BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 107
Deborah V. Ortiz, Chair Hearing date: June 26, 2000
AB 107 (Knox) as amended 6/20/00 FISCAL: YES
PERS AND STRS: DIVESTMENT OF TOBACCO STOCKS:
INDEMNIFICATION OF PERS AND STRS BOARDS FOR POSSIBLE LOSSES
HISTORY :
Sponsor: author
Prior legislation: AB 3445 ( Knox) 1996
Died
AB 1679 (Perata) 1998
Died
AB 1744 (Knox) 1998
Died
SB 1433 (Hayden)
Died
ASSEMBLY VOTES :
NEW BILL WITH SENATE AMENDMENTS
SUMMARY :
Would:
a) prohibit the Public Employees Retirement System (PERS)
and the State Teachers Retirement System (STRS) from making
new or additional investments in any tobacco company on or
after July 1, 2001,
b) require a divestment of those investments by July 1,
2002, at which time PERS and STRS would have zero holdings
in tobacco companies,
c) provide legislative declaration language citing health
related illnesses and conflict with California's
anti-smoking education programs as reasons for the
divestment, and questions related to the future
profitability of tobacco investments, and potential high
David Felderstein AB 107
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risk of such investments, and
d) indemnify (by the General Fund of the State of
California) present and former members of the PERS and STRS
Boards against all liability, losses or damages "?sustained
by reason of any decision not to invest in tobacco
companies pursuant to this chapter."
BACKGROUND :
The committee is advised that Proposition 162, "The
California Pension Protection Act of 1992," was adopted by
the voters in November of that year. Prop. 162 amended the
California Constitution, Article XVI, Section 17, to require
that the PERS and STRS Boards of Administration have the
following mandates:
a) to exercise sole and exclusive "plenary" authority to
administer the system in a manner that will ensure prompt
delivery of benefits and related services to the
participants and their beneficiaries,
b) to discharge their duties with respect to the system
policy in the interest of, and for the exclusive purpose of
providing benefits to participants and their beneficiaries,
minimizing employer contributions, and
c) to discharge their duties with respect to the system
with care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting
in a like capacity would exercise.
However, Proposition 162 also specifically provides:
"The Legislature may by statute continue 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 standard of fiduciary care and
loyalty required of a retirement board pursuant to this
section."
ANALYSIS :
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1) Existing state Constitutional law , pursuant to Prop. 162,
provides that all investment standards and procedures for the
PERS and STRS Funds are derived from the fiduciary duty
to ensure that trust assets are used for the exclusive
purposes, as described above.
2) This bill makes legislative declarations that:
a) the cost to the State for healthcare services for
persons with tobacco-related illnesses is $630 million
annually,
b) California spends $50 million annually on anti-smoking
education programs,
c) PERS and STRS together hold investments of close to one
billion dollars in tobacco companies; holdings which create
an interest that conflicts with the aims of California's
healthcare and anti-smoking education programs, and
d) in 1999, the leading cigarette manufacturer's stock
lost 52% in value, and that other public institutional
investors have restricted or ceased tobacco industry
investments.
3) This bill requires that:
a) on or after January 1, 2001, PERS and STRS would be
prohibited from making new or additional investments in any
"tobacco company," defined as a business entity that makes
more than 10% of its gross revenue from the production of
cigarettes or tobacco-related products,
b) by July 1, 2002, PERS and STRS shall hold no
investments in tobacco companies, and
c) present and former members of the PERS and STRS Boards
shall be indemnified (by the General Fund of the State of
California) against all liability, losses or damages
"?sustained by reason of any decision not to invest in
tobacco companies pursuant to this chapter."
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COMMENTS :
1) STRS BOARD VOTES JUNE 7, 2000, TO DIVEST OF TOBACCO
STOCKS
Following is the Executive Summary of the 6/7/00 Board item
related to the passive (as opposed to active) investment of
tobacco related stocks. The STRS Board voted to divest $238
million in tobacco stocks held in it's passive investment
portfolio at the 6/7/00 meeting.
"The California State Teachers' Retirement System (STRS/
System) on May 3, 2000 adopted a Benchmark Modification
Policy. The STRS Investment Committee (Board) instructed
its Staff and Pension Consulting Alliance, Inc. (PCA) to
provide written analysis specific to the tobacco industry
as it pertains to the Benchmark Modification Policy
(Policy).
Due diligence was to determine whether a change in STRS'
existing benchmark(s) would be in the economic interest of
the System, as determined by specific indicators provided
in the Policy. "Economic interest" is defined as when
either: 1) a more cost efficient alternative is available,
or 2) an industry or sector is exposed to economic risk.
This report focuses on the latter as it is of particular
relevance to the tobacco industry. Economic risk
indicators, as outlined in the Policy, include product
liability judgements, industry-wide bankruptcy filings,
regulatory and/or legislative actions, as well as
deleterious effects of institutional policy decisions. Our
findings indicate that all four of these indicators are
evidenced, thereby, meeting the minimum requirement for
benchmark modification that at least three of four be
present."
STRS also indicates that the definition of "tobacco company"
in this bill is broader than the definition used by the STRS
Board in the adoption of the above passive investment policy
change. The STRS policy change only affects manufacturers of
tobacco products.
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2) PERS MAY VOTE TO DIVEST TOBACCO STOCKS
According to a 6/20/00 article in the Sacramento Bee, the
PERS Board has instructed it's staff to draw up guidelines on
divestiture that would apply to tobacco or any other
industry, and report to the Board at it's August, 2000,
meeting. The Board also received testimony that the PERS
Fund's $400 million in tobacco holdings had lost 40% in value
in the previous two years.
3) PERS and STRS BOARD DEFER TAKING A POSITION ON THIS BILL
The committee is advised that the PERS and STRS Board, in
their respective monthly meetings, have deferred taking a
position this bill .
3) SUPPORT :
American Heart Association
California Teachers Association (CTA)
Planned Parenthood Affiliates of California (PPAC)
American Lung Association
United Teachers Los Angeles (UTLA)
California Cardiovascular Disease Prevention Coalition
American Federation of State, County and Municipal
Employees (AFSCME)
4) OPPOSITION :
None to date.
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