BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 903 (Anderson)
Hearing Date: 5/16/2011 Amended: As Introduced
Consultant: Maureen Ortiz Policy Vote: PE&R: 5-0 Jud: 5-0
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BILL SUMMARY: SB 903 provides that any decision not to divest
from a company by CalPERS or CalSTRS as specified under the
California Public Divest from Iran Act because doing so would be
a breach of fiduciary responsibility, must be made in a public
hearing.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Public investment discussion -----unknown, likely
minor----- Specials*
*Teachers' Retirement Fund and the Public Employee Retirement
Fund
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STAFF COMMENTS: This bill may meet the criteria for referral to
the Suspense file.
The California Public Divest from Iran Act (CPDIA) enacted by
Chapter 671, Statutes of 2007 (AB 221, Anderson), requires
CalSTRS and CalPERS, when it is consistent with their fiduciary
responsibilities, to divest from companies that are invested in
or engaged in business operations with entities in the defense,
nuclear petroleum or natural gas sectors of Iran, or that have
demonstrated complicity with an Iranian terrorist organization.
SB 903 changes the standard from exempting compliance with
CPDIA from "it is consistent with their fiduciary
responsibilities," to requiring that the action be a "breach" of
fiduciary responsibilities.
SB 903 requires any decision not to divest from a company as
required by the California Public Divest from Iran Act be made
in a public hearing of the full board after proper public notice
and an opportunity for public comment. Neither CalPERS nor
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CalSTRS indicates significant costs associated with the
hearings, since the item would be added to the agenda of an
already scheduled hearing. According to CalSTRS, the potential
impact of holding a divesture debate at a public hearing could
result in a significant loss to the Teachers' Retirement Fund.
While CalSTRS has not discovered an investment that the board
felt should be exempt from divestment for fiduciary reasons, it
remains a future possibility. Debating the fiduciary
responsibilities in relation to a specific investment in open
session could expose the investment to potentially negative
market impact which could ultimately result in significant
losses for the Teachers' Retirement Fund.
CalSTRS has identified 29 investments as having ties to Iran.
Only seven of those companies were subject to the restrictions
under CPDIA, and CalSTRS has divested all seven from its
portfolio. The divestment process is extensive and involved,
and begins with direct engagement with the company aimed at
bringing about change in the corporation. Efforts at engagement
include shareholder resolutions, media campaigns and other
strategies. Reasons to avoid divestment if at all possible
include divestment could result in increased costs and
short-term losses, and that divestment could compromise the
investment strategies and negatively affect investment
performance. Only after all efforts at engagement are concluded
and fail to resolve the risk factor does actual consideration of
divestment begin.
CalPERS is the largest public pension plan in the United States,
responsible for over $200 billion in global assets, which are
invested to provide retirement and health benefits for over 1.6
million Californians. Since the enactment of Chapter 671 in
2007, CalPERS has been actively engaged with companies
identified as having certain business ties to Iran, first
identifying the companies by use of an external research group.
CalPERS had identified 41 investments as having ties to Iran,
and while ten companies are no longer identified as being
prohibited investments, CalPERS does hold portfolio positions in
23 companies with which they are actively undergoing engagement.
CalPERS does not hold investments with eight of the companies
that had been identified.
After the companies were initially identified, CalPERS completed
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a fiduciary analysis to consider the potential economic impact
of divesting shares in those companies including a calculation
of expected costs and an assessment of the impact on CalPERS
risk and return profile if the companies' shares were divested
and alternatives were sought. At a February 2009 Investment
Committee, the Board decided not to divest at that time due to
its overriding fiduciary duty. However, according to CalPERS,
substantial progress has been made through the engagement
process in the curtailment and cessation of business operations
in Iran.
Congress passed the "Iran Freedom Support Act of 2006" (P.L.
109-293) to hold Iran accountable for its 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.