BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 17
Gloria Negrete McLeod, Chair HEARING DATE: June 25, 2012
AB 17 (Davis) as amended 6/15/12 FISCAL: YES
CALSTRS BOARD OF ADMINISTRATION: COMPULSORY LEGISLATIVE
HEARINGS
HISTORY :
Sponsor: Author
Prior legislation: SB 294 (Price),
Chapter 710, Statutes of 2011
SB 1108 (Price), 2010
Died in Assembly Appropriations Committee
AB 1913 (Davis), 2010
Held in Senate Rules Committee
AB 1919 (Davis), 2010
Held in Senate Rules Committee
ASSEMBLY VOTES :
Not relevant - new bill with, June 15, 2012, amendments
SUMMARY :
AB 17 requires the board members of the California State
Teachers Retirement System (CalSTRS) to "aggressively
participate" in annual legislative hearings.
BACKGROUND AND ANALYSIS :
1)Existing law :
a) establishes CalSTRS, which provides retirement and
death benefits for California's teachers and school
administrators.
b) establishes the governing board of CalSTRS and vests
the board with management and exclusive control of the
administration and investment of the retirement fund.
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c) pursuant to the California Pension Protection Act of
1992 (Proposition 162) passed by voters, provides that
the boards of California's public retirement systems
have "plenary authority and fiduciary responsibility for
investment of monies and administration of the system."
d) pursuant to Proposition 162, allows the Legislature
to, 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 standards of fiduciary care
and loyalty required of a retirement board pursuant to
this section."
e) pursuant to the State Constitution, states:
"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."
f) pursuant to Proposition 209 passed by voters in 1996,
amended the California Constitution to state:
"The state shall not discriminate against, or grant
preferential treatment to, any individual or group on
the basis of race, sex, color, ethnicity, or national
origin in the operation of public employment, public
education, or public contracting."
g) requires CalSTRS and CalPERS, pursuant to SB 294
(Price, Chapter 710, Statutes of 2011), to each create a
5-year strategic plan, as specified, for emerging
investment manager participation across all asset
classes. The boards must report annually to the
Legislature, until January 1, 2018, regarding the
progress of the strategic plans.
1)This bill :
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a) requires the members of the CalSTRS board, annually
prior to August 1st each year, to "aggressively
participate" in legislative hearings on ethnic and
gender diversity in regard to the investment managers
and brokerage firms with it has contracted in the
preceding year, as specified. Testimony must include
the following:
i. The ownership composition of any privately owned
investment firm, including ethnic and gender
breakdowns, portfolio values, asset classes managed,
and fees paid to the investment managers.
ii.The percentage breakdown of ethnicity and gender of
investment officers in contracted portfolio management
firms.
iii.Strategic plans of promoting existing underlying
emerging managers from manager-of-manager structures
to direct mandates.
iv.The commissions paid for trading equity securities
and par value traded for fixed income by product to
each brokerage firm utilized.
a) requires the members of the CalSTRS board, annually
prior to August 1st each year, to also aggressively
participate in legislative hearings for the purpose of
developing a plan and strategy for participation of
emerging investment managers, as specified, and emerging
brokerage firms, as specified, and provides that any
percentages provided by the board shall be used as a
reporting threshold only and not as a basis upon which
to contract with an given emerging manager or firm.
b) requires the CalSTRS board to define "emerging
investment manager" and "emerging investment firm"
through the regulatory process for purposes of the
requirements of this bill.
FISCAL :
CalSTRS pegged costs of at least $70,000 to earlier versions
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of the bill that required annual reports only. There has not
been adequate time to analyze costs associated with this
version of the bill.
COMMENTS :
1)CalSTRS Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
In 2001, the CalSTRS Board adopted the Policy on California
Investments. The Policy on California Investments also
established a goal of investing 2 percent of CalSTRS assets
in underserved markets, primarily in California. This
action attempted to eliminate the obstacles some sectors
were having in terms of access to capital and recognized
the importance of diverse investments.
In February 2002, the Board's Investment Committee approved
an implementation plan for investing in underserved urban
and rural markets. The plan called for hiring fund-of-fund
managers with independent decision-making authority who
would work with general partners. It also incorporated a
newly created New and Next Generation Investment Program
into the existing program for Urban and Rural Investing,
which had been guided by the Policy on California
Investments.
In August 2005, CalSTRS embarked on an approach to build a
strategy to incorporate diversity into the management of
CalSTRS investments.
The Proactive Portfolio is a strategy that is interwoven in
all asset classes within CalSTRS' Portfolio, whereby a
framework is provided for selecting investments when the
investments are: 1) in the emerging space, and/or; 2) to
capture innovative strategies (i.e. new market
opportunities and/or new drivers of value creation due to
changing demographics, etc.), and/or; 3) investments
consistent with the Board's Policy on
California Investments.
2)Concerns of the Committee
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The PE&R Committee questions the necessity of this bill and
shares the concern stated by the Assembly Committee on
Appropriations with regard to creating a statutory
requirement for a state board to appear at hearings. The
Legislature already has the right and authority to compel
testimony, including the right to subpoena witnesses. As
stated in the Assembly analysis, "Placing a requirement to
testify in statute sets a precedent that suggests that a
statute may be necessary to require testimony." In
addition, to the best of the Committee's knowledge, CalSTRS
has always agreed to appear at a hearing when requested to
by the Legislature.
Moreover, SB 294, passed by the Legislature in 2011,
requires both CalPERS and CalSTRS to create strategic plans
for emerging investment manager participation across all
asset classes. The retirement systems must report on those
strategic plans and related outcomes over a four-year
period. The Legislature may call for informational
hearings as necessary pending the outcomes of the strategic
plans and subsequent reporting.
3)Arguments in Support
The author believes that women and minority owned businesses
are not reflected among pension fund asset managers to the
same extent as they are represented in the U.S. population.
"AB 17 seeks to promote diversity among those who manage
pension fund investments."
4)Arguments in Opposition
CalSTRS has not had enough time to thoroughly analyze the
provisions of the bill, as amended on June 15th, and to
obtain an official board position, but has noted the
following concerns to the Committee:
i. The bill may infringe upon the board's plenary
authority and fiduciary responsibilities as the language
suggests that CalSTRS would have to include the
Legislature in the development of a plan and strategy for
participation of emerging investment managers through the
legislative hearing process.
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ii. There are potential unknown costs associated with this
process and the development of the plan and strategy if
it must be created in addition to, or significantly
different from, what CalSTRS already has in place.
iii.CalSTRS had specifically requested a provision relating
to Section 17 of Article XVI of the Constitution,
relating to CalSTRS' plenary authority, be included in
the measure. The 6/15/12 amendments strike that
provision from the bill.
iv. The hearings required by the bill are not defined as to
jurisdiction, nor is the term "aggressively participate"
defined.
1)SUPPORT :
None on file for current version of this bill.
2)OPPOSITION :
None on file for current version of this bill.
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