BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1379
Gloria Negrete McLeod, Chair Hearing date: June 27, 2011
AB 1379 (Bradford) as amended 6/23/11 FISCAL: YES
CALPERS AND CALSTRS: INVESTMENTS AND ECONOMIC DEVELOPMENT
HISTORY :
Sponsor: Assembly Jobs, Economic Development, and the
Economy Committee
Prior legislation: SB 294 (Price), 2011
in Assembly Appropriations Committee
AB 17 (Davis), 2011
in Assembly Appropriations Committee
AB 1913 (Davis), 2010
held in Senate Rules Committee
AB 1919 (Davis), 2010
held in Senate Rules Committee
SB 1108 (Price), 2010
died in Assembly Appropriations
Committee
AB 2570 (Arambula), 2006
Vetoed
ASSEMBLY VOTES :
PER & SS 4-1 4/13/11
Appropriations 12-5 5/27/11
Assembly Floor 51-27 6/02/11
SUMMARY :
1) This bill :
a) makes Legislative findings and declarations regarding
the State's economy, unemployment rate, the need for the
State to support the recovery and expansion of
industries, as specified, investments by public
retirement system, and implementing effective economic
development policies based on better information on fund
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investments in California and in emerging domestic
markets;
b) requires a State or local public retirement systems
with assets over $4 billion to provide a report, as
specified, to the State Controller on California
investments, as defined, and emerging domestic market
investments, as defined, that it obtains and holds in its
portfolio on and after July 1, 2012; and
c) allows the State Controller, at his or her discretion,
to compile and publish on its internet website the
information that State and local public retirement
systems are required to provide by this bill, as
specified.
BACKGROUND AND ANALYSIS :
1)Existing law :
a) requires all State and local public retirement
systems to submit audited financial statements to the
Controller who is required to compile and publish a
report annually on the financial condition of those
systems;
b) created the California Public Employees' Retirement
System (CalPERS) and the California State Teachers
Retirement System (CalSTRS);
c) vests the CalPERS and CalSTRS boards with management
and exclusive control of the administration and
investment of their respective retirement funds;
d) pursuant to the California Pension Protection Act of
1992 (Proposition 162) passed by voters, 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";
e) under Proposition 162, retains the authority of the
Legislature to, by statute, "continue to prohibit
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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 pursuant to
this section";
f) pursuant to the State Constitution, states:
"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, minimizing employer contributions
thereto, and defraying reasonable expenses of
administering the system"; and
g) pursuant to Proposition 209, passed by voters in
1996, amended the California Constitution to state:
"The state shall not discriminate against, or grant
preferential treatment to, any individual or group on
the basis of race, sex, color, ethnicity, or national
origin in the operation of public employment, public
education, or public contracting."
1)This bill :
a) makes Legislative findings and declarations regarding
the State's economy, unemployment rate, the need for the
State to support the recovery and expansion of
industries, as specified, public pensions system
investments, and implementing effective economic
development policies based on better information on fund
investments in California and in emerging domestic
markets;
b) requires each State or local public retirement system
with assets over $4 billion, to include a report, as
specified, on California investments and emerging
domestic markets, as each are defined, obtained and held
in its portfolio after July 1, 2012;
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c) specifies that investments by asset class must be
reported by fair market value and a percentage of the
total portfolio, and may include an estimate of the
number of jobs created and retained as a result of the
system's investment activity;
d) clarifies that a State or local public retirement
system may elect to satisfy the reporting requirements
by reporting on its total portfolio, rather than those
investments made after July 1, 2012, if the information
is provided and identified consistently, as specified;
e) declares that intent of the Legislature that public
retirement systems with sufficiently diversified
portfolios adopt emerging domestic market investment
policies, consistent with their plenary authority and
fiduciary responsibilities, to meet their own investment
objectives;
f) defines "California investment" as an investment that
produces competitive risk-adjusted rates of return while
promoting economic and community development
opportunities, which include moneys that are directed
under an agreement with the asset manager to be
primarily invested in California with regard to
fund-to-fund investments;
g) defines "emerging domestic market investment" as an
investment that produces competitive risk-adjusted rates
of return while promoting economic and community
development opportunities to areas of the State that
have had limited access to capital markets, and that
targets groups of people who are historically
underserved;
h) requires the boards of CalPERS and CalSTRS to share
with other public pensions systems streamlined and
cost-effective methods for identifying investments
within their portfolios, as specified;
i) allows the State Controller, at his or her
discretion, to compile and publish on its internet
website the information provided by State and local
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public retirement systems, as specified; and
j) requires the State Controller, if he or she decides
to publish the information received from State and local
retirement systems, as specified, to publish the
information on its website within 12 months of receipt
of the information, or no later than 18 months after the
end of the fiscal year on which the information is
based.
FISCAL :
The committee notes that costs of this bill are unknown at
this time. However, both CalPERS and CalSTRS already have
policies regarding investment in emerging domestic markets
within the State. If the definition of "emerging domestic
markets" in this bill differs from CalPERS' or CalSTRS'
definition, program costs may arise if investment program
restructuring is required.
Additional program costs may arise based on the requirement
that CalPERS and CalSTRS are required to share streamlined
and cost-effective methods for identifying investments within
their portfolios with other public pension plans, and
additional costs may be incurred by the Controller for
ongoing compiling and publishing of the required information
from State and local retirement systems, including annual
maintenance of this information on its internet website.
COMMENTS :
1)Comparison to SB 294 (Price), 2011
Previously heard by this committee on May 2, SB 294 (Price)
requires the CalPERS and CalSTRS boards to each provide a
5-year strategic plan, as specified, for emerging
investment manager participation across all asset classes;
requires each board to submit an annual report to the
Legislature, until January 1, 2018, with benchmarks
regarding the progress of the strategic plan; and, requires
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the boards to define "emerging investment manager" for
purposes of its provisions.
2)CalPERS' Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
The CalPERS Board of Administration has adopted several
policies and investment programs to diversify its
investments portfolio, which provides opportunities and
resources for the investment industry as a whole. Through
its private equity program and California Initiative, which
invests in underserved communities throughout California,
CalPERS has committed more than $4 billion to firms with
significant minority participation. In addition, CalPERS
created a Management Development Program over ten years ago
to invest directly in small and emerging funds in exchange
for an equity stake. In 2007, CalPERS also established a
series of emerging manager programs including hedge funds
and private equity while encouraging minority-owned and
emerging money-management firms to participate in its
research briefings and outreach events held around the
country.
In January 2007, both CalPERS and CalSTRS unveiled an
online Emerging Managers and other Financial Service
Provider (EMFSP) database of more than 700 emerging
managers and financial service providers towards exposing
public and private pension funds and other institutional
investors to a new universe of emerging investment firms,
and in an effort to boost investment returns by building
investment portfolios that tap into the changing
demographics and talent emerging in California and across
the country.
According to CalPERS and CalSTRS, the EMFSP database is
intended to capture the universe of emerging financial
service firms, create an industry reference guide, provide
information transparency and broaden opportunities for
adding value to institutional investors' portfolios from a
largely untapped pool of talent. It also gives plan
sponsors, corporations, endowments and institutional
investors across the nation exposure to a wide range of new
investment options.
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3)CalPERS' Investment Considerations
According to CalPERS:
The capital that CalPERS invests in California usually is
not explicitly directed to the State, but is the
consequence of a process weighing the financial merits of
particular companies, properties and projects, regardless
of location. The size of CalPERS, and of California's
economy, is the primary driver of the System's significant
exposure to local communities and the related benefits that
this brings, like job creation. As of June 30, 2010,
CalPERS invested:
a) $6.1 billion in 644 California-headquartered public
companies, which employ over 700,000 people in the state
- nearly 5% of the total workforce.
b) $4.7 billion of fixed income capital in California,
$810 million of which is invested in 14 California
headquartered corporate bond issuers employing over
85,000 workers in the state.
c) $2.9 billion in 1,331 California-headquartered
private companies, which support more than 140,000 local
jobs.
d) $3.3 billion in 387 California-based real estate
projects.
e) $80 million in six California-based infrastructure
projects.
Based on these investments, CalPERS has invested
approximately $17 billion in companies, properties and
projects located in California across five key asset
classes - public equities, private equities, fixed income,
real estate, and infrastructure.
1)CalPERS' $400 Million Commitment to Emerging Managers
On April 27, 2011, CalPERS announced that it had committed
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a total of $400 million to three emerging managers in the
pension fund's Manager Development Program II (MDP II) for
public equity investment.
CalPERS earmarked funds to companies that either specialize
in quantitative core strategies or provide assets and
venture capital to small and emerging public equity firms
that have no more than $2 billion of assets under
management.
According to Joseph Dear, CalPERS' Chief Investment
Officer, CalPERS, "These emerging managers will play an
important role in our effort to nurture potential diverse
major players in the financial markets."
2)CalSTRS' Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
In 2001, the CalSTRS Board adopted the Policy on California
Investments. The Policy on California Investments also
established a goal of investing 2% of CalSTRS assets in
underserved markets, primarily in California. This action
attempted to eliminate the obstacles some sectors were
having in terms of access to capital and recognized the
importance of diverse investments.
In February 2002, the Board's Investment Committee approved
an implementation plan for investing in underserved urban
and rural markets. The plan called for hiring fund-of-fund
managers with independent decision-making authority who
would work with general partners. It also incorporated a
newly created New and Next Generation Investment Program
into the existing program for Urban and Rural Investing,
which had been guided by the Policy on California
Investments.
In August 2005, CalSTRS embarked on an approach to build a
strategy to incorporate diversity into the management of
CalSTRS investments.
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The Proactive Portfolio is a strategy that is interwoven in
all asset classes within CalSTRS' Portfolio, whereby a
framework is provided for selecting investments when the
investments are: 1) in the emerging space, and/or; 2) to
capture innovative strategies (i.e. new market
opportunities and/or new drivers of value creation due to
changing demographics, etc.), and/or; 3) investments
consistent with the Board's Policy on California
Investments.
3)CalSTRS' Annual Report on California Investments Policy,
Period Ending June 30, 2010
According to CalSTRS' September 2, 2010 Investment
Committee Meeting, at the Investment Committee's request,
staff developed and presented a report on California
Investments since September 5, 2001. The report identifies
the California content of CalSTRS' investment portfolio,
and the amount of investments in the underserved portions
of the State.
a) as of June 30, 2010, the California content of the
Portfolio amounted to more than $19.9 billion, or 15.3%
of the portfolio.
b) in the underserved markets, CalSTRS has invested $5.0
billion which represents 3.97% of the total portfolio.
The California content of CalSTRS' portfolio increased by
$3.0 billion in the 2009-10 fiscal year which resulted in
CalSTRS surpassing, and almost doubling its 2% investment
objective.
4)The California Economic Strategy Panel
The fifteen-member bipartisan California Economic Strategy
Panel, established in 1993 is comprised of eight appointees
by the Governor, two appointees each by the President pro
Tempore and the Speaker, and one each by the Senate and
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Assembly Minority Leaders. The Secretary of the California
Labor and Workforce Development Agency serves as the Chair.
According to its website, the Panel "continuously examines
changes in the state's economic base and industry sectors
to develop a statewide vision and strategic initiatives to
guide public policy decisions for economic growth and
competitiveness. The California Regional Economies Project
is currently the lead mechanism for these efforts."
5)Arguments in Support
According to the author,
"Existing law is not sufficiently specific on the
contents of the state economic development strategy.
This has resulted in a lack of concrete recommendations
relating to the use and attraction of private
investment. California communities represent a
potentially significant investment opportunity for
institutional investors generating appropriate
risk-adjusted returns. The State, however, does not
track investments made by public pension funds and does
not engage private investors on how to make the State a
more attractive place in which to invest. More private
investment, in turn, could result in increased financial
opportunities for the state's historically underserved
capital markets, also known as emerging domestic markets
�which] include ethnic, and women-owned firms, urban and
rural communities, companies which serve
low-to-moderate-income populations, and other small, and
medium-sized businesses. Despite advances in venture
capital, the vast majority of minority firms do not have
access to financing technologies available to larger
companies."
The author further contends that, "�This bill] mitigates
these limitations by directly engaging private investors
and beginning to track the large, fully diversified, public
pension funds."
6)SUPPORT :
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California Black Chamber of Commerce
California Small Business Association (CSBA)
CDC Small Business Finance (CDCSBF)
California Reinvestment Coalition (CRC)
California Urban Partnership (CUP)
Latino Business Chamber of Greater Los Angeles (LBCGLA)
Los Angeles LDC, Inc.
Small Business California (SBC)
Small Business Financial Development Corporation of Orange
County (SBFDC)
The Greenlining Institute
10) OPPOSITION :
None to date
#####
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