BILL ANALYSIS Ó AB 1052 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1052 (Cooley) As Amended August 17, 2015 Majority vote -------------------------------------------------------------------- |ASSEMBLY: | 77-0 | (May 7, 2015) |SENATE: |38-0 | (August 27, | | | | | | |2015) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: P.E., R., & S.S. SUMMARY: Allows the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) to enter into contracts for investment related services under the terms and conditions established by their respective boards and consistent with their fiduciary duties rather than under the state contracting requirements. Specifically, this bill: 1)Provides that, notwithstanding any other law pertaining to state contracting, CalSTRS and CalPERS, in exercising their constitutional discretion to invest fund assets, may contract for services under terms and conditions and utilizing the processes the boards deem necessary and consistent with their fiduciary duties. 2)Requires the processes utilized by CalSTRS and CalPERS to be AB 1052 Page 2 competitive except when allowed under existing law through specific exemptions in the Public Contract Code (e.g., for an emergency contract), as specified. 3)Provides an exemption for CalSTRS to the requirement that the contract process be competitive when there is an existing contractual relationship with an investment manager that had previously qualified as an emerging investment manager, as defined by the board. The bill requires that CalSTRS monitor and assess contractors under this exemption in accordance with all other provisions governing investment managers generally and consistent with the board's fiduciary duties. 4)Authorizes the CalPERS board to enter into agreements, contracts, or other arrangements for the providing of trade order management services under the terms and conditions the board deems necessary and consistent with its fiduciary duties. In selecting an individual or outside firm for trade order management services, the processes utilized by the board shall be competitive, as specified. The Senate amendments: 1)Require the contract process utilized by CalPERS and CalSTRS to be competitive, as specified. 2)Create an exemption for CalSTRS from the requirement that the contract process be competitive for emerging investment managers, as specified. 3)Specifically authorize the CalPERS board to contract for trade order management services under the terms and conditions deemed necessary by the board, as specified. 4)Make other technical and clarifying changes. AB 1052 Page 3 EXISTING LAW: 1)Provides, as established by The California Pension Protection Act of 1992 (Proposition 162) which amended State Constitution Article XVI, Section 17, that the retirement board of a public pension or retirement system has plenary authority and fiduciary responsibility for investment of monies and administration of the system. 2)Requires, based on provisions in the California Constitution, that services provided by state agencies generally be performed by state civil service employees. 3)Restricts under state law, but does not prohibit, private contracting by public agencies. Public agencies are authorized to engage in private contracting in various instances, as specified. FISCAL EFFECT: Unknown. This bill is keyed non-fiscal by the Legislative Counsel. COMMENTS: Most of California's state agencies, including CalSTRS and CalPERS, must abide by state contracting requirements. In recognition of the unique nature of the services required of certain government agencies, often out of the need for expediency, the Legislature has granted specific exemptions from state competitive bidding requirements. For example, the California Housing Finance Agency and the California Health Benefit Exchange Board have been granted blanket exemptions. In addition, CalPERS is exempt from competitive bidding requirements when contracting with health plans and long-term care insurance plans. General exemptions also apply for any state agency when obtaining expert witnesses, or for contracts for legal defense, legal advice or legal services or the development, maintenance, administration or use AB 1052 Page 4 of licensing or proficiency testing examinations. According to CalSTRS, "The overall purpose of the competitive bidding requirements set forth in the Public Contract Code is to stimulate competition conducive to sound fiscal practices; protect the public from the misuse of public funds; and guard against favoritism, fraud and corruption. As fiduciaries, the CalSTRS and CalPERS boards are bound by standards set forth in the California State Constitution and federal law to invest plan assets in a manner that is solely in the interest of members and beneficiaries. These strict standards require fiduciaries to discharge duties with care, skill, prudence and diligence at a level that goes beyond the goals of competitive bidding requirements. "In addition to competitive bidding, state law requires that contractors certify compliance with a myriad of California-specific statutes and regulations, some of which require certification prior to even being considered. Many of these certifications are entirely inapplicable to the highly specialized nature of investment management. As a result, firms that desire to compete for a contract must allocate the necessary time and resources to decipher contract laws when their expertise is and should be more centered on the management of investments. "As a consequence, oftentimes smaller emerging manager firms that do not employ the extensive marketing staff of larger firms cannot afford to allocate critical investment staff capacity to compete for these contracts. These disincentives to compete reduce the universe of potential manager firms with which to contract. This can prevent CalSTRS and CalPERS from being able to invest timely in certain hard-to-reach sectors of the marketplace, thus resulting in opportunity costs to the funds." The author states, "Consistent with existing authority set forth in the California State Constitution, AB 1052 authorizes the CalSTRS and CalPERS boards to set the terms and conditions for AB 1052 Page 5 procuring investment management services, thus eliminating the opportunity costs that result in a diminished universe of potential investment manager firms and from delays in the timely funding of asset allocation strategies. This authorization will enhance the boards' ability to secure the best value for members and beneficiaries and successfully fulfill their fiduciary obligations." Analysis Prepared by: Karon Green / P.E.,R., & S.S. / (916) 319-3957 FN: 0001355