BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                     SB 185

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          185 (De León)

          As Amended  June 2, 2015

          Majority vote

          SENATE VOTE:  24-14

          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |Public          |5-1  |Bonta, Cooley,        |Waldron             |
          |Employees       |     |Jones-Sawyer,         |                    |
          |                |     |O'Donnell, Rendon     |                    |
          |                |     |                      |                    |
          |Appropriations  |12-5 |Gomez, Bloom, Bonta,  |Bigelow, Chang,     |
          |                |     |Calderon, Nazarian,   |Gallagher, Jones,   |
          |                |     |Eggman, Eduardo       |Wagner              |
          |                |     |Garcia, Holden,       |                    |
          |                |     |Quirk, Rendon, Weber, |                    |
          |                |     |Wood                  |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |

          SUMMARY:  Prohibits the California Public Employees' Retirement  


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          System (CalPERS) and California State Teachers' Retirement  
          System (CalSTRS) from investing in thermal coal companies, as  
          specified.  Specifically, this bill: 

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

          2)Requires CalPERS and CalSTRS to liquidate investments in  
            thermal coal companies on or before July 1, 2017.

          3)States that CalPERS and CalSTRS, in making a determination to  
            liquidate investments in a thermal coal company, are to  
            constructively engage with the thermal coal company to  
            establish whether the company is transitioning its business  
            model to adapt to clean 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% or more of its revenue from the mining of  
            thermal coal.

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

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


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             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.

          7)States that nothing in this bill requires CalPERS and CalSTRS  
            to take action unless they determine, in good faith, that the  
            action is consistent with their fiduciary responsibilities as  
            described in California Constitution Article XVI Section 17.

          8)Provides that CalPERS and CalSTRS board members and other  
            covered persons, as described, are 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.

          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."


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             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  

             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 CalPERS and CalSTRS from investing in companies with  
            active business operations in Sudan and in Iran, as specified.

          FISCAL EFFECT:  According to the Assembly Appropriations  

          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.


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          COMMENTS:  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."

          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  

          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."

          According to supporters, "Many reputable investment advisors and  
          market data firms, like MSCI and FTSE, have produced research  
          that shows the effects of fossil fuel divestment on a portfolio  
          are de minimis.  In fact, over the past five years, fossil free  
          portfolios have outperformed the market while maintaining low  
          risk metrics.  The coal companies in question have been a drag  
          on the retirement system for the last decade.  Since 2008 the  
          coal industry has plummeted in stock value by 66.9 percent.   
          Divesting from coal is not only the right thing to do, it's the  
          prudent and logical thing to do."


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          Opponents believe this bill "unfairly targets one type of  
          business in which to divest from state retirement funds,  
          starting down a slippery slope for divestiture from other  
          businesses based on principles unrelated to fiduciary  
          responsibility to the retirees."

          Current and Prior Legislation:

          AB 1410 (Nazarian), of the current legislative session, would  
          have prohibited CalPERS and CalSTRS from investing public  
          employee retirement funds in specified investments issued by,  
          owned, controlled, or managed by the government of Turkey.  AB  
          1410 bill was held in the Assembly Appropriations Committee.

          AB 761 (Dickinson), of 2013, would have prohibited CalPERS and  
          CalSTRS from investing in companies that manufacture firearms or  
          ammunition for a recipient other than the United States  
          military, subject to a process specified in the bill and  
          consistent with previous divestment legislation, but subject to  
          the board's fiduciary duties.  AB 761 was held in the Assembly  
          Appropriations Committee.

          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  


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          Analysis Prepared by:                                             
                          Karon Green / P.E.,R., & S.S. / (916) 319-3957