BILL ANALYSIS Ó
SB 294
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Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
SB 294 (Price) - As Amended: May 9, 2011
SENATE VOTE : 24-11
SUBJECT : Public employees' retirement: emerging investment
managers.
SUMMARY : Requires the Board of Administration of the
California Public Employees' Retirement System (CalPERS) and
Teachers Retirement Board to provide a five-year strategic plan
for emerging investment manager participation and to report to
the Legislature annually on the progress of the plan, as
specified. Specifically, this bill :
1)Requires the CalPERS and California State Teachers' Retirement
System (CalSTRS) boards each to provide a five-year strategic
plan, beginning August 1, 2012, for emerging investment
manager participation across all asset classes.
2)Requires the CalPERS and CalSTRS boards to submit an annual
report to the Legislature, beginning March 1, 2014, and
annually thereafter, regarding the progress of the strategic
plan.
3)Requires the CalPERS and CalSTRS boards to define the term
"emerging investment manager".
4)Provides that nothing in this bill shall require the boards to
take action that is not consistent with the fiduciary
responsibilities of the board as described in Section 17 of
Article XVI of the California Constitution.
5)Specifies that the provisions of this bill remain in effect
until January 1, 2018, unless a later statute is enacted to
delete or extend that date.
EXISTING LAW :
1)Vests the Boards of Administration for CalPERS and CalSTRS
with management and executive control of the administration
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and investment of the retirement fund.
2)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."
3)Pursuant to the State Constitution, requires "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 benefit to, participants and their beneficiaries,
minimizing employer contributions thereto, and defraying
reasonable expenses of administering the system."
FISCAL EFFECT : According to CalSTRS, the administrative cost
associated with this bill are minor and absorbable. CalPERS
estimates annual administrative costs of $100,000 to prepare the
proposed report.
COMMENTS : According to the author's office, "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."
The CalPERS Board of Administration has adopted several policies
and investment programs to diversity 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 country.
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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.
According to CalSTRS, "Pension funds around the country have
recently begun pursuing strategies to increase the diversity of
their investing managers, recognizing these emerging managers as
a source of untapped economic value. In this vein, CalSTRS has
been pursuing strategies to expand the diversity of investment
management, both internally and externally. In
2003, the board adopted Strength as one of CalSTRS Core Values,
elaborated as ensuring the strength of CalSTRS by embracing a
diversity of ideas and people, and set forth an objective to
increase the diversity of investment managers, by focusing
efforts on emerging managers. CalSTRS defines an emerging
manager in terms of the size and longevity of the fund managers,
without regard to gender or ethnicity. As a direct result of
this effort, women and minorities now manage more than $3
billion of assets for CalSTRS. CalSTRS has received national
recognition, including several awards, for its efforts and
actions to expand diversity within its investment portfolio and
is seen as an industry leader and best practice model.
"This dedication to diversity has brought about the development
and approval by the board in February 2011 of a 5-year
comprehensive business plan to expand diversity in the
management of investments, which includes emerging investment
managers. The plan is designed to formalize the commitment to
diversity within CalSTRS and to make a statement to the industry
that this is a long-term effort, as well as provide the
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Investment Committee, investment staff, and external consultants
a plan of action for the next five years. The purpose of this
business plan is to formalize the programs CalSTRS currently has
in place, to set new goals, and establish a long-term plan.
Diversity will be further interwoven across CalSTRS' entire
investment portfolio and
Program - thus, making it a truly comprehensive plan."
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,
"These emerging managers will play an important role in our
effort to nurture potential diverse major players in the
financial markets."
AB 17 (Davis), of this year, requires CalSTRS and CalPERS boards
to report annually to the Legislature on the ethnicity and
gender of investment firms and managers who participate in
managing its portfolio. This bill is currently in the Assembly
Appropriations Committee and is a 2-year bill.
AB 1913 (Davis) of 2010, would have required CalPERS and CalSTRS
to report annually to the Legislature on or before January 1,
2012, and until January 1, 2016, information regarding the
ethnicity and gender of emerging investment managers who manage
retirement fund assets and the ethnicity and gender of the
owners of investment management firms with retirement fund
management contracts. The bill also would have required each
board to develop and report plans and strategies to increase
emerging investment manager participation in each fund's
actively managed portfolio to ten percent. This bill died in
the Senate Rules Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Public Employees' Retirement System
California State Teachers' Retirement System
New America Alliance
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957