BILL ANALYSIS                                                                                                                                                                                                    Ó






           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                        SB 185|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 


                                   THIRD READING 


          Bill No:  SB 185
          Author:   De León (D), et al.
          Amended:  6/2/15  
          Vote:     21  

          SENATE PUBLIC EMP. & RET. COMMITTEE:  3-2, 4/13/15
           AYES:  Pan, Beall, Hall
           NOES:  Morrell, Fuller

           SENATE APPROPRIATIONS COMMITTEE:  5-2, 5/28/15
           AYES:  Lara, Beall, Hill, Leyva, Mendoza
           NOES:  Bates, Nielsen

           SUBJECT:   Public retirement systems: Public Divestiture of  
                     Thermal Coal Companies Act


          SOURCE:    Author
          
          DIGEST:   This bill prohibits the California Public Employees'  
          Retirement System (CalPERS) and the California State Teachers'  
          Retirement System (CalSTRS) boards from making new or additional  
          investments of public employee retirement funds in thermal coal  
          companies, as defined, and requires each board to liquidate its  
          existing investments in thermal coal companies on or before July  
          1, 2017, provided that the boards make a good faith  
          determination that thermal coal divestment is consistent with  
          their fiduciary responsibility.  The boards must first  
          constructively engage with the affected companies to determine  
          whether they are transitioning to clean energy generation and  
          must report to the Legislature and Governor by January 1, 2018,  
          on the boards' engagement and divestment activities.









                                                                     SB 185  
                                                                    Page  2





          ANALYSIS:
            
          Existing law:
          
          1)Pursuant to the California Constitution provides that:

             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 the respective CalPERS and CalSTRS boards (board)  
            from investing public employee retirement funds in companies:

             a)   With business operations in the defense and nuclear  
               sectors of Iran, or that are involved in the development of  
               Iranian petroleum or natural gas resources and are subject  
               to specified federal sanctions, or have demonstrated  
               complicity with an Iranian organization that has been  
               labeled as a terrorist organization by the U.S. government.

             b)   That supply military equipment within the borders of  
               Sudan.  If a company provides equipment within the borders  
               of Sudan that may be readily used for military purposes,  
               including, but not limited to, radar systems and  
               military-grade transport vehicles, there shall also be a  







                                                                     SB 185  
                                                                    Page  3


               strong presumption against investing in that company unless  
               that company implements safeguards to prevent the use of  
               that equipment for military purposes.

          3)Requires the board to file annual reports with the Legislature  
            detailing relevant investments in companies subject to the  
            investment restrictions on investing in Iran and Sudan, and  
            any actions that the board has taken related to those  
            restrictions.

          4)States that the board is not required to implement the  
            divestment provisions related to Iran and Sudan or take other  
            prescribed actions, as specified, unless it determines, in  
            good faith, that the action is consistent with its fiduciary  
            duties.

          5)Requires the board, whenever feasible and consistent with its  
            fiduciary responsibility, to support shareholder resolutions  
            designed to encourage domestic and international corporations  
            in which it has invested to pursue a policy of affirmative  
            action in Northern Ireland in compliance with the law  
            applicable in Northern Ireland and in accordance with the  
            goals as defined in California statute, as specified.

          6)Provides that board members and other covered persons, as  
            described, shall be indemnified from the General Fund and held  
            harmless by the State of California from all claims, demands,  
            suits, etc., sustained by reason of any decision to restrict  
            investments in Iran or Sudan pursuant to the relevant  
            provisions of law.

          This bill:

          1)Prohibits the respective CalPERS and CalSTRS boards from  
            making new or additional investments of public employee  
            retirement funds in thermal coal companies.

          2)Requires the board to liquidate investments in thermal coal  
            companies on or before July 1, 2017.

          3)States that the board, in making a determination to liquidate  
            investments in a thermal coal company, shall constructively  
            engage with the thermal coal company to establish whether the  
            company is transitioning its business model to adapt to clean  







                                                                     SB 185  
                                                                    Page  4


            energy generation, such as through a decrease in its reliance  
            on thermal coal as a revenue source.

          4)Defines thermal coal as coal used to generate electricity and  
            excludes from the definition "metallurgical" or "coking" coal  
            used to produce steel.

          5)Defines a thermal coal company as a publicly traded company  
            that generates 50 percent or more of its revenue from the  
            mining of thermal coal.

          6)Requires the board to file a report with the Legislature and  
            the Governor on or before January 1, 2018, which shall  
            include:

             a)   A list of thermal coal companies of which the board has  
               liquidated its investments.

             b)   A list of companies with which the board engaged and  
               that the board established were transitioning to clean  
               energy generation, with supporting documentation to  
               substantiate the board's determination.

             c)   A list of thermal coal companies of which the board has  
               not liquidated its investments as a result of a  
               determination that a sale or transfer of investments is  
               inconsistent with the board's fiduciary duty along with the  
               board's findings adopted in support of that determination.

          1)States that nothing in this bill shall require a board to take  
            action unless the board determines, in good faith, that the  
            action is consistent with the board's fiduciary  
            responsibilities as described in Section 17 of Article XVI of  
            the California Constitution.

          2)Provides that board members and other covered persons, as  
            described, shall be indemnified from the General Fund and held  
            harmless by the State of California from all claims, demands,  
            suits, etc., sustained by reason of any decision to restrict,  
            reduce, or eliminate investments pursuant to this bill's  
            provisions.

          Background








                                                                     SB 185  
                                                                    Page  5


          According to CalPERS and CalSTRS, the two funds "are members of  
          the Investor Network on Climate Risk - a leading network of 100  
          U.S. institutional investors, representing more than $10  
          trillion, addressing a policy agenda that calls on governments  
          and regulators to introduce carbon pricing and disclosure, so  
          that risks can be addressed effectively.  This is part of a  
          global effort among investors worth $24 trillion that have  
          signed and supported the United Nations Statement on Climate  
          Change."

          Also, the two funds state "our pension funds prefer constructive  
          engagement to divesting as a means of affecting the conduct of  
          companies in which we invest."  "When considering divestment, we  
          firmly believe that active and direct engagement as a first line  
          approach is the best way to resolve issues."

          Prior/Related Legislation
          
          AB 1410 (Nazarian, 2015) prohibits CalPERS and CalSTRS from  
          investing public employee retirement funds in specified  
          investments issued by, owned, controlled, or managed by the  
          government of Turkey.

          AB 1151 (Feuer, Chapter 441, Statutes of 2011) clarified 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) prohibited  
          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) prohibited  
          CalPERS and CalSTRS from investing public employee retirement  
          funds in a company with business operations in the Sudan, as  
          specified.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No








                                                                     SB 185  
                                                                    Page  6


          According to the Senate Appropriations Committee:

           One-time administrative/transactional costs of approximately  
            $683,500 and $129,100 annual ongoing costs to CalSTRS (Special  
            Fund)

           One-time administrative/transactional costs of approximately  
            $1.46 million and $365,000 annual ongoing costs to CalPERS  
            (Special Fund)

          CalSTRS indicates that the pension system currently invests in  
          12 companies with a combined market value of approximately $40  
          million that meet the definition of thermal coal company.   
          CalPERS invests in approximately 20-30 thermal coal companies  
          valued at approximately $100-$200 million.  The pension systems  
          may additionally incur opportunity costs if suitable alternative  
          investments are unavailable.


          SUPPORT:   (Verified5/29/15)


          350 Sacramento
           American Lung Association in California
          California Public Health Association - North
          Center for Climate Change and Health; Public Health Institute
          Cool Davis
          Cool Planet
          Doctors for Climate Health
          Friends Committee on Legislation of California
          Health Care Without Harm
          Human Impact Partners
          Physicians for Social Responsibility
          Physicians for Social Responsibility - Los Angeles
          Public Health Institute
          Regional Asthma Management and Prevention
          San Francisco Asthma Task Force
          Yolo MoveOn Council


          OPPOSITION:   (Verified5/29/15)


          California Business Properties Association







                                                                     SB 185  
                                                                    Page  7


          California Chamber of Commerce
          California Independent Petroleum Association
          California Manufacturers and Technology Association
          National Federation of Independent Business


          ARGUMENTS IN SUPPORT:     According to the author, "Coal  
          combustion for energy generation is the single leading cause of  
          the pollution that causes global climate change."  Also, burning  
          coal is "a leading cause of smog, acid rain, and toxic air  
          pollution.  Some emissions can be significantly reduced with  
          readily available pollution controls, but most U.S. coal plants  
          have not installed these technologies."


          ARGUMENTS IN OPPOSITION:  According to the California Chamber of  
          Commerce, "divestment from coal and fossil fuels could threaten  
          the financial strength of CalPERS and CalSTRS, and undermine  
          their fiduciary responsibility by using these retirement funds  
          to target unpopular companies for financial harm."
          


          Prepared by:Glenn Miles / P.E. & R. / (916) 651-1519
          6/2/15 10:02:44


                                   ****  END  ****