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