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