BILL ANALYSIS �
AB 1151
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1151 (Feuer and Blumenfield)
As Amended July 12, 2011
Majority vote
-----------------------------------------------------------------
|ASSEMBLY: |79-0 |(May 31, 2011) |SENATE: |38-0 |(August 31, |
| | | | | |2011) |
-----------------------------------------------------------------
Original Committee Reference: P.E.,R. & S.S.
SUMMARY : Amends the California Public Divest from Iran Act
(Act) to clarify that pension boards must divest pension funds,
as specified, unless to do so would fail to satisfy a fiduciary
responsibility; 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
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.
AB 1151
Page 2
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 and based on credible
information available to the public, that an action would fail
to satisfy the fiduciary responsibilities of the board as
described in the California constitution. However, any
determination that an action would fail to satisfy fiduciary
responsibilities shall be made in a public hearing of the full
board that is properly noticed and offers an opportunity for
public comment, as specified.
6)Eliminates existing exemptions from the Act for companies
engaged in certain humanitarian, educational, religious,
journalistic, or welfare activities.
The Senate amendments change the phrase "breach of fiduciary
duty" to "fail to satisfy the fiduciary responsibilities," in
order to maintain consistency with the relevant constitutional
language.
AS PASSED BY THE ASSEMBLY , this bill was substantially similar
to the version approved by the Senate.
FISCAL EFFECT : According to the Senate Appropriations
Committee, 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
AB 1151
Page 3
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 requirements in the initial implementing
legislation (AB 221 (Anderson), Chapter 671, Statutes of 2007),
and that the system would incur unknown, additional expenses
beyond those initial costs for implementation of this bill.
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 fail to satisfy of the boards'
constitutionally-mandated fiduciary responsibilities. In
addition, this bill would require that certain board
determinations be adopted by a roll call 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 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 are required
to liquidate investments in that company within 18 months.
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
AB 1151
Page 4
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 is
something less than a legal breach "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 would breach or otherwise fail to satisfy a fiduciary
responsibility. 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 roll call vote at a properly noticed
public hearing of the full board. In addition, this bill would
require that any determination that an action would fail to
satisfy a fiduciary responsibility similarly be adopted by a
roll call 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
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
AB 1151
Page 5
FN: 0002324