BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1412|
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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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