BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1052


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          1052 (Cooley)


          As Amended  August 19, 2016


          Majority vote


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          |ASSEMBLY:  |77-0  |(May 7, 2015)  |SENATE: |39-0  |(August 25,      |
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          Original Committee Reference:  P.E.,R., & S.S.


          SUMMARY:  Allows the California State Teachers' Retirement  
          System (CalSTRS) to enter into contracts for investment services  
          under the terms and conditions and utilizing the processes the  
          board deems necessary and consistent with its fiduciary duties  
          rather than under state contracting requirements, as specified.   
          Specifically, this bill:  


          1)Provides that, notwithstanding any other law pertaining to  
            state contracting except that making contracts subject to  
            audit and examination by the State Auditor, CalSTRS, in  
            exercising its constitutional discretion to invest fund  
            assets, may contract for services under terms and conditions  
            and utilizing the processes the board deems necessary and  
            consistent with their fiduciary duties.


          2)Requires the processes utilized by CalSTRS to be competitive,  








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            except as specified below, and to include all of the  
            following:


             a)   Standardized solicitation documents.


             b)   Minimum qualifications.


             c)   Public advertisement.


             d)   Opportunity to protest.


          3)Authorizes CalSTRS to contract for investment services without  
            utilizing a competitive process under the following  
            circumstances:


             a)   When allowed under existing law through specific  
               exemptions in the Public Contract Code (e.g., for an  
               emergency contract), as specified. 


             b)   When there is an existing contractual relationship with  
               an investment manager that qualifies that person as an  
               emerging investment manager, as defined by the board.  This  
               bill requires that CalSTRS monitor and assess contractors  
               under this exemption, as specified.


          4)Authorizes an emerging investment manager who is not selected  
            in the course of a noncompetitive contract process for  
            investment services to have the opportunity to protest. 


          5)Specifies that CalSTRS' authority to contract for investment  
            services, as specified, does not modify any other law  
            restricting the eligibility of persons or entities to bid on  
            or be awarded contracts.








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          The Senate amendments:


          1)Delete all sections of the bill that affect the California  
            Public Employees' Retirement System.
          2)Require that CalSTRS contracts for investment services be  
            subject to audit by the State Auditor.


          3)Require the contract process utilized by CalSTRS to be  
            competitive and include certain features, as specified.


          4)Create an exemption for CalSTRS from the requirement that the  
            contract process be competitive for emerging investment  
            managers, as specified.


          5)Provide that an emerging investment manager who is not  
            selected to contract with CalSTRS has the opportunity to  
            protest the selection.


          6)Stipulate that the board authority over the terms and  
            conditions and processes regarding state contracts does not  
            modify any other law restricting the eligibility of persons or  
            entities to bid on or be awarded contracts.


          7)Make other technical and clarifying changes.


          EXISTING LAW:  


          1)Provides, as established by The California Pension Protection  
            Act of 1992 (Proposition 162) which amended State Constitution  








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            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:  According to the Senate Appropriations  
          Committee, pursuant to Senate Rule 28.8, negligible state costs.  



          COMMENTS:  Most of California's state agencies, including  
          CalSTRS, 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 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;  








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          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."


          Analysis Prepared by:                                             
                          Karon Green / P.E.,R., & S.S. / (916) 319-3957    
                                                                    FN:  
          0004774













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