BILL ANALYSIS �
SB 903
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Date of Hearing: August 17, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 903 (Anderson) - As Amended: July 1, 2011
Policy Committee: PERSS Vote:9-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill amends the California Public Divest from Iran Act to
clarify the criteria and process that the boards of the
California Public Employees' Retirement System (CalPERS) and the
California Teachers' Retirement System (CalSTRS) must use to
invest in Iran. Specifically this bill:
1)Allows CalPERS and CalSTRS to invest in Iran if the board
determines that to divest would be a breach of fiduciary
responsibilities.
2)Requires that a determination of a breach of fiduciary
responsibilities be made in a public hearing of the full board
after proper notice to the public and an opportunity for
public comment is granted.
FISCAL EFFECT
The requirement of the bill on CalPERS and CalSTRS to hold
hearings, make determinations and produce a report on a
quarterly basis would result in administrative costs of
approximately $200,000. In addition, both CalPERS and CalSTRS
have raised the possibility of significant investment losses
through discussion in open meetings of issues that could have a
detrimental impact on investments.
COMMENTS
1)Purpose . According to the author, Senate Bill 903 is a public
transparency measure to help CalPERS and CalSTRS fulfill their
statutory commitment to divest of their prohibited investments
in the Islamic Republic of Iran.
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2)Constitutional requirements . Proposition 162 of 1992 amended
the California Constitution to provide that the boards of
California's public retirement systems have "plenary authority
and fiduciary responsibility for investment of monies and
administration of the system." Proposition 162 also stated
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." However, this section is equally clear that
the Legislature retains 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."
3)Background-Federal Law . For more than a decade the United
States government has condemned the government of Iran for its
support of international terrorism, human rights violations
and efforts to develop nuclear weapons in defiance of the
international community. Although federal law has for some
time prohibited American companies from engaging in specified
business practices with Iran, it has no similar power to ban
the actions of foreign businesses. However, the United States
does have the power to penalize foreign companies by denying
them certain advantages of U.S. law. The key provisions of
the Iran Sanctions Act require the president to impose two of
seven possible sanctions on foreign persons or companies that
make an investment of more than $20 million in Iran's energy
sector.
4)Background. The California Public Divest from Iran Act of
2007, AB 221 (Anderson), Chapter 671, Statutes of 2007,
prohibits the boards of CalPERS and CalSTRS from investing in
companies that have specified energy- or defense-related
operations in Iran. In addition, AB 221 required the boards
to independently review publicly available information
regarding companies with business operations in Iran and,
based on that review, to notify such companies that they must
take "substantial action" to reduce or eliminate investments
in Iran or face the prospect of withdrawal of public pension
funds. If the company fails to satisfactorily take
substantial action within a year, then the boards of CalPERS
and CalSTRS are required to liquidate investments in that
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company within 18 months.
CalPERS has submitted the required reports to the Legislature.
They note that board members and staff have testified on
numerous occasions to provide updates and information to the
Legislature. Their 2010 Report on Iran Divestment describes
its implementation of the act during the year, including the
active engagement of companies, and the significant number of
portfolio companies curtailing their activities in Iran or
withdrawing from Iran.
In May 2011, CalPERS divested from remaining companies doing
business in Iran. This action was taken as the fiduciary
analysis showed there will be no impact on portfolio risk and
only minimal trading costs, which will be offset by changing
their compliance activities.
According to CalSTRS, 29 investments were identified as having
ties to Iran, but only seven of those companies were subject
to the restrictions under the Act, and CalSTRS has divested
all seven from its portfolio.
5)Opposition . CalPERS and CalSTRS oppose this bill, arguing it
would impose mandates that would limit their authority in
making investment decisions. They contend that SB 903 has a
public meeting requirement that is contrary to their policies
and state open meeting laws, and also sets a higher standard
than required by their constitutional authority and fiduciary
responsibility. They argue the public hearing requirement
runs counter to the Bagley-Keene Open Meeting Act, which would
allow the consideration of whether or not a potential decision
violated their fiduciary duty to be conducted in closed
session.
6)Relevant legislation. This bill is similar to AB 1151 (Feuer
and Blumenfield), which clarifies that pension boards must
divest pension funds, 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. AB
1151 is pending in Senate Appropriations Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081
SB 903
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