BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 294 (Price) Hearing Date: 5/23/2011 Amended: 5/9/2011 Consultant: Maureen Ortiz Policy Vote: PE&R: 4-1 _________________________________________________________________ ____ BILL SUMMARY: SB 294 requires the CalPERS Board and the CalSTRS board to provide a five-year strategic plan commencing August 1, 2012 and to report to the Legislature each year beginning March 1, 2014 regarding the progress of that plan. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Plan/report $50 $100 $100 Special* Plan/report ----------------minor, absorbable------------- Special** *Public Employees Retirement Fund **Teachers Retirement Fund _________________________________________________________________ ____ STAFF COMMENTS: The boards of both retirement systems will be required to provide a five-year strategic plan for emerging investment manager participation across all asset classes. Each board is required to define the term "emerging investment manager" for purposes of the report. CalPERS indicates costs of $100,000 annually for the reporting requirement, and CalSTRS will have minor costs. The CalPERS Board of Administration has already 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 SB 294 (Price) Page 3 to participate in its research briefings and outreach events held around the 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. The database exposes public and private pension funds and other institutional investors to a new universe of emerging investment firms, and creates 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. 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. 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, SB 294 (Price) Page 4 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. 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 provide assets and venture capital to small and emerging public equity firms that have no more than $2 billion of assets under management. Existing law requires CalPERS to annually report to the Legislature on the investment performance of all external investment managers, and the projected and actual fees paid to them. In addition, CalPERS voluntarily produces an annual diversity report with key indicators in each of its specialized investment programs and external diversity outreach efforts on progress toward more diverse representation. The report includes data on participation in assets under management reported by asset class for emerging investment managers and diversity along gender, ethnicity, and disabled veterans status. However, the information is gather through voluntary surveys of these firms which are not compelled to participate in the surveys. SB 294 provides that neither CalPERS nor CalSTRS will be required to take action that is not consistent with their fiduciary responsibilities. The provisions of the bill will be repealed January 1, 2018.