BILL ANALYSIS �
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| SENATE COMMITTEE ON NATURAL RESOURCES AND WATER |
| Senator Fran Pavley, Chair |
| 2011-2012 Regular Session |
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BILL NO: SB 1094 HEARING DATE: April 10, 2012
AUTHOR: Kehoe URGENCY: Yes
VERSION: April 9, 2012 CONSULTANT: Katharine Moore
DUAL REFERRAL: Governance and FinanceFISCAL: Yes
SUBJECT: Land use: mitigation lands: nonprofit organizations.
BACKGROUND AND EXISTING LAW
When state or local agencies approve land use projects, they can
require the project proponent to transfer interest in real
property (either fee title or easements), and funds for the
management of the property in perpetuity to the agency in order
to mitigate for the impact the development will have on natural
or cultural resources. In general, agencies prefer not to hold
the mitigation lands or easements, and non-profits, local
open-space districts or other local governments are asked to
hold the land and accompanying endowments. As an example,
California land trusts hold endowments for mitigation projects
that range from $750,000 to slightly more than $60 million per
organization.
In 2009, AB 444 (Caballero) sought to, in part, clarify existing
law regarding the role of non-profits in holding mitigation
lands and associated endowments. Governor Schwarzenegger vetoed
AB 444 citing concern over safeguards to assure endowments were
managed appropriately. Last year, SB 436 (Kehoe, c. 590,
statutes of 2011) explicitly established and expanded upon a
number of standards and requirements for mitigation agreements
with respect to both the entities allowed to hold the mitigation
lands or easements and those allowed to hold the associated
endowments (Government Code (GOV) �� 65965 - 65968). The
provisions of SB 436 included:
Specified standards that endowment holders must meet;
Specified requirements for the holding, managing, and
investing of the endowment as well as disbursements from
the endowment and other funds;
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Assurances that endowment management is consistent with
other state laws;
Creation of a link between the endowment holder and the
owner of the land or easement - critical for the long-term
management of both the endowment and property;
Reporting requirements to the permitting entity about
the endowment, while removing state oversight of the
approval and review process for endowment holders;
Identification of certain exceptions for eligibility for
holding the endowments (e.g. for-profit entities, pursuant
to long-standing law); and
A sunset date in 10 years (January 1, 2022) to provide
the opportunity for the Legislature to revisit the matter.
The final floor votes for SB 436 were 77 - 0 and 38 - 0 in the
Assembly and Senate, respectively.
PROPOSED LAW
This bill would clarify and expand upon SB 436. Specifically,
this bill would:
State legislative intent that an endowment set aside for
and dedicated to the long-term stewardship of a property be
managed, invested and disbursed by qualified entities that
are California-based, qualified to do business in
California and meet the specified requirements;
Restrict the definition of "endowment" to mean
permanently restricted funds;
Define the "National Fish and Wildlife Foundation" and
allow it to hold endowment funds where the mitigation land
is held or managed by a federal agency, and where the
mitigation land is conveyed to satisfy the requirements of
both a federal and a state permit and the federal agency
and holder of the mitigation property agree;
Require that the National Fish and Wildlife Foundation
provide an annual report to the legislature, as specified,
should it hold endowment funds as part of these mitigation
agreements;
Define "community foundation" and add community
foundations to the list of entities able to hold endowment
funds for mitigation lands, even if the foundation does not
hold the mitigation property in specified circumstances;
Define "government entity" and add government entities
to the list of those subject to the the chapter (GOV ��
65965 - 65968);
Require that no party to a mitigation agreement may
waive or exempt any requirement of the chapter;
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Require that no state or local agency shall require as a
condition of obtaining approval that a preferred or
exclusively named entity be chosen as the holder of the
endowment;
Specifically establish the criteria required to be
considered "qualified" pursuant to the legislative intent
language and remove the requirement that the state or local
agency exercise due diligence in evaluating the holder of
the endowment;
Permit endowment funds to be held temporarily in escrow
until December 31, 2012, after which the funds should be
transferred to the entity that will permanently hold the
endowment; and
Make additional technical and clarifying changes to the
code, including requiring non-profits holding endowments to
use accounting practices promulgated by the Financial
Accounting Standards Board; allowing elected officials to
administer endowments where a state or local agency is
protecting or enhancing its own property; with respect to
how endowments are held for National Communities
Conservation Plans and Safe Harbor Plans; and with respect
to one-time fees used to defray costs associated with
setting-up and administering the initial mitigation
agreement.
ARGUMENTS IN SUPPORT
According to the California Council of Land Trusts, "many
diverse stakeholders worked for several years to establish
strong laws and protections for holding, managing, investing and
disbursing mitigation endowment funds. �?] In 2011 and after
years of work and education, SB 436 was chaptered and provided a
very strong law for mitigation endowments." Further, California
"has a vital and continuing interest in ensuring that the
mitigation endowment funds being set aside pursuant to the
issuance of state permits are well-managed by experienced and
competent organizations, are permanently restricted and
dedicated to the mitigation property they were created for, are
not consolidated into a single vast holding that is inherently
risky, and that the funds are transparent so that the public can
track them."
A joint letter from 12 land trusts and foundations supports SB
1094 which "maintains strong protections for mitigation
endowments and continues to maintain a strong link between the
mitigation land and the permanent funding for these lands."
"Throughout California, there are more than 120 nonprofit land
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trusts working in local communities to conserve special lands
and waters. We are often regarded as the premier partner of the
state in acting as stewards in perpetuity for many of our
state's more magnificent natural treasures. And we are
accountable to the state, and more importantly, to the public,
to perform this task to the best of �our] ability."
"We applaud the provision �?] that requires that community
foundations must meet all the standards and requirements that
are critical to long-term endowment management, such as the
funds held as permanently restricted funds. Community
foundations have a strong local presence and accountability as
well as a solid reputation for financial management."
"However, long-term stewardship requires a dedicated investment
for these purposes" and state "it is essential that the funding
is dedicated solely to the long-term management of each
property."
The League of California Community Foundations adds that
"community foundations represent a key element of California's
philanthropic landscape. �?] Many of our members have forged
strong partnerships with environmental project proponents, land
trusts and landowners located within their respective
communities to hold and manage endowments attached to specific
long-term mitigation properties. �?] SB 1094 recognizes a
qualified community foundation as an eligible manager of the
endowment when the project proponent, land trust or other
landowner and community foundation all agree." They continue
that passage of SB 1094 would "allow these partnerships to
continue and, at the same time, ensure that all qualified
endowment holders of long-term mitigation properties meet and
maintain strong fiduciary standards and requirements for
prudently managing these endowments."
COMMENTS
Temporary restricted funds are not the same as permanently
restricted funds. The Financial Accounting Standards Board
requires non-profit organizations to classify their net assets
into three categories depending upon whether there are
donor-imposed restrictions on the assets. These three
categories are: (1) unrestricted net assets (2) temporary
restricted net assets, and (3) permanently restricted net
assets. Not surprisingly, "unrestricted" are net assets that
have no donor-imposed restrictions. Temporary restricted assets
have been restricted by a donor for either a specific purpose(s)
, time period(s) or event(s). When the restriction is
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satisfied, the funds may be used to support operations in the
current operating period. Permanently restricted funds are just
that - the donor has restricted them in perpetuity. These are
endowments and the income, dividends, interest and capital gains
may be used for operations. However, the principal is
restricted in perpetuity and may not be utilized to support
operations with very limited exception.
Chasing returns and lands to be managed for perpetuity .
Investment return is inherently related to risk. As returns
increase, the riskiness of the investment is also, in all
likelihood, increasing. A diverse and well-managed investment
portfolio will contain investments of varying return (and thus
risk) and should be designed with the performance goals and time
horizon of the investor in mind. Endowments to support
conservation lands and easements must be invested with a risk
profile appropriate for the principal of the endowment to last
in perpetuity. Permanently restricted funds are required to be
managed in this manner. Further, investment diversity for all
of these endowments as a whole includes diversity in investment
advisors and managers overall. Each individual endowment,
however, does not need to be held by a "diversified pool"
(Amendment 1).
The National Fish and Wildlife Foundation. The National Fish
and Wildlife Foundation (NFWF) is a non-profit 501(c)(3)
organization chartered by Congress in 1984. It is not a federal
agency, although the Department of Fish and Game says it is
subject to congressional oversight, and the funds it manages do
not appear to have a federal guarantee. Its principal purpose
is to administer donations and funds in support of U.S. Fish and
Wildlife Service programs and conservation activities in the
United States. It has a variety of partnerships with
individuals, foundations, other non-profits, corporations and
government agencies serving its conservation focus. According to
its 2009 IRS Form 990 - required of all 501(c)(3) organizations
- it held $32 million in unrestricted net assets, $49 million in
temporary restricted assets and no permanently restricted
assets.
In December 2010, the Department of Fish and Game (DFG) entered
into a mitigation land endowment pilot program which allowed
NFWF to hold the endowments for long-term management of
California Endangered Species Act mitigation lands. For the
duration of the pilot program (now completed), funds could be
deposited with DFG or NFWF only. DFG believes the pilot program
was successful and the Natural Resources Agency is interested in
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continuing the relationship with NFWF. Under the short duration
of the program, 12 project proponents entered into agreements
with DFG and NFWF, and deposited a total of $15 million now held
by NFWF. There is a technical amendment for consistency which
matches the conditions needed for NFWF to hold endowments to
those for community foundations (Amendment 2).
Community foundations already manage permanently restricted
funds - some on behalf of land trusts through mitigation
agreements . Members of the League of California Community
Foundations manage more than $2.6 billion in permanently
restricted funds and hold about $7 billion in assets overall,
according to the league. Approximately $80 million is in funds
dedicated for environmental causes in California, and community
foundations serve the entire state. Thirty league members
adhere to the strict National Standards for U.S. Community
Foundations - a requirement of SB 1094 - and comply with all
local, state and federal laws mandating their work and
management of the endowment funds held. Many members have
established on-going relationships with owners and managers of
long-term mitigation properties. Community foundations already
manage endowment funds on behalf of land trusts. For example,
the San Francisco Foundation manages three endowments on behalf
of the Land Trust of Santa Cruz County of which two are in
support of different conservation easements. The San Francisco
Foundation also will receive funds from a recent settlement
negotiated between a group of developers and the City of Oakley.
The $7 - 8 million received will be used to purchase
conservation easements over the next 7 - 10 years. Community
foundations also hold and manage endowments to acquire and
maintain a green belt around the City of San Luis Obispo.
Government entity . A government entity is any state agency,
office, officer, department, division, bureau, board, and
commission, and any city, county, or city and county. As
defined, government entities have already been participating in
the mitigation agreements of interest to this bill (for example,
the San Francisco Public Utilities Commission).
Contents of mitigation agreements. In order to safeguard the
mitigation agreement, including the endowments intended to
support the mitigation lands in perpetuity, SB 1094 explicitly
specifies that no part of the statute governing the creation and
management of mitigation agreements may be waived by any
signatory to the agreement.
Potential pitfalls of nonprofits- The Environmental Trust (TET):
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This San Diego-based nonprofit was the first land trust in the
nation to declare bankruptcy in March 2005. TET had been using a
number of aggressive practices that- according to the California
Council of Land Trust- is not typical or consistent with
standard land trust practices, including using its endowment
principal to pay for operating costs and failing to secure
adequate endowments. When TET went bankrupt, the state became
financially responsible for the on-going management of the
mitigation lands that were once held by TET.
This bill is a work-in-progress. The author continues to meet
with stakeholders who, for example, have on-going interests in
mitigation agreements and manage mitigation lands. The
Committee may wish to direct Committee staff to continue working
with the author's office on issues relevant to the jurisdiction
of the Committee.
SUGGESTED AMENDMENTS
AMENDMENT 1
Page 3, line 1 - 7, inclusive, and replace with:
" SECTION 1. It is the intent of the Legislature, and in
the best interest of the public, that there is available a
diversified pool of eligible entities that are qualified to
do business in California, based in California, and that
meet the requirements of this chapter to hold, manage,
invest, and disburse endowment funds in furtherance of the
long-term stewardship of the property set aside for
mitigation purposes.
AMENDMENT 2
Page 12, line 9: delete "of the holder of the mitigation
property" and replace with "of the project proponent and
the holder of the mitigation property or conservation
easement."
SUPPORT
California Council of Land Trusts (sponsor)
Big Sur Land Trust
Center for Natural Lands Management
Land Trust of Santa Cruz County
Mendocino Land Trust
Ojai Valley Land Conservancy
Peninsula Open Space Trust
Redwood Coast Land Conservancy
Rocky Mountain Elk Foundation
Sierra Foothill Conservancy
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Solano Land Trust
Trust for Public Land
Wildlife Heritage Foundation
League of California Community Foundations
OPPOSITION
None Received
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