BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 1379|
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THIRD READING
Bill No: AB 1379
Author: Bradford (D), et al.
Amended: 9/1/11 in Senate
Vote: 21
SENATE PUBLIC EMPLOY. & RETIRE. COMMITTEE : 3-2, 6/27/11
AYES: Negrete McLeod, Padilla, Vargas
NOES: Walters, Gaines
SENATE APPROPRIATIONS COMMITTEE : 8-1, 8/25/11
AYES: Kehoe, Alquist, Emmerson, Lieu, Pavley, Price,
Runner, Steinberg
NOES: Walters
ASSEMBLY FLOOR : 51-27, 6/2/11 - See last page for vote
SUBJECT : Economic development: public pension funds
SOURCE : Assembly Jobs, Economic Development, and the
Economy Committee
DIGEST : This bill makes legislative findings and
declarations regarding the States 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 investments in California and in emerging domestic
markets; requires a state or local public retirement
systems with assets over $4 billion to provide a report, as
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specified, to the State Controller (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 allows the
Controller, at his/her discretion, to compile and publish
on its internet Web site the information that State and
local public retirement systems are required to provide by
this bill, as specified.
Senate Floor Amendments of 9/1/11 make a technical
nonsubstantive change in order to correct an improper date
requirement.
ANALYSIS : Existing law:
1. 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.
2. Created the California Public Employees' Retirement
System (CalPERS) and the California State Teachers
Retirement System (CalSTRS).
3. Vests the CalPERS and CalSTRS boards with management and
exclusive control of the administration and investment
of their respective retirement funds.
4. 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".
5. Under Proposition 162, retains the authority of the
Legislature to, by statute, "continue to prohibit
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".
6. Pursuant to the State Constitution, states:
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"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".
7. 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."
This bill:
1. Makes Legislative findings and declarations:
A. Public pension fund investments represent billions
of dollars of financing for California communities,
and the state could adopt and implement more
effective economic development policies with better
information on fund investments in California and in
emerging markets.
B. Historically, economic growth in California has
outpaced the economic growth rate of the nation as a
whole, and the state has led the nation in
export-related jobs, business startups, and
innovation. However, since the subprime home
mortgage crisis in 2007, California communities have
struggled. With the increasing rates of home
foreclosure and the tightening of the credit markets,
many businesses have found their existing lines of
credit inaccessible. Significant drops in consumer
spending have led to workforce reductions and
business bankruptcies.
C. For much of 2009, the number of unemployed workers
rose by 40,000 to 60,000 per month, and the year
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ended with 2.25 million unemployed California
workers. While California may be emerging from the
recession, unemployment is expected to remain high
through 2011. Without specific intervention to
support job creation and business expansion, many
regions of California will be very slow to recover.
D. As California moves forward from this recession,
it is important that the state support the recovery
and expansion of industries that provide quality
jobs, enhance regional and global supply chains, and
strengthen the state's competitiveness.
E. Modern investment theory includes a set of
concepts aimed at building a most efficient portfolio
of different types of assets that yields the highest
return for a given level of investor risk.
Diversification is one of the key elements in
building a portfolio, including diversification by
asset class and by geography. Given that the United
States is the largest economy in the world and that
California is the largest economy in the United
States, a certain portion of any fully diversified
investment portfolio includes investments in
California. Therefore, there is a clear alignment of
interest between medium to large institutional
investors and the economic recovery of California.
F. Increasing investments in minority-owned
businesses and within minority communities is vital
to the future economic health of the nation and its
business community. Investment in historically
disadvantaged communities by public pension systems
adds value for the members of those systems and
increases access to financial capital for
historically underserved markets and groups of
people. Investments in emerging domestic markets can
provide appropriate risk-adjusted returns to
institutional investors including public pension
funds. In 2000, the boards of administration for the
CalPERS and the CalSTRS each adopted a two-percent
goal for economically targeted investments. These
investments are intended to create value for the
members of those retirement systems while
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facilitating improved access to financial capital in
historically underserved markets.
It is the intent of the Legislature, consistent with
the plenary authority and fiduciary responsibilities
of the retirement boards of public pension or
retirement systems under Section 17 of Article XVI of
the California Constitution, that those retirement
boards that have sufficiently diversified portfolios
adopt California emerging market investment policies
that meet their own unique investment objectives.
2. Requires each State or local public retirement system
with assets over $4 billion, to include a report, as
specified, on California investments and California
emerging markets, as each are defined, obtained and held
in its portfolio after July 1, 2012.
3. 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.
4. 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.
5. Defines "California investment" as an investment that
assists in the improvement of state and regional
economies, 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;
6. Defines "California emerging market investment" as an
investment that produces competitive risk-adjusted rates
of return while facilitating the improvement of
traditionally underserved markets, including urban and
rural areas undergoing, or in deed of, revitalization
where assets conducive to business development are
located. A retirement board is permitted to modify the
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definitions and parameters established in this section
for the reporting purposes required by Section 7504.3,
in order to ensure consistency with its adopted
investment policies and to limit its reporting costs.
These definitions and parameter, along with the
methodologies used to formulate the report, shall be
described in its report.
7. Requires for the 2011-12 and 2012-13 fiscal years 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.
8. Allows the Controller, at his/her discretion, to compile
and publish on its internet Web site the information
provided by State and local public retirement systems,
as specified.
9. Requires the 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
Web site 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.
10.These provisions sunset on January 1, 2017.
Comments
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 10 years ago
to invest directly in small and emerging funds in exchange
for an equity stake. In 2007, CalPERS also established a
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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.
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:
1. $6.1 billion in 644 California-headquartered
public companies, which employ over 700,000 people in
the state - nearly 5% of the total workforce.
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2. $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.
3. $2.9 billion in 1,331 California-headquartered
private companies, which support more than 140,000
local jobs.
4. $3.3 billion in 387 California-based real estate
projects.
5. $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.
CalPERS' $400 Million Commitment to Emerging Managers
On April 27, 2011, CalPERS announced that it had committed
a total of $400 million to three emerging managers in the
pension fund's Manager Development Program 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."
CalSTRS' Diversity and Investment Policies, Reporting and
Emerging Manager Efforts
In 2001, the CalSTRS Board adopted the Policy on California
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Investments. The Policy on California Investments also
established a goal of investing two percent 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.
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.
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.
1. as of June 30, 2010, the California content of the
Portfolio amounted to more than $19.9 billion, or 15.3
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percent of the portfolio.
2. in the underserved markets, CalSTRS has invested $5.0
billion which represents 3.97 percent 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 two percent
investment objective.
The California Economic Strategy Panel
The 15-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
Assembly Minority Leaders. The Secretary of the California
Labor and Workforce Development Agency serves as the Chair.
According to its Web site, 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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
CalPERS reporting potentially up to $350
one-time Special*
CalSTRS reporting
-------------------minor------------------- Special**
Local agency reporting ---unknown, nonreimbursable
costs--- Local
Controller admin --------potentially $27
annually-------- General
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*Public Employees Retirement Fund
**Teachers Retirement Fund
SUPPORT : (Per Senate Public Employment and Retirement
Committee analysis of 6/24/11) (Unable to reverify at time
of writing)
Assembly Jobs, Economic Development, and the Economy
Committee (source)
California Black Chamber of Commerce
California Small Business Association
CDC Small Business Finance
California Reinvestment Coalition
California Urban Partnership
Latino Business Chamber of Greater Los Angeles
Los Angeles LDC, Inc.
Small Business California
Small Business Financial Development Corporation of Orange
County
The Greenlining Institute
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."
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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."
ASSEMBLY FLOOR : 51-27, 6/2/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes,
Furutani, Galgiani, Gatto, Gordon, Hayashi, Roger
Hern�ndez, Hill, Huber, Hueso, Huffman, Lara, Bonnie
Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V.
Manuel P�rez, Portantino, Skinner, Solorio, Swanson,
Torres, Wieckowski, Williams, Yamada, John A. P�rez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller,
Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth,
Valadao, Wagner
NO VOTE RECORDED: Gorell, Hall
CPM:kc 9/2/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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