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 SB 1353 (Pan) Page 2 of ? 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 SB 1353 (Pan) Page 3 of ? 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).) SB 1353 (Pan) Page 4 of ? 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).) SB 1353 (Pan) Page 5 of ? 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 SB 1353 (Pan) Page 6 of ? 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 SB 1353 (Pan) Page 7 of ? 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 SB 1353 (Pan) Page 8 of ? 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 SB 1353 (Pan) Page 9 of ? 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. **************