BILL ANALYSIS Ó
SB 1412
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Date of Hearing: June 21, 2016
ASSEMBLY COMMITTEE ON HIGHER EDUCATION
Jose Medina, Chair
SB
1412 (Block) - As Amended April 12, 2016
SENATE VOTE: 39-0
SUBJECT: California State University: investments
SUMMARY: Authorizes the California State University to invest
in mutual funds subject to regulation by the United States
Securities and Exchange Commission (SEC) or in United States
registered real estate investment trusts, as specified, and
restricts earnings to capital outlay expenditures.
Specifically, this bill:
1)Authorizes the CSU to invest money received from specified
funds in mutual funds subject to SEC registration and
regulation, or in United States registered real estate
investment trusts.
2)Authorizes Department of Finance (DOF) to audit the CSU
Special Projects Fund as frequently as the Audits Division of
the DOF deems appropriate.
3)Requires the CSU Trustees to establish a committee to provide
advice and expertise on investments, as outlined below:
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a) Requires that a majority of the committee members be
individuals with investment experience.
b) Prohibits committee members from being employees of the
CSU.
c) Requires that the Treasurer be allowed to serve, or
appoint a deputy treasurer to serve, as a member of the
committee.
4)Caps the total amount to be invested in securities outside
those currently authorized at $200 million for Fiscal Year
(FY) 2016-17, $400 million for FY 2017-18, and $600 million
for FY 2018-2019. Beginning in FY 2019-20, 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.
5)Establishes related reporting requirements, including requires
that the CSU Trustees receive a quarterly investment
performance report describing investment returns, comparisons
to benchmarks, holdings, market values, and fees; and,
requires the CSU Trustees to distribute an annual investment
performance report to the Legislature and DOF.
6)Establishes restrictions on the use of monies earned through
investments in the expanded securities and investments to only
deferred maintenance or capital outlay projects and prohibits
the use of these investment returns for ongoing operations.
7)Establishes prohibitions relative to the expanded investment
authority by prohibiting the CSU Trustees from requesting
funding from the DOF or the Legislature to compensate for
investment losses and prohibiting the CSU Trustees from citing
investment losses to justify approval of an increase in
student tuition or fees.
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EXISTING LAW:
1)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 Section 16430)
2)Appropriates monies received from a variety of other sources
for the support of the CSU 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. (Education Code Section 89720)
3)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, as authorized. 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. (EC
Section 89724)
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4)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, as authorized. (EC Section 89725)
FISCAL EFFECT: According to the Senate Appropriations
Committee:
1)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
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.
2)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
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management services.
COMMENTS: Purpose of this bill. According to the author, "the
capital needs of the CSU are substantial. Currently, it is
estimated that the CSU has $2.6 billion of deferred maintenance
on existing infrastructure and this amount will grow by
approximately $150 million per year. There is also the
additional need to renovate existing or construct new facilities
totaling approximately $6 billion to better serve teaching and
learning for the 21st century. To put this into perspective,
the annual CSU operating budget totals approximately $5.2
billion."
The author further notes, "since 2014, CSU has allocated $35
million of ongoing, new state funding provided to the university
to support debt service on approximately $300 million to $525
million of capital projects. Additionally, the state provided
$25 million of one-time funding in the Budget Act of 2015 for
these purposes, specifically for pay-go projects. This is
certainly a step forward, but relatively small compared to the
overall CSU capital needs of $8.8 billion as detailed in the CSU
Five-Year Capital Improvement Plan."
This bill proposes changes to the current statutory limits on
investments to create another tool to help address capital
outlay and infrastructure needs. Specifically, current law
limits CSU's investment earnings potential to fixed-income
securities, which has, according to CSU, resulted in annual
returns of less than 1 percent. This bill proposes to expand
investment options to mutual funds regulated by the SEC,
including equity mutual funds, and real estate investment
trusts. The CSU believes this could lead to greater returns
within appropriate levels of risk.
Oversight of investment activity. CSU points to the following
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provisions in the bill that provide protection of the public
interest and oversight of investments:
1)Measured and Phased-In. CSU notes the proposal will phase in
over a multi-year period the amount of fund balances that can
be invested by CSU in the new asset classes (See: Summary #4).
2)Uses. CSU notes that this bill would be limited to one-time
capital outlay and maintenance only (See: Summary #6).
3)No Burden on the State or Students. CSU notes this proposal
stipulates that CSU will not request funding from the
Legislature or increase student fees as a result of negative
investment returns (See: Summary #7).
4)Transparency and Oversight. CSU points to the requirements
for quarterly investment performance reports to the Trustees,
the annual investment performance report to the Legislature,
increased auditing authority of the DOF, and the investment
committee made up of investment experts as evidence of strong
transparency and oversight requirements. (See: Summary #2,
3, and 5).
Prior 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.
REGISTERED SUPPORT / OPPOSITION:
SB 1412
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Support
California State University (Sponsor)
John Chiang, Treasurer, State of California
Opposition
None on File
Analysis Prepared by:Laura Metune / HIGHER ED. / (916)
319-3960