BILL ANALYSIS Ó
SB 1412
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Date of Hearing: August 3, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
SB 1412
(Block) - As Amended April 12, 2016
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
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
shortfalls.
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.
COMMENTS:
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
16430.
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)
319-2081
SB 1412
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