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 ****