BILL ANALYSIS Ó SB 185 Page 1 Date of Hearing: July 15, 2015 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair SB 185 (De León) - As Amended June 2, 2015 ----------------------------------------------------------------- |Policy |Public Employees, |Vote:|5 - 1 | |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 making any new or additional investments in thermal coal companies, and requires both pensions to liquidate existing investments in thermal coal companies on or before July 1, 2017. The bill does not require the board of either pension to take action it believes in good faith is inconsistent with its fiduciary duties. The bill requires CalPERS and CalSTRS to report to the legislature by January 1, 2018, on thermal coal liquidation SB 185 Page 2 activities, engagement with any coal companies on transition to clean technologies, and any investments retained for fiduciary reasons. FISCAL EFFECT: 1)One-time Special Fund administrative and transaction costs of approximately $1.45 million and $700,000 to CalPERS and CalSTRS, respectively, and ongoing annual administrative costs of approximately $350,000 and $150,000 to CalPERS and CalSTRS, respectively, to comply with identification, liquidation, and reporting requirements. 2)Potentially substantial opportunity costs to each fund as a result of liquidation 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, burning coal to generate energy is the leading source of pollution that causes global climate change, and burning coal contributes to smog, acid rain, and toxic air pollution. Supporters contend market research demonstrates fossil fuel divestment would have a de minimis impact on pension funds, and fossil free portfolios have low risk profiles that have outperformed the broader market over the past five years. Supporters indicate coal industry stock values have declined by more than 60% since 2008. 2)Fiduciary Tension. In the past, CalPERS and CalSTRS have generally opposed legislation that restricts their ability to SB 185 Page 3 invest plan assets as those restrictions may interfere with their fiduciary obligations to members and beneficiaries. With increasing pressure on California's public pensions to deliver greater investment returns, accessing the best products, markets, and fund managers is increasingly important to CalPERS and CalSTRS. Both funds indicate they prefer constructive engagement to divesting as a means of affecting the conduct of companies in which they invest. Limiting investment options and forcing investment liquidations could lead to shortfalls in the defined benefit plans, leaving the state responsible for backfilling those losses. SB 185 allows each fund to maintain thermal coal investments whenever the relevant board believes, in good faith, such investments are consistent with its constitutional fiduciary duties. Article 16 of the California Constitution gives public pensions "sole and exclusive" fiduciary responsibility over all plan assets, and, in theory at least, every investment decision by each board ought to be consistent with their fiduciary duties. As a result, an argument could be made that this bill does not actually require CalPERS or CalSTRS to take any specific action since they are already prohibited from acting in a manner inconsistent with their fiduciary obligations. 3)Pension Policymaking. Reducing greenhouse gas emissions and toxic air pollutants is certainly a worthy policy goal, and CalPERS and CalSTRS support that goal as members of the Investor Network on Climate Risk, a network of institutional investors that subscribe to the United Nations Statement on Climate Change and encourage governments and regulators to introduce carbon pricing and disclosure. There have been numerous bills proposed over recent years requiring pension funds to divest from businesses and investments deemed unsavory by the Legislature. Industries including fossil fuels, firearms and ammunition, and tobacco, have all been the subject of attempted sanctions. SB 185 Page 4 With the sixth and thirteenth largest investment funds in the world, California's pensions have the capacity to significantly impact world capital markets and influence global affairs. Though this bill is not the first effort to legislate social policy through the state's pension systems, it raises important questions about the proper role of the Legislature in directing beneficiary funds to achieve broader social aims. 4)Playing With House Money. Though there are many investment funds that have adopted divestment strategies with respect to thermal coal and other fossil fuels similar to that proposed by this bill, it is important to distinguish CalPERS and CalSTRS from sovereign or private institutional funds. California's pensions exist to benefit state employees, not general taxpayers or their elected representatives. Members of CalPERS and CalSTRS are able to vote for board representation and petition the boards to make specific investment decisions. Members remain free to pursue the policy aims of this bill without the need for legislation. While the policy goals of this bill are laudable, the cost of compliance can be substantial and disruptive to investment processes. Such restrictions can also significantly limit available investment opportunities, reducing fund performance. The administrative and opportunity costs of SB 185 will be borne, directly and indirectly, by plan members and beneficiaries even though the bill declares its policy goals to be of statewide importance. The Legislature has often resisted imposing such restrictions on its state pension funds, and the Committee may wish to consider whether allowing this restriction is consistent with the fiduciary obligations of the boards, the democratic SB 185 Page 5 process by which members affect board policy, and the Committee's obligation to protect the public purse. Analysis Prepared by:Joel Tashjian / APPR. / (916) 319-2081