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)
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          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.








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          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.









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          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 








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          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.