BILL ANALYSIS �
AB 1151
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Date of Hearing: May 18, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1151 (Feuer) - As Amended: May 5, 2011
Policy Committee: Judiciary
Committee Vote: 9-0
PERS Committee 6-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill amends the California Public Divest from Iran Act to
clarify that the boards of CalPERS and CalSTRS must divest
pension funds, as specified, unless to do so would breach a
fiduciary duty. Specifically, this bill:
1)Expands the criteria for companies that have business
operations in Iran, which would then be subject to
disinvestment by the boards of CalPERS and CalSTRS. The
criteria added by the bill are companies that have an
investment of $20 million or more in the energy sector of
Iran, as specified. Eliminates existing exemptions from the
California Public Divest from Iran Act for companies engaged
in certain humanitarian, educational, religious, journalistic
or welfare activities.
2)Requires the board to annually review its investment portfolio
based on publicly available information.
3)Requires that board determinations as to whether a company is
subject to divestment be based on credible information
available to the public and supported by findings adopted by a
roll call vote in open session during a properly noticed
public hearing of the full board.
4)Provides that if a company fails to take substantial action,
as defined, within one year, then the board shall not renew or
make additional investments in that company and shall
liquidate investments in this company within 18 months.
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5)Specifies that nothing in this bill would require the board to
take an action pursuant to the above provisions if the board
determines, in good faith, that an action would be a breach of
the fiduciary responsibilities of the board as described in
the California constitution.
FISCAL EFFECT
CalPERS estimates the costs of implementing the provisions of AB
1151 are an additional $850,000 to $1,275,000 because the bill
would have the Board of Administration hold hearings, make
determinations and produce a report on a quarterly instead of
annual basis. Ongoing monitoring costs under existing law are
approximately $550,000 annually for CalPERS staff costs and
external fiduciary counsel and this amount is not expected to
change.
COMMENTS
1.Purpose. According to the authors, even though existing law
requires California public pension funds to divest from
companies doing business with Iran, "CalPERS continues to
invest in companies with interests in Iran and has failed to
satisfactorily comply with statutorily mandated reporting
requirements to the Legislature." The authors point to a 2010
legislative oversight hearing showing that CalPERS has
"increased investments in several energy companies doing
business in Iran, while decreasing investments in other energy
companies that do not do business with Iran." In addition,
the authors contend the CalPERS required report to the
Legislature failed to adequately explain why CalPERS continues
to invest in companies that do business with Iran.
2.Constitutional Requirements . Section 17 of Article XVI of the
California Constitution, as amended by Proposition 162 in
1992, 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." This section also states that 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."
However, this section is equally clear that the Legislature
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retains its authority 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."
3.Background: the California Public Divest from Iran Act of
2007 . AB 221 (Anderson, Chapter 671, Statutes of 2007)
enacted the California Public Divest from Iran Act. This
legislation prohibits the boards of CalPERS and CalSTRS from
investing public employee retirement funds in companies that
have specified energy- or defense-related operations in Iran.
In addition, AB 221 required the boards to independently
review publicly available information regarding companies with
business operations in Iran and, based on that review, to
notify such companies that they must take "substantial action"
to reduce or eliminate investments in Iran or face the
prospect of withdrawal of public pension funds. If the
company fails to satisfactorily take substantial action within
a year, then the boards of CalPERS and CalSTRS are required to
liquidate investments in that company within 18 months.
4.Federal Law Background : For more than a decade the United
States government has condemned the government of Iran for its
support of international terrorism, human rights violations
and efforts to develop nuclear weapons in defiance of the
international community. Although federal law has for some
time prohibited American companies from engaging in specified
business practices with Iran, it has no similar power to ban
the actions of foreign companies. However, the United States
does have the power to penalize foreign companies by denying
them certain advantages of U.S. law. As such, the key
provisions of the Iran Sanctions Act require the president to
impose two of seven possible sanctions on foreign persons or
companies that make an investment of more than $20 million in
Iran's energy sector.
5.Support . The bill is supported by several human rights
organizations. For example, the Simon Wiesenthal Center
argues that this bill "would increase accountability by
requiring that any determination that an action would breach a
fiduciary duty be done by a roll call 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." In addition, the Simon Wiesenthal Center argues
that this bill, coming from a key American state, "will send a
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message to the long-suffering people of Iran that Californians
stand with their quest for freedom and will not, under any
circumstances, help to prop up an evil regime that threats the
region and oppresses its own people."
6.Opposition . CalSTRS opposes the bill stating, "This measure
would require the board to potentially compromise its
fiduciary responsibility and infringe on its investment
authority. Requiring investment decisions to be made in a
public hearing could adversely affect the market conditions
for those investments, resulting in harm to the value of those
investments and a negative impact to the Teachers' Retirement
Fund."
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081