BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1410


                                                                    Page  1





          Date of Hearing:   April 29, 2015


                        ASSEMBLY COMMITTEE ON APPROPRIATIONS


                                 Jimmy Gomez, Chair


          AB  
          1410 (Nazarian) - As Introduced February 27, 2015


           ----------------------------------------------------------------- 
          |Policy       |Public Employees,              |Vote:|6 - 0        |
          |Committee:   |Retirement/Soc Sec             |     |             |
          |             |                               |     |             |
          |             |                               |     |             |
           ----------------------------------------------------------------- 


          Urgency:  No  State Mandated Local Program:  NoReimbursable:  No


          SUMMARY:


          This bill prohibits the California Public Employees' Retirement  
          System (CalPERS) and the California State Teachers' Retirement  
          System (CalSTRS) from investing public employee retirement funds  
          in any investment vehicle issued by, owned, controlled, or  
          managed by the government of the Republic of Turkey.


          The bill requires the boards of CalPERS and CalSTRS to identify  
          which investments are subject to divestment by June 30, 2016,  
          contact the external fund managers for any of their investments  
          that include prohibited investments to request removal of those  
          assets from the funds, and liquidate any interests in  








                                                                    AB 1410


                                                                    Page  2





          investments that remain associated with the Republic of Turkey  
          within 18 months.  The bill requires each board to report  
          annually to the Legislature on activities relating to Turkish  
          investment identification and divestment.


          FISCAL EFFECT:


          1)One-time Special Fund administrative and transaction costs of  
            approximately $800,000 and ongoing annual administrative costs  
            of approximately $100,000 to comply with identification,  
            liquidation, and reporting requirements.


          2)Potentially substantial opportunity costs to each fund as a  
            result of divestment and limitations on future investments,  
            leading to potential future General Fund pressure to augment  
            contributions to defined benefit programs.


          COMMENTS:


          1)Purpose.  According to the author, each of CalPERS and CalSTRS  
            hold bonds issued by the Republic of Turkey with estimated  
            dollar values in the hundreds of millions.  The author  
            contends these investments are inappropriate while the Turkish  
            government continues to deny that the systematic killings of  
            1.5 million Armenians during World War I constitute genocide.   
            The author asserts AB 1410 continues California's commitment  
            to act appropriately against countries that perpetrate crimes  
            against humanity.


          2)Fiduciary Pressure.  CalSTRS opposes this bill, and both  
            pension funds generally oppose legislation that restricts  
            their ability to invest plan assets as these restrictions  
            interfere with their fiduciary obligations to act in the sole  








                                                                    AB 1410


                                                                    Page  3





            interest of members and beneficiaries.  With increasing  
            pressure on California's public pensions to deliver greater  
            investment returns, accessing the best products, markets, and  
            managers will become increasingly important for CalPERS and  
            CalSTRS.  CalSTRS asserts AB 1410 could lead to additional  
            shortfalls in its defined benefit plan, leaving the state  
            responsible for backfilling these losses.


            While performance has softened in recent years, the Turkish  
            economy grew at a very strong pace throughout the past decade,  
            proving relatively resilient during the financial crisis and  
            generating impressive stock market returns from 2009-2011, and  
            relatively strong returns since then.


          3)Pension Diplomacy.  Though this bill is not the first effort  
            to legislate social policy through the state's pension  
            systems, it is one of the most significant bills directed  
            toward sovereign investments.  Unlike previous restrictions on  
            investing pension funds in sovereign instruments, which  
            typically adhered to sanctions regulations adopted by the  
            federal government (for example, California's sanctions  
            against Iran), this bill imposes a California sanction on a US  
            and NATO ally.  With the sixth and thirteenth largest  
            investment funds in the world, California has the capacity to  
            make a significant impact on world capital markets and  
            influence global affairs.  AB 1410 represents a dramatic  
            expansion of the use of financial sanctions to influence a  
            foreign government, raising important questions about the role  
            of states in US diplomacy.  While genocide recognition is  
            certainly a worthy policy goal, the Committee may wish to  
            consider whether this is an appropriate or even constitutional  
            action for California to undertake without federal approval.


          4)Not With Our Money.  There have been numerous bills proposed  
            and enacted over recent years that require divestment of  
            pension funds from businesses and investments deemed unsavory  








                                                                    AB 1410


                                                                    Page  4





            by the Legislature.  Certain industries, such as fossil fuels,  
            firearms and ammunition, and tobacco, have all been the  
            subject of attempted sanctions.  In addition, international  
            incidents and federal sanctions have given rise bills  
            requiring or encouraging pension fund divestment from  
            investments in or connected to Russia, Iran, and Sudan.  While  
            these may all be worthy policy goals, the cost of compliance,  
            particularly when pension funds are required to look through  
            investment funds and underlying vehicles to understand the  
            ultimate holdings, can be significant and disruptive to  
            investment processes.  Such restrictions can also  
            significantly limit available investment opportunities,  
            reducing fund performance.  The Legislature has often resisted  
            imposing such restrictions on its state pension funds, and the  
            Committee may wish to consider whether allowing these types of  
            restrictions is consistent with its obligation to protect the  
            public purse. 





          Analysis Prepared by:Joel Tashjian / APPR. / (916)  
          319-2081