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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