BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Carol Liu, Chair
2013-2014 Regular Session
BILL NO: SB 1017
AUTHOR: Evans
INTRODUCED: February 14, 2014
FISCAL COMM: Yes HEARING DATE: April 24, 2014
URGENCY: Yes CONSULTANT:Daniel Alvarez
NOTE : This bill has been referred to the Committees on
Education and Governance and Finance. A "do pass" motion
should include referral to the Committee on Governance and
Finance.
SUBJECT : Taxation: Oil Severance Tax Law.
SUMMARY
This bill, an urgency measure, imposes an oil and gas severance
tax, as specified, and directs the proceeds of this tax to the
newly created California Higher Education Fund which is
continuously appropriated to the newly established 15-member
California Higher Education Endowment Corporation to be
annually allocated to the University of California (UC),
California State University (CSU), California Community
Colleges (CCCs), State Department of Parks and Recreation, and
the California Health and Human Services Agency for support of
programs, as specified.
BACKGROUND
The California Constitution (Article IX, section 9) states that
the UC is a public trust, to be administered by the Regents of
the UC with full powers of organization and government, subject
only to legislative control as may be necessary to ensure the
security of its funds and compliance with the terms of the
endowments of the university, among other things. Current law
provides that statutes related to UC (and most other aspects of
the governance and operation of UC) are applicable only to the
extent that the Regents of UC make such provisions applicable.
(Education Code § 67400)
Current law confers upon the Trustees of the CSU the powers,
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duties, and functions with respect to the management,
administration, and control of the CSU system.
(EC § 66066)
The California Community Colleges is the largest system of
higher education in the nation, with 2.4 million students
attending 112 colleges. The colleges provide workforce
training, basic courses in English and math, certificate and
degree programs and preparation for transfer to four-year
institutions. The community colleges to accept all applicants
who are high school graduates, as well as any other adults who
can benefit from attendance.
ANALYSIS
This bill, an urgency measure, imposes an oil and gas severance
tax, as specified, and directs the proceeds of this tax to the
newly created California Higher Education Fund which is
continuously appropriated to the newly established 15-member
California Higher Education Endowment Corporation to be
annually allocated to the University of California (UC),
California State University (CSU), California Community
Colleges (CCCs), State Department of Parks and Recreation, and
the California Health and Human Services Agency for support of
programs, as specified. More specifically, this bill:
1) Imposes an oil and gas severance tax on the extraction
of oil from the earth or water within California's
jurisdiction and deposits those funds in the California
Higher Education Fund (CHEF), created by this bill.
2) Creates the California Higher Education Endowment
Corporation (CHEEC) that is governed by a 15-member
oversight board, appointed to four year terms, with the
following requirements, powers, and duties:
a) Authority to appoint a chief executive officer,
who shall be designated a confidential position
exempt from civil service, as specified, and to whom
the board may delegate authority, including, but not
limited to, the authority to enter into and sign
contracts on behalf of the corporation. The chief
executive officer may delegate any duties to his or
her designee.
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b) Authority to hire employees as it deems
necessary.
c) Allocate annually funds for immediate
expenditure as follows: 50 percent (equally
distributed) to the UC, CSU, and the CCCs; 25 percent
to the state Department of Parks and Recreation; and
25 percent to the state Health and Human Services
Agency.
d) Conduct periodic audits to determine if the
funding allocated is being appropriately used for
direct classroom instruction. Each segment would be
audited at least once every six years, with audits
occurring alternately between the three segments
every two years. In addition, the bill requires the
oversight board to select a different auditing firm
at least every six years. The audits are funded with
investment returns from the CHEF.
e) Establish a graduated set of disciplinary
actions for campuses or administrative offices of any
segment that improperly uses or administers funding:
(i) initial finding - probation status and
remediation plan required; (ii) if a second finding
occurs, after an initial finding, within five years -
a campus(es) or administrative office is barred from
receiving funds for the following fiscal year; and
(iii) if a third finding of misuse of funds occurs
within five years of a second finding - the
campus(es) or related administrative office are
barred from receiving funding. Permits the oversight
board to reinstatement funding for campuses or
administrative offices that may have been barred from
receiving funding under (iii) above, only after five
years have passed.
f) Maintain exclusive control of the investment of
CHEF monies, as specified, and requires investment
transactions made during closed session to be
disclosed and reported at a public meeting within 12
months of the close of the transaction.
3) Establishes a 15-voting member oversight board
appointed to four-year terms, as follows:
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a) Two members appointed by the Board of Trustees
of the CSU,
with at least one member being a CSU
non-management
employee.
b) Two members appointed by the Regents of the UC,
with at least
one member being a UC non-management employee.
c) Two members appointed by the Chancellor of the
California
Community Colleges.
d) Two members appointed by the Senate Rules
Committee.
e) Two members appointed by the Speaker of the
Assembly.
f) One member appointed by the State Treasurer.
g) One member appointed by the Superintendent of
Public Instruction.
h) One student member appointed by the Board of
Governors, as
specified, who is a student enrolled at a California
Community
College.
i) One student member appointed by the CSU Board of
Trustees, as
specified, who is student enrolled at CSU.
j) One student member appointed by UC Regents, as
specified, who
is a student enrolled at UC.
4) Specifies three non-voting ex-officio members of the
oversight board as follows: (a) the Chancellor of the CSU,
(b) the President of UC, and (c) the Chancellor of the
CCC.
5) Requires funds allocated to the higher education
segments can only be used for the following purposes and
in the following order or priority:
a) To reduce mandatory systemwide tuition and
fees.
b) To hire faculty and reduce class sizes.
c) For instructional materials.
d) For English as a second language (ESL)
programs.
e) For deferred maintenance.
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1) Requires funds allocated to the Department of Parks and
Recreation are for the maintenance and improvement of
state parks, and funds allocated to the California Health
and Human Services Agency are for health and human
services programs.
2) Requires funding allocated to the higher education
segments be used to supplement, not supplant, existing
levels of state funding.
STAFF COMMENTS
1) Need for the bill . According to the author's office,
California is the only state of the top ten oil producing
states in the nation that does not charge a severance tax
on every barrel of oil taken from our state lands and sea
bed. Oil producing states such as Alaska charge a 25% tax
and the state of Texas charges 4.75%, on top of royalties.
In order to bring California taxes up to Texas oil tax
burden, California would need to levy an additional 10
percent oil extraction tax at current oil prices.
2) UC and CSU receive their funding through the annual Budget
Act . There is no funding policy in statute for these
institutions; thus, their funding is discretionary.
However, UC and CSU have entered into system-specific
"compacts" and "partnerships" with several Governors to
ensure stable multi-year funding in exchange for a
commitment to deliver on specific performance measures.
3) Proposition 98, in general, provides K-14 schools with a
guaranteed source of funding that grows each year with the
economy and the number of students through a combination
of General Funds and local property taxes. The
legislature determines the allocation of Proposition 98
funds between K-12 and CCC; in general, CCC receives
approximately 11%.
4) Funds for higher education cannot be supplanted , what
happens if states General Funds are reduced as a matter of
legislative budgeting priorities, does the California
Higher Education Endowment Corporation (CHEEC) not
allocate funding? It is unclear why non-supplanting
language only applies to institutions of higher education;
the measure does not provide for the same non-supplanting
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restrictions on General Funds provided to the Department
of Parks and Recreation (DPR) and the Health and Human
Services Agency (HHSA). The applicability of
non-supplantation language either works for all
discretionary funded departments, institutions, and
programs that may benefit for any oil extraction tax
proceeds, or the language should be eliminated. If it is
the desire of the committee to move this measure, staff
recommends amendments eliminating the non-supplanting
provisions.
5) Limits on the use of funding by higher education . The
measure specifies the first priority of oil tax funding is
to reduce mandatory systemwide tuition and fees. Assuming
this tax generates $1.6 billion in revenue for a full year
of operation, taking into account the share for
Proposition 98, it is highly conceivable that all revenue
generated in the foreseeable future would be dedicated to
buying down tuition and fees; is this a prudent use of a
limited funding stream?
In addition, if oil extraction revenue is considered
volatile (a $5 shift in per barrel extraction, could
result in a revenue fluctuation of $80 million) is it
prudent to prioritize the lowering of student tuition and
fees, rather than provide for investments in one-time
higher education needs like deferred maintenance,
instructional equipment, minor capital outlay, or debt
service on already issued state bonds?
Accordingly, if it is the desire of the committee to move
this measure, staff recommends amendments that permit the
use of funds for all of the following (no prioritization)
(a) deferred maintenance, (b) instructional equipment
replacement, (c) debt as a result of statewide G.O. bond
issuances on behalf of the affected public education
segment, and (d) minor capital outlay.
6) Audit requirements only for higher education ? The author
should be commended for moving toward providing
accountability and transparency on the uses of CHEF funds;
however, this measure requires audits to insure
expenditure compliance for higher education only, and the
cycle of auditing described in this measure may lead to
only one audit of each higher education segment every six
years, would a shorter timeframe for auditing and
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accountability purposes make more sense? Furthermore, why
are only the higher education segments required to submit
audits, shouldn't all entities receiving funds from this
funding source comply with audit requirements too?
If it is the desire of the committee to move this measure,
staff recommends amendments that strike out on page 6,
lines 17 through 36, and re-work Section 99508 of the
measure to: (1) require annual audits of prior year funds
received from the CHEF; (2) require any audit conducted
pursuant to this measure shall comply with the
Governmental Auditing Standards issued by the Comptroller
General of the United States; (3) require each audit
conducted in accordance with this measure shall include a
determination of whether the funds were expended for the
permitted uses described for higher education (per #5
above and eliminating "direct classroom instruction"), the
DPR, and HHSA; (4) require the oversight board shall
select a public accounting firm licensed and in good
standing with the California Board of Accountancy to
perform the audit; (5) require the oversight board shall
not employ a public accounting firm to provide audit
services if the lead audit partner or coordinating audit
partner having primary responsibility for the audit, or
the audit partner responsible for reviewing the audit, has
performed audit services for the board for six consecutive
fiscal years; and (6) the independent audits shall be
funded with investment returns from the fund.
7) Confusing disciplinary process for improperly using or
improperly administering funding . This bill contains a
confusing graduated disciplinary approach for higher
education not being in compliance with authorized uses of
CHEF; in addition, the bill is silent on any discipline
approach to the Department of Parks and Recreation and the
Health and Human Services Agency.
The DPR has a recent history of questionable internal
budgetary oversight; what is the rationale for excluding
Department of Parks and Recreation from the graduated or
any disciplinary approach prescribed for higher education?
If it is the desire of the committee to advance this
measure, staff recommends amendments that strike on page 7
lines 3 through 24, and insert a more straightforward
disciplinary process that (1) upon a first finding of
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improper use or improper administration of moneys, an
entity is prohibited from receiving funding from the CHEF
in the ensuing fiscal year and requires a remediation,
plan approved by the board, for compliance by the entity;
(2) upon a second finding within five years of the first
finding, the entity is prohibited from receiving funding
from the CHEF for the ensuring two fiscal years and a
board approved remediation plan is required; and (3) any
other finding violations within the five year period
prohibits funding being made to that entity.
8) There are no reporting requirements in the measure to the
Legislature . How is accountability and transparency to
the public and Legislature to occur? If it is the desire
of the committee to move this measure, staff recommends
amendments that require an annual report to the
Legislature, no later than April 1, that includes but is
not limited to, revenue and expenditure data of the CHEEC
and CHEF, and review of compliance audits. In addition,
the report shall examine the level of General Fund
appropriations to UC, CSU, and CCCs and the amount of
funding provided by the CHEF.
9) Oversight board mainly constructed to only oversee higher
education . The 15-member oversight board is comprised of
representatives from various entities in higher education
- yet this board will be responsible for a considerable
amount of other programmatic, budgetary, and investment
management. The author may wish to consider expanding on
the experiential requirements of board members, for
example, one or more members of the oversight board with
relevant Parks and Recreation and / or health care
delivery experience. In addition, the author should
continue to work with Senate Rules Committee to correct
any appointment related deficiencies - such as whether the
bill clearly states qualifications of Senate Rules
Committee appointees or requires collaboration with the
Speaker of the Assembly and governor, are terms
defined/staggered, and should there be a sunset provision,
and are appointments contrary to statutory Senate
confirmation timelines.
10) Various questions and issues that need addressing :
a) Could the new California Higher Education
Endowment have a negative effect on philanthropic
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activity for higher education in general?
b) In creating appointments to the newly formed
corporation, the CSU and UC governing bodies make the
appointments; however, in this measure the Chancellor
for the California CCC makes appointments, not the
Board of Governors, why is this the case?
c) What rationale is there to the distribution of
funds in the measure? Given the emphasis on
mandating expenditure areas and possible disciplinary
actions in higher education, why not provide all
funds to higher education?
d) What is the rationale allowing the California
Higher Education Fund to be continuously appropriated
rather than allowing for appropriations through the
annual budget process? Should the funds be allocated
through the budget process? By allocating these
monies separate from the budget process, there is no
legislative oversight of where the monies are spent
or how they coordinate with the funds these
institutions receive in the annual budget act -
except that funding be spent on "direct classroom
instruction."
e) Should there be a reasonable cap on
administrative costs of the CHEEC? CHEEC has the
authority to hire employees, who will be funded from
the CHEF, yet there is no limit on the amount of
funds that can be spent on administration.
11) Prior and related legislation . The oil and gas severance
tax provisions are similar to:
a) SB 241 (Evans, 2013) imposed a 9.5 percent
severance tax on oil and gas, as specified. SB 241
provided that 93 percent of the funds would be for
higher education and 7 percent for parks and
recreation. This bill was held under submission by
the Senate Appropriations Committee.
b) AB 1326 (Furatani, 2011) imposed a 12.5 percent
severance tax, as specified, for higher education.
This measure was held in the Assembly Revenue and
Taxation Committee.
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c) AB 656 (Torrico, 2010) imposed a 12.5 percent
oil and gas severance tax to fund higher education.
This bill was held in Senate Education Committee at
the request of the author.
d) ABX1 2 (Evans, 2008) would have imposed a 9.9
percent severance tax; however, this measure was part
of a broader budget package which was vetoed by the
Governor.
e) ABX3 9 (Nunez, 2008) would have imposed a 6
percent severance tax; again this measure was in the
context of a broader budget discussion. The measure
failed passage in the Assembly.
SUPPORT
AFSCME
California Fair Share
California Federation of Teachers
California Labor Federation
California Nurses Association
California Partnership
California Teachers Association
Community College League of California
Consumer Federation of California
Courage Campaign
Los Angeles College Faculty Guild
Parent Voices
Service Employees International Union
Vovle
OPPOSITION
Associated Builders and Contractors of California
California Business Properties Association
California Chamber of Commerce
California City
California Grocers Association
California Independent Petroleum Association
California Manufacturers and Technology Association
California Retailers Association
California Taxpayer Protection Committee
Cal Tax
Camarillo Chamber of Commerce
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Chambers of Commerce Alliance of Ventura and Santa Barbara
Counties
City of Bakersfield
City of Ridgecrest
City of Shafter
City of Taft
County of Kern
Fullerton Chamber of Commerce
Greater Bakersfield Chamber of Commerce
Howard Jarvis Taxpayers Association
Independent Oil Producers' Agency
Kern County Board of Supervisors
Kern County Firefighters IAFF Local 1301
Kern County Superintendent of Schools
Kern County Taxpayers Association
Kern Economic Development Corporation
National Federation of Independent Business
Orange County Business Council
Placer County Taxpayers Association
San Diego Tax Fighters
Santa Clara Chamber of Commerce
Southwest California Legislative Council
Valley Industry and Commerce Association
Western States Petroleum Association