BILL ANALYSIS Ó AB 1151 Page 1 Date of Hearing: May 4, 2011 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL SECURITY Warren T. Furutani, Chair AB 1151 (Feuer and Blumenfield) - As Amended: April 14, 2011 SUBJECT : Public retirement systems: investments: Iran. SUMMARY : Amends the California Public Divest from Iran Act to, among other things, clarify that pension boards must divest pension funds, as specified, unless to do so would breach a fiduciary duty; modify the types of companies that fall within the scope of the bill; and require that certain findings and determinations must be made in noticed public hearings. Specifically, this bill : 1)Provides that the boards of CalPERS and CalSTRS (board) shall not invest public employee retirement funds in a company which has business operations in Iran, as identified by the board through publicly available information, if the company meets either of the following criteria: a) The company has an investment of $20 million or more in the energy sector of Iran, including a company that provides oil or liquefied natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquefied natural gas, for the energy sector of Iran, and that company is subject to sanctions under relevant federal law. b) The Company has demonstrated complicity with an Iranian organization that has been labeled as a terrorist organization by the United States government. 2)Requires the board to annually review its investment portfolio based on publicly available information. 3)Requires that board determinations as to whether a company is subject to, or remains subject to, divestment be based on credible information available to the public and supported by findings adopted by a roll call vote in open session during a properly noticed public hearing of the full board. Requires further that all proposed findings of the board shall be made public 72 hours before they are considered by the full board, AB 1151 Page 2 and the board shall maintain a list of interest parties who shall be notified. 4)Provides that if a company fails to take substantial action, as defined, within one year, then the board shall not make additional, or renew, investments in that company, and, thereafter, the board shall liquidate investments in this company within 18 months in a manner consistent with its fiduciary responsibilities. 5)Specifies that nothing in this bill would require the board to take an action pursuant to the above provisions if the board determines, in good faith, that an action would be a breach of the fiduciary responsibilities of the board as described in the California constitution. However, any determination that an action would be a breach fiduciary duty shall be made in a public hearing of the full board after proper notice and an opportunity for public comment. 6)Eliminates existing exemptions from the California Public Divest from Iran Act for companies engaged in certain humanitarian, educational, religious, journalistic, or welfare activities. EXISTING LAW : 1)Prohibits the boards of CalPERS and CalSTRS from investing public employee retirement funds in a company which has business operations in Iran if the company (a) is invested in or engaged in business operations with entities in the defense or nuclear sectors in Iran or involved in the development of petroleum or natural gas resources of Iran OR (b) has demonstrated complicity with an Iranian organization that has been labeled as a terrorist organization by the United States government. (Government Code Section 7513.7 (b).) 2)Requires the board to identify and notify any company that may be subject to divestment. If the company fails to take corrective measures within one year, as specified, then the board shall not make any new or additional investments in that company and, thereafter, shall liquidate existing investments within 18 months. (Government Code Section 7513.7 (c)-(h).) 3)Requires that the board shall file an annual report with the Legislature detailing relevant investments in companies AB 1151 Page 3 subject to divestment, any actions that the board has taken to reduce investments or transfer funds in compliance with the above provisions, and a calculation of any costs or losses associated with compliance. (Government Code Section 7513.7 (i)-(j).) 4)Specifies that the above provisions do not require the board to take a divestment action unless the board determines, in good faith, that the action is consistent with its fiduciary responsibilities, as described in the state constitution. (Government Code Section 7513.7 (k).) 5)Exempts from the above provisions companies that are engaged in certain humanitarian, educational, religious, journalistic, or welfare activities. (Government Code Section 7513.7 (l).) 6)Provides that the above provisions shall cease to be operative if Iran is removed from the United States Department of State's list of countries that have been determined to support international terrorism AND the President of United States, as provided by federal law, determines that Iran has ceased its efforts to design, develop, manufacture, or acquire a nuclear explosive device or related materials or technology. (Government Code Section 7513.7 (m).) 7)Provides that the board of a public pension fund shall have sole and exclusive fiduciary responsibility over the assets of the public pension fund and that the members of the board shall discharge their duties solely in the interest of providing benefits to participants and their beneficiaries. However, the Legislature may by statute prohibit certain investments where it is in the public interest to do so, and provided that any prohibition satisfies the standards of fiduciary care, as specified. (Section 17 of Article XVI of the California Constitution.) FISCAL EFFECT : Unknown. COMMENTS : Existing law prohibits the boards of CalPERS and CalSTRS (boards) from making new investments in companies that do business in Iran's energy sector and generally requires the boards to liquidate existing investments in such companies. This bill seeks to clarify that these actions are required unless doing so would constitute a breach of the boards' constitutionally-mandated fiduciary responsibilities. In AB 1151 Page 4 addition, this bill would require that certain board determinations be adopted by a rollcall vote at a noticed public hearing. Federal Law Background : For more than a decade the United States government has condemned the government of Iran for its support of international terrorism, human rights violations, and efforts to develop nuclear weapons in defiance of the international community. Although federal law has for some time prohibited American companies from engaging in specified business practices with Iran, it has no similar power to ban the actions of foreign companies. However, the United States does have the power to penalize foreign companies by denying them certain advantages of U.S. law. As such, the key provisions of the Iran Sanctions Act require the President to impose two of seven possible sanctions on foreign persons or companies that make an investment of more than $20 million in Iran's energy sector. Sanctions primarily include denial of access to certain forms of credit, denial of licenses for the export of certain U.S. military technologies, and various prohibitions relating to dealing in U.S. bonds, acting as a repository of U.S. funds, or securing certain government procurements. More recently, the Iran Refined Petroleum Act amended the ISA to direct the President to impose sanctions on any person, entity, business, or corporation that has knowingly made an investment of $20 million or more that directly or significantly contributes to Iran's ability to develop its petroleum resources. Persons or companies could also face sanctions for providing refined products or goods, services, technology or information worth $200,000 or more. Background: the California Public Divest from Iran Act of 2007 . AB 221 (Anderson, Chapter 671, Statutes of 2007) enacted the California Public Divest from Iran Act. This legislation prohibits the boards of CalPERS and CalSTRS from investing public employee retirement funds in companies that have specified energy- or defense-related operations in Iran. In addition, AB 221 required the boards to independently review publicly available information regarding companies with business operations in Iran and, based on that review, to notify such companies that they must take "substantial action" to reduce or eliminate investments in Iran or face the prospect of withdrawal of public pension funds. If the company fails to satisfactorily take substantial action within a year, then the boards of CalPERS and CalSTRS are required to liquidate investments in AB 1151 Page 5 that company within 18 months. According to information provided to this Committee by the Assembly Judiciary Committee, "Existing law, however, contains a significant loophole: it specifies that CalPERS and CalSTRS are only required to divest funds to the extent that it is 'consistent' with their fiduciary responsibilities. The authors of the present bill point to recent legislative oversight hearings which found that CalPERS has 'increased investments in several energy companies doing business in Iran, while decreasing investments in other energy companies which do not do business in Iran.' Arguably, one of the reasons that CalPERS and CalSTRS have not been as successful in achieving divestment as one might hope is a byproduct of the somewhat vague standard that requires divestment only if doing so is 'consistent' with a board's fiduciary responsibilities. It is not quite clear what 'consistent' means in this context, and the word 'consistent' has no meaning in the case law defining the scope of fiduciary duties. For example, would an action be 'inconsistent' with fiduciary responsibilities only if it rose to the level to a 'breach' of fiduciary responsibility, or could something less than a legal breach still be 'inconsistent' with that responsibility? "In order to clarify this issue, this bill would clearly state that a board is required to take a divestment action unless to do so would create a 'breach of fiduciary responsibility,' a term which has a more definite legal meaning. For example, while the implications of an action that is 'consistent' with fiduciary duty is not clear, a 'breach' of fiduciary duty means that the fiduciary is liable to the beneficiaries for any damages caused by the action. In addition, this bill seeks to increase greater accountability and transparency by requiring that certain board findings and determinations be adopted at a noticed public hearing. Specifically, existing law requires the boards to request that a notified company take "substantial action," as specified, toward curtailing business in Iran and requires the boards to determine a company's compliance at 90-day intervals. This bill would require that the determinations be based on credible information available to the public and be adopted by a rollcall vote at a properly noticed public hearing of the full board. In addition, this bill would require that any determination that an action would be a breach of fiduciary duty similarly be adopted by a AB 1151 Page 6 rollcall of the full board following a presentation and discussion of findings in an open session, during a properly noticed public hearing. Constitutional Requirements . Section 17 of Article XVI of the California Constitution, as amended by Proposition 162 in 1992, provides that the boards of California's public retirement systems have "plenary authority and fiduciary responsibility for investment of monies and administration of the system". This section also states that the "members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries." However, this section is equally clear that the Legislature retains its authority to "prohibit certain investments by a retirement board where it is in the public interest to do so, and provided that the prohibition satisfies the standards of fiduciary care and loyalty required of a retirement board." The authors and supporters of this bill contend that it is certainly in the public interest of Californians to ensure that public funds are not used to sponsor international terrorism or support a regime that violates human rights and pursues nuclear weapons in defiance of the international community. Consistent with the California Constitution, the bill expressly states that its prohibitions only apply to the extent that they permit the members of the boards to meet their constitutionally mandated standards of fiduciary care and loyalty to beneficiaries. According to the authors, even though existing law requires California public pension funds to divest from companies doing business with Iran, "CalPERS continues to invest in companies with interests in Iran and has failed to satisfactorily comply with statutorily mandated reporting requirements to the Legislature." In support of this position, the authors point to a 2010 legislative oversight hearing showing that CalPERS has "increased investments in several energy companies doing business in Iran, while decreasing investments in other energy companies that do not do business with Iran." In addition, the authors contend that CalPERS required report to the Legislature failed to adequately explain why CalPERS continues to invest in companies that do business with Iran. The bill is supported by several human rights organizations. For example, the Simon Wiesenthal Center argues that this bill AB 1151 Page 7 "would increase accountability by requiring that any determination that an action would breach a fiduciary duty be done by a roll call vote of the board, following a presentation and discussion of the findings in open session, during a properly noticed public hearing of the full board." In addition, the Simon Wiesenthal Center argues that this bill, coming from a key American state, "will send a message to the long-suffering people of Iran that Californians stand with their quest for freedom and will not, under any circumstances, help to prop up an evil regime that threats the region and oppresses its own people." The Center for the Promotion of Democracy and Human Rights argues that this bill will "continue California's long-standing leadership" in this area and will address the instances of non-compliance that were revealed in the 2010 legislative oversight hearing. CalSTRS opposes the bill stating, "This measure would require the board to potentially compromise its fiduciary responsibility and infringe on its investment authority. Requiring investment decisions to be made in a public hearing could adversely affect the market conditions for those investments, resulting in harm to the value of those investments and a negative impact to the Teachers' Retirement Fund." This bill was also heard in the Assembly Judiciary Committee where is passed out of Committee on a vote of 9 to 0. The Committee is informed the author will be offering amendments in Committee that restore "defense and nuclear sectors of Iran" to the description of companies from which pension funds must divest. REGISTERED SUPPORT / OPPOSITION : Support 30 Years After American Jewish Committee Anti-Defamation League City of Beverly Hills Jewish Community Relations Council Jewish Labor Committee, Western Region Jewish Public Affairs Committee AB 1151 Page 8 Simon Wiesenthal Center United Against Nuclear Iran Opposition California State Teachers' Retirement System Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957