BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       SB 1412|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   THIRD READING 


          Bill No:  SB 1412
          Author:   Block (D) 
          Amended:  4/12/16  
          Vote:     21 

           SENATE EDUCATION COMMITTEE:  9-0, 4/6/16
           AYES:  Liu, Block, Hancock, Huff, Leyva, Mendoza, Monning, Pan,  
            Vidak

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 5/27/16
           AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
           
           SUBJECT:   California State University:  investments


          SOURCE:    Author

          DIGEST:  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.

          ANALYSIS:  
          
          Existing law:

          1)Appropriates, in addition to any funding appropriated to the  
            CSU by the Legislature, 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  








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            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.

          2)Authorizes, upon approval by the CSU Trustees, a 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)

          3)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 CSU 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)

          4)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 CSU to invest  
          in securities beyond those authorized for surplus state funds  







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          (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.

          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 describing investment  
                 returns, comparisons to benchmarks, holdings, market  







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                 values, and fees.
               ii)    Requires the Trustees to distribute an annual  
                 investment performance report to the Legislature and 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. 

          Comments
          
          1)Need for the bill.  According to the 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 identification of new options for addressing its  
            capital needs.  This bill expands 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. 








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          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,  
            Chapter 34, 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 CSU capital  
            expenditure process was streamlined by granting the CSU  
            authority to pursue capital outlay projects subject to  
            approval by the DOF 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 expands 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 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.  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.  







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            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, 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 results 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 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 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, this 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 DOF.







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             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 this bill 1) prohibits the request of funds to  
            compensate for investment losses or the use of such losses to  
            justify student fee increases and 2) prohibits any increase in  
            tuition or reduction in course sections as a result of  
            investment losses.  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. 

          6)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.   

          Related/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.   








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          FISCAL EFFECT:   Appropriation:    Yes         Fiscal  
          Com.:YesLocal:   No

          According to the Senate Appropriations Committee there are  
          unknown costs or savings related to expanded investment  
          authority.  To the extent higher returns materialize, this bill  
          would relieve pressure on the CSU's operating budget, including  
          state General Fund, to address the system's capital needs.  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.

          SUPPORT:  (Verified 5/27/16)

          John Chiang, California State Treasurer
          California State University


          OPPOSITION:   (Verified 5/27/16)


          None received

          Prepared by:Kathleen Chavira / ED. / (916) 651-4105
          5/28/16 17:15:08


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