BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 1151 (Feuer)
Hearing Date: 8/15/2011 Amended: 7/12/2011
Consultant: Maureen Ortiz Policy Vote: PE&R 5-0 Jud 5-0
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BILL SUMMARY: AB 1151 amends the California Public Divest from
Iran Act to clarify that the California Public Employees'
Retirement System (CalPERS) and California State Teachers'
Retirement System (CalSTRS) Boards must divest pension funds
unless doing so would fail to satisfy its fiduciary
responsibilities. Additionally, AB 1151 modifies the types of
companies that fall within the scope of the Act and requires
that certain findings and determinations must be made in public
hearings.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
CalSTRS
------------------------minor----------------------
Special*
CalPERS ---potentially several
hundred thousand-- Special**
*Teachers Retirement fund **Public Employees Retirement
Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense file.
According to CalSTRS, the changes being proposed to the
California Public Divest from Iran Act would not significantly
affect the pension system, and would not adversely impact the
board's fiduciary duties or responsibilities. There would be an
increase in administrative requirements for compliance, however,
those costs would be minor. CalPERS indicates that they
incurred costs of $550,000 to comply with the monitoring
AB 1151 (Feuer)
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requirements in the initial implementing legislation (AB 221,
Chapter 671, Statutes of 2007), and that the system would incur
unknown, additional expenses beyond those initial costs for
implementation of this bill.
Specifically, AB 1151 does the following:
a) Prohibits the state pension systems from investing in a
company that has an investment of $20 million or more in the
energy sector of Iran including in 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. (This revised definition conforms to the definition of
investment activities in Iran articulated in federal Public Law
111-195 enacted on July 1, 2010.
b) Requires the boards to review investments annually and to
determine which companies are subject to divestment based on
publicly available information.
c) Requires that the boards' determination as to whether a
company is subject to divestment be supported by findings
adopted by a rollcall vote and discussion in open session during
a properly noticed public hearing of the full board.
d) Requires 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 interested
parties who shall be notified. These findings must be included
in the annual report to the Legislature.
e) Specifies that no provisions in the bill will require a
board to take an action if the board determines that action
would fail to satisfy its fiduciary responsibilities. However,
any adopted findings shall demonstrate how divestment
disadvantages the fund and that any feasible investment
alternatives would yield either a lower rate of return with
commensurate degrees of risk, or create a higher degree of risk
with commensurate rates of return.
f) Eliminates existing exemptions from the California Public
Divest from Iran Act for companies engaged in certain
humanitarian, educational, religious, journalistic, or welfare
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activities.
g) Provides all provisions of the act are severable.
The California Public Divest from Iran Act prohibits the Public
Employment Retirement System and the State Teachers' Retirement
System 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, or the company is invested or engaged in
business operations with entities involved in the development of
petroleum or natural gas resources, or engaged in business
operations with an Iranian organization that has been labeled as
a terrorist organization by the United States government.
The Act further requires CalPERS and CalSTRS to sell or transfer
any investments in companies with business operations in Iran
until Iran is removed from a U. S. Department of State's list of
countries that support international terrorism, as specified.
However, CalPERS and CalSTRS are not required to divest if the
boards determine that the company has taken substantial action
in a 90 day period to curtail or end those operations.
Additionally, the boards do not have to take action unless they
determine in good faith that the action is consistent with its
fiduciary responsibilities.
CalSTRS
After enactment of AB 221 (Anderson, Chapter 671, Statutes of
2007), CalSTRS contracted with external sources to identify
companies that have possible ties to Iran. The list is reviewed
by the Geopolitical Investments Review Committee, and any
companies that are identified as meeting the requirements of law
are engaged with through a letter requesting information on that
company's ties to the respective investments and holdings. The
initial list of companies with some level of business ties to
Iran was presented to the CalSTRS board in June 2008 and was
comprised of 23 companies. Three of those companies were
already restricted under the Sudan Divestment Act, 18 did not
meet the restriction criteria, and the last two were not CalSTRS
holdings. One additional company was later identified as having
ties to Iran, but by October 2008, the CalSTRS' portfolio was
free of that company.
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Recently, CalSTRS had 29 investments identified as having ties
to Iran. Only seven of those companies were subject to the
restrictions under the Act and CalSTRS has divested all seven
from its portfolio. CalSTRS continues to monitor and engage
companies identified as having ties to Iran and report annually
to the Legislature. To date, CalSTRS has not made a
determination that taking action of divestiture would be in
conflict or be a breach of its fiduciary duty.
CalPERS
CalPERS is the largest public pension plan in the U. S.,
responsible for over $230 billion in global assets, which are
invested to provide retirement benefits for over 1.6 million
members and retirees. The CalPERS board has the exclusive
authority and sole responsibility to administer system funds to
provide benefits to participants and their beneficiaries, while
minimizing employer contributions and defraying reasonable
administrative expenses.
Existing board policy states that the board will meet in closed
session to discuss investment matters when a public discussion
is likely to impair CalPERS' ability to achieve its investment
objectives. Two specific situations that trigger a closed
session are the discussion of 1) activity reports concerning the
screening and review of potential investments, and 2) decisions
to terminate the contracts of external managers or advisors.
According to CalPERS, it has fully implemented the California
Public Divest from Iran Act since it became effective and has
complied with all of the reporting requirements. CalPERS has
fully engaged with all of the companies on its list, and many of
the companies have withdrawn from Iran through the imposition of
economic sanctions by the United Nations, the European Union,
Japan, South Korea, and the United States. However, CalPERS
indicates all actions to divest have been limited by the board's
fiduciary responsibilities. Since passage of the Act, CalPERS'
portfolio holdings in companies subject to the Act decreased
from $2 billion to about $300 million. On May 16, 2011, CalPERS
announced that "in response to the impact of federal and
international sanctions, the board adopted a plan to divest
shares of the remaining public companies operating in specific
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segments of the Iran and Sudan economies, and that new
investments in these companies would be blocked as well."
SB 903 (Anderson), currently pending in the Assembly
Appropriations Committee, requires that any determination made
by the CalPERS and CalSTRS boards that an action, as specified
in the California Public Divest from Iran Act, would be a breach
of fiduciary duty, be made in a public hearing of the full board
after proper public notice and an opportunity for public
comment.