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:










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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