BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 107|
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THIRD READING
Bill No: AB 107
Author: Knox (D), et al
Amended: 8/8/00 in Senate
Vote: 21
SENATE PUBLIC EMP. & RET. COMMITTEE : 3-2, 6/26/00
AYES: Ortiz, Karnette, Soto
NOES: Haynes, Lewis
SENATE APPROPRIATIONS COMMITTEE : 8-4, 8/23/00
AYES: Johnston, Alpert, Bowen, Burton, Escutia, Karnette,
Perata, Vasconcellos
NOES: Johnson, Kelley, Leslie, Mountjoy
ASSEMBLY FLOOR : Not relevant
SUBJECT : Public employees' retirement investments
SOURCE : Author
DIGEST : This bill prohibits new or additional
investments by the State Public Employees' Retirement
System and the State Teachers' Retirement System, on and
after January 1, 2001, in tobacco companies, as defined,
and requires a divestment of those existing investments by
July 1, 2002. Makes related legislative findings and
declarations. It also provides for indemnification from
the General Fund by the State for present and former
members of the governing board of the funds, officers and
employees of the State, and investment managers under
contract with the State from all claims, demands, suits,
CONTINUED
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actions, damages, judgments, and other costs, charges, and
expenses sustained by them at any time by reason of any
decision not to invest in tobacco companies.
ANALYSIS : Proposition 162, "The California Pension
Protection Act of 1992," was adopted by the voters in
November of that year. Prop. 162 amended the California
Constitution, Article XVI, Section 17, to require that the
PERS and STRS boards of administration have the following
mandates:
1.Exercise sole and exclusive "plenary" authority to
administer the system in a manner that will ensure prompt
delivery of benefits and related services to the
participants and their beneficiaries.
2.Discharge their duties with respect to the system policy
in the interest of, and for the exclusive purpose of
providing benefits to participants and their
beneficiaries, minimizing employer contributions.
3.Discharge their duties with respect to the system with
care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person
acting in a like capacity would exercise.
However, Proposition 162 also specifically provides:
"The Legislature may by statute continue 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 standard of fiduciary care and
loyalty required of a retirement board pursuant to this
section."
Existing state constitutional law, pursuant to Prop. 162,
provides that all investment standards and procedures for
the PERS and STRS funds are derived from the fiduciary duty
to ensure that trust assets are used for the exclusive
purposes, as described above.
This bill makes legislative declarations that:
1.The cost to the State for healthcare services for persons
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with tobacco-related illnesses is $630 million annually.
2.California spends $50 million annually on anti-smoking
education programs.
3.The State Public Employees' Retirement System (PERS) and
the State Teachers' Retirement System (STRS) together
hold investments of close to one billion dollars in
tobacco companies; holdings which create an interest that
conflicts with the aims of California's healthcare and
anti-smoking education programs.
4.In 1999, the leading cigarette manufacturer's stock lost
52 percent in value, and other public institutional
investors have restricted or ceased tobacco industry
investments.
This bill requires that:
1.On or after January 1, 2001, PERS and STRS would be
prohibited from making new or additional investments in
any "tobacco company," defined as a business entity that
makes more than 10% of its gross revenue from the
production of cigarettes or tobacco-related products.
2.By July 1, 2002, PERS and STRS shall hold no investments
in tobacco companies.
3.Present and former members of the PERS and STRS boards
shall be indemnified (by the General Fund of the State of
California) against all liability, losses or damages
"?sustained by reason of any decision not to invest in
tobacco companies pursuant to this chapter."
Comments
STRS Board votes June 7, 2000, to divest of tobacco stocks
Following is the Executive Summary of the June 7, 2000,
board item related to the passive (as opposed to active)
investment of tobacco related stocks. The STRS board voted
to divest $238 million in tobacco stocks held in its
passive investment portfolio at the June 7 meeting.
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"The California State Teachers' Retirement System (STRS/
System) on May 3, 2000 adopted a Benchmark Modification
Policy. The STRS Investment Committee (Board) instructed
its Staff and Pension Consulting Alliance, Inc. (PCA) to
provide written analysis specific to the tobacco industry
as it pertains to the Benchmark Modification Policy
(Policy).
"Due diligence was to determine whether a change in STRS'
existing benchmark(s) would be in the economic interest of
the System, as determined by specific indicators provided
in the Policy. 'Economic interest' is defined as when
either: 1) a more cost efficient alternative is available,
or 2) an industry or sector is exposed to economic risk.
"This report focuses on the latter as it is of particular
relevance to the tobacco industry. Economic risk
indicators, as outlined in the Policy, include product
liability judgments, industry-wide bankruptcy filings,
regulatory and/or legislative actions, as well as
deleterious effects of institutional policy decisions. Our
findings indicate that all four of these indicators are
evidenced, thereby, meeting the minimum requirement for
benchmark modification that at least three of four be
present."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
Fiscal Impact (in thousands)
Major Provisions 2000-01 2001-02
2002-03 Fund
Divestment -- Unknown, probably
significant -- STRF &
PERF
Indemnification -- unknown
-- General
According to the Senate Appropriations Committee analysis:
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The divestment of tobacco company holdings will result in
transaction costs as tobacco equities are sold and the
proceeds reinvested in other companies. Additional ongoing
staff time will be required to monitor the activity of fund
managers to ensure that the restricted equities are not
purchased. It is unknown what impact tobacco divestment
will have on the future investment returns of STRS' and
PERS' aggregate portfolios.
The STRS Board has recently adopted a policy to modify its
existing benchmark to exclude tobacco manufacturers.
Therefore, that system will not be holding such investments
in its passive portfolio. That decision, however, does not
apply to its active investments.
STRS passively and actively invests a broadly diversified
portfolio valued at over $100 billion. As of December 31,
1999, STRS held domestic and international equities in 22
companies that manufacture and distribute tobacco products
valued at $319 million - less than 0.5 percent of equity
holdings.
SUPPORT : (Verified 8/24/00)
American Federation of State, County and Municipal
Employees
American Heart Association
American Lung Association
California Federation of Teachers
California Teachers Association
County of Los Angeles
County of San Diego
Planned Parenthood Affiliates of California
United Teachers of Los Angeles
OPPOSITION : (Verified 8/28/00)
Department of Finance
Public Employees' Retirement System
ARGUMENTS IN OPPOSITION : The Department of Finance is
opposed to this bill for the following reasons:
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"This bill would result in one-time costs of $56.6 million
to $89.2 million to CalPERS and STRS.
"To the extent that the General Fund would be required to
indemnify CalPERS' and STRS' board members, officers,
employees, and investment managers, this bill would result
in indeterminable costs to the General Fund.
"This bill would impede CalPERS' and STRS' constitutional
authority to make investments and carry out their fiduciary
duties to maximize investment returns on behalf of system
participants and beneficiaries, meet their benefit
obligations, and minimize employer retirement costs."
TSM:cm 8/28/00 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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