BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1094 HEARING: 4/25/12
AUTHOR: Kehoe FISCAL: Yes
VERSION: 4/19/12 TAX LEVY: No
CONSULTANT: Lui
MITIGATION OF LAND USE DECISIONS (URGENCY)
Makes several changes to state laws governing conservation
easements.
Background
When cities and counties approve land use projects, they
can require builders to set aside resource land or
easements to mitigate the conversion of other property to
development. Public agencies may impose mitigation
conditions to offset the effects of other agencies' public
works projects. Rather than own and manage the mitigation
land or the easements themselves, public agencies can turn
over the property interests to nonprofit organizations that
meet statutory criteria (SB 2746, Blakeslee, 2006; AB 1246,
Blakeslee, 2007).
In addition to requiring project sponsors to set aside
resource lands for mitigation purposes, sometimes public
agencies also require applicants to set aside money, known
as an endowment, to pay for managing the land or easements.
A 2006 Legislative Counsel opinion explained that the 2006
Blakeslee bill allows the State Department of Fish and Game
to authorize a nonprofit corporation to hold and manage
funds for the operation and maintenance of the resource
lands or easements. In 2010, the State Department of Fish
and Game set up a one-year pilot program with the National
Fish and Wildlife Foundation. The Foundation will hold and
manage the mitigation lands which the Department required
when issuing permits under the California Endangered
Species Act.
Last year, Governor Brown signed SB 436 (Kehoe), which
authorizes a state or local agency to allow a qualified and
approved nonprofit organization or special district to hold
property and long-term endowments to mitigate adverse
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impacts to natural resources caused by a permitted
development project. Governmental entities, community
foundations, and some water districts and utility
commissions want a similar authorization. Additionally,
when federal and state agencies share mitigation lands
federal agencies and the nonprofit or entity it appoints to
manage the endowment are subject to SB 436's reporting and
accountability provisions. The U.S. Fish and Wildlife
Service and NFWF want the flexibility to separate the
endowment holder from the owner of the land or easement.
Proposed Law
I. Conservation easement accounting. State law requires
that any conservation easement created as a component of
satisfying a local or state mitigation requirement must be
held in perpetuity. If a state or local agency authorizes
a governmental entity, special district, or nonprofit
organization to hold property to mitigate adverse impacts
of a project or facility, the agency may require an
administrative endowment from the project proponent, as a
one-time payment for reasonable costs associated with
reviewing qualifications, approving holders, and regular
oversight of compliance and performance.
SB 1094 provides that the endowment must be calculated to
include a principal amount that, when managed and invested,
is reasonably anticipated to cover the annual stewardship
costs of the property in perpetuity.
If a nonprofit corporation holds the endowment, SB 1094
requires the nonprofit to utilize generally accepted
accounting practices promulgated by the Financial
Accounting Standards Board.
SB 1094 repeals the term "administrative endowment" and
replaces it with "one-time fee." SB 1094 clarifies that
the one-time fee cannot exceed the reasonable costs of the
agency in reviewing qualifications of potential holders of
the property, approving those holders, and any regular
oversight over those holders to ensure that the holders are
complying with all applicable laws. The one-time fee must
be held, managed, and invested to produce an annual revenue
sufficient to cover the costs of reviewing qualifications,
approving holders, and ongoing oversight.
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II. Land-money. If a conservation easement is created as
a component to satisfy a local or state mitigation
requirement, state law requires that endowments must be
held by the agency, special district, or nonprofit
organization that requires the mitigation, with the
following exceptions:
Endowments are held by an entity other that the
state or holder of the mitigation property, as of
January 1, 2012;
Endowments are held by another entity pursuant to
the terms of a natural community conservation plan;
or ,
If existing law prohibits the holder of the
mitigation property to hold the endowment, including
for-profit entities.
SB 1094 adds exceptions to this requirement:
If the project proponent and the holder of the
mitigation property or conservation easement agree
that a community foundation should hold the endowment.
If the mitigation property is held or managed by a
federal agency, the agency may hold the endowment
itself or designate a qualified entity, including a
community foundation or NFWF, to hold the endowment.
If the same mitigation property is required to be
conveyed pursuant to both a federal and state permit,
and the federal agency directs that a community
foundation or NFWF should hold the endowment with the
agreement of the project proponent and the holder of
the mitigation property or conservation easement.
III. Endowment funds. To qualify to hold endowment funds,
state law requires that the holder of an endowment must
certify to the project proponent, or the holder of the
mitigation property or a conservation easement, that it
meets all of the following requirements:
The holder has the capacity to effectively manage
the mitigation funds.
The holder has the capacity to achieve reasonable
rates of return on the investment of those funds
similar to those of other prudent investors.
The holder utilizes generally accepted accounting
practices as promulgated by either:
o The Financial Accounting Standards Board
for nonprofit organizations, or
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o The Governmental Accounting Standards
Board for public agencies.
The holder will be able to ensure that funds are
accounted for, and tied to, a specific property.
If the holder is a nonprofit organization, a
community foundation, or the National Fish and
Wildlife Foundation, it has an investment policy that
is consistent with the Uniform Prudent Management of
Institutional Funds Act.
SB 1094 requires an entity, which holds an endowment but is
exempted from holding the land, to meet all these
qualifications and requirements for holding, managing,
investing, and disbursing the endowment funds.
IV. Natural community conservation plans (NCCPs). SB 1094
provides that in order for NCCPs to apply to the exception,
on or before January 1, 2012, a NCCP or safe harbor
agreement must be at a recognized initial, interim, or
final stage as reflected in the completion of planning
agreements, framework plans, subarea plans, implementing
agreements, or other documents that are part of the
recognized NCCP process.
V. Preferred entity. SB 1094 prohibits a state or local
agency from requiring, as a condition of obtaining any
permit, clearance, agreement, or mitigation approval from
the state or local agency, a preferred or exclusively named
entity by the state or local agency be named as the entity
to hold, manage, invest, and disburse the funds in
furtherance of the long-term stewardship of the property
for which the funds were set aside.
VI. National Fish and Wildlife Foundation. SB 1094
defines the National Fish and Wildlife Foundation (NFWF)
and authorizes NFWF to hold endowment funds separate from
the governmental entity special district, or nonprofit
organization that holds the property when mitigation
property is conveyed to a federal and state permit and the
federal agency and holder of the mitigation property agree.
If NFWF holds endowment funds to satisfy a local or state
mitigation requirement, SB 1094 requires NFWF to provide,
no later than July 1, 2013, and annually thereafter, a
report to the Legislature with all of the following:
An audited financial statement for the previous
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financial year that states the organization's
investment policy, return objectives and other items
required by generally accepted accounting principles
related to endowment management by nonprofit
corporations.
A list of all mitigation properties where the
National Fish and Wildlife Foundation is the holder of
the endowment.
For each endowment identified by NFWF, the
following items shall be provided in the report:
o Beginning of year balance;
o Contributions;
o Investment earnings or losses;
o Grants;
o Program expenses;
o Administrative expenses;
o End of year balance;
o The estimated percentage of the year-end
balance held as a board-designated endowment or
quasi-endowment, held as a permanent endowment,
and held as a term endowment; and ,
o Endowment funds not in the possession of
the organization that are held and administered
for the organization by unrelated organizations,
or related organizations.
The required reporting must be submitted as a printed copy
to both the Legislative Counsel and the Secretary of the
Senate, and as an electronic copy to the Chief Clerk of the
Assembly.
SB 1094 requires that a community foundation or the
National Fish and Wildlife Foundation's investment policy
be consistent with the Uniform Prudent Management of
Institutional Funds Act (pg. 13)
VII. Governmental entity. SB 1094 defines governmental
entity as any state agency, office, officer, department,
division, bureau, board, and commission, and any city,
county, or city and county.
SB 1094 extends to a governmental entity similar
provisions to those authorized in SB 436 for nonprofits and
special districts. These include:
A requirement that, if it holds an endowment,
moneys to acquire land or easements, or moneys for
initial stewardship costs, a governmental entity must
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provide the local or state agency with an annual
fiscal report that contains at least the same
information as required by Internal Revenue Service
Form 990 regarding the funds.
It is subject to a local agency's third party
review about its qualifications to hold and manage the
accompanying funds endowment, set aside for long-term
stewardship of the property, and its qualification to
effectively manage and steward natural land or
resources.
Authorization to contract with a community
foundation at any time to hold, manage, and invest the
endowment for a mitigation property and disbursing
payments to the holder of the mitigation property
consistent with the fund agreement.
If a state or local agency requires a project
proponent to transfer property to mitigate any adverse
impact upon natural resources caused by permitting the
development of a project or facility, the agency may
authorize a governmental entity, special district, a
nonprofit organization, a for-profit entity, a person,
or another entity to hold title to and manage that
property.
VIII. Community foundation. SB 1094 defines community
foundation as any community foundation the meets all of the
following requirements:
Is a tax-exempt 501(c)(3) organization;
Is qualified to do business in the state;
Is a "qualified organization" as defined in the
Internal Revenue Code; and ,
Has complied with the National Standards for U.S.
Community Foundations as determined by the Community
Foundations.
SB 1094 adds community foundations to the list of entities
that are able to hold endowment funds for mitigation lands,
even if the foundation does not hold the mitigation
property. Community foundations are:
Authorized to hold endowment funds for mitigation
lands;
Required to provide the local or state agency with
an annual fiscal report that contains at least the
same information as required by Internal Revenue
Service Form 990, if it holds endowment funds, moneys
to acquire land or easements, or moneys for initial
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stewardship costs;
Subject to a local agency's third party review
about its qualifications to hold and manage the
accompanying funds endowment, set aside for long-term
stewardship of the property; and ,
Exempt from the land-money linkage, if the same
mitigation property is required to be conveyed to both
a federal and state permit, and the federal agency
directs that a community foundation to hold the
endowment with the agreement of the holder of the
mitigation property.
SB 1094 provides that a governmental entity, special
district, or nonprofit organization may contract with a
community foundation at any time to hold, manage, and
invest the endowment for a mitigation property and
disbursing payments to the holder of the mitigation
property consistent with the fund agreement.
IX. Mitigation of state or local agency's land. If a
state or local agency, in the development of its own
project, is required to protect property to mitigate an
adverse impact on natural resources, the agency can take
any action to meet its mitigation obligations, including,
but not limited to, the following:
Transfer the interest to a governmental entity,
special district, or nonprofit organization after it
reviews the entity's qualifications, using adopted
guidelines, standards, or accreditation established by
a qualified entity that are in widespread state or
national use.
Provide funds to a governmental entity, nonprofit
organization, a special district, a for-profit entity,
a person, or other entity to acquire land or easements
that satisfy the agency's mitigation obligations.
SB 1094 authorizes a state or local agency to hold an
endowment in an account administered by an elected official
provided that the state or local agency is protecting,
restoring, or enhancing its own property.
X. Waiver. SB 1094 provides that no party to a mitigation
agreement can waive or exempt any requirement from
requirements from the chapter.
XI. Escrow. SB 1094 authorizes a state or local agency to
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allow the endowment to be held temporarily in an escrow
account until December 31, 2012. After that date, the
funds must be transferred to the entity that will
permanently hold the accompanying funds endowment.
XII. Definitions. SB 1094 defines several key terms.
Endowments replace the term "accompanying funds."
Endowments mean the funds that are conveyed solely for
the long-term stewardship of a property. The initial
endowment forms the principle that is held and managed
as a permanently restricted fund to genera annual
revenues for the property's long-term management and
stewardship.
Nonprofit organization means any nonprofit
organization that meets all of the following
requirements:
o Is a tax-exempt 501 (c)(3) organization;
o Is qualified to do business in this
state;
o Is a "qualified organization" as defined
in the Internal Revenue Code;
o Is registered with the Registry of
Charitable Trusts maintained by the Attorney
General pursuant to Section 12584; and ,
o Has as its principal purpose and activity
the direct protection or stewardship of land,
water, or natural resources, including, but not
limited to, agricultural lands, wildlife habitat,
wetlands, endangered species habitat, open-space
areas, and outdoor recreational areas.
Special districts means any regional park district,
regional park and open-space district, regional
open-space district, resource conservation district,
and the following:
o A district organized or formed pursuant
to the Metropolitan Water District Act;
o A county water district that has 5,000 or
more acres of mitigation lands;
o A special district that provides water
and wastewater treatment services; and ,
o A district organized or formed by the
County Water Authority Act.
XIII. Intent. SB 1094 clarifies the bill's intent to
support its purpose.
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XIV. Urgency. SB 1094 provides that an urgency statute is
necessary to ensure that mitigation projects, particularly
in relation to desert renewable energy projects, are
approved in a timely manner.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Before SB 436, if a city or
county approved a project and required builders to set
aside resource lands or easements for mitigation purposes,
an endowment holder and the owner of the land or easement
could be separate entities. If an endowment holder misused
endowment funds, the owner of the land - a land trust, a
nonprofit organization, or a special district - and
possibly, DFG were liable for mitigation responsibilities.
To ensure that endowment holders properly use endowment
funds, SB 436 did several things: a) linked the endowment
holder and the owner of the land or easement, critical for
the long-term management interest of both the endowment and
the property, and b) required reporting requirements to the
permitting entity about the endowment. This required
linkage and transparency measure ensures that the same
entity that holds the funds and land appropriately manages.
Since last year, other entities have voiced interest in
similar explicit authorization to hold endowment funds for
mitigation lands. Owners of mitigation lands use the
principal from the endowment for conservation purposes. In
many cases, this means millions of dollars of possible
endowment funds earned at interest are at stake. SB 1094
refines SB 436's provisions and ensures that entities that
hold endowment funds must adhere to transparent reporting
requirements. By requiring endowment holders and land
owners to abide by basic money management principles --
spreading the risk and a diversified portfolio of eligible
entities- California benefits from ensuring that mitigation
endowment funds, set-aside by the issuance of state
permits, are well-managed by experienced and competent
organizations.
2. Further discussion . Federal agencies and NFWF are
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concerned that SB 1094's requirements conflict with NFWF's
current practices. Additionally, federal and state tensions
revolve around several issues:
The Uniform Prudent Management of Institutional
Funds Act (UPMIFA) provides standards for managing,
investing, and expending funds held by nonprofit
institutions. In 2009, California adopted UPMIFA as a
baseline set of rules for investing prudently.
According to NFWF, it is unclear whether "stewardship
funds" paid by permittees for mitigation lands are
considered a charitable or a regulatory purpose and
thus, subject to California's standard UPMIFA
practice. This means that endowments managed by NFWF
for California projects may not adhere to UMPIFA.
The Attorney General has a Charitable Trust
department that oversees public trusts and relevant
contracts. If an issue arises with a nonprofit
organization, governmental entity, special district,
or community foundation's contract on federal lands,
the Solicitor is concerned that the California
Attorney General may make decisions about federal
mitigation lands in California.
When NFWF holds mitigation funds, it acts only as
an agent of the relevant permitting agency to ensure
that mitigation measures are implemented properly.
When SB 436 ties the endowment holder and mitigation
lands together, NFWF does not consider itself the
"owner" over the funds.
The U.S. Fish and Wildlife Service, Bureau of Land
Management, NFWF, California's Natural Resources Agency and
Department of Fish and Game, and other stakeholders
continue to meet to resolve these issues.
3. Joint endeavors . When a federal and state agency share
the same property set aside for mitigation, a developer
goes through a consolidated permit process, which leads to
projects starting sooner because mitigation agreements can
be completed earlier. The joint-permit process is also
more cost-effective than if a developer had to complete two
permit processes. Under this arrangement, a mitigation
land can satisfy both a state and federal requirement
simultaneously. Where federal and state agencies hold
shared mitigation lands, federal agencies want an exemption
from SB 436's required land-money linkage. In testimony to
the Senate Committee on Natural Resources and Water, a U.S.
Fish and Wildlife Service official claimed that if this
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flexibility is not granted, the nesting process may no
longer be an option.
4. National Fish and Wildlife Foundation . Chartered by
Congress in 1984, NFWF is a nonprofit 501(c) (3)
organization subject to congressional oversight, and the
funds it manages may not have a federal guarantee.
According to its 2009 IRS Form 990, a document required of
all nonprofit 501(c)(3) organizations, NFWF held $43
million in unrestricted net assets, $49 in temporary
restricted assets and no permanently restricted assets.
Because NFWF has never held permanently restricted assets,
SB 1094 requires NFWF to submit an annual audit, with
accompanying report to the California Legislature for all
mitigation endowments it holds for California-based
projects.
5. Cautionary tale . In March 2005, the Environmental
Trust, a San Diego based nonprofit, was the first land
trust in the nation to declare bankruptcy. According to
the California Council of Land Trusts, the Environmental
Trust was using aggressive practices, inconsistent with
standard practices, like using endowment principal to pay
for operating costs and failing to ensure adequate
endowments. When TET went under, the state was financially
responsible for ongoing management of mitigation lands held
by the Environmental Trust. This event prompted SB 436 and
continues to be a cautionary tale of potential pitfalls of
unqualified nonprofits holding endowments.
6. Recent amendments . Senate Natural Resources and Water
Committee heard SB 1094 on April 10. That committee
approved the bill by the vote of 9 to 0, after discussing
and accepting amendments. These amendments:
Clarify the bill's intent.
Require that a project proponent and the holder of
the mitigation property or conservation easement must
agree that a community foundation or NFWF can hold the
endowment, if the same mitigation property is required
to be conveyed to both a federal and state permit.
Support and Opposition (4/19/12)
Support : Big Sur Land Trust; California Community
Foundation; California Council of Land Trusts (sponsor);
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Center for Natural Lands Management; Community Foundation
of Mendocino County; Community Foundation for Monterey
County; Community Foundation of San Joaquin; Community
Foundation Santa Cruz County; Community Foundation of
Sonoma County; Community Foundation of the Verdugos; Contra
Costa Water District (if amended); Fresno Regional
Foundation; Kern Community Foundation; Land Trust of Santa
Cruz County; League of California Community Foundations;
Marin Community Foundation; Mendocino Land Trust; Napa
Valley Community Foundation; Ojai Valley Land Conservancy;
Orange County Community Foundation; Pasadena Community
Foundation; Peninsula Open Space Trust; Redwood Coast Land
Conservancy; Rocky Mountain Elk Foundation; Sacramento
Region Community Foundation;
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San Luis Obispo County Community Foundation; Santa Barbara
Foundation; Shasta Regional Community Foundation; Sierra
Foothill Conservancy; Silicon Valley Community Foundation;
Solano Land Trust; Stanislaus Community Foundation; Tahoe
Truckee Community Foundation; The Community Foundation; The
San Diego Foundation; The San Francisco Foundation; Trust
for Public Land; Ventura County Community Foundation;
Wildlife Heritage Foundation.
Opposition : Unknown.