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 SB 1094 - 4/19/12 -- Page 2 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. SB 1094 - 4/19/12 -- Page 3 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 SB 1094 - 4/19/12 -- Page 4 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 SB 1094 - 4/19/12 -- Page 5 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 SB 1094 - 4/19/12 -- Page 6 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 SB 1094 - 4/19/12 -- Page 7 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 SB 1094 - 4/19/12 -- Page 8 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. SB 1094 - 4/19/12 -- Page 9 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 SB 1094 - 4/19/12 -- Page 10 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 SB 1094 - 4/19/12 -- Page 11 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); SB 1094 - 4/19/12 -- Page 12 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; SB 1094 - 4/19/12 -- Page 13 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.