BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1412 (Block) - California State University: investments
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|Version: April 12, 2016 |Policy Vote: ED. 9 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: April 25, 2016 |Consultant: Jillian Kissee |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: This bill expands the investment authority of the
California State University (CSU) by authorizing the CSU to
invest certain 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.
Fiscal
Impact:
Investments: Unknown costs or savings related to expanded
investment authority. The authority provided to the CSU to
utilize alternative investment tools, could potentially lead
to a significant increase in returns. To the extent higher
returns materialize, the CSU would be restricted to using
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these funds to address one-time capital outlay projects which
would relieve pressure on the CSU's operating budget,
including state General Fund, to address the system's capital
needs. The bill establishes certain protections to mitigate
risk exposure to the CSU, including an incremental phase-in of
funds that may be invested under this authority and the
establishment of an advisory committee dedicated to providing
advice and expertise on how these funds will be invested. The
actual performance of the investments under the authority
provided in this bill would depend on a number of factors,
including the performance of the overall economy. See Staff
Comments.
Administrative costs: The Investment Advisory Committee is
expected to have between nine and 13 members that meet
quarterly. The CSU indicates the potential need for
additional staff. Together these activities could cost the
CSU in the low hundreds of thousands. Additional, potentially
significant costs could be incurred related to increasing
contracted support for financial advisory and investment
management services.
Background: Existing law authorizes, upon approval by the CSU Trustees, a
chief fiscal officer of a campus or the Treasurer to invest
certain funds in the eligible securities authorized pursuant to
Government Code §16430. (Education Code § 89724) These
securities are characterized as low-risk, fixed-income
securities with fairly low rates of return (according to the
CSU, less than one percent annually). The CSU's largest
investment fund, the Systemwide Investment Fund Trust (SWIFT),
as are other state agency funds, is limited to investment of its
funds to these securities.
The SWIFT includes reserves from sources such as parking,
student unions, student housing, student tuition, fees, health
center fees, other self-supporting programs, as well as other
sources. Investment returns on the SWIFT are currently used to
support one-time expenses of the CSU and its campuses. The
provisions of this bill do not apply to CSU General Fund
appropriations. Though currently the SWIFT portfolio is
restricted in the types of investments that can be made, CSU's
endowment funds have no state limitations and utilize equity,
fixed-income, real estate, commodities, and alternative assets
and typically perform better than the SWIFT.
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SB 860 (Committee on Budget, Statutes of 2014) shifted the
primary responsibility for funding the university's capital
program to the CSU and authorized it to issue its own debt, as
specified. A similar process and authority were also created
for the University of California (UC). State investment
limitations for investments do not apply to the UC.
According to the CSU, this bill would expand the investment
tools available to support new capital outlay and infrastructure
investments to meet its overall capital needs. Expanding the
eligible investments for specified CSU funds to include mutual
funds and real estate trust investments could lead to greater
returns within appropriate levels of risk.
Proposed Law:
This bill expands the authority of the CSU to invest in
securities beyond those authorized for surplus state funds
(pursuant to GC § 16430). Specifically, it:
Authorizes the CSU, upon approval of the Trustees, 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 United States registered real
estate investment trusts in accordance with certain
requirements.
Establishes certain requirements that must be fulfilled if the
CSU acts upon authority provided in this bill to invest
specified funds in securities or investments outside what is
currently authorized in statute (which includes mutual funds
and real estate investment trusts mentioned above).
o The first requirement is a gradual phase-in of the
maximum amount of funds that may be invested in these
asset categories. In fiscal year 2016-17, the cap is
$200 million; in fiscal year 2017-18 the cap is $400
million; and for the 2018-19 fiscal year the cap is $600
million. Starting in the 2019-20 fiscal year and each
year thereafter, up to 30 percent of all moneys received
and invested pursuant to specified law may be invested in
this way by the campus or the Trustees.
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o The second requirement is for the Trustees to
establish a committee to provide advice and expertise on
investments. The majority of the committee members are
required to have investment expertise and not be
employees of the CSU. The State Treasurer, or an
appointed deputy treasurer, is required to be allowed to
serve as a member on the committee.
Requires a quarterly investment performance report to be
provided to the Trustees and an annual report to the
Legislature and the Department of Finance to include
investment returns, among other things.
Provides additional protections. Specifically, the bill
states that any additional moneys earned through these
investments are required to be used only for capital outlay or
maintenance, and not for ongoing operations. In addition,
this bill specifies that the Trustees are prohibited from
submitting a request to the Department of Finance or the
Legislature for any funds to compensate for any investment
loss from making these investments, and that no increase in
tuition or reduction in course sections offered shall be
adopted due to losses from these investments.
Related
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.
Staff
Comments: The fiscal impact of this bill is dependent on a
number of factors, including: (1) how this portfolio will
perform given the applicable economic conditions; (2) how much
funding the CSU actually invests under this authority; and (3)
the asset allocation selected. Inherent in the possibility to
earn greater yield on the funds it invests, is the exposure to
greater risk.
According to the CSU, the asset allocation will be developed,
monitored, and adjusted continuously by the new investment
committee. This committee will establish objectives for the new
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fund in which the investments pursuant to this bill will be
held. The new fund would incrementally increase from the
2016-17 fiscal year to the maximum amount by the 2019-20 fiscal
year with periodic reporting requirements provided to the
Trustees, Legislature, and the Department of Finance.
According to CSU, the SWIFT fluctuates seasonally due to
influxes of student revenue, but is at an ongoing level of about
$3.4 billion on average. Therefore, pursuant to this bill, up
to about $1 billion could be invested in mutual funds and real
estate investment trusts, as specified, in fiscal year 2019-20.
The remaining funds (about $2.4 billion) would continue to be
invested in fixed-income securities authorized in Government
Code § 16430. This bill requires that any additional moneys
earned through the expanded investment authority be used only
for capital outlay or maintenance, and not ongoing operations.
The CSU indicates that in the case of an economic downturn, the
University will reduce the amount of funding dedicated to future
one-time capital needs, thereby not affecting operating funds.
The CSU also indicates that returns under this authority may be
in the range of three to five percent per year. Up to two
percent of that yield would be used for the capital program and
the difference would be held in a reserve to assist in
mitigating fluctuations of the market. This is similar to how
the endowments within the CSU are managed.
Even though no state funds would be included under the expanded
investment authority, the funds included in the SWIFT are
reserves and provide a cushion for operating needs. The CSU
could sustain greater losses attributed to the new investment
strategies, but this would also depend upon the asset allocation
of the fund and how its risk is distributed, which would
determine whether losses could be mitigated or even offset by
utilizing other strategies. The CSU also indicates that current
year operations are not dependent upon these reserves, so
neither they nor student tuition would be impacted by investment
losses. To the extent increased returns do materialize from
this bill, it could contribute significantly to addressing the
University's capital needs, thereby relieving pressure on the
state General Fund.
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