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
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|Policy |Public Employees, |Vote:|5 - 1 |
|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 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
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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
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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.
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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
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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