BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair AB 1151 (Feuer) Hearing Date: 8/25/2011 Amended: 7/12/2011 Consultant: Maureen Ortiz Policy Vote: PE&R 5-0 Jud 5-0 _________________________________________________________________ ____ BILL SUMMARY: AB 1151 amends the California Public Divest from Iran Act to clarify that the California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS) Boards must divest pension funds unless doing so would fail to satisfy its fiduciary responsibilities. Additionally, AB 1151 modifies the types of companies that fall within the scope of the Act and requires that certain findings and determinations must be made in public hearings. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund CalSTRS ------------------------minor---------------------- Special* CalPERS ---potentially several hundred thousand-- Special** *Teachers Retirement fund **Public Employees Retirement Fund _________________________________________________________________ ____ STAFF COMMENTS: SUSPENSE FILE. According to CalSTRS, the changes being proposed to the California Public Divest from Iran Act would not significantly affect the pension system, and would not adversely impact the board's fiduciary duties or responsibilities. There would be an increase in administrative requirements for compliance, however, those costs would be minor. CalPERS indicates that they incurred costs of $550,000 to comply with the monitoring requirements in the initial implementing legislation (AB 221, AB 1151 (Feuer) Page 1 Chapter 671, Statutes of 2007), and that the system would incur unknown, additional expenses beyond those initial costs for implementation of this bill. Specifically, AB 1151 does the following: a) Prohibits the state pension systems from investing in a company that has an investment of $20 million or more in the energy sector of Iran including in 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. (This revised definition conforms to the definition of investment activities in Iran articulated in federal Public Law 111-195 enacted on July 1, 2010. b) Requires the boards to review investments annually and to 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 divestment be 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. These findings must be included in the annual report to the Legislature. e) Specifies that no provisions in the bill will require a board to take an action if the board determines that action would fail to satisfy its fiduciary responsibilities. However, any adopted findings shall demonstrate how divestment disadvantages the fund and that any feasible investment alternatives would yield either a lower rate of return with commensurate degrees of risk, or create a higher degree of risk with commensurate rates of return. f) Eliminates existing exemptions from the California Public Divest from Iran Act for companies engaged in certain humanitarian, educational, religious, journalistic, or welfare activities. AB 1151 (Feuer) Page 2 g) Provides all provisions of the act are severable. The California Public Divest from Iran Act prohibits the Public Employment Retirement System and the State Teachers' Retirement System from investing public employee retirement funds in a company with business operations in Iran that is invested in or engaged in business operations with entities in the defense or nuclear sectors, or the company is invested or engaged in business operations with entities involved in the development of petroleum or natural gas resources, or engaged in business operations with an Iranian organization that has been labeled as a terrorist organization by the United States government. The Act further requires CalPERS and CalSTRS to sell or transfer any investments in companies with business operations in Iran until Iran is removed from a U. S. Department of State's list of countries that support international terrorism, as specified. However, CalPERS and CalSTRS are not required to divest if the boards determine that the company has taken substantial action in a 90 day period to curtail or end those operations. Additionally, the boards do not have to take action unless they determine in good faith that the action is consistent with its fiduciary responsibilities. CalSTRS After enactment of AB 221 (Anderson, Chapter 671, Statutes of 2007), CalSTRS contracted with external sources to identify companies that have possible ties to Iran. The list is reviewed by the Geopolitical Investments Review Committee, and any companies that are identified as meeting the requirements of law are engaged with through a letter requesting information on that company's ties to the respective investments and holdings. The initial list of companies with some level of business ties to Iran was presented to the CalSTRS board in June 2008 and was comprised of 23 companies. Three of those companies were already restricted under the Sudan Divestment Act, 18 did not meet the restriction criteria, and the last two were not CalSTRS holdings. One additional company was later identified as having ties to Iran, but by October 2008, the CalSTRS' portfolio was free of that company. AB 1151 (Feuer) Page 3 Recently, CalSTRS had 29 investments identified as having ties to Iran. Only seven of those companies were subject to the restrictions under the Act and CalSTRS has divested all seven from its portfolio. CalSTRS continues to monitor and engage companies identified as having ties to Iran and report annually to the Legislature. To date, CalSTRS has not made a determination that taking action of divestiture would be in conflict or be a breach of its fiduciary duty. CalPERS CalPERS is the largest public pension plan in the U. S., responsible for over $230 billion in global assets, which are invested to provide retirement benefits for over 1.6 million members and retirees. The CalPERS board has the exclusive authority and sole responsibility to administer system funds to provide benefits to participants and their beneficiaries, while minimizing employer contributions and defraying reasonable administrative expenses. Existing board policy states that the board will meet in closed session to discuss investment matters when a public discussion is likely to impair CalPERS' ability to achieve its investment objectives. Two specific situations that trigger a closed session are the discussion of 1) activity reports concerning the screening and review of potential investments, and 2) decisions to terminate the contracts of external managers or advisors. According to CalPERS, it has fully implemented the California Public Divest from Iran Act since it became effective and has complied with all of the reporting requirements. CalPERS has fully engaged with all of the companies on its list, and many of the companies have withdrawn from Iran through the imposition of economic sanctions by the United Nations, the European Union, Japan, South Korea, and the United States. However, CalPERS indicates all actions to divest have been limited by the board's fiduciary responsibilities. Since passage of the Act, CalPERS' portfolio holdings in companies subject to the Act decreased from $2 billion to about $300 million. On May 16, 2011, CalPERS announced that "in response to the impact of federal and international sanctions, the 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 AB 1151 (Feuer) Page 4 investments in these companies would be blocked as well." SB 903 (Anderson), currently pending in the Assembly Appropriations Committee, requires that any determination made by the CalPERS 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.