BILL ANALYSIS Ó SB 185 Page 1 SENATE THIRD READING SB 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 SB 185 Page 2 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. SB 185 Page 3 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." SB 185 Page 4 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 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 Committee: 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. SB 185 Page 5 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 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." 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." SB 185 Page 6 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 specified. SB 185 Page 7 Analysis Prepared by: Karon Green / P.E.,R., & S.S. / (916) 319-3957 FN: 0001637