BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 1151 (Feuer)
As Amended May 5, 2011
Hearing Date: July 5, 2011
Fiscal: Yes
Urgency: No
TW
SUBJECT
Public Retirement Systems: Investments: Iran
DESCRIPTION
Existing law, the California Public Divest from Iran Act
(CPDIA), prohibits the Public Employees' Retirement System
(CalPERS) and the State Teacher's Retirement System (CalSTRS)
from investing public employee retirement funds in a company
with business operations in Iran. This bill, among other things,
would require additional public reporting requirements, as
specified, by CalPERS and CalSTRS, regarding retirement
investments in companies with business operations in Iran. This
bill also would clarify the fiduciary duties of CalPERS and
CalSTRS regarding investments subject to the CPDIA.
BACKGROUND
According to the U.S. Department of State, Iran remains the most
active state sponsor of terrorism. The U.S. Government, by
Executive Orders issued by the President as well as by
Congressional legislation, prohibits most trade with Iran. Some
sanctions were imposed on Iran because the government is a state
sponsor of terrorism, others because of the nuclear
proliferation issues, and still more for human rights
violations, including infringement of religious freedom. The
commercial relations that do exist between the two countries
consist mainly of Iranian purchases of food and medical products
and U.S. imports of carpets and food.
Congress passed the "Iran Freedom Support Act of 2006" (P.L.
109-293) to hold the current Iranian regime accountable for its
(more)
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threatening behavior and to support a transition to democracy.
On March 24, 2007, the United Nations Security Council imposed
new, more stringent sanctions in an effort to stop Iran's
uranium enrichment program and to try to force it to rejoin
negotiations to halt its efforts at developing weapons of mass
destruction. Since 2007, the United Nations Security Council
has issued additional sanctions against Iran, and the European
Union and Canada have imposed restrictions on investments in
Iran's energy sector. On July 1, 2010, the Comprehensive Iran
Sanctions, Accountability and Divestment Act of 2010 (P.L.
111-195) was enacted which, among other things, provides a legal
framework for U.S. states and local governments to divest their
portfolios of foreign companies involved in Iran's energy
sector.
While most American companies are barred by law from working
with or in countries listed as sponsors of terrorism, most
foreign companies are legally allowed to operate in such nations
unless their own governments prohibit such activity.
In California, the Legislature enacted the California Public
Divest from Iran Act (CPDIA), which prohibits CalPERS and
CalSTRS from investing public employee retirement funds in a
company with business operations in Iran that is invested in or
engaged in business operations with entities in the defense or
nuclear sectors of Iran, or the company is invested or engaged
in business operations with entities involved in the development
of petroleum or natural gas resources of Iran. (AB 221
(Anderson, Ch. 671, Stats. 2007).)
CalPERS and CalSTRS filed reports on December 31, 2009 as
required under CPDIA.
After reviewing these reports, the California Attorney General
notified both CalPERS and CalSTRS of their failure to provide
enough detail to enable the public to know whether CalPERS and
CalSTRS were complying with CPDIA. Further, the reports failed
to explain why CalPERS and CalSTRS continue to invest in
companies that do business in Iran. (See Attorney General
Edmund G. Brown Jr., letters to CalPERS Chief Executive Officer
Anne Stausboll and CalSTRS Chief Executive Officer Jack Ehnes,
Feb. 8, 2010.) In addition, the 2010 annual report submitted by
CalPERS showed that CalPERS continues to maintain investments in
companies with business operations in Iran because divesting
investments in these companies "would be inconsistent with the
Board's constitutional fiduciary duties." (CalPERS, California
Public Divest from Iran Act, Annual Legislative Report (Dec. 31,
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2010), pg. 9.)
This bill contains public hearing provisions similar to, but not
the same as, SB 903 (Anderson, 2011), which, among other things,
would require Cal ERS and CalSTRS, when making a determination
that an action taken pursuant to the CPDIA would be a breach of
fiduciary duty, to make such determination in a properly noticed
public hearing with an opportunity for public comment. SB 903
is currently in the Assembly Public Employees, Retirement and
Social Security Committee.
This author-sponsored bill, among other things, would require
additional public reporting requirements, as specified, by
CalPERS and CalSTRS, regarding retirement investments in
companies with business operations in Iran. This bill also
would clarify the fiduciary duties of CalPERS and CalSTRS
regarding investments subject to the CPDIA.
This bill also contains provisions relating to particular
definitions and exclusions under the CPDIA. This bill has been
heard by the Senate Public Employment and Retirement Committee
for consideration of those provisions, which are not within this
Committee's jurisdiction. The measure was approved by that
committee on June 13, 2011 by a vote of 5-0.
CHANGES TO EXISTING LAW
Existing law , the California Public Divest from Iran Act,
generally prohibits the Public Employees' Retirement System and
the Teachers' Retirement System from investing public employee
retirement funds in a company which has business operations in
Iran. (Gov. Code Sec. 7513.7.)
Existing law defines the "board" to mean the Board of
Administration of the Public Employees' Retirement System or the
Teachers' Retirement Board of the
State Teachers' Retirement System, as applicable. (Gov. Code
Sec. 7513.7(a)(1).)
Existing law defines "substantial action" to mean a boycott of
the government of Iran, curtailing business in Iran, as
specified, or selling company assets, equipment, or real and
personal property located in Iran. (Gov. Code Sec.
7513.7(a)(9).)
Existing law requires the board to monitor and review, at
intervals not to exceed 90 days, the progress of a company until
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that company has taken substantial action in Iran. (Gov. Code
Sec. 7513.7(g).)
Existing law prohibits the board from making additional or new
investments or renewing existing investments in a company which
has business operations in Iran that has failed to take
substantial action and the board is required to liquidate the
investments of the board in that company, as specified, in a
manner consistent with the board's fiduciary responsibilities
under the California Constitution, Article XVI, Section 17.
(Gov. Code Sec. 7513.7(h).)
Existing law requires the board to annually report to the
Legislature information, as specified, regarding the board's
investments in companies with business operations in Iran.
(Gov. Code Sec. 7513.7(i).)
Existing law , the California Constitution, provides that the
board has the sole and exclusive responsibility to administer
the retirement system in a manner that will assure prompt
delivery of benefits and related services to the participants
and their beneficiaries. The assets of a public pension or
retirement system are trust funds and shall be held for the
exclusive purposes of providing benefits to participants in the
pension or retirement system and their beneficiaries and
defraying reasonable expenses of administering the system.
(Cal. Const., art. XVI, sec. 17.)
Existing law , the California Constitution, provides that the
people have the right of access to information concerning the
people's business and requires meetings of public bodies and the
writings of public officials and agencies to be open to public
scrutiny. (Cal. Const., art. I, sec. 3(b)(1).)
Existing law , the Bagley-Keene Open Meeting Act, provides
statutory requirements of state public bodies to keep the public
informed. (Gov. Code Sec. 11120 et seq.) Existing law requires
state public bodies to post notices and agendas of state public
body meetings. (Gov. Code Secs. 11123, 11125, 11125.4, 11125.5,
11125.9, and 11126.)
This bill would provide that any determination by the board made
at each 90-day interval, as required, that a company has taken
substantial action shall be supported by findings, made public
72 hours before being considered by the board, adopted by a
rollcall vote of the board following a presentation and
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discussion of the findings in open session, during a properly
noticed public hearing of the full board.
This bill would require that the board maintain a list of
interested parties who shall be notified 72 hours before board
consideration of proposed findings that a company has taken
substantial action.
This bill would require the board to include in its annual
report to the Legislature findings and any public comments
relating to the 90-day determination that a company has taken
substantial action.
This bill would provide that a board does not have to take
action pursuant to the CPDIA if the board determines and adopts
findings, in good faith and based on credible information
available to the public, that the action would be a breach of
fiduciary responsibilities of the board.
This bill would require the board to demonstrate how divestment
disadvantages the fund and that any feasible investment
alternatives would yield a lower rate of return with
commensurate degrees of risk, or create a higher degree of risk
with commensurate rates of return.
This bill would require the board, when making a determination
that an action taken pursuant to the CPDIA would be a breach of
fiduciary duty, to make such determination through a recorded
rollcall vote of the full board, following a presentation and
discussion of findings in open session in a properly noticed
public hearing of the full board.
This bill would require that all proposed findings of the board
that an action would be a breach of fiduciary duty shall be made
public 72 hours before they are considered by the board, and the
board shall maintain a list of interested parties who shall be
notified of proposed findings 72 hours before board
consideration.
This bill would require the board to include in its annual
report to the Legislature findings and any public comments
relating to the determination that an action would be a breach
of fiduciary duty.
COMMENT
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1. Stated need for the bill
The author writes:
California public pension funds are statutorily mandated to
divest from companies doing business with Iran, subject to
specified constitutional requirements and limitations.
Nonetheless CalPERS continues to invest in companies with
interests in Iran and has failed to satisfactorily comply with
statutorily mandated reporting requirements to the
Legislature. AB 1151 is in response to a 2010 Legislative
oversight hearing that revealed CalPERS had increased
investments in several energy companies doing business in
Iran, while decreasing investments in other energy companies
which do not do business in Iran.
2. Public access to determinations regarding the California
Public Divest from Iran Act (CPDIA)
This bill would require the Board of Administration of CalPERS
or the Teachers' Retirement Board of CalSTRS, when making a
determination that a company has taken substantial action or
that an action taken pursuant to the CPDIA would be a breach of
fiduciary duty, to make such determinations in a properly
noticed public hearing with an opportunity for public comment.
Existing law provides a public right of access to information
concerning the people's business and requires meetings of public
bodies and the writings of public officials and agencies to be
open to public scrutiny. (Cal. Const., art. I, sec. 3(b)(1).)
In furtherance of this constitutional right, the Legislature
enacted the Bagley-Keene Open Meeting Act (Bagley-Keene), which
provides statutory requirements of state public bodies to keep
the public informed. (Gov. Code Sec. 11120 et seq.)
Bagley-Keene also requires state public bodies to post notices
and agendas of state public body meetings. (Gov. Code Secs.
11123, 11125, 11125.4, 11125.5, 11125.9, and 11126.)
In support of this bill, the author points to the February 8,
2010 letters submitted by the Attorney General to CalPERS and
CalSTRS, which notified each agency of its failure to provide
adequate information to enable the public to know whether
CalPERS and CalSTRS were complying with CPDIA. The Attorney
General also notified them that the reports submitted by these
agencies as required by the CPDIA had failed to explain why
CalPERS and CalSTRS continue to invest in companies that do
business in Iran. (See Attorney General Edmund G. Brown Jr.,
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letters to CalPERS Chief Executive Officer Anne Stausboll and
CalSTRS Chief Executive Officer Jack Ehnes, Feb. 8, 2010.)
A review of the CalPERS annual report submitted to the
Legislature on December 31, 2010 revealed that CalPERS continues
to maintain investments contrary to the requirements of CPDIA.
In support of CalPERS' inaction to divest from Iran businesses
required under CPDIA, CalPERS stated in the annual report that
"�t]he CalPERS Board, with advice from external fiduciary legal
counsel and contemplation of staff and Wilshire cost analysis,
concluded that it would be inconsistent with the Board's
constitutional fiduciary duties to implement a divestment of
companies with Iran business operations solely to comply with
the Iran Act." (CalPERS, California Public Divest from Iran
Act, Annual Legislative Report (Dec. 31, 2010), pg. 9.)
The author argues that this bill would provide new levels of
transparency to the investment practices of CalPERS and CalSTRS
and pension fund compliance with state divestment requirements.
Given the Attorney General's findings that CalPERS and CalSTRS
have failed to divest their investments as required under the
CPDIA and subsequent annual reports by CalPERS and CalSTRS
showing the failure to comply with CPDIA, the public has a right
of access under the Constitution to oversee these agencies and
their decisions for failing to conform to the divestment
requirements.
The Jewish Public Affairs Committee, a supporter of this bill,
argues that "�i]t is clear from both legislative oversight
hearings and the reports issued by these agencies, particularly
CalPERS, that they are avoiding the intent of the Legislature
and have not divested. These decisions are based on a
questionable interpretation of fiduciary duty. . . . �AB 1151]
would . . . clarify the burden of making such a finding by
shifting the findings burden to a specific determination of
inconsistency which is more in line with Legislative intent."
The author argues that if these agencies believe they have
fiduciary duties that will be breached by divesting the
investments, then the public has a right to know why.
Accordingly, this bill would provide that determinations by
CalPERS and CalSTRS of whether a company has taken substantial
action, as defined, or whether an action taken by the board
could result in a breach of fiduciary duties with respect to
investments in Iran would be made at a properly noticed public
hearing with an opportunity for the public to comment on these
determinations.
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3. Fiduciary duty of CalPERS and CalSTRS does not change under
this bill
This bill would clarify that CalPERS and CalSTRS do not have to
take action pursuant to the CPDIA if the board determines and
adopts findings, in good faith and based on credible information
available to the public, that the action would be a breach of
fiduciary responsibilities of the board. Existing law prohibits
CalPERS and CalSTRS from making additional or new investments or
renewing existing investments in a company which has business
operations in Iran that has failed to take substantial action
and the board is required to liquidate the investments of the
board in that company, as specified, in a manner consistent with
the board's fiduciary responsibilities under the California
Constitution, Article XVI, Section 17. (Gov. Code Sec.
7513.7(h).) However, existing law also requires the board to
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. (Cal.
Const. art. XVI, sec. 17(d).)
CalPERS, an opponent of this bill, and CalSTRS, expressed
concern that this bill would be in conflict with Government Code
Section 11126, which authorizes a state agency to hold closed
sessions when considering investment decisions. CalSTRS argues
that if the public knows that CalSTRS is about to sell the stock
in companies doing business with Iran, there could be a negative
market impact on the investment, and the shares would lose value
by the time CalSTRS sold them, resulting in a loss of pension
funds. The Committee has not received a letter from CalSTRS,
but CalSTRS has posted an opposition analysis of this bill on
its website.
In response to CalPERS' and CalSTRS' concerns, the author argues
that this bill would only require "a public discussion of any
determination not to divest from a company doing business in
Iran's energy, nuclear or defense sectors, and to discuss why
divesting would be a breach of fiduciary duty. Discussing why
the pension fund will not divest sends a signal to the
investment market that CalSTRS or CalPERS will remain invested
in an asset (as opposed to terminating their investment), and if
anything, that signal should have a salutary effect on the
market value of the asset."
This bill would require the board to demonstrate how divestment
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disadvantages the fund and that any feasible investment
alternatives would yield a lower rate of return with
commensurate degrees of risk, or create a higher degree of risk
with commensurate rates of return. Further, this bill would
require the board, when making a determination that an action
taken pursuant to the CPDIA would be a breach of fiduciary duty,
to make such determination through a recorded rollcall vote of
the full board, following a presentation and discussion of
findings in open session in a properly noticed public hearing of
the full board. This bill does not change the fiduciary duty of
CalPERS and CalSTRS to manage investments 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. This bill
merely requires CalPERS and CalSTRS to publicly report the
reasoning behind failing to divest investments pursuant to the
CPDIA as it relates to a particular risk of loss or inability to
maximize the rate of return.
In order to maintain consistency with the language contained in
the California Constitution, article XVI, section 17(g), which
provides for a "failure to satisfy" fiduciary duties by CalPERS
or CalSTRS rather than providing for a "breach of" fiduciary
duties, as in this bill, the author proposes to amend the bill
as follows:
Author's amendments :
1. On page 6, line 19, strike out "towards" and insert
"toward"
2. On page 8, lines 7 and 8, strike out "be a breach of"
and insert "fail to satisfy"
3. On page 8, line 15, strike out "be a breach of fiduciary
duty" and insert "fail to satisfy the fiduciary
responsibilities of the board as described in Section 17 of
Article XVI of the California Constitution"
The author indicates that this amendment was negotiated with
CalSTRS and may remove its opposition.
Support : American Jewish Committee; American Legion, Department
of California; AMVETS, Department of California; Anti-Defamation
League; Center for the Promotion of Democracy and Human Rights;
City of Beverly Hills; City of West Hollywood; Jewish Labor
Committee Western Region; Jewish Public Affairs Committee;
Military Officers Association of America, California Council of
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Chapters; Simon Wiesenthal Center; 30 Years After; United
Against Nuclear Iran
Opposition : California Public Employees' Retirement System;
California State Teacher's Retirement System
HISTORY
Source : Author
Related Pending Legislation : SB 903 (Anderson, 2011) See
Background.
Prior Legislation : AB 221 (Anderson, Ch. 671, Stats. 2007) See
Background.
Prior Vote :
Senate Public Employment and Retirement Committee (Ayes 5, Noes
0)
Assembly Floor (Ayes 79, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Public Employees, Retirement and Social Security
Committee (Ayes 6, Noes 0)
Assembly Judiciary Committee (Ayes 9, Noes 0)
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