BILL ANALYSIS Ó AB 1052 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1052 (Cooley) As Amended August 19, 2016 Majority vote -------------------------------------------------------------------- |ASSEMBLY: |77-0 |(May 7, 2015) |SENATE: |39-0 |(August 25, | | | | | | |2016) | | | | | | | | | | | | | | | -------------------------------------------------------------------- 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, AB 1052 Page 2 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. AB 1052 Page 3 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 AB 1052 Page 4 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; AB 1052 Page 5 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 AB 1052 Page 6