LAO 2006-07 Budget Analysis: Resources

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

State Lands Commission (3560)

The State Lands Commission (SLC) is responsible for managing lands that the state has received from the federal government. These lands total more than four million acres and include tide and submerged lands, swamp and overflow lands, the beds of navigable waterways, and state school lands.

For 2006-07, the budget proposes $25.1 million for the support of the commission. The amount is financed from various funds, including the General Fund ($9.7 million), the Oil Spill Prevention and Administration Fund ($9.4 million), and other special funds and reimbursements ($6 million). The proposed budget is $1.5 million, or 1.5 percent, above the commission’s estimated current-year expenditures. Most of this increase is to fund remediation activities at a toxic, state-owned site in Selby in Contra Costa County.

No Progress in Commission’s Management of School Land Bank Fund

The School Land Bank Fund (SLBF) is projected to have a reserve of $59 million by the end of the budget year. Because the State Lands Commission over the past many years has expended almost no money from the fund, we recommend the adoption of trailer bill language transferring the fund balance and any subsequent proceeds from land sales to the Teachers’ Retirement Fund for management and investment by the State Teacher’s Retirement System, the original intended beneficiary of SLBF investments.

The School Land Bank Fund. The SLC manages lands that were given to the state by the federal government in order to help support public education. Some of these lands are leased for commercial purposes (such as mining and oil drilling). Lease revenues (royalties) are deposited in the Teachers’ Retirement Fund (TRF) after SLC recovers its costs. The TRF is administered by the California State Teachers’ Retirement System (CalSTRS).

Under the School Land Bank Act of 1984, the commission may also sell school lands and use the proceeds to purchase other properties in order to consolidate school land parcels into contiguous holdings. The purpose of consolidating school lands is to facilitate the effective management of those lands for the purpose of generating lease revenue for TRF. Proceeds from land sales are deposited in the SLBF. These proceeds are available to SLC only for acquiring and enhancing school lands.

Fund Reserves Continue to Grow. Pursuant to the School Land Bank Act, SLC has sold school lands and deposited the proceeds in SLBF. However, because SLC has not expended SLBF monies to acquire new land holdings, the fund balance has mounted over the years. As shown in Figure 1, the fund is expected to have a reserve of $59 million at the end of the budget year.

Commission Has Made No Progress In Improving Its Management of SLBF. During hearings on the 1996-97 and 2001-02 budgets, the Legislature examined the issue of the mounting reserve in SLBF. As a result of the budget hearings, the Supplemental Report of the 2001 Budget Act required SLC to report on its expenditures from SLBF and actions it planned to take to draw down the reserves of the SLBF. In its report, SLC indicated it expected to use the fund to purchase property in the near future. However, our review finds that over the past five years SLC has expended no money from SLBF for the purchase of new land investments-which is the purpose of this fund. Additionally, the 2006-07 Governor’s Budget does not show any investments being made by SLC from the fund in the budget year.

Legislative Intent Not Fulfilled. In enacting the School Land Bank Act in 1984, the Legislature expressed concern over a “significant depletion” of school lands, and stated its intent that all remaining school lands be “managed and enhanced” as a revenue-generating resource for TRF. The legislative goal of the program was to ensure that revenues from the sale of school lands would be reinvested in other land holdings that generate lease revenues for TRF. Maintaining a large fund balance for multiple years, however, does not achieve that goal.

Fund Balance Should Be Transferred to TRF. In view of SLC’s inaction in purchasing new school lands with SLBF monies, as well as the significant reserve that continues to accumulate in the fund, we believe the Legislature should take action to ensure that its intent for the use of the SLBF is fulfilled.

Specifically, we recommend the adoption of trailer bill language requiring the SLBF fund balance be transferred to TRF and that subsequent proceeds from school land sales be deposited in TRF for investment by CalSTRS. In this way, the ultimate beneficiary of school lands proceeds-CalSTRS-could invest those funds directly for the benefit of teachers.

We note that CalSTRS has a significant portfolio and the staff expertise and organizational structure for identifying investment opportunities and managing the investments more efficiently than SLC. We also note that, under this recommendation, SLC would continue to manage existing school lands, and lease revenues from those lands would continue to be deposited in TRF.

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