BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 185  


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          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