agreement.
           
           IX.  Mitigation of state or local agency's land.  If a 
          state or local agency, in the development of its own 
          project, is required to protect property to mitigate an 
          adverse impact on natural resources, the agency can take 
          any action to meet its mitigation obligations, including, 
          but not limited to, the following:  
                  Transfer the interest to a governmental entity, 
               special district, or nonprofit organization after it 
               reviews the entity's qualifications, using adopted 
               guidelines, standards, or accreditation established by 
               a qualified entity that are in widespread state or 
               national use.
                 Provide funds to a governmental entity, nonprofit 
               organization, a special district, a for-profit entity, 
               a person, or other entity to acquire land or easements 
               that satisfy the agency's mitigation obligations.

          SB 1094 authorizes a state or local agency to hold an 
          endowment in an account administered by an elected official 
          provided that the state or local agency is protecting, 
          restoring, or enhancing its own property.
           
           X.  Waiver.  SB 1094 provides that no party to a mitigation 
          agreement can waive or exempt any requirement from 
          requirements from the chapter. 

          XI.  Escrow.  SB 1094 authorizes a state or local agency to 





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          allow the endowment to be held temporarily in an escrow 
          account until December 31, 2012.  After that date, the 
          funds must be transferred to the entity that will 
          permanently hold the accompanying funds endowment. 
          
          XII.  Definitions.  SB 1094 defines several key terms.
                 Endowments replace the term "accompanying funds."  
               Endowments mean the funds that are conveyed solely for 
               the long-term stewardship of a property.  The initial 
               endowment forms the principle that is held and managed 
               as a permanently restricted fund to genera annual 
               revenues for the property's long-term management and 
               stewardship.  
                 Nonprofit organization means any nonprofit 
               organization that meets all of the following 
               requirements:
                  o         Is a tax-exempt 501 (c)(3) organization;
                  o         Is qualified to do business in this 
                    state;
                  o         Is a "qualified organization" as defined 
                    in the Internal Revenue Code;
                  o         Is registered with the Registry of 
                    Charitable  Trusts maintained by the Attorney 
                    General pursuant to Section 12584;  and  ,
                  o         Has as its principal purpose and activity 
                    the direct protection or stewardship of land, 
                    water, or natural resources, including, but not 
                    limited to, agricultural lands, wildlife habitat, 
                    wetlands, endangered species habitat, open-space 
                    areas, and outdoor recreational areas.
                 Special districts means any regional park district, 
               regional park and open-space district, regional 
               open-space district, resource conservation district, 
               and the following:
                  o         A district organized or formed pursuant 
                    to the Metropolitan Water District Act;
                  o         A county water district that has 5,000 or 
                    more acres of mitigation lands; 
                  o         A special district that provides water 
                    and wastewater treatment services;  and  ,
                  o         A district organized or formed by the 
                    County Water Authority Act. 

          XIII.  Intent.  SB 1094 clarifies the bill's intent to 
          support its purpose. 






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          XIV.  Urgency.  SB 1094 provides that an urgency statute is 
          necessary to ensure that mitigation projects, particularly 
          in relation to desert renewable energy projects, are 
          approved in a timely manner.


                               State Revenue Impact
           
          No estimate. 


                                     Comments  

          1.   Purpose of the bill  .  Before SB 436, if a city or 
          county approved a project and required builders to set 
          aside resource lands or easements for mitigation purposes, 
          an endowment holder and the owner of the land or easement 
          could be separate entities.  If an endowment holder misused 
          endowment funds, the owner of the land - a land trust, a 
          nonprofit organization, or a special district - and 
          possibly, DFG were liable for mitigation responsibilities.  
          To ensure that endowment holders properly use endowment 
          funds, SB 436 did several things: a) linked the endowment 
          holder and the owner of the land or easement, critical for 
          the long-term management interest of both the endowment and 
          the property, and b) required reporting requirements to the 
          permitting entity about the endowment.  This required 
          linkage and transparency measure ensures that the same 
          entity that holds the funds and land appropriately manages. 
           Since last year, other entities have voiced interest in 
          similar explicit authorization to hold endowment funds for 
          mitigation lands.  Owners of mitigation lands use the 
          principal from the endowment for conservation purposes.  In 
          many cases, this means millions of dollars of possible 
          endowment funds earned at interest are at stake.  SB 1094 
          refines SB 436's provisions and ensures that entities that 
          hold endowment funds must adhere to transparent reporting 
          requirements.  By requiring endowment holders and land 
          owners to abide by basic money management principles -- 
          spreading the risk and a diversified portfolio of eligible 
          entities- California benefits from ensuring that mitigation 
          endowment funds, set-aside by the issuance of state 
          permits, are well-managed by experienced and competent 
          organizations. 

          2.   Further discussion  .  Federal agencies and NFWF are 





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          concerned that SB 1094's requirements conflict with NFWF's 
          current practices. Additionally, federal and state tensions 
          revolve around several issues:  
                 The Uniform Prudent Management of Institutional 
               Funds Act (UPMIFA) provides standards for managing, 
               investing, and expending funds held by nonprofit 
               institutions.  In 2009, California adopted UPMIFA as a 
               baseline set of rules for investing prudently.  
               According to NFWF, it is unclear whether "stewardship 
               funds" paid by permittees for mitigation lands are 
               considered a charitable or a regulatory purpose and 
               thus, subject to California's standard UPMIFA 
               practice.  This means that endowments managed by NFWF 
               for California projects may not adhere to UMPIFA.
                 The Attorney General has a Charitable Trust 
               department that oversees public trusts and relevant 
               contracts.  If an issue arises with a nonprofit 
               organization, governmental entity, special district, 
               or community foundation's contract on federal lands, 
               the Solicitor is concerned that the California 
               Attorney General may make decisions about federal 
               mitigation lands in California.
                 When NFWF holds mitigation funds, it acts only as 
               an agent of the relevant permitting agency to ensure 
               that mitigation measures are implemented properly.  
               When SB 436 ties the endowment holder and mitigation 
               lands together, NFWF does not consider itself the 
               "owner" over the funds. 
          The U.S. Fish and Wildlife Service, Bureau of Land 
          Management, NFWF, California's Natural Resources Agency and 
          Department of Fish and Game, and other stakeholders 
          continue to meet to resolve these issues. 
           
          3.   Joint endeavors  .  When a federal and state agency share 
          the same property set aside for mitigation, a developer 
          goes through a consolidated permit process, which leads to 
          projects starting sooner because mitigation agreements can 
          be completed earlier.  The joint-permit process is also 
          more cost-effective than if a developer had to complete two 
          permit processes.  Under this arrangement, a mitigation 
          land can satisfy both a state and federal requirement 
          simultaneously.  Where federal and state agencies hold 
                                                         shared mitigation lands, federal agencies want an exemption 
          from SB 436's required land-money linkage.  In testimony to 
          the Senate Committee on Natural Resources and Water, a U.S. 
          Fish and Wildlife Service official claimed that if this 





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          flexibility is not granted, the nesting process may no 
          longer be an option. 

          4.   National Fish and Wildlife Foundation  .  Chartered by 
          Congress in 1984, NFWF is a nonprofit 501(c) (3) 
          organization subject to congressional oversight, and the 
          funds it manages may not have a federal guarantee.  
          According to its 2009 IRS Form 990, a document required of 
          all nonprofit 501(c)(3) organizations, NFWF held $43 
          million in unrestricted net assets, $49 in temporary 
          restricted assets and no permanently restricted assets.  
          Because NFWF has never held permanently restricted assets, 
          SB 1094 requires NFWF to submit an annual audit, with 
          accompanying report to the California Legislature for all 
          mitigation endowments it holds for California-based 
          projects.  

          5.   Cautionary tale  .  In March 2005, the Environmental 
          Trust, a San Diego based nonprofit, was the first land 
          trust in the nation to declare bankruptcy.  According to 
          the California Council of Land Trusts, the Environmental 
          Trust was using aggressive practices, inconsistent with 
          standard practices, like using endowment principal to pay 
          for operating costs and failing to ensure adequate 
          endowments.  When TET went under, the state was financially 
          responsible for ongoing management of mitigation lands held 
          by the Environmental Trust.  This event prompted SB 436 and 
          continues to be a cautionary tale of potential pitfalls of 
          unqualified nonprofits holding endowments. 

          6.   Recent amendments  .  Senate Natural Resources and Water 
          Committee heard SB 1094 on April 10.  That committee 
          approved the bill by the vote of 9 to 0, after discussing 
          and accepting amendments.  These amendments:
                 Clarify the bill's intent.
                 Require that a project proponent and the holder of 
               the mitigation property or conservation easement must 
               agree that a community foundation or NFWF can hold the 
               endowment, if the same mitigation property is required 
               to be conveyed to both a federal and state permit. 


                         Support and Opposition  (4/19/12)

           Support  :  Big Sur Land Trust; California Community 
          Foundation; California Council of Land Trusts (sponsor); 





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          Center for Natural Lands Management; Community Foundation 
          of Mendocino County; Community Foundation for Monterey 
          County; Community Foundation of San Joaquin; Community 
          Foundation Santa Cruz County; Community Foundation of 
          Sonoma County; Community Foundation of the Verdugos; Contra 
          Costa Water District (if amended); Fresno Regional 
          Foundation; Kern Community Foundation; Land Trust of Santa 
          Cruz County; League of California Community Foundations; 
          Marin Community Foundation; Mendocino Land Trust; Napa 
          Valley Community Foundation; Ojai Valley Land Conservancy; 
          Orange County Community Foundation; Pasadena Community 
          Foundation; Peninsula Open Space Trust; Redwood Coast Land 
          Conservancy; Rocky Mountain Elk Foundation; Sacramento 
          Region Community Foundation; 





































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          San Luis Obispo County Community Foundation; Santa Barbara 
          Foundation; Shasta Regional Community Foundation; Sierra 
          Foothill Conservancy; Silicon Valley Community Foundation; 
          Solano Land Trust; Stanislaus Community Foundation; Tahoe 
          Truckee Community Foundation; The Community Foundation; The 
          San Diego Foundation; The San Francisco Foundation; Trust 
          for Public Land; Ventura County Community Foundation; 
          Wildlife Heritage Foundation. 

           Opposition  :  Unknown.