BILL ANALYSIS �
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 903
Gloria Negrete McLeod, Chair Hearing date: May 2, 2011
SB 903 (Anderson) as introduced 2/18/11 FISCAL: YES
CALPERS AND CALSTRS: DIVESTMENT FROM IRAN - DETERMINATION OF
BREACH OF FIDUCIARY DUTY AND REQUIREMENTS OF PUBLIC NOTICE
AND HEARING
HISTORY :
Sponsor: Author
Prior legislation: AB 221 (Anderson)
Chapter 671, Statutes of 2007
SB 861 (Corbett), 2011
Currently in Senate Appropriations Committee
AB 1151 (Feuer), 2011
Currently in Assembly PER&SS Committee
SUMMARY :
With regard to the California Public Employees' Retirement
System (CalPERS) and the California State Teachers'
Retirement System (CalSTRS):
This bill would require that any decision not to divest from
a company as specified under the California Public Divest
from Iran Act because doing so would be a breach of fiduciary
duty, must be made in a public hearing of the full board
after proper public notice and an opportunity for public
comment.
BACKGROUND AND ANALYSIS :
1)Existing law :
a) pursuant to the state Constitution, as amended by
Proposition 162 (The California Pension Protection Act
of 1992), provides that the boards of California's
public retirement systems have "?plenary authority and
fiduciary responsibility for investment of monies and
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administration of the system."
b) pursuant to the state Constitution, as amended by
Proposition 162 added Constitutional language providing
that the Legislature also retained its authority, by
statute "?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."
c) pursuant to the state Constitution, provides that
"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;"
d) known as the Bagley-Keene Open Meeting Act provides
that nothing in the Act shall be construed to prevent a
state body that invests retirement, pension, or
endowment funds from holding closed sessions when
considering investment decisions;
e) establishes the California Public Divest from Iran
Act (Chapter 671, 2007) which prohibits the boards of
the CalPERS and CalSTRS from investing public employee
retirement funds in companies with business operations
in the defense or nuclear sector of Iran, or that are
involved in the development of Iranian petroleum or
natural gas resources and are subject to specified
federal sanctions;
f) requires the CalPERS and CalSTRS boards to sell or
transfer any assets in a company with business
operations in Iran until the federal government removes
Iran from its list of countries determined to provide
support for acts of terrorism, and the President
determines and certifies that Iran has ceased specified
efforts regarding nuclear materials and technology, and
g) does not require the boards of CalPERS and CalSTRS to
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divest investments and take other prescribed actions, as
specified, unless they determine in good faith that the
action is consistent with their fiduciary duties.
2)This bill :
a) would require 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.
COMMENTS :
1)CalPERS and CalSTRS Activities in Compliance with Chapter
671, Statutes of 2007 (AB 221 - Anderson)
In addition to providing the required reports to the
Legislature regarding specified divestment activities, both
CalPERS and CalSTRS provided an update during a joint
informational hearing by this committee and the Assembly
Public Employees', Retirement and Social Security committee
in February last year.
During that hearing, representatives from both CalPERS and
CalSTRS testified that pursuant to Chapter 671, they
identified, monitored and engaged companies in their
respective investment portfolios, reviewed their status
under Chapter 671, had taken specified action with some
companies, and will continue their commitment to compliance
with the Act.
As a result of activities pursuant to Chapter 671,
withdrawals by these major multinational corporations
reduced the value of CalPERS' portfolio holdings in
companies subject to divestment from $2 billion to
approximately $300 million, which potentially could be
subject to further divestment.
CalSTRS has continued to monitor the situation with regards
to Iran and engage companies identified as having ties to
the country. According to CalSTRS, CalSTRS has divested
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holdings under Chapter 671. Over the past year, CalSTRS
staff has met with identified companies and plans to
continue engagement activities in 2011.
2)Arguments in Support
According to the Jewish Public Affairs Committee (JPAC):
"It 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. This bill would establish a transparent and
public process for such a determination, and would also
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."
JPAC further adds:
"The State Legislature passed AB 221 to join an
international effort, a United States effort and
national movements among the states to put international
pressure on Iran to end its rogue activities. It is
unfortunate that CalPERS continues to defy the
Legislature and hide behind fiduciary duty when other
states have divested. This bill is a step forward in
shedding the light of day on their efforts to avoid
divestment."
3)Arguments in Opposition
According to CalSTRS:
This measure changes the application of the board's
fiduciary duty pursuant to Section 17 of Article XVI of
the California Constitution relative to investments in
Iran.
Under the California Public Divest from Iran Act, the
CalSTRS board is required to take specified actions
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unless the board determines, in good faith, that such
actions would not be consistent with its fiduciary duty.
This measure changes that standard so that the board's
standard for exercising its fiduciary duty would be set
much higher.
In addition, CalSTRS expresses concerns regarding
discussing investment strategies during an open, public
session of the board:
The public hearing requirement runs counter to the
Bagley-Keene Open Meeting Act which authorizes a state
body that invests retirement, pension, or endowment
funds to consider investment decisions in closed
session.
If the board were to debate the fiduciary responsibility
of a specific investment in open session with the
required notice period, the investment would be exposed
to a potentially negative market impact which could
result in significant losses for CalSTRS. These actions
would not serve to maximize the investment and would run
counter to the board's fiduciary responsibility of
maximizing income for the fund.
4) SUPPORT :
Jewish Public Affairs Committee (JPAC)
5) OPPOSITION :
California Conference of Machinists
California State Teachers' Retirement System (CalSTRS)
California Teamsters Public Affairs Council
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