BILL ANALYSIS �
SB 903
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Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Warren T. Furutani, Chair
SB 903 (Anderson) - As Introduced: February 18, 2011
SENATE VOTE : 39-0
SUBJECT : Public retirement systems: investments: Iran.
SUMMARY : Amends the California Public Divest from Iran Act
(Act) to clarify that pension boards must divest pension funds,
as specified, unless to do so would be a breach of fiduciary
duty and requires that this determination be made in a properly
noticed public hearing of the full board with an opportunity for
public comment.
EXISTING LAW :
1)Pursuant to the State Constitution, as amended by Proposition
162 (The California Pension Protection Act of 1972), provides
that the boards of administration of California's public
retirement system have "plenary authority and fiduciary
responsibility for investment of monies and administration of
the system."
2)Pursuant to the State Constitution, as amended by Proposition
162, which added Constitutional language providing that the
Legislature also retained its authority 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."
3)Provides, pursuant to the State Constitution, 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
purpose of providing benefits to, participants and their
beneficiaries, minimizing employer contributions thereto, and
defraying reasonable expenses of administering the system."
4)Provides, pursuant to the Bagley-Keen Open Meeting Act, that
nothing in the Act shall be construed to prevent a state body
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that invests retirement, pension, or endowment funds from
holding closed sessions when considering investment decisions.
5)Establishes the California Public Divest from Iran Act (Act),
created by AB 221 (Anderson), Chapter 671, Statutes of 2007,
which prohibits the boards of the California Public Employees'
Retirement System (CalPERS) and the California Teachers'
Retirement System (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.
6)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 supports for acts of terrorism, and the
President determines and certifies that Iran has ceased
specified efforts regarding nuclear materials and
technologies.
7)Does not require the boards of CalPERS and CalSTRS to divest
investments and take other prescribed actions, as specified,
unless they determine in good faith that the action is
consistent with their fiduciary duties.
FISCAL EFFECT : Unknown.
COMMENTS : According to information provided to the Committee
by CalPERS, the federal government recently enacted the
Comprehensive Iran Sanctions, Accountability, and Divestment Act
of 2010, to strengthen existing federal law imposing sanctions
on Iran by generally tightening investment thresholds and
definitions. The act also tightens export prohibitions to
countries that are deemed to be diversion points for
weapons-related technology being sold to Iran. It further
shields certified investment companies, and their executives,
from civil, criminal, or administrative action resulting from a
decision to divest in Iran's energy sector. Finally, the act
expresses the sense of Congress that it is not a breach of
fiduciary responsibility for a pension plan, governed by the
Employee Retirement Income Security Act of 1974 (ERISA), to
divest from Iran's energy sector, if the divestment
determination 1) is reached using credible, publically available
information, and 2) does not provide a lower rate of return or
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provide a higher rate of risk. However, these safe harbor and
fiduciary responsibility provisions do not apply to CalPERS or
CalSTRS since neither are governed by ERISA.
As the act relates to Iran divestment, it authorizes state and
local governments to divest their assets in companies with more
than $20 million invested in the Iranian energy sector, which is
intended to prevent legal challenges based on federal
preemption.
According to the author, "In recent legislative oversight
hearing in 2010, and in the annual reports issued by CalPERS and
CalSTRS, 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."
Supporters state, "SB 903 would require CalPERS and CalSTRS to
establish a transparent and effective process for determining
whether companies with which it invests have complied with
California law mandating divestment from the energy and military
sectors of Iran. It is critical, now more than ever, that we
support and strengthen our commitment made with the passage of
AB 221 several year ago to force the government of Iran to stop
sponsoring state terrorism, attacking its own people - including
vicious attacks on trade unionists - and developing nuclear
weapons."
CalPERS states they have fully implemented the Act from the time
it became effective on January 1, 2008. "CalPERS has submitted
each report to the Legislature on time with all the required
information. In addition, CalPERS Board Members and staff have
testified on numerous occasions to provide updates and
information to the Legislature. CalPERS' 2010 Report on Iran
Divestment describes its implementation of the Act during the
year, including the active engagement of companies as required
by the Act, and the significant number of portfolio companies
curtailing their activities in Iran or withdrawing from Iran.
It noted that companies' withdrawal from Iran accelerated
through the imposition of economic sanctions on Iran by the
United Nations, the European Union, Japan, South Korea, and the
United States. Examples of major multinationals which withdrew
from Iran in 2010 include Royal Dutch Shell, which announced
that it has agreed to terminate its investments and avoid any
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new activity in Iran's energy sector in full compliance with the
newly expanded U.S. legislation. Likewise, France's Total SA,
Norway's Statoil ASA, Brasil's Petrobras and Italy's Eni Spa
have also agreed to end all investments in Iran. CalPERS has
been calling for withdrawal by these companies since the
inception of the Act, and has actively engaged their senior
management and boards through correspondence and in person
meetings.
"The Report also noted that withdrawals by these major
multinational corporations reduced the value of CalPERS
portfolio holdings in companies subject to the Act from $2
billion to approximately $300 million, prompting CalPERS to
commission a new fiduciary analysis to establish the impact of
potential divestment on the portfolio, while it continues to
identify companies potentially subject to the Act, to notify
them of the law's provisions, and call for their taking of
substantial action or withdrawal from Iran.
"In May 2011, the Board decided to divest from remaining
companies doing business in Iran and Sudan. This action could
only be taken as the fiduciary analysis shows there will be no
impact on portfolio risk and minimal trading costs, which will
be offset by modifying compliance activities. CalPERS will
continue to identify, monitor and rigorously engage companies in
its portfolio and review their status under the Act."
CalPERS is opposed to the bill, stating, "CalPERS must protect
its right to discuss investment decisions in closed session. If
analyses regarding due diligence and investment strategy were to
be made in open session, there could be immediate, unintended
consequences in the public and private markets. Due to this
possible negative market impact, it is imperative that CalPERS
retain the ability to analyze and make investment decisions in
closed session."
According to CalSTRS, they recently had 29 investments
identified as having ties to Iran. "Only seven of those
companies were subject to the restrictions under the Act, and
CalSTRS has divested all seven from its portfolio. CalSTRS
identified 19 companies having ties to Iran that do not meet the
requirements for divestment. The remaining three companies were
reviewed to determine if they met the criteria for divestment,
and two were determined to have not met the criteria, while one
continued to be undetermined. CalSTRS continues its engagement
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activities with the remaining undetermined company and plans to
meet with the company's management this year. While the status
of this company is being determined, CalSTRS has restricted any
further investment.
"CalSTRS continues to monitor and engage companies identified as
having ties to Iran and report annually to the Legislature as
mandated by the California Public Divest from Iran Act. To date,
CalSTRS has not made a determination that taking action as
specified in Chapter 671 (the Act) would be in conflict or be a
breach of its fiduciary duty.
CalSTRS is opposed to the bill stating, "This measure would
require that any determination that an action 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. The public hearing requirement runs counter to the
Bagley-Keene Open Meeting Act, as the consideration of whether
or not a potential decision violated the board's fiduciary duty
under current law would be conducted in closed session.
Specifically, it is in conflict with Government Code Section
11126 that authorizes a state body that invests retirement,
pension, or endowment funds to consider investment decisions in
closed sessions.
"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 losses for the
Teachers' Retirement Fund. This action would not serve to
maximize the investment and would run counter to the board's
fiduciary responsibility of maximizing the income for the fund."
This bill is similar to AB 1151 (Feuer and Blumenfield), of this
year, that amends the Act to, among other things, clarify that
pension boards must divest pension funds, as specified, unless
to do so would breach a fiduciary duty; modify the types of
companies that fall within the scope of the bill; and, require
that certain findings and determinations must be made in noticed
public hearings.
REGISTERED SUPPORT / OPPOSITION :
Support
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AMVETS, Department of California
Anti-Defamation League
California Conference of Machinists
California State Commanders Veterans Council
California Teamsters Public Affairs Council
Jewish Public Affairs Committee
Military Officers Association of America, California Council of
Chapters
Opposition
California Public Employees' Retirement System
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957