BILL ANALYSIS Ó
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 294
Gloria Negrete McLeod, Chair Hearing date: May 2, 2011
SB 294 (Price) as amended 3/24/11 FISCAL: YES
CALPERS AND CALSTRS: DEVELOPMENT OF A STRATEGIC PLAN AND
ANNUAL REPORTING TO THE LEGISLATURE ON EMERGING INVESTMENT
MANAGERS
HISTORY :
Sponsor: Author
Prior legislation: AB 17 (Davis), 2011
Currently in Assembly Appropriations Committee
AB 1913 (Davis), 2010
Held in Senate Rules Committee
AB 1919 (Davis), 2010
Held in Senate Rules Committee
SB 1108 (Price), 2010
Died in Assembly Appropriations
Committee
SUMMARY :
With regard to the California Public Employees' Retirement
System (CalPERS) and California State Teachers' Retirement
System (CalSTRS) boards:
This bill would require each board to provide a five-year
strategic plan with a 15 percent participation goal of
emerging investment managers, benchmarks on the progress of
the plan, and annual reports submitted to the Legislature, as
specified.
BACKGROUND AND ANALYSIS :
1)Existing law :
a) created the California Public Employees' Retirement
System (CalPERS) and the California State Teachers
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Retirement System (CalSTRS);
b) vests the CalPERS and CalSTRS boards with management
and exclusive control of the administration and
investment of the retirement fund;
c) pursuant to the California Pension Protection Act of
1992 (Proposition 162) passed by voters, 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";
d) under Proposition 162, the Legislature also retained
its authority to, by statute, "continue 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";
e) pursuant to the State Constitution, states:
"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;" and
f) Pursuant to Proposition 209 passed by voters in 1996,
amended the California Constitution to state:
"The state shall not discriminate against, or grant
preferential treatment to, any individual or group on
the basis of race, sex, color, ethnicity, or national
origin in the operation of public employment, public
education, or public contracting."
1)This bill would :
a) require the CalPERS and CalSTRS boards each to
provide a five-year strategic plan, beginning August 1,
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2012, to expand the participation of emerging investment
managers across all asset classes;
b) require the strategic plan of each board to include a
15 percent participation goal of emerging investment
managers;
c) require the CalPERS and CalSTRS boards to submit an
annual report to the Legislature, beginning March 1,
2014, with benchmarks regarding the progress of the
strategic plan;
d) permit the CalPERS and CalSTRS boards to define by
regulation, "emerging investment manager";
e) specify that its provisions remain in effect until
January 1, 2018, unless a later statute is enacted to
delete or extends that date, and
f)require printed reports to be submitted to both
Legislative Counsel and Secretary of the Senate, as
specified, and electronic copies to the Chief Clerk of
the Assembly and to each Member of the Legislature, and
a notice of the reports in the Journal of the Assembly
or Senate, as specified.
COMMENTS :
1)Author's Amendments
The committee is informed that the author has offered
suggested amendments to this bill.
The amendments would:
a) remove the requirement that the CalPERS and CalSTRS
five-year strategic plans to include expansion of
participation of emerging investment managers across all
asset classes;
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b) instead, require the CalPERS' and CalSTRS' five-year
strategic plans to include emerging manager
participation across all asset classes, beginning August
1, 2012;
c) remove the requirement that the CalPERS and CalSTRS
five-year strategic plans include a 15 percent
participation goal of emerging investment managers;
d) remove the requirement that CalPERS and CalSTRS
five-year strategic plans include benchmarks;
e) remove the requirement that the CalPERS and CalSTRS
boards define 'emerging investment manager' by
regulation;
f) specify that the boards of CalPERS and CalSTRS are
not required to take any action regarding this measure
if it is not consistent with their fiduciary
responsibilities pursuant to the State Constitution, and
g) maintain all other provisions of the bill.
1)CalPERS' Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
The CalPERS Board of Administration has adopted several
policies and investment programs to diversify its
investments portfolio, which provides opportunities and
resources for the investment industry as a whole. Through
its private equity program and California Initiative, which
invests in underserved communities throughout California,
CalPERS has committed more than $4 billion to firms with
significant minority participation. In addition, CalPERS
created a Management Development Program over ten years ago
to invest directly in small and emerging funds in exchange
for an equity stake. In 2007, CalPERS also established a
series of emerging manager programs including hedge funds
and private equity while encouraging minority-owned and
emerging money-management firms to participate in its
research briefings and outreach events held around the
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country.
In January 2007, both CalPERS and CalSTRS unveiled an
online Emerging Managers and other Financial Service
Provider (EMFSP) database of more than 700 emerging
managers and financial service providers towards exposing
public and private pension funds and other institutional
investors to a new universe of emerging investment firms,
and in an effort to boost investment returns by building
investment portfolios that tap into the changing
demographics and talent emerging in California and across
the country.
According to CalPERS and CalSTRS, the EMFSP database is
intended to capture the universe of emerging financial
service firms, create an industry reference guide, provide
information transparency and broaden opportunities for
adding value to institutional investors' portfolios from a
largely untapped pool of talent. It also gives plan
sponsors, corporations, endowments and institutional
investors across the nation exposure to a wide range of new
investment options.
2)CalSTRS Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
In 2001, the CalSTRS Board adopted the Policy on California
Investments. The Policy on California Investments also
established a goal of investing 2% of CalSTRS assets in
underserved markets, primarily in California. This action
attempted to eliminate the obstacles some sectors were
having in terms of access to capital and recognized the
importance of diverse investments.
In February 2002, the Board's Investment Committee approved
an implementation plan for investing in underserved urban
and rural markets. The plan called for hiring fund-of-fund
managers with independent decision-making authority who
would work with general partners. It also incorporated a
newly created New and Next Generation Investment Program
into the existing program for Urban and Rural Investing,
which had been guided by the Policy on California
Investments.
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In August 2005, CalSTRS embarked on an approach to build a
strategy to incorporate diversity into the management of
CalSTRS investments.
The Proactive Portfolio is a strategy that is interwoven in
all asset classes within CalSTRS' Portfolio, whereby a
framework is provided for selecting investments when the
investments are: 1) in the emerging space, and/or; 2) to
capture innovative strategies (i.e. new market
opportunities and/or new drivers of value creation due to
changing demographics, etc.), and/or; 3) investments
consistent with the Board's Policy on California
Investments.
3)CalPERS Announces $400 Million Commitment to Emerging
Managers
On April 27, 2011, CalPERS announced that it had committed
a total of $400 million to three emerging managers in the
pension fund's Manager Development Program II (MDP II) for
public equity investment.
CalPERS earmarked funds to companies that either specialize
in quantitative core strategies or provides assets and
venture capital to small and emerging public equity firms
that have no more than $2 billion of assets under
management.
According to Joseph Dear, CalPERS' Chief Investment
Officer, CalPERS, "These emerging managers will play an
important role in our effort to nurture potential diverse
major players in the financial markets."
4)Arguments in Support
According to the author:
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"While both entities have voluntarily adopted emerging
manager programs as a strategy to increase
diversification, there is no existing law that governs
these programs. This bill is to encourage expanded
opportunities for newer and smaller investment companies
in the state procurement of financial services,
including the management of assets managed by the
state's public pension funds."
5) OPPOSITION :
None to date
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