April 20, 2009
Assemblymember Alberto Torrico
P.O. Box 942849
Sacramento, CA 94249-0020
Fax: 916-319-2120

Re: AB 656 – Support if Amended

Dear Assemblymember Torrico,

While we endorse both the general aim of AB 656, which is to increase funding for public higher education in California, and the bill’s proposed method of an oil and gas severance tax, we cannot support the bill in its present form. To be effective legislation that can actually accomplish its goals, the bill needs far greater specificity in its language. We propose the following additions as amendments. In our view, these changes will substantially strengthen the bill.

1) Consistent with the principle that the natural resources in the State of California be managed for the benefit of its people, this oil and gas severance tax is enacted for the benefit of California public higher education.

2) It is the duty of the board to maintain the integrity of the fund and to manage it for the benefit of public higher education in the State of California. The board shall adhere the highest standards of transparency, accountability, and fiduciary responsibility.

3) Among the oversight responsibilities of the board is to manage the tax revenues to create an endowment for California public higher education that will outlast the declining oil and gas production in the State.

4) All members of the board, the director, and all employees of the corporation shall be subject to California law and reporting requirements relating to conflicts of interest.

5) The board shall maintain a public website to report on its activities including all of the reports listed below.

6) The board shall issue quarterly and annual reports on all of its activities including, but not limited to, income, payouts, and investment holdings, transactions, and performance.

7) The activities of the corporation shall be audited on an annual basis by the California State Auditor and the resulting reports shall be posted on the website.

8) The three segments of California public higher education shall issue annual reports on how they have used funds from the corporation to improve quality, access, and affordability for their students. These reports shall be placed on the website.

9) The board shall conduct quarterly open meetings with the agenda posted on the website two weeks in advance of the meeting and the minutes posted within two weeks after the meeting.

10) Payments to the segments shall be made both directly from the tax revenues and additionally from the endowment net appreciation. During each year, one half of the tax revenue shall be paid directly to the segments while the other half is added to the endowment. For each year, the net appreciation of the endowment shall be calculated as the inflation adjusted year-on-year increase in the market value of the endowment minus the amount added to the endowment from tax revenue during that year. The additional annual payment to the segments from the net appreciation shall be one half of the five year running average of the net appreciation.

11) If the endowment reaches a market value of $60B in 2009 dollars, the payout method shall be shifted to the following. All of the annual severance taxes shall be paid out to the segments. The annual endowment appreciation shall be the year-on-year, inflation adjusted increase in the market value of the endowment. The additional annual payment to the segments from the appreciation shall be the five year running average of the annual appreciation.

12) Each segment shall use no less than 25% of its revenue from the corporation to fund proposals from faculty members. The proposals shall be for the purpose of improving the quality of student education and shall be funded on a competitive, peer reviewed basis.

13) Management fees for the endowment investments shall not exceed 1%.

14) The severance tax rate shall be 10%.

15) The percentage of the payouts to each segment shall be
Community colleges 10%
CSU 45%
UC 45%

16) In addition, delete 99514.d on real estate investments and the references to real property investments in other places.

Respectfully yours,
Joe Kiskis
CUCFA Vice President for External Relations,
and Professor of Physics, UC Davis