BILL ANALYSIS                                                                                                                                                                                                    

                                                                    SB 1412  

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          Date of Hearing:  August 3, 2016


                               Lorena Gonzalez, Chair

          SB 1412  
          (Block) - As Amended April 12, 2016

          |Policy       |Higher Education               |Vote:|13 - 0       |
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          Urgency:  No  State Mandated Local Program:  NoReimbursable:  No


          This bills expands the California State University's (CSU's)  
          investment authority for certain university funds to include  
          mutual funds and real estate investment trusts, with the  
          earnings to fund deferred maintenance and capital outlay.  


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          Specifically, this bill:

          1)Authorizes the CSU to invest money received from specified  
            funds in mutual funds subject to Securities and Exchange  
            Commission (SEC) registration and regulation or in United  
            States registered real estate investment trusts.

          2)Requires the CSU Trustees to establish a committee, as  
            specified, to provide advice and expertise on investments.

          3)Caps the total amount available for the alternative investment  
            instruments at $200 million for 2016-17, $400 million for  
            2017-18, $600 million for 2018-2019, and in 2019-20 and  
            thereafter, at 30% of all monies received and invested by the  
            campus or the Trustees.

          4)Restricts the use of monies earned through these investments  
            to deferred maintenance or capital outlay, and prohibits their  
            use for ongoing operations.

          5)Prohibits CSU from (a) requesting state funding to compensate  
            for investment losses or (b) citing investment losses to  
            justify increasing student tuition or fees.

          FISCAL EFFECT:

          1)Unknown revenue gains or losses 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. Current law restricts CSU to  
            investing in securities characterized as low-risk,  
            fixed-income securities with fairly low rates of return  


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            (according to the CSU, less than one percent annually). To the  
            extent higher returns materialize, the CSU would be restricted  
            to using these funds to address one-time maintenance and  
            capital outlay projects, which theoretically would relieve  
            pressure on the CSU's operating budget, including the General  
            Fund. However, given CSU's huge backlog on deferred  
            maintenance and its capital needs (see below), the additional  
            investment gains would instead help to reduce these funding  

          2)CSU would incur annual administrative costs in the low  
            hundreds of thousands of dollars for at least one staff  
            position and to support the investment advisory committee.


          1)Background. According to the author, CSU currently has a $2.6  
            billion deferred maintenance backlog and has identified about  
            $6 billion in capital outlay needs. The author notes that  
            since 2014, CSU has allocated $35 million of ongoing  
            additional state funding 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 2015-16 and in 2016-17 to address CSU's  
            deferred maintenance. While significant, this level of funding  
            is small relative to the overall need.

          2)Purpose. This bill expands CSU investment options with the  
            intent of generating greater returns, and thus more funding  
            for maintenance and capital needs. The CSU's largest  
            investment fund, the Systemwide Investment Fund Trust (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  


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            to support one-time expenses of the CSU and its campuses. (The  
            authority granted in this bill does not apply to CSU's General  
            Fund appropriations.) Though currently the SWIFT portfolio is  
            limited in the types of investments that can be made, CSU's  
            endowment funds, which have no such limitations and utilize  
            equity, fixed-income, real estate, commodities, and  
            alternative assets, typically perform better than the SWIFT.

            According to CSU, the SWIFT fluctuates seasonally due to  
            influxes of student fee revenue, but is at an ongoing level of  
            about $3.4 billion on average.  Therefore, with the phased-in  
            investment authority provided in the bill, by 2019-20 up to  
            about $1 billion of SWIFT funds could be invested in mutual  
            funds and real estate investment trusts. The remaining funds  
            (about $2.4 billion) would continue to be invested in  
            fixed-income securities authorized in Government Code Section  

          3)Prior Legislation. This bill is almost identical to AB 130  
            (Committee on Budget)-a trailer bill proposed for the 2015-16  
            Budget Act. While AB 130 passed the Assembly, Senate Budget  
            Committee members requested that this policy be deferred until  
            the next legislative year and be considered through the policy  
            committee process.

          Analysis Prepared by:Chuck Nicol / APPR. / (916)  


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