BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 903 (Anderson)
As Introduced
Hearing Date: May 3, 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 would provide that
any determination by the Board of Administration of CalPERS or
the Teachers' Retirement Board of CalSTRS that an action taken
pursuant to the CPDIA would be a breach of fiduciary duty shall
be made in a properly noticed public hearing with an opportunity
for public comment.
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.) Further, 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 would provide that any determination by the Board of
Administration of CalPERS or the Teachers' Retirement Board of
CalSTRS that an action taken pursuant to the CPDIA would be a
breach of fiduciary duty shall be made in a properly noticed
public hearing with an opportunity for public comment.
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 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 , 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.
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(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 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 in a properly noticed
public hearing with an opportunity for public comment.
COMMENT
1. Stated need for the bill
The author writes:
In recent legislative oversight hearings in 2010, and in the
annual reports issued by CalPERS �California Public Employees'
Retirement System] and CalSTRS �California State Teachers'
Retirement System], the divestment process required by law
lacks adequate accountability and transparency in the
decision-making process to - contrary to the clear and
undeniable intent of the law, and expressed will of the
Legislature - still remain invested in the Islamic Republic of
Iran.
In a recent letter from Attorney General Jerry Brown to
CalPERS, Brown wrote: "Unfortunately, in violation of state
law, the report fails to explain why CalPERS continues to
invest in companies that do business in Iran."
This transparency bill would simply allow that "(A)ny
determination that an action would be a breach of fiduciary
duty shall be made in a public hearing of the full board after
proper public notice and an opportunity for public comment."
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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 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. 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.,
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 Committee has not received a letter from CalSTRS, but an
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analysis posted on the CalSTRS website 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 the shares, resulting in a loss of
pension funds.
The author argues that, 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. . . . �SB 903] 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 regarding
their 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 the determinations.
Support : Jewish Public Affairs Committee
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : AB 1151 (Feuer), among other
things, would require determinations under the California Public
Divest from Iran Act to be disclosed in properly noticed, public
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hearings. This bill is in the Assembly Judiciary Committee.
Prior Legislation : See Background.
Prior Vote : Senate Committee on Public Employment and
Retirement to be heard May 2, 2011
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