BILL ANALYSIS Ó SB 1412 Page 1 Date of Hearing: August 3, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Lorena Gonzalez, Chair SB 1412 (Block) - As Amended April 12, 2016 ----------------------------------------------------------------- |Policy |Higher Education |Vote:|13 - 0 | |Committee: | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | ----------------------------------------------------------------- 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. SB 1412 Page 2 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 SB 1412 Page 3 (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 SB 1412 Page 4 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 Page 5