BILL ANALYSIS �
AB 1151
Page 1
ASSEMBLY THIRD READING
AB 1151 (Feuer and Blumenfield)
As Amended May 5, 2011
Majority vote
JUDICIARY 9-0 PUBLIC EMPLOYEES 6-0
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|Ayes:|Feuer, Wagner, Atkins, |Ayes:|Furutani, Mansoor, Allen, |
| |Dickinson, Huber, | |Harkey, Ma, Wieckowski |
| |Huffman, Jones, Monning, | | |
| |Wieckowski | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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APPROPRIATIONS 17-0
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|Ayes:|Fuentes, Harkey, | | |
| |Blumenfield, Bradford, | | |
| |Charles Calderon, Campos, | | |
| |Davis, Donnelly, Gatto, | | |
| |Hall, Hill, Lara, | | |
| |Mitchell, Nielsen, Norby, | | |
| |Solorio, Wagner | | |
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SUMMARY : Amends the California Public Divest from Iran Act
(Act) to, among other things, clarify that pension boards must
divest pension funds, as specified, unless to do so would breach
a fiduciary duty; modify the types of companies that fall within
the scope of the bill; and, require that certain findings and
determinations must be made in noticed public hearings.
Specifically, this bill :
1)Provides that the boards of California Public Employees'
Retirement System (CalPERS) and California State Teachers'
Retirement System (CalSTRS) (boards) shall not invest public
employee retirement funds in a company which has specified
business operations in Iran, as identified by the boards
through publicly available information, if the company meets
either of the following criteria:
a) The company is invested in or engaged in business
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operations with entities in the defense or nuclear sectors
of Iran, or has an investment of $20 million or more in the
energy sector of Iran, including a company that provides
oil or liquefied natural gas tankers, or products used to
construct or maintain pipelines used to transport oil or
liquefied natural gas, for the energy sector of Iran, and
that company is subject to sanctions under relevant federal
law; or,
b) The company has demonstrated complicity with an Iranian
organization that has been labeled as a terrorist
organization by the United States (U.S.) government.
2)Requires the boards to annually review their investment
portfolios based on publicly available information.
3)Requires that the boards' determination as to whether a
company is subject to, or remains 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. Requires further that all proposed findings of the
boards shall be made public 72 hours before they are
considered by the full board, and the boards shall maintain a
list of interest parties who shall be notified.
4)Provides that if a company fails to take substantial action,
as defined, within one year, then the boards shall not make
additional, or renew, investments in that company, and,
thereafter, the boards shall liquidate investments in this
company within 18 months in a manner consistent with its
fiduciary responsibilities.
5)Specifies that nothing in this bill would require the boards
to take an action pursuant to the above provisions if the
boards determine, in good faith, that an action would be a
breach of the fiduciary responsibilities of the board as
described in the California constitution. However, any
determination that an action would be a breach fiduciary duty
shall be made in a public hearing of the full board after
proper notice and an opportunity for public comment.
6)Eliminates existing exemptions from the Act for companies
engaged in certain humanitarian, educational, religious,
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journalistic, or welfare activities.
EXISTING LAW :
1)Prohibits the boards from investing public employee retirement
funds in a company which has business operations in Iran if
the company: a) is invested in or engaged in business
operations with entities in the defense or nuclear sectors in
Iran or involved in the development of petroleum or natural
gas resources of Iran; OR, b) has demonstrated complicity with
an Iranian organization that has been labeled as a terrorist
organization by the U.S. government.
2)Requires the boards to identify and notify any company that
may be subject to divestment. If the company fails to take
corrective measures within one year, as specified, then the
board shall not make any new or additional investments in that
company and, thereafter, shall liquidate existing investments
within 18 months.
3)Requires that the boards shall file an annual report with the
Legislature detailing relevant investments in companies
subject to divestment, any actions that the boards have taken
to reduce investments, and a calculation of any costs or
losses associated with compliance.
4)Specifies that the above provisions do not require the boards
to take a divestment action unless the boards determine, in
good faith, that the action is consistent with its fiduciary
responsibilities.
5)Exempts from the above provisions companies that are engaged
in humanitarian, educational, religious, journalistic, or
welfare activities.
6)Provides that the above provisions shall cease to operate if
Iran is removed from the U. S. Department of State's list of
countries that have been determined to support international
terrorism AND the President of U.S., as provided by federal
law, determines that Iran has ceased its efforts to design,
develop, manufacture, or acquire a nuclear explosive device or
related materials or technology.
7)Provides that the board of a public pension fund shall have
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sole and exclusive fiduciary responsibility over the assets of
the public pension fund and that the members of the board
shall discharge their duties solely in the interest of
providing benefits to participants and their beneficiaries.
However, the Legislature may by statute prohibit certain
investments where it is in the public interest to do so, and
provided that any prohibition satisfies the standards of
fiduciary care, as specified.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, CalPERS estimates the costs of implementing the
provisions of this bill 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 : Existing law prohibits the boards of CalPERS and
CalSTRS (boards) from making new investments in companies that
do business in Iran's energy sector and generally requires the
boards to liquidate existing investments in such companies.
This bill seeks to clarify that these actions are required
unless doing so would constitute a breach of the boards'
constitutionally-mandated fiduciary responsibilities. In
addition, this bill would require that certain board
determinations be adopted by a rollcall vote at a noticed public
hearing.
AB 221 (Anderson) Chapter 671, Statutes of 2007, enacts 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.
AB 1151
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Existing law, however, contains a significant loophole: it
specifies that CalPERS and CalSTRS are only required to divest
funds to the extent that it is "consistent" with their fiduciary
responsibilities. The authors of this bill point to recent
legislative oversight hearings which found that CalPERS has
"increased investments in several energy companies doing
business in Iran, while decreasing investments in other energy
companies which do not do business in Iran." Arguably, one of
the reasons CalPERS has not been as successful in achieving
divestment as one might hope is a byproduct of the somewhat
vague standard that requires divestment only if doing so is
"consistent" with a board's fiduciary responsibilities. It is
not clear what "consistent" means in this context, and the word
"consistent" has no meaning in case law defining the scope of
fiduciary duties. For example, would an action be
"inconsistent" with fiduciary responsibilities only if it rose
to the level to a "breach" of fiduciary responsibility, or could
something less than a legal breach be "inconsistent" with that
responsibility?
In order to clarify this issue, this bill would clearly state
that a board is required to take a divestment action unless to
do so would create a "breach of fiduciary responsibility," a
term which has a more definite legal meaning. In addition, this
bill seeks to increase greater accountability and transparency
by requiring that certain board findings and determinations be
adopted at a noticed public hearing. Specifically, existing law
requires the boards to request that a notified company take
"substantial action," as specified, toward curtailing business
in Iran and requires the boards to determine a company's
compliance at 90-day intervals. This bill would require that
the determinations be based on credible information available to
the public and be adopted by a rollcall vote at a properly
noticed public hearing of the full board. In addition, this
bill would require that any determination that an action would
be a breach of fiduciary duty similarly be adopted by a rollcall
of the full board following a presentation and discussion of
findings in an open session, during a properly noticed public
hearing.
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
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with interests in Iran and has failed to satisfactorily comply
with statutorily mandated reporting requirements to the
Legislature." In support of this position, 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 that CalPERS required report to the Legislature
failed to adequately explain why CalPERS continues to invest in
companies that do business with Iran.
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
FN: 0000879