BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 436 (Kehoe)
Hearing Date: 05/16/2011 Amended: 05/02/2011
Consultant: Mark McKenzie Policy Vote: NR&W 9-0; G&F 9-0
_________________________________________________________________
____
BILL SUMMARY: SB 436 would authorize state and local agencies to
transfer any funds set aside for long-term management of land
acquired as environmental mitigation related to a development
project, if the interest in the land is transferred to a
qualified nonprofit organization (land trust). The bill would
also authorize a state or local agency to provide funds to a
land trust to acquire land or easements that satisfy the
agency's mitigation obligations. The bill's provisions would
sunset on January 1, 2022.
_________________________________________________________________
____
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Mitigation fund shift unknown, potentially significant future
shift Special*
of funds from state to nonprofit
organizations
DFG review and ongoing $200-$300 $300-$400 $400-$500 General/
monitoring (potentially partially offset by
administrative Special**
endowments, as specified. See staff
comments)
____________
* Special Deposit Fund in the PMIA
** Fish and Game Preservation Fund or General Fund
_________________________________________________________________
____
STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Existing law allows the state and local governments to impose
conditions on developers during the permitting process to
mitigate the environmental impact of a development project,
which may include the transfer property to the public entity for
SB 436 (Kehoe)
Page 1
preservation purposes to offset the conversion of other property
for a development purpose. Rather than owning and maintaining
these lands, existing law authorizes the public entity to turn
the property over to nonprofit groups to manage the land, such
as public land trusts that meet specified qualifications. State
and local officials are required to review the qualifications of
nonprofits prior to transferring title to the property.
While existing law authorizes a state or local agency to
transfer land or conservation easements to a nonprofit entity to
manage the property, there is no explicit authority to also
transfer any corresponding endowment funds that are dedicated
for management of the property. Despite this lack of explicit
statutory authority, Legislative Counsel has opined that the
authority to manage a real property interest that a state or
local public agency may grant to a nonprofit organization
includes both the authority to control and direct ongoing duties
related to the direct protection or stewardship of that real
property interest and the authority to control or direct funds
set aside for those purposes.
SB 436 would provide explicit authority for a state or local
public agency to convey any corresponding endowment funds to a
land trust when mitigation land or easements are transferred to
that entity. This bill would also authorize a state or local
agency to provide funds to a nonprofit organization to acquire
mitigation lands or easements, if that public agency is required
to protect an interest in real property to mitigate
environmental impacts related to its own project. The public
agency would be required to determine that a nonprofit has the
capacity to effectively manage the mitigation funds and achieve
a reasonable investment return, utilizes generally accepted
accounting practices, and has adopted an investment policy
consistent with the Uniform Management of Institutional Funds
Act. The public agency may require an annual report detailing
the management and condition of the property and accompanying
funds. Any funds would revert to the state or local agency if
the nonprofit ceases to operate, dissolves, goes bankrupt, or
fails to perform its duties. Staff notes a concern that funds
that may have been improperly spent would be unrecoverable. SB
436 would also authorize the public agency to contract with or
designate an independent third party to conduct preliminary
review of a nonprofit's qualifications and ongoing monitoring
and evaluations. Lastly, a public agency would be authorized to
SB 436 (Kehoe)
Page 2
require an additional administrative endowment from a project
proponent responsible for mitigation of impacts for costs
associated with preliminary review of qualifications and ongoing
oversight. The public agency may also require a project
proponent to provide a separate account to provide for initial
management costs while an endowment matures.
To the extent that DFG shifts deposits of mitigation funds from
the State Treasury to nonprofit organizations pursuant to the
provisions of this bill, the Fish and Game Endowment and
Expendable Funds in the Special Deposit Fund of the PMIA would
see reductions in revenues and corresponding interest revenues.
There would also presumably be a corresponding reduction in DFG
workload associated with the management of the mitigation lands
and funds. Staff notes, however, that DFG would have the new
responsibility of negotiating and reviewing agreements and
monitoring the activities of nonprofits' activities related to
the management of these lands and endowment funds. DFG would
also need to adopt regulations to establish requirements and
procedures related to the management of the funds.
DFG indicates that initial program startup, including
establishing standards and guidelines, a tracking system, an
initiating a process for due diligence reviews of applicants
would require startup costs of approximately $1.17 million for
the equivalent of a half-year's work by an attorney, an
accountant and an investment officer, two-year's work by staff
environmental scientists and program analysts, plus management
staff time. Staff notes that these costs are likely excessive,
considering DFG has been performing due diligence reviews of
third party endowment holders for over a year and likely has
established processes that would be substantially similar to
those required by this bill. As such, staff estimates DFG
one-time costs of $200,000 to $300,000 to adopt a full
regulations package and initiate processes for preliminary
review and ongoing oversight of third party managers. DFG
indicates that ongoing staff costs would be approximately $1.25
million to process requests, review proposals, establish and
manage contracts, and establish a statewide tracking system.
DFG identifies the same staff indicated above would be necessary
to manage the program, and indicates that annual costs would be
expected to triple by year seven as more endowment holders
participate in the program. Staff estimates that actual ongoing
costs are unknown and would depend upon the number of proposals
SB 436 (Kehoe)
Page 3
it receives, approves, and manages. These costs could initially
be approximately $200,000 to $300,000 if DFG reviewed and
approved 25 or fewer applications, and these costs could
increase to over $1 million per year after several years as
demand for the program increases and more projects and third
parties are approved and monitored annually. Staff notes,
however, that these costs could be partially offset to the
extent DFG required project sponsors to provide an additional
administrative endowment to cover costs associated with
preliminary review and ongoing oversight, as authorized in the
bill. It is unclear whether it is feasible to assume that a
project sponsor could provide additional endowment funds.
Staff notes that funds transferred to a nonprofit entity would
not be subject to the same restrictions and requirements imposed
on public agencies in the investment of public funds, which may
affect risk and returns associated with nonprofits' investments.
State-managed funds are generally more secure and pose less
risk, but may not achieve yields of a private sector third party
manager. While the third party approach may generate higher
yields, there is less security and more risk, which may
jeopardize the long term viability of mitigation and management
responsibilities. Recent exceptional economic pressures
highlight third-party risk. One example of such risk is the
recent collapse of the Environmental Trust, an organization
holding endowments for state and federal mitigation. As a
result of financial mismanagement, the organization filed for
bankruptcy and DFG was forced to accept 11 mitigation properties
with insufficient endowment funds for continued land management.
Existing law requires funds received by the Department of Fish
and Game (DFG) for management of mitigation lands to be
deposited in the Fish and Game Mitigation and Protection
Endowment Principal Account or the Fish and Game Mitigation and
Protection Expendable Funds Account, which are part of the
Special Deposit Fund within the State's Pooled Money Investment
Account (PMIA). The interest earned on endowment funds is to be
used, upon appropriation by the Legislature, to fund long-term
management of mitigation lands. SB 1538 (Steinberg), Chapter
411 of 2008, authorizes these funds to be moved to another
account within the State Treasury system to allow longer-term
investments, with the goal of increasing earnings over time, as
determined by DFG. That bill also authorizes DFG to retain
appropriate investment advisors acceptable to the State
SB 436 (Kehoe)
Page 4
Treasurer's Office to develop and maintain an investment
strategy. Staff notes that various limitations on the
investment of funds and the short-term nature of the PMIA have
resulted in a relatively low average rate of return (annual
interest rates of 1.4% to 4.5% over the last five years). The
lower the rate earned on these funds, the higher the initial
principal endowment costs for project proponents and less money
available for land management activities. As a result of the
authority provided by SB 1538, DFG reports that it can now
achieve a rate of return comparable to third parties under a
reasonable risk scenario. This relatively new approach
addresses some of the concerns that SB 634 seeks to address,
providing a reasonable and competitive rate of return without
the need for additional DFG staff to conduct due diligence
review and monitoring of third party endowment holders.
This bill is substantially similar to AB 444 (Caballero), which
was vetoed by the Governor in 2009 with the following statement:
Although I am support of this bill's efforts to allow
non-governmental entities to manage funds set aside for the
long-term management of lands and easements, authorizing
them to hold funds without adequate fiscal assurances, as
this bill would provide, is unacceptable. I am directing
the Department of Fish and Game to work with the author and
interested parties toward developing an alternative that
provides sufficient protections for the financial and
environmental resources subject to third-party agreements.
DFG has since implemented a pilot project that would give
applicants two options for the management of endowment funds
required under a California Endangered Species Act incidental
take permit. The two options recommended by DFG would be to
either: a) have the funds held in the State Deposit Fund; or, b)
have the funds held and managed by a single third party
endowment manager as an alternative to the State Deposit Fund.
The single third party endowment manager proposed by DGF to
manage CESA endowment funds is the National Fish and Wildlife
Foundation.