BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
SB 1353 (Pan)
Version: March 28, 2016
Hearing Date: April 19, 2016
Fiscal: Yes
Urgency: No
TMW
SUBJECT
Public employee retirement systems: prohibited investments
DESCRIPTION
This bill would require, if the boards of administration of the
California Public Employees' Retirement System (CalPERS) and the
California State Teachers' Retirement System (CalSTRS) determine
that an action regarding investment in Sudan or thermal coal
companies fails to satisfy the boards' constitutional fiduciary
responsibilities, that determination to be recorded in a
rollcall vote of the full board, following a presentation and
discussion of findings in an open session during a properly
noticed public hearing, as specified. This bill would also
require that proposed findings be made public 72 hours before
board consideration and that the findings and any public
comments regarding adopted findings and determinations be
included in the required reports to the Legislature.
BACKGROUND
The California Constitution grants the retirement board of a
public employee retirement system plenary authority and
fiduciary responsibility for investment of moneys and
administration of the retirement fund and system. The
California Constitution qualifies this grant of powers by
reserving to the Legislature the authority to prohibit
investments if it is in the public interest and the prohibition
satisfies standards of fiduciary care and loyalty required of a
retirement board.
In 2006, the Legislature enacted AB 2941 (Koretz, Dymally,
Jerome Horton, Chapter 442, Statutes of 2006), which prohibits
CalPERS and CalSTRS from investing public employee retirement
funds in a company with active business operations in Sudan, as
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specified, and requires the boards of administration of CalPERS
and CalSTRS to sell or transfer any investments in a company
with active business operations in Sudan. AB 2941 also requires
those boards to report to the Legislature any investments in a
company with business operations in Sudan and the sale or
transfer of those investments, subject to the fiduciary duty of
those boards, by January 1, 2008, and every year thereafter.
The following year, the Legislature enacted the California
Public Divest from Iran Act (CPDIA), which prohibits CalPERS and
CalSTRS from investing public employee retirement funds in a
company with business operations in Iran that is invested in or
engaged in business operations with entities in the defense or
nuclear sectors of Iran, or the company is invested or engaged
in business operations with entities involved in the development
of petroleum or natural gas resources of Iran. (AB 221
(Anderson, Ch. 671, Stats. 2007).)
Last year, SB 185 (De León, Chapter 605, Statutes of 2015)
prohibited the boards of administration of CalPERS and CalSTRS
from making new investments or renewing existing investments of
public employee retirement funds in a thermal coal company, as
defined. SB 185 also requires the boards to liquidate
investments in thermal coal companies on or before July 1, 2017,
and requires the boards, in making a determination to liquidate
investments, to constructively engage with thermal coal
companies to establish whether the companies are transitioning
their business models to adapt to clean energy generation.
With respect to divesture in Iranian businesses as required
under the CPDIA, CalPERS and CalSTRS filed reports on the status
of those investments on December 31, 2009. After reviewing
these reports, the California Attorney General notified both
CalPERS and CalSTRS of their failure to provide enough detail to
enable the public to know whether CalPERS and CalSTRS were
complying with CPDIA. Further, the reports failed to explain
why CalPERS and CalSTRS continued to invest in companies that do
business in Iran. (See Attorney General Edmund G. Brown Jr.,
letters to CalPERS Chief Executive Officer Anne Stausboll and
CalSTRS Chief Executive Officer Jack Ehnes, Feb. 8, 2010.) In
addition, the 2010 annual report submitted by CalPERS showed
that CalPERS continued to maintain investments in companies with
business operations in Iran because divesting investments in
these companies "would be inconsistent with the Board's
constitutional fiduciary duties." (CalPERS, California Public
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Divest from Iran Act, Annual Legislative Report (Dec. 31, 2010),
pg. 9.)
In response to the lack of adequate information provided in
those reports, AB 1151 (Feuer, Chapter 441, Statutes of 2011),
among other things, required additional public reporting
requirements, as specified, by CalPERS and CalSTRS, regarding
public employee retirement investments in companies with
business operations in Iran, and clarified the fiduciary duties
of CalPERS and CalSTRS regarding investments subject to the
CPDIA.
This bill would require additional public reporting requirements
for public employee retirement investments in thermal coal
companies and Sudan business operations similar to those enacted
in AB 1151 for investments in Iran.
This bill was heard by the Senate Public Employment and
Retirement Committee on April 11, 2016, and passed out on a vote
of 3-2.
CHANGES TO EXISTING LAW
Existing law , the California Constitution, provides that a
retirement board of a public pension or retirement system has
the sole and exclusive responsibility to administer the
retirement system in a manner that will assure prompt delivery
of benefits and related services to the participants and their
beneficiaries. (Cal. Const., art. XVI, sec. 17.) The assets of
a public pension or retirement system are trust funds and shall
be held for the exclusive purposes of providing benefits to
participants in the pension or retirement system and their
beneficiaries and defraying reasonable expenses of administering
the system. (Id.)
Existing law authorizes the Legislature 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. (Cal. Const., art. XVI, sec. 17(g).)
Existing law defines "board" to mean the Board of Administration
of CalPERS or the Teacher's Retirement Board of CalSTRS. (Gov.
Code Secs. 7513.6(a)(2), 7513.7(a)(1), 7513.75(b)(1).)
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Existing law prohibits the board from investing public employee
retirement funds in a company with business operations in Sudan,
as specified, or a company that supplies military equipment
within the borders of Sudan. (Gov. Code Sec. 7513.6(b), (c).)
Existing law prohibits the board from making additional or new
investments or renewing existing investments in a company that
fails to take substantial action, as specified, regarding its
business operations in Sudan, and, consistent with the board's
fiduciary responsibilities, requires the board to liquidate the
investments of the board in that company, as specified. (Gov.
Code Sec. 7513.6(h).)
Existing law requires the board to file annual reports with the
Legislature, including, among other things, a list of
investments the board has in companies with business operations
in Sudan, whether the board has reduced its investments in the
prohibited companies, and, if the board has not completely
reduced its investments in a prohibited company, when the board
anticipates that it will reduce all investments in that company
or the reasons why a sale or transfer of investments is
inconsistent with the fiduciary responsibilities of the board.
(Gov. Code Sec. 7513.6(i).)
Existing law provides that a board is not required to take
divestment action unless the board determines, in good faith,
that the action is consistent with the fiduciary
responsibilities of the board. (Gov. Code Sec. 7513.6(k).)
Existing law prohibits the board from making additional or new
investments or renewing existing investments of public employee
retirement funds in a thermal coal company, and requires the
board to liquidate investments in a thermal coal company on or
before July 1, 2017. (Gov. Code Sec. 7513.75(c).)
Existing law requires the board to file a report with the
Legislature, as specified, regarding liquidation of thermal coal
company investments. (Gov. Code Sec. 7513.75(e).)
Existing law does not require the board to take divestment
action unless the board determines in good faith that the action
is consistent with the fiduciary responsibilities of the board.
(Gov. Code Sec. 7513.75(f).)
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Existing law , the California Public Divest from Iran Act
(CPDIA), generally prohibits the board from investing public
employee retirement funds in a company which has business
operations in Iran. (Gov. Code Sec. 7513.7.)
Existing law requires any determination made at each 90-day
interval that a company has taken substantial action in Iran to
be supported by findings adopted by a rollcall vote of the board
following a presentation and discussion of the findings in open
session, during a properly noticed public hearing of the full
board. (Gov. Code Sec. 7513.7(g).) Existing law requires the
board to make public all proposed findings of the board 72 hours
before they are considered by the board and requires the board
to maintain a list of interested parties who shall be notified
of proposed findings 72 hours before the board's consideration.
(Id.) Existing law requires those findings and any public
comments regarding the adopted findings and determinations to be
included in the report to the Legislature. (Id.)
Existing law requires the board to file a report with the
Legislature, which includes, among other things, a list of
investments the board has in the prohibited companies, whether
the board has reduced investments in the prohibited company,
and, if the board has not completely reduced investments in the
prohibited company, when the board anticipates that it will
reduce all investments in that company or the findings adopted
in support of a determination made pertaining to why a sale or
transfer of investments is inconsistent with the fiduciary
responsibilities of the board. (Gov. Code Sec. 7513.7(i).)
Existing law does not require the board to take divestment
action if the board determines, and adopts findings, in good
faith and based on credible information available to the public,
that the divestment action would fail to satisfy the fiduciary
responsibilities of the board. (Gov. Code Sec. 7513.7(k).)
Existing law , the California Constitution, provides that the
people have the right of access to information concerning the
people's business and requires meetings of public bodies and the
writings of public officials and agencies to be open to public
scrutiny. (Cal. Const., art. I, sec. 3(b)(1).)
Existing law , the Bagley-Keene Open Meeting Act, provides
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statutory requirements of state public bodies to keep the public
informed. (Gov. Code Sec. 11120 et seq.) Existing law requires
state public bodies to post notices and agendas of state public
body meetings. (Gov. Code Secs. 11123, 11125, 11125.4, 11125.5,
11125.9, and 11126.)
This bill , if a determination that an action relating to public
employee retirement investments in a company with business
operations in Sudan or a thermal coal company would fail to
satisfy the fiduciary responsibilities of the board as described
in Section 17 of Article XVI of the California Constitution,
would require the board to hold a recorded rollcall vote of the
full board, following a presentation and discussion of findings
in open session, during a properly noticed public hearing of the
full board.
This bill would require all proposed findings of the board to be
made public 72 hours before they are considered by the board.
This bill would require the findings and any public comments
regarding the adopted findings and determinations made to be
included in the reports to the Legislature.
COMMENT
1. Stated need for the bill
The author writes:
In February 2016, CalPERS investment staff recommended a
revision to CalPERS' divestment policy which would authorize
the investment staff to automatically reinvest in prohibited
investments if divestment mandates (i.e., prohibited
investments) result in losses (i.e., opportunity costs) either
individually or collectively above specified limits. The
policy, as proposed, would allow the CalPERS board to avoid
taking a position on whether to reinvest in the prohibited
investments.
SB 1353 ensures that the CalPERS board would have to provide
proper public notice of its intention to reinvest in
statutorily prohibited investments.
2. Public access to board determinations regarding prohibited
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investments
Existing law provides a public right of access to information
concerning the people's business and requires meetings of public
bodies and the writings of public officials and agencies to be
open to public scrutiny. (Cal. Const., art. I, sec. 3(b)(1).)
In furtherance of this constitutional right, the Legislature
enacted the Bagley-Keene Open Meeting Act (Bagley-Keene), which
provides statutory requirements of state public bodies to keep
the public informed. (Gov. Code Sec. 11120 et seq.)
Bagley-Keene also requires state public bodies to post notices
and agendas of state public body meetings. (Gov. Code Secs.
11123, 11125, 11125.4, 11125.5, 11125.9, and 11126.)
This bill would provide that a determination by the Board of
Administration of CalPERS or the Teachers' Retirement Board of
CalSTRS that an action relating to public employee retirement
investments in thermal coal companies or business operations in
Sudan fails to satisfy the constitutional fiduciary
responsibilities of the board would require:
a presentation and discussion of findings in open session;
a recorded rollcall vote of the full board;
public notice of all proposed findings 72 hours before they
are considered by the board; and
inclusion in the report to the Legislature the findings and
any public comments regarding the adopted findings and
determinations made.
In support of this bill, the author notes that in February 2016,
CalPERS investment staff recommended a revision to CalPERS'
divestment policy, which would authorize the investment staff to
automatically reinvest in prohibited investments if divestment
mandates (i.e., prohibited investments) result in losses (i.e.,
opportunity costs) either individually or collectively above
specified limits. The author argues that the policy, as
proposed, would allow the CalPERS board to avoid taking a
position on whether to reinvest in the prohibited investments.
Notably, AB 1151 (Feuer, Chapter 441, Statutes of 2011) sought
to address the Attorney General's findings that CalPERS and
CalSTRS had failed to divest their investments as required under
the California Public Divest from Iran Act (CPDIA) and
subsequent annual reports by CalPERS and CalSTRS showed the
failure to comply with CPDIA, even though the public has a right
of access under the Constitution to oversee these agencies and
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their decisions for failing to conform to the divestment
requirements. (See Attorney General Edmund G. Brown Jr.,
letters to CalPERS Chief Executive Officer Anne Stausboll and
CalSTRS Chief Executive Officer Jack Ehnes, Feb. 8, 2010.) The
Attorney General notified CalPERS and CalSTRS that the reports
submitted by these agencies as required by the CPDIA had failed
to explain why CalPERS and CalSTRS continue to invest in
companies that do business in Iran. (Id.)
Similarly, this bill seeks to provide the same level of
transparency required under the CPDIA for the investment
practices of CalPERS and CalSTRS and pension fund compliance
with state divestment requirements related to business
operations in Iran and thermal coal companies. The author
argues that if these boards believe they have fiduciary duties
that will be breached by divesting the investments, then the
public has a right to know why. Accordingly, this bill would
provide that determinations made by CalPERS and CalSTRS on
whether an action taken by the board could result in a breach of
fiduciary duties with respect to investments in thermal coal
companies or business operations in Sudan would be based on
written findings disclosed to the public and made at a properly
noticed public hearing with an opportunity for the public to
comment on these determinations. This bill would also require
those findings and public comments to be included in the reports
to the Legislature.
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
SB 185 (De León, Chapter 605, Statutes of 2015) See Background.
AB 1410 (Nazarian, Achadjian, Wilk, 2015) would have prohibited
CalPERS and CalSTRS from investing public employee retirement
funds in a Turkish investment vehicle, as specified. AB 1410
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was held under submission in the Assembly Appropriations
Committee.
AB 761 (Dickinson, 2013) would have prohibited CalPERS and
CalSTRS from investing public employee retirement funds in a
company with business operations described as the manufacture of
firearms or ammunition and contained public meeting requirements
similar to those in this bill. AB 761 was held under submission
in the Assembly Appropriations Committee.
AB 1151 (Feuer, Chapter 441, Statutes of 2011) See Background;
Comment 2.
AB 2337 (Ammiano, 2010) would have prohibited CalPERS and
CalSTRS from investing public employee retirement funds in a
company with business operations engaged in predatory investment
practices, as defined, that rely on, or result in, the
displacement of persons residing in rent-regulated housing,
converting rent-regulated housing units to market rate units, or
raising rents above regulated levels, as specified. AB 2337
failed passage in the Senate Public Employment and Retirement
Committee.
AB 221 (Anderson, Chapter 671, Statutes of 2007) See Background.
AB 2941 (Koretz, Dymally, Jerome Horton, Chapter 442, Statutes
of 2006) See Background.
Prior Vote : Senate Committee on Public Employment and
Retirement (Ayes 3, Noes 2.
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