BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1353|
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THIRD READING
Bill No: SB 1353
Author: Pan (D)
Amended: 3/28/16
Vote: 21
SENATE PUBLIC EMP. & RET. COMMITTEE: 3-2, 4/11/16
AYES: Pan, Beall, Hall
NOES: Morrell, Moorlach
SENATE JUDICIARY COMMITTEE: 5-2, 4/19/16
AYES: Jackson, Hertzberg, Leno, Monning, Wieckowski
NOES: Moorlach, Anderson
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Public employee retirement systems: prohibited
investments
SOURCE: Author
DIGEST: This bill requires CalPERS and CalSTRS (respectively,
board) to hold a properly noticed public hearing and take a
rollcall vote, as specified, when making a determination that
statutory prohibited investments (PI)s in Sudan and thermal coal
violate the board's fiduciary duty. This requirement already
exists for statutory PIs in Iran.
ANALYSIS:
Existing law:
1)Provides, pursuant to the California Constitution, that:
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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."
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.
d) The board shall diversify the investments of the system
so as to minimize the risk of loss and to maximize the rate
of return, unless under the circumstances it is clearly not
prudent to do so.
2)Prohibits the board from investing public employee retirement
funds in companies:
a) With business operations in the defense and nuclear
sectors of Iran, or that are involved in the development of
Iranian petroleum or natural gas resources and are subject
to specified federal sanctions, or have demonstrated
complicity with an Iranian organization that has been
labeled as a terrorist organization by the U.S. government.
b) That supply military equipment within the borders of
Sudan. If a company provides equipment within the borders
of Sudan that may be readily used for military purposes,
including, but not limited to, radar systems and
military-grade transport vehicles, there shall also be a
strong presumption against investing in that company unless
that company implements safeguards to prevent the use of
that equipment for military purposes.
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c) That produce thermal coal, as specified. The board
shall also liquidate investments in thermal coal companies
on or before July 1, 2017, but in making a determination to
liquidate investments in a thermal coal company, the board
shall 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.
3)Requires the board to file annual reports with the Legislature
detailing relevant investments in companies subject to the
investment restrictions on investing in Iran and Sudan and any
actions that the board has taken related to those
restrictions. The board must also file a report with the
Legislature on or before January 1, 2018, providing
information relating to engagement initiatives with thermal
coal companies and related information.
4)States that the board is not required to implement the PI
provisions related to Iran, Sudan, and thermal coal companies,
or take other prescribed actions unless it determines, in good
faith, that the action is consistent with its fiduciary
duties.
5)Provides, pursuant to the Bagley-Keene Open Meeting Act, that
nothing in the Act shall be construed to prohibit the board
from holding closed sessions when considering investment
decisions.
6)Requires that the board hold a recorded rollcall vote,
following a presentation and discussion of findings in open
session during a properly noticed public hearing of the full
board when making a determination that the statutory PI in
Iran fails to satisfy the fiduciary responsibilities of the
board as described in Section 17 of Article XVI of the
California Constitution.
This bill:
1)Requires that the board hold a recorded rollcall vote,
following a presentation and discussion of findings in open
session during a properly noticed public hearing of the full
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board when making a determination that the statutory PIs in
Sudan and thermal coal fail to satisfy the fiduciary
responsibilities of the board as described in Section 17 of
Article XVI of the California Constitution.
2)Requires the board to make public 72 hours before
consideration by the board its proposed findings to be used in
making its determination that the PIs in Sudan and thermal
coal fail to satisfy the board's fiduciary responsibilities.
3)Requires that the board include in a report to the
Legislature, as specified, its findings adopted in making a
determination that the statutory PIs in Sudan and thermal coal
violate the board's fiduciary responsibilities and any public
comments regarding the findings.
Background
In February 2016, CalPERS Investment staff recommended a
revision to CalPERS' divestment policy to establish a loss
mitigation component regarding PIs. The proposed policy would
authorize staff to automatically reinvest in PIs that result in
a loss of either $750 million individually over 12 consecutive
quarters or in a cumulative loss of $2.5 billion collectively.
If the cumulative loss reached $2.5 billion, all PIs, except a
PI that generated no loss, would be subject to the new automatic
reinvestment policy regardless of a PI's proportional
contribution to the loss. The policy requires the staff to
inform the board when a PI exceeds a loss mitigation limit but
authorizes staff to reinvest in the PI without any further
approval.
The proposed policy makes no distinction between PIs required by
statute and those set independently by the board. In treating
statutory PIs the same as board-initiated PIs the proposed
policy violates the intent of the constitutional provision
reserving authority to the Legislature to prohibit certain
investments by a retirement board subject to the board's
standards of fiduciary care and loyalty.
This bill ensures that the CalPERS board would have to provide
proper notice of its decision to reinvest in statutory PIs in
Sudan and thermal coal and requires the board to have a rollcall
vote when making a determination that the PIs violate the
board's fiduciary responsibilities. This requirement already
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exists for PIs in Iran.
Related/Prior Legislation
SB 185 (De León, Chapter 605, Statutes of 2015) prohibited
CalPERS and CalSTRS from investing in thermal coal but after
first determining whether a company is transitioning from
thermal coal as a revenue source.
AB 1151 (Feuer, Chapter 441, Statutes of 2011) amended the
California Public Divest from Iran Act to clarify that CalPERS
and CalSTRS must divest public employee retirement funds, as
specified, unless to do so would fail to satisfy the fiduciary
responsibilities of the boards, modified the types of companies
that fall within the scope of the bill, and required that
certain findings and determinations must be made in noticed
public hearings.
AB 221 (Anderson, Chapter 671, Statutes of 2007) established the
California Public Divest from Iran Act which prohibits CalPERS
and CalSTRS from investing public employee retirement funds 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 companies with business operations in the Sudan.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified 5/2/16)
None received
OPPOSITION: (Verified5/2/16)
None received
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ARGUMENTS IN SUPPORT: According to the author, "this bill is
intended to ensure that state public retirement systems hold
public board meetings and take a public vote prior to
reinvesting in companies in which they are otherwise statutorily
prohibited from investing should the system decide that the
statutorily required divestment violates its fiduciary
responsibilities.
This bill merely adds existing procedural requirements before
reinvesting in statutorily prohibited investments in Iran to the
divestment requirements in Sudan and Thermal Coal, ensuring that
the CalPERS board would have to provide proper public notice of
its intention to reinvest in statutorily prohibited investments
and would require the board to have a rollcall vote when making
a determination that the required divestment violates the
board's fiduciary responsibilities."
Prepared by:Glenn Miles / P.E. & R. / (916) 651-1519
5/4/16 14:58:05
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