BILL ANALYSIS Ó AB 2283 Page 1 Date of Hearing: April 20, 2016 ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT, AND SOCIAL SECURITY Rob Bonta, Chair AB 2283 (Calderon) - As Amended March 28, 2016 SUBJECT: Public retirement system: investments: securitized rental homes SUMMARY: Prohibits the California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS) from investing in new securitized home rental properties or reinvesting in existing investments in securitized home rental properties before conducting an evaluation of those investments and ensuring that certain conditions are met. Specifically, this bill: 1)Requires CalPERS and CalSTRS, prior to investing in new securitized home rental properties or reinvesting in existing investments in securitized home rental properties, to evaluate those investments and ensure all of the following: a) That the property management group is in compliance with fair housing laws, as specified; b) That rents are not inconsistent with the surrounding rental market and are kept affordable, as specified; AB 2283 Page 2 c) That the properties are in compliance with lawful eviction guidelines, as specified; and, d) That the properties are being adequately maintained, as specified. 2)Requires CalPERS and CalSTRS to appoint an independent ombudsman to provide oversight and enforcement of these requirements. 3)Defines "securitized home rental properties" for purposes of these provisions as single-family homes in California used as rental properties that are aggregated with other properties with the resulting income from the properties funding publicly traded investment products. 4)States that nothing in this bill requires CalPERS and CalSTRS to take action unless they determine, in good faith, that the action is consistent with their fiduciary responsibilities as described in California Constitution Article XVI Section 17. EXISTING LAW: 1)Pursuant to the California Constitution provides that: AB 2283 Page 3 a) The respective boards of California's public retirement systems have "plenary authority and fiduciary responsibility for investment of monies and administration of the system." b) The Legislature retains its authority, by statute "to prohibit certain investments by a retirement board where it is in the public interest to do so, and provided that the prohibition satisfies the standards of fiduciary care and loyalty required of a retirement board pursuant to this section." c) The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system." 2)Prohibits CalPERS and CalSTRS from investing in companies with active business operations in Sudan and in Iran and in thermal coal companies, as specified. FISCAL EFFECT: Unknown. COMMENTS: According to the author, "Over the last few years, institutional investors, such as Blackstone, have bought up billions of dollars-worth of single-family homes. Instead of renovating and reselling them or just waiting for the real AB 2283 Page 4 estate market to recover, they have converted these properties into permanent rental homes. Of the five largest metropolitan areas in the U.S. where concentration of this type of investment is highest, three of them reside in California: Los Angeles, Riverside, and Sacramento. "At the time, the vast majority of these purchases were foreclosures or short sales; however, purchases of homes coming from natural sales have recently increased. The CEO of Colony American Homes, which is one of the largest single-family landlords in the country, said it himself, 'the first phase was distressed homes, the second phase is acquiring homes in a more regular way.'" In October 2013, an institutional investor created the first triple-A-rated, mortgage-backed security supported by revenue from single-family rental properties. The emergence of a new form of mortgage-backed securities tied to single-family rentals is certain to have an impact on the housing market, communities, and tenants. A mortgage-backed security is created by pooling assets together and then selling interests in that pool to investors, who then receive regular payments from the asset pool. This process provides access to a much larger pool of investors than would otherwise be feasible, increasing liquidity and generally providing a less expensive source of funding than traditional borrowing from banks or private investors." AB 2283 Page 5 The author concludes, "As CalPERS and CalSTRS invest more money into these large-scale, single-family rental bonds, it becomes more and more important for them to pay closer attention to this industry. Financial stability concerns in these bonds may become more significant should debt financing become more prevalent or if the share of homes owned by investors in certain markets rises significantly further. In a recent Federal Reserve brief, they warn that, 'To the extent that public markets develop for bonds backed by the underlying income or assets of investor portfolios, there is greater risk of the development of shadow banking activities on these securities or derivatives referencing them' and calls for greater monitoring of these markets. As California's two largest public pensions become more entrenched in these investments, it's imperative to ensure these institutional landlords are responsive to the needs of their tenants and are following the law." Supporters state, "It is important that our state retirement funds are investing consciously in businesses that do not harm our communities. AB 2283 would collect more information on the activities to these investor-landlords in California and make recommendations to CalPERS and CalSTRS if these landlords are violating tenants' rights, charging unfair rents, or failing to maintain properties." Opponents state that AB 2283, "?inappropriately uses the retirement funds of public employees to pursue public policy and to create a new, unprecedented and costly responsibility for these funds to provide oversight where regulatory oversight already exists. The bill unfairly targets one type of business in which to divest from state retirement funds, starting down a AB 2283 Page 6 slippery slope for divesture from other businesses based on principles unrelated to fiduciary responsibility to the retirees. Instead, investment decisions should be made based on sound economic principles. Although the bill uses a creative strategy to get at divestiture, its ultimate goal is for the funds to divest of investments in securitized home rental properties. "Furthermore, we oppose setting a precedent for CalPERS and CalSTRS to double check the regulatory compliance of private companies because it has no public policy utility and will be costly. The bill calls for the boards of the retirement funds to evaluate and ensure compliance with fair housing and other laws, and to appoint staff to create a system of oversight and enforcement. California state government has in place mechanisms within its regulatory agencies to enforce these laws." Opponents further state, "AB 2283 establishes a rent control mandate, by requiring that before the STRS or PERS Board chooses to invest or reinvest in securitized home rental properties that they ensure that, 'rents are not increased to a level that is inconsistent with the surrounding rental market; that an unreasonable financial burden is not placed on the tenant through unjustly raising rents, and that rents are kept affordable.' While this provision establishes an alarming precedent, California law - known as the Costa-Hawkins Rental Housing Act - prohibits in the market place this type of mandate on single family homes, condominiums, and new construction built after 1995 (Civil Code Section 1954.50). This provision is certainly counter to settled public policy. AB 2283 Page 7 "At the same time, the mandate in AB 2283 that requires STRS and PERS ensure a property management group is in compliance with fair housing, eviction, and general housing maintenance laws is pointless, and the required independent ombudsman is an unnecessary provision. Rental housing management and ownership is highly regulated by federal, state, and local governments, including but not limited to, the California Bureau of Real Estate, the Attorney General, the Fair Employment and Housing Agency, the U.S. Department of Housing and Urban Development, local housing departments, and the courts in general. In addition, consumer rights organizations receive millions of dollars in public funding each year that adds to this enforcement." The California Association of Realtors and the San Diego County Apartment Association are opposing the bill unless it is amended to remove all references relating to rent control like concepts. Prior/Related Legislation: SB 185 (DeLeon), Chapter 605, Statutes of 2015, prohibits CalPERS and CalSTRS from investing in thermal coal companies, as specified. AB 2283 Page 8 AB 1410 (Nazarian) of 2015 would have prohibited CalPERS and CalSTRS from investing public employee retirement funds in specified investments issued by, owned, controlled, or managed by the government of Turkey. This bill was held on suspense in the Assembly Appropriations Committee. AB 1151 (Feuer), Chapter 441, Statutes of 2011, clarifies that CalPERS and CalSTRS must divest pension funds, as specified, unless to do so would fail to satisfy their fiduciary responsibility. The law also modifies the types of companies that fall within the Act's scope and requires certain findings and determinations be made in noticed public hearings. AB 221 (Anderson), Chapter 671, Statutes of 2007, prohibits CalPERS and CalSTRS from investing in companies that have specified energy or defense-related operations in Iran. AB 2941 (Koretz), Chapter 442, Statutes of 2006, prohibits CalPERS and CalSTRS from investing public employee retirement funds in a company with business operations in the Sudan, as specified. AB 2283 Page 9 REGISTERED SUPPORT / OPPOSITION: Support Tenants Together Opposition California Apartment Association California Association of Realtors (Oppose, unless amended) California Chamber of Commerce San Diego County Apartment Association (Oppose, unless amended)) Analysis Prepared by:Karon Green / P.E.,R., & S.S. / (916) 319-3957 AB 2283 Page 10