BILL ANALYSIS Ó
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1151
Gloria Negrete McLeod, Chair Hearing date: June 13, 2011
AB 1151 (Feuer and Blumenfield) as amended 5/05/11
FISCAL: YES
CALPERS AND CALSTRS: DIVESTMENT FROM IRAN
HISTORY :
Sponsor: Author
Prior legislation: SB 903 (Anderson), 2011
Currently in the Assembly
SB 861 (Corbett), 2011
Currently in the Assembly
AB 1650 (Feuer)
Chapter 573, Statutes of 2010
AB 221 (Anderson)
Chapter 671, Statutes of 2007
ASSEMBLY VOTES :
Judiciary 9-0 4/26/11
PER & SS 6-0 5/04/11
Appropriations 17-0 5/27/11
Assembly Floor 79-0 5/31/11
SUMMARY :
With respect to the California Public Divest from Iran Act,
this bill would :
Amend the California Public Divest from Iran Act to, among
other things, clarify that the California Public Employees'
Retirement System (CalPERS) and California State Teachers'
Retirement System (CalSTRS) 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.
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Date: 6/09/11 Page 1
BACKGROUND AND ANALYSIS :
1) Existing law :
a) pursuant to the state Constitution, as amended by
Proposition 162 (The California Pension Protection Act
of 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";
b) pursuant to the state Constitution, as amended by
Proposition 162 added Constitutional language providing
that the Legislature also retained its authority, by
statute "?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 pursuant to this section";
c) pursuant to the state Constitution, provides 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, minimizing
employer contributions thereto, and defraying reasonable
expenses of administering the system";
d) known as the Bagley-Keene Open Meeting Act provides
that nothing in the Act shall be construed to prevent a
state body that invests retirement, pension, or
endowment funds from holding closed sessions when
considering investment decisions;
e) establishes the California Public Divest from Iran
Act (AB 221 Anderson, Chapter 671, Statutes of 2007)
which prohibits the boards of the CalPERS and CalSTRS
from investing public employee retirement funds in
companies with business operations in the defense and
nuclear sectors of Iran, or that are involved in the
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Date: 6/09/11 Page 2
development of Iranian petroleum or natural gas
resources and are subject to specified federal
sanctions, or have demonstrated complicity with an
Iranian organization that has been labeled as a
terrorist organization by the U.S. government;
f) requires the CalPERS and CalSTRS boards to sell or
transfer any assets in a company with business
operations in Iran until the federal government removes
Iran from its list of countries determined to provide
support for acts of terrorism, and the President
determines and certifies that Iran has ceased specified
efforts regarding nuclear materials and technology;
g) requires the boards 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;
h) requires the CalPERS and CalSTRS boards to file an
annual report with the Legislature detailing relevant
investments in companies subject to divestment, any
actions that the boards have taken to reduce
investments, and a calculation of any costs or losses
associated with compliance, and
i) does not require the boards of CalPERS and CalSTRS to
divest investments and take other prescribed actions, as
specified, unless they determine in good faith that the
action is consistent with their fiduciary duties.
2) This bill :
a) specifies the criteria to be applied to companies
subject to divestment to include the following:
i) the company is invested in or engaged in business
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operations with entities in the defense or nuclear
sectors of Iran, or 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; or
ii) the company has demonstrated complicity with an
Iranian organization that has been labeled as a
terrorist organization by the United States
government.
b) requires the boards to annually review their
investment portfolios and determine which companies are
subject to divestment based on publicly available
information;
c) requires that the boards' determination as to whether
a company is subject to, or remains subject to,
divestment be based on publicly available information and
supported by findings adopted by a rollcall vote and
discussion in open session during a properly noticed
public hearing of the full board;
d) requires that all proposed findings of the boards shall
be made public 72 hours before they are considered by the
full board, and the boards shall maintain a list of
interested parties who shall be notified;
e) specifies that nothing in the bill would require the
boards to take an action pursuant to the above provisions
if the boards determine, in good faith and based on
credible information available to the public, that an
action would be a breach of its fiduciary duty as
described in the California Constitution;
f) requires that 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;
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g) eliminates existing exemptions from the California
Public Divest from Iran Act for companies engaged in
certain humanitarian, educational, religious,
journalistic, or welfare activities, and
h) makes provisions of this act severable.
FISCAL :
According to the Assembly Appropriations Committee:
Ongoing monitoring costs under existing law are
approximately $550,000 annually for CalPERS staff costs and
external fiduciary counsel and this amount is not expected
to change.
CalPERS estimates the costs of implementing the provisions
of AB 1151 as an additional $850,000 to $1,275,000 because
the bill would require the Board of Administration to hold
hearings, make determinations and produce a report
quarterly instead of annually.
COMMENTS :
1)Divestment Action by CalPERS and CalSTRS
On May 16, 2011, CalPERS announced that in response to "the
impact of federal and international sanctions, Ýthe Board]
adopted a plan to divest shares of the remaining public
companies operating in specific segments of the Iran and
Sudan economies, and that new investments in these
companies would be blocked as well."
According to CalSTRS, CalSTRS has divested holdings under
Chapter 671. Over the past year, CalSTRS staff has met
with identified companies and plans to continue engagement
activities in 2011.
2)Comparison to SB 903 (Anderson, 2011 )
SB 903 (Anderson) previously heard by this committee on May
2, would require that any determination made by the CalPERS
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and CalSTRS boards that an action, as specified in the
California Public Divest from Iran Act, would be a breach
of fiduciary duty, be made in a public hearing of the full
board after proper public notice and an opportunity for
public comment.
3)Arguments in Support
According to the author:
"The State has the responsibility to decide how and
where its financial resources should be invested and
California for decades, has engaged in socially
responsible investing, ranging from divesting pension
funds from companies supporting apartheid in South
Africa to sanctions for human rights violations in
Sudan. California took further action in 2010 by
passing AB 1650 (Feuer) to prohibit State and local
governments from entering into or renewing contracts
over $1 million with companies that have restricted
business activities in Iran's petroleum sector."
"This bill would further California's efforts to ensure
that public tax dollars and public pensions are not put
at risk by companies that invest in Iran's energy
sector."
4)Arguments in Opposition
According to CalSTRS' analysis:
"This measure changes the application of the board's
fiduciary duty pursuant to Section 17 of Article XVI of
the California Constitution relative to investments in
Iran.
Under the California Public Divest from Iran Act, the
CalSTRS board is required to take specified actions
unless the board determines, in good faith, that such
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actions would not be consistent with its fiduciary duty.
This measure changes that standard so that the board's
standard for exercising its fiduciary duty would be set
much higher."
In addition, CalSTRS expresses concerns regarding discussing
investment strategies during an open, public session of the
board:
"The public hearing requirement runs counter to the
Bagley-Keene Open Meeting Act which authorizes a state
body that invests retirement, pension, or endowment
funds to consider investment decisions in closed
session.
If the board were to debate the fiduciary responsibility
of a specific investment in open session with the
required notice period, the investment would be exposed
to a potentially negative market impact which could
result in significant losses for CalSTRS. These actions
would not serve to maximize the investment and would run
counter to the board's fiduciary responsibility of
maximizing income for the fund."
5) SUPPORT :
30 Years After
American Jewish Committee (AJC)
Anti-Defamation League (ADL)
Center For the Promotion of Democracy and Human Rights
(CFPD)
City of Beverly Hills
Jewish Labor Committee Western Region (JLC)
Jewish Public Affairs Committee (JPAC)
Simon Wiesenthal Center
United Against Nuclear Iran
6) OPPOSITION :
California State Teachers' Retirement System (CalSTRS)
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Date: 6/09/11 Page 7
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