BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: SB 1928
Deborah V. Ortiz, Chair Hearing date: April 24, 2000
SB 1928 (Haynes) as amended 4/24/00 FISCAL: YES
PERS and STRS: "CAPITOL MARKETS TASK FORCE BOARD" PROPOSED
TO MAKE RECOMMENDATIONS REGARDING PENSION FUND INVESTMENTS IN
CERTAIN FOREIGN COMPANIES THAT POSE A SECURITY THREAT
HISTORY :
Sponsor: author
Prior legislation: Proposition 162 (adopted in 1992)
AB 2745 (Kaloogian, 2000)
SUMMARY :
Would create the "Capitol Markets Task Force Board" to make
recommendations to the PERS and STRS Boards of Administration
in the areas of national security concerns, human rights
concerns, and social concerns material to the performance of
their investments.
BACKGROUND
1) The committee is advised that lawmakers at both the
Federal and State levels have expressed concern about
investment by U.S. investors in companies that may "threaten
national security."
In May 1999, the U.S. House of Representatives Select
Committee on U.S. National Security and Military/Commercial
Concerns with the Peoples' Republic of China issued a report
(the "Cox Report") which includes in its findings that
capital from companies traded in the U.S. markets is flowing
to the Peoples' Republic of China and ultimately represents
funding for that government's military operations.
2) The California Joint Legislative Audit Committee (JLAC)
has recently initiated inquiries into PERS and STRS
investments in companies the Cox Report found had ties to the
Peoples' Republic of China.
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PERS and STRS provided analyses of their holdings in these
companies, which are said to be widely held in the investment
community by pension plans, mutual funds and other
institutional investors and are not the subject of Federal
government investment restrictions or limitations.
JLAC is scheduled to decide soon whether or not to order an
audit of the systems on this matter.
ANALYSIS :
1) Existing language in the State Constitution , pursuant to
Proposition 162 (adopted in 1992), provides that pension
boards such as the PERS and STRS Boards of Administration
"?shall have plenary authority and fiduciary responsibility
for investment monies and administration?." of the retirement
systems (Section 17 of Article XVI).
"Plenary" is defined by Funk and Wagnalls as, "Full in all
respects or requisites; entire; absolute; complete."
2) SECTION 1 OF THE BILL - LEGISLATURE'S CONCERNS
This bill :
a) expresses the Legislature's concerns that PERS "?has
invested pension funds in foreign companies that may pose
threats to national security?," and
b) states that the Legislature encourages PERS and STRS
"?not to invest in foreign companies that pose threats to
national security and fundamental human rights."
3) SECTION 2 OF THE BILL - CREATION OF "CAPITAL MARKETS TASK
FORCE BOARD"
This bill would create such a board, consisting of:
- The Governor,
- The Treasurer,
- The Controller,
- The Majority and Minority leaders of the Senate, and
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- The Majority and Minority leaders of the Assembly.
This bill would provide that the Task Force Board would make
recommendations in the areas of national security concerns,
human rights concerns, and social concerns material to the
performance of PERS and STRS investments to the Boards of
Administration of those systems.
COMMENTS :
1) The author asserts:
"This bill is needed because of several recent
improprieties involving PERS' and STRS' investments. Last
year, it was revealed that PERS had invested millions of
dollars of employee pension funds in companies connected
with Chinese military and intelligence operations, even
though investment in Chinese companies is expressly
forbidden by
PERS' own policies.
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One of these companies was caught attempting to smuggle
2,000 AK-47 fully-automatic assault rifles into California,
and has been described as 'essentially a naval arm of the
People's Liberation Army.' Such investments could pose
serious financial risks for state employees and retirees,
as well as serious security risks to the United States.
Moreover, it was revealed that both PERS and STRS have
owned stock in a Canadian-based oil company that is a
partner with the China National Petroleum Corporation for
the development and construction of oil fields and
pipelines in Sudan. The U.S. State Department has labeled
Sudan as one of seven state sponsors of international
terrorism, and both companies have been internationally
condemned for their role in financing the Sudanese regime
and its war of genocide and slavery against its own people.
These incidents clearly point to the need for an external
body with expertise in international finance, national
security, and human rights issues, to provide advice to
PERS and STRS."
2) The PERS analysis of AB 2745 (Kaloogian, 2000), a similar
bill, states:
"PERS portfolios are managed within specific policies and
guidelines approved by PERS' Investment Committee. PERS
considers many non-financial criteria in establishing PERS'
Permissible Country Policies (e.g. political risk, market
liquidity and volatility, country development, market
regulation, legal system, investor protections, settlement
proficiency, transaction costs, and technological growth.)
Based on the results of this review process, the Investment
Committee determines the list of countries that are
appropriate for manager discretion, countries where
managers must limit PERS' exposure, and prohibited
countries that are outside manager discretion. The
Permissible Country criteria, both financial and
non-financial, are currently under Investment Committee
reevaluation.
The Federal government can prohibit American citizens from
purchasing or selling goods, services, or interests of
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specific foreign countries, such as Cuba and Iraq.
However, there is currently no national security-based
review of entities seeking to gain access to capital
through the U.S. markets. Therefore, U.S. investors are
unlikely to know if they are inadvertently assisting in
financing activities that threaten national security. The
U.S. government does not currently provide the investment
community with information linking specific companies to
terrorist activities, proliferation of weapons of mass
destruction, or other activities the U.S. considers
national security risks."
3) SUPPORT :
California Correctional Peace Officers Association
(CCPOA)
4) OPPOSITION :
None to date.
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