BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: SB 1412
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|Author: |Block |
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|Version: |February 19, 2016 Hearing |
| |Date: April 6, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Kathleen Chavira |
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Subject: California State University: investments
SUMMARY
This bill expands the investment authority of the California
State University (CSU) by authorizing CSU to invest specified
funds in mutual funds and real estate investment trusts, as
specified, and restricts the use of any increased earnings from
these investments to capital outlay expenditures.
BACKGROUND
Existing law, in addition to any funding appropriated to the CSU
by the Legislature, appropriates monies received from a variety
of other sources for the support of the State University system.
These sources include funds received from the sale of
publications, fees for services, materials, or facilities,
non-resident fees, special session fees, gifts, bequests and
donations of real property and monies from agreements entered
into by the Trustees with public or private agencies, persons,
institutions, and others, for performance of acts or furnishing
of services, facilities, materials, goods, supplies or
equipment, and monies collected as higher education fees and
income from students. Existing law specifically excludes fees
for instructionally related activities as defined, and revenues
derived from the conduct of the instructionally related
activities from this appropriation.
Existing law authorizes, upon approval by the CSU Trustees, a
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chief fiscal officer of a campus or the Treasurer to invest
these funds in the eligible securities authorized pursuant to
Government Code § 16430. Existing law also requires that any
funds received from the sale or disposition of real property
acquired by, or on behalf of, a particular state university to
be appropriated to the Trustees for expenditure for capital
outlay for the acquisition or improvement of real property for
that state university, subject to the approval of the Director
of Finance. (Education Code § 89724)
Existing law authorizes that grants, revenues and other funds
received by the Trustees for research, workshops, conferences
institutes and special projects, as specified, be transmitted to
the Treasurer and deposited in the California State University
Special Projects Fund (Fund). Existing law grants the Trustees
the authority to establish the rules and procedures under which
the Fund will operate. Existing law authorizes the Treasurer,
upon approval of the Trustees, to invest these funds in the
eligible securities authorized pursuant to Government Code §
16430. (Education Code § 89725)
Existing law specifies the types of securities that are eligible
for the investment of surplus state funds. These include U.S.
government securities, securities of federally-sponsored
agencies, domestic corporate bonds, interest-bearing time
deposits in California banks, savings and loan associations and
credit unions, prime-rated commercial paper, repurchase and
reverse repurchase agreements, security loans, banker's
acceptances, negotiable certificates of deposit and loans to
various bond funds. (Government Code § 16430)
ANALYSIS
This bill expands the investment authority of the California
State University (CSU) to invest in securities beyond those
authorized for surplus state funds (pursuant to GC § 16430).
Specifically, it:
1) Authorizes the CSU to invest specified funds received by a
campus or by the Trustees in mutual funds subject to
registration by, and under the regulatory authority of, the
United States Securities and Exchange Commission or, in
real estate investment trusts.
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2) Expands the authority of the Department of Finance (DOF) to
annually audit the CSU Special Projects Fund by authorizing
an audit as frequently as the Audits Division of the DOF
deems appropriate.
3) Establishes specified conditions to be met in order to
exercise the expanded investment authority Specifically it:
a) Requires the Trustees to establish a
committee to provide advice and expertise on
investments. Further it:
i) Requires that a majority of
the committee members be individuals with
investment experience.
ii) Prohibits committee members from being
employees of the CSU.
iii) Requires that the Treasurer be allowed
to serve, or appoint a deputy treasurer to serve,
as a member of the committee.
b) Caps the total amount to be invested in
securities outside those listed in GC § 16430 at $200
million, $400 million, and $600 million in the fiscal
years ending June 30th 2017, 2018, and 2019,
respectively.
c) Beginning in the fiscal year ending
June 30, 2020, caps the total amount to be invested in
mutual funds and real estate investment trusts at 30
percent of all monies received and invested by the
campus or the Trustees, pursuant to specified law.
d) Establishes related reporting
requirements. Specifically it:
i) Requires that the Trustees
receive a quarterly investment performance report
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describing investment returns, comparisons to
benchmarks, holdings, market values, and fees.
ii) Requires the Trustees to distribute an
annual investment performance report to the
Legislature and Department of Finance (DOF).
e) Establishes restrictions on the use of
monies earned through investments in the expanded
securities and investments authorized by the bill.
Specifically it:
i) Requires that these
investment returns be used only for deferred
maintenance or capital outlay projects.
ii) Prohibits the use of these investment
returns for ongoing operations.
f) Establishes prohibitions relative to
the expanded investment authority. Specifically it:
i) Prohibits the Trustees from
requesting funding from the DOF or the
Legislature to compensate for investment losses.
ii) Prohibits the Trustees from citing
investment losses to justify approval of an
increase in student tuition or fees.
4) Clarifies an obsolete cross reference to the Civil Code.
5) Makes a number of related technical changes.
STAFF COMMENTS
1) Need for the bill. According to the California State
University (CSU), this bill is necessary to support new
capital outlay and infrastructure investments to meet its
overall capital needs of $8.8 billion, as identified in the
CSU Five-Year Capital Improvement Plan. According to the
CSU, the 2014 shift of primary responsibility for funding
its capital program and annual debt service obligations on
existing buildings from the State to the CSU, requires the
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identification of new options for addressing its capital
needs. This bill would expand the investment tools
available to the CSU for this purpose by expanding the
eligible investments for specified CSU funds to include
mutual funds and real estate trust investments; greater
risk, but higher yield investments.
2) Related budget activity. Prior to 2014-15, the state
funded construction of projects for the CSU by issuing
general obligation bonds and lease revenue bonds and
appropriated funding annually to service the associated
debt. This was changed by the enactment of SB 860
(Committee on Budget, statues of 2014) which authorized the
CSU to pledge up to 12% of the state funds provided in its
General Fund support budget, less general obligation debt
payments and lease payments, towards capital outlay,
lease-revenue bond debt financed and "pay as you go"
capital outlay projects. As a result, the state no longer
issues bonds for university capital outlay projects. In
addition, the California State University (CSU) capital
expenditure process was streamlined by granting the CSU
authority to pursue capital outlay projects subject to
approval by the Department of Finance and review by the
budget committees and subcommittee in each house.
A similar process and authority were also created for the
University of California (UC).
3) Clarification of application of investment authority. This
bill authorizes the expanded investment of revenues
received by the CSU campuses from fees for services,
materials and facilities, agreements, non-residents,
special sessions, special fees, gifts, bequests and
donations, the sale of unclaimed, lost or abandoned
property, and monies collected as higher education fees and
income from students of any campus of the CSU. Currently,
investment of these funds is limited to those securities
identified for investment of state surplus funds by
Government Code § 16430. This bill would expand this list
(for the CSU only) to include mutual funds and real estate
trust investments.
According to the Treasurer's Office Government Code § 16430
guides the investment of monies in the Pooled Money
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Investment Account (PMIA), which is funded from State
general fund, special funds held by State agencies, and
monies deposited by cities, counties and other entities
into the Local Agency Investment Fund (LAIF). According to
the Treasurer, PMIA policy sets as primary investment
objectives safety, liquidity and yield. The Treasurer's
Office, characterizes the investments authorized by GC §
16430 as securities that are short term, liquid, maintain
principal, and have a fairly low rate of return.
The provisions of this bill do not apply to CSU general
fund appropriations or PMIA balances.
4) How would it work? According to the CSU, it has the option
of placing the affected fee revenues in the appropriate
"special" fund in the State Treasury or in a local trust
account outside of the State Treasury. The CSU has chosen
as a matter of systemwide policy to place all these
revenues in local trusts and invests all funds from these
sources under the CSU Investment Policy. According to the
CSU, its current investment fund, the Systemwide Investment
Fund Trust (SWIFT), is made up of reserves from the fee
sources previously noted. The CSU reports that returns
from investment of these funds are frequently less than 1
percent and are used to support one-time expenses of the
University and its 23 campuses.
This bill would result in a new local trust account for
purposes of the expanded investment authority. The CSU
reports that about $2.8 to $3 billion in reserves are
carried over year to year so, under the provisions of this
bill, up to $1 billion of these reserves could be invested
in mutual funds and real estate investment trusts in 2020.
The remaining reserve funds would continue to be invested
in the securities authorized under Government Code § 16430.
According to the California State University (CSU), current
year operations are not dependent upon these reserves so
neither they, nor student tuition, would be impacted by any
investment losses. In addition, the CSU indicates that it
intends to implement a fiscally prudent investment/payout
strategy based upon its experience managing endowment
accounts, and, because increased earnings are restricted to
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one time capital purposes, it has the ability to adjust its
capital program to reflect earnings.
5) Controls and accountability. In anticipation of concerns
regarding the potential for, and consequences of,
investment losses from higher yield investments, the bill
incorporates several elements to mitigate risks and ensure
accountability. These include the following:
a) Quarterly investment reports to the Trustees.
b) Annual investment reports to the Legislature
and Department of Finance.
c) Annual caps on the amount which can be
invested in the expanded securities for the first
three years with an ongoing cap of no more than 30
percent of all monies invested.
d) Creation of a committee with investment
expertise to provide advice and expertise on
investments.
e) Prohibitions on the use of investment earnings
for ongoing operational expenses.
f) Restrictions on the use of earnings to capital
outlay or deferred maintenance costs.
In addition the bill prohibits the request of funds to
compensate for investment losses or the use of such losses
to justify student fee increases. While these provisions
do not necessarily bind a future Legislature, they do
codify the intent and expectation that the CSU exercise
fiscal prudence in the implementation of its new investment
authority.
In order to strengthen and further clarify the
Legislature's expectations in this regard, staff recommends
the bill be amended to insert on page 6 after line 37,
"There shall be no increase in tuition or reduction in
course sections offered due to investment losses sustained
as a result of this section."
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1) In the absence of this bill? The CSU reports that it has
already allocated $35 million of ongoing new state funding
provided by the Legislature and Governor for debt service
on new projects. Absent this bill, the CSU reports that it
can use its operating funds for its facilities needs and
campuses can and have reserved about $175 million in funds
on a case-by-case basis for specific projects. However,
the CSU is concerned that the pressure to use operational
funds for infrastructure needs could ultimately come at the
expense of support for students, faculty and staff.
While the state could also provide additional general
obligation bond funding in the future, the last bond
authorization to provide such funding to the CSU occurred
in 2006.
2) Technical amendments. Consistent with the author's
request, staff recommends the bill be amended on page 3,
line 32 to insert "U.S. registered" before "real estate
investment trusts."
3) Prior legislation. This bill is almost identical to AB 130
(Committee on Budget, 2015). While AB 130 was successfully
passed out of the Assembly, Senate Budget Committee members
requested that this measure be deferred until the next
legislative year and be considered through the policy
committee process.
SUPPORT
California State University
OPPOSITION
None received.
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