BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1151| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 1151 Author: Feuer (D) and Blumenfield (D), et al. Amended: 7/12/11 in Senate Vote: 21 SENATE PUBLIC EMPLOYMENT & RETIRE.COMM. : 5-0, 6/13/11 AYES: Negrete McLeod, Walters, Gaines, Padilla, Vargas SENATE JUDICIARY COMMITTEE : 5-0, 7/5/11 AYES: Evans, Harman, Blakeslee, Corbett, Leno SENATE APPROPRIATIONS COMMITTEE : 9-0, 8/25/11 AYES: Kehoe, Walters, Alquist, Emmerson, Lieu, Pavley, Price, Runner, Steinberg ASSEMBLY FLOOR : 79-0, 5/31/11 - See last page for vote SUBJECT : Public retirement systems: investments: Iran SOURCE : Author DIGEST : This bill amends the California Public Divest from Iran Act to, among other things, clarify that the Board of Administration of the California Public Employees Retirement System and the Teacher's Retirement Board of the California State Teachers' Retirement System must divest pension funds, as specified, unless to do so would fail to satisfy the fiduciary responsibilities of the boards, modify the types of companies that fall within the scope of the bill, and require that certain findings and CONTINUED AB 1151 Page 2 determinations must be made in noticed public hearings. ANALYSIS : Existing law: 1. 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". 2. 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". 3. 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". 4. 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. 5. Establishes the California Public Divest from Iran Act (AB 221 ÝAnderson], Chapter 671, Statutes of 2007) which prohibits the boards of the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) from investing public employee retirement funds in companies with business operations in the defense and nuclear sectors AB 1151 Page 3 of Iran, or that are involved in the 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 United States government. 6. 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. 7. 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. 8. 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. 9. 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. This bill: 1. Specifies the criteria to be applied to companies subject to divestment to include the following: A. The company is invested in or engaged in business 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 AB 1151 Page 4 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 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 boards to annually review their investment portfolios and determine which companies are subject to divestment based on publicly available information. 3. 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. 4. 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. 5. 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 fail to satisfy its fiduciary responsibilities as described in the California Constitution. 6. Requires that any determination that an action would fail to satisfy the fiduciary responsibilities of the board, as described in the California Constitution, shall be made in a public hearing of the full board after proper notice and an opportunity for public comment. 7. Eliminates existing exemptions from the California Public Divest from Iran Act for companies engaged in AB 1151 Page 5 certain humanitarian, educational, religious, journalistic, or welfare activities. 8. Makes the provisions of this act severable. Comments The California Public Divest from Iran Act prohibits CalPERS and CalSTRS 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 AB 1151 Page 6 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. 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 United States, 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 AB 1151 Page 7 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 investments in these companies would be blocked as well." FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund CalSTRS -------------------minor----------------Special* CalPERS potentially several hundred thousandSpecial** * Teachers Retirement Fund ** Public Employees Retirement Fund SUPPORT : (Verified 8/29/11) 30 Years After American Jewish Committee American Legion, Department of California AMVETS, Department of California Anti-Defamation League Center for the Promotion of Democracy and Human Rights City of Beverly Hills Jewish Labor Committee Western Region Jewish Public Affairs Committee Military Officers Association of America, California Council of Chapters Simon Wiesenthal Center United Against Nuclear Iran OPPOSITION : (Verified 8/29/11) AB 1151 Page 8 California Public Employees' Retirement System ARGUMENTS IN SUPPORT : According to the author's office: "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." ARGUMENTS IN OPPOSITION : ASSEMBLY FLOOR : 79-0, 5/31/11 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Gorell CPM:mw 8/29/11 Senate Floor Analyses AB 1151 Page 9 SUPPORT/OPPOSITION: SEE ABOVE **** END ****