BILL ANALYSIS                                                                                                                                                                                                    

                              Senator Carol Liu, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 1412            
          |Author:    |Block                                                |
          |Version:   |February 19, 2016                       Hearing      |
          |           |Date:     April 6, 2016                              |
          |Urgency:   |No                     |Fiscal:     |Yes             |
          |Consultant:|Kathleen Chavira                                     |
          |           |                                                     |
          Subject:  California State University:  investments

          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.

          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)

          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,  

                    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. 

          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  

                  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  

               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.   

          California State University

           None received. 

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