BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 221
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 221 (Anderson)
          As Amended September 4, 2007
          Majority vote
           
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          |ASSEMBLY:  |75-0 |(June 5, 2007)  |SENATE: |36-0 |(September 6,  |
          |           |     |                |        |     |2007)          |
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           Original Committee Reference:    P.E., R. & S.S.

          SUMMARY  :  Prohibits the California Public Employees' Retirement  
          System (CalPERS) and the California State Teachers' Retirement  
          System (CalSTRS) from investing public employee retirement funds  
          in companies that have specified energy- or defense-related  
          operations in Iran.  Specifically,  this bill  :  

          1)Prohibits the boards of CalPERS and Casters 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 federal sanctions, as  
            specified.

          2)Requires the boards to contract with a research firm to  
            determine those companies that have business operations in  
            Iran and to report its findings to the board on or before  
            March 30, 2008, and to update those reports as circumstances  
            in Iran change.

          3)Requires the boards to independently review publicly available  
            information regarding companies with business operation in  
            Iran and to take specific actions based on that review by  
            March 30, 2008.

          4)Establishes a timeframe under which these boards must stop  
            investing in companies with business operations in Iran that  
            fail to take substantial action, as specified, and for  
            divesting their holdings in these companies.

          5)Requires the boards to report to the Legislature by January 1,  
            2009, and annually thereafter, on their investments with  
            companies with business operations in Iran, as specified.









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          6)Provides that these provisions will be repealed once both of  
            the following have occurred:

             a)   Iran has been removed from the U.S. Department of  
               State's list of countries which have been determined to  
               have repeatedly provided support for acts of international  
               terrorism; and,

             b)   The President determines and certifies to the  
               appropriate congressional committees that Iran has ceased  
               its efforts to design, develop, manufacture, or acquire a  
               nuclear explosive device or related materials and  
               technology.

          7)Indemnifies and holds harmless, by the General Fund, present  
            and former board members, state officers and employees,  
            research firms and investment managers from all liability,  
            losses or damages sustained by reason of any decision not to  
            invest in companies with business operations Iran pursuant to  
            the provisions of this bill.

          8)Specifies that these provisions are severable and if any  
            provision is held invalid, that invalidity will not affect  
            other provisions of the bill.

           The Senate amendments  :

          1)Specify that companies that are involved in the development of  
            Iranian natural gas resources are also covered under the  
            provisions of the bill.

          2) Add a severability clause.

          3)Make other technical changes.

           EXISTING LAW:   As provided in the state Constitution by  
          Proposition 162, The California Pension Protection Act of 1992,  
          the boards of California's public retirement systems have  
          "plenary authority and fiduciary responsibility for investment  
          of monies and administration of the system".  Under Proposition  
          162, the Legislature also retained it's authority to, 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 standards of  
          fiduciary care and loyalty required of a retirement board  








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          pursuant to this section."  The Constitution also states, "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, minimizing employer contributions thereto, and  
          defraying reasonable expenses of administering the system."

           AS PASSED BY THE ASSEMBLY,  this bill was substantially similar  
          to the version approved by the Senate.

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee; the fiscal impact of this bill will depend on the  
          number of companies that the retirement systems' boards  
          determine meet the divestment criteria set forth in this bill.

           1)CalPERS Costs  :  In its analysis of the bill, CalPERS  
            identifies the following potential costs:

             a)   Administrative Costs - About $350,000 over a two-year  
               period related to research, correspondence with companies,  
               and reporting to Legislature.  More modest, but still  
               significant, ongoing costs related to continued monitoring  
               and reporting;

             b)   Divestment Costs - CalPERS estimates that its portfolio  
               includes $2 billion in investments in 10 companies that  
               could meet the criteria for divestment.  Divestment costs  
               associated with these companies would be about $20 million.  
               The costs would be less if fewer companies were ultimately  
               subject to divestment; and,

             c)   Impact on CalPERS Investment Returns - CalPERS staff  
               indicates that, by restricting the investment opportunities  
               available to CalPERS, the bill may result in higher  
               volatility and/or a reduced rate of expected returns for  
               their investment portfolio. CalPERS staff indicates that  
               this bill is not likely to produce an impact that is  
               sufficient to warrant a reduction in its  
               actuarially-assumed rate of return of 7.75%.  Thus, the  
               measure would not have an immediate impact on employer  
               contributions to the fund.

             However, CalPERS staff points out that if all 50 of the  
               companies potentially meeting the criteria for divestment  








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               were excluded from the fund over the past five years, the  
               overall annualized rate of return would have fallen from  
               9.84% to 9.83%--a $66 million loss in fund value. These  
               losses would have been made up through higher employer  
               contributions over a multi-year period.

           2)Casters Costs  :  Casters has not prepared a detailed analysis  
            of the bill's potential costs. It asserts, however, that it  
            would incur significant costs to administer the divestment and  
            the restrictions could result in potentially major reductions  
            in investment returns.

           COMMENTS  :  According to the author, this bill is "?a direct  
          follow-up to last year's AB 2941 by Assemblyman Paul Koretz,  
          which divested CalPERS and Casters of investments in Sudan.   
          Built on the famous South African divestment legislation of the  
          1980s, that bill received strong, bi-partisan support and was  
          signed into law by Governor Schwarzenegger.  Since then, the  
          movement to divest public pension funds from foreign, publicly  
          traded companies that have business ties of any kind to U.S.  
          State Department-designated terrorist-sponsoring states has  
          grown, with efforts - patterned after the successful one in  
          Missouri -sprouting in more than half-a-dozen statehouses across  
          the nation."

          The author goes on to state, "The national security implications  
          of bolstering the economies and infrastructure of terrorist  
          states, such as the Islamic Republic of Iran, may seem apparent.  
           However, the essence and intent of AB 221 is to protect state  
          investments from profound risk and ensure that the millions of  
          Californians who depend on CalPERS and Casters for their  
          retirement income need not fear the risks to their portfolio  
          associated with funding business in a terrorist regime."

           Illinois Lawsuit  :  A federal court judge has overturned an  
          Illinois statute requiring state public pension funds to divest  
          investments in companies with ties to Sudan. Judge Mathew F.  
          Kennelly of U.S. District Court in Chicago ruled in  National  
          Foreign Trade Council v. Topinka  that the act violates federal  
          constitutional provisions that preclude the states from taking  
          actions that interfere with the federal government's authority  
          over foreign affairs and commerce with foreign countries. 

           Foreign Policy Decisions  :  Public pension funds state that  
          foreign policy decisions are a province of the federal  








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          government. Divestment legislation such as this one substitute  
          pension fund foreign policy for State Department foreign policy.  
          Investors are neither equipped nor empowered to make national  
          security decisions, which a federal court judge has recently  
          ruled in Illinois. The federal government is the only credible  
          centralized source of this type of information with the  
          capability to understand the national security implications. 

          Public pension funds across the nation have been reaching out to  
          federal officials to this end to urge the creation of a federal  
          list of prohibited investments based on U.S. national security  
          concerns. Public retirement systems contend it may prove far  
          easier and more productive in the long run for the federal  
          government to direct appropriate prohibitions and sanctions  
          against the companies engaging in activities determined to be  
          contrary to national security interests, rather than against  
          U.S. investors.

           Link to Terrorism  :  Highlighting whether a company or its  
          subsidiary has a business tie to a country on the State  
          Department's terrorism list does not disclose whether the  
          company is in some way "aiding and abetting our enemies." There  
          are companies that may legally operate within these nations  
          according to the policies established by the U.S. government.

          The only official pronouncement of a company's link to terrorism  
          comes from the federal government in the Iran and Syria  
          Non-Proliferation Act.  Public pension funds use this list to  
          avoid investing in companies with confirmed ties to terrorism.

           Center for Security Policy  :  Based in Washington DC, the Center  
          for Security Policy (the Center) has issued a report titled "The  
          Terrorism Investments of the 50 States" contending that public  
          pension funds are aiding and abetting terrorists by investing in  
          publicly-traded companies that legally conduct business in  
          countries deemed terrorism-sponsoring states. Even though the  
          report gives a summary of the their estimated exposure levels  
          for CalPERS and Casters based on publicly available data, the  
          detailed information is considered proprietary information and  
          would have to be purchased from the Center to view.

          The National Association of State Retirement Administrators  
          (NASRA), the National Association of State Auditors,  
          Comptrollers and Treasurers (NASACT), the National Conference on  
          Public Employee Retirement Systems (NCPERS), the National  








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          Conference of State Legislatures and the National Council on  
          Teacher Retirement (NCTR) wrote a mutual letter dated August 30,  
          2004 to the President of the Center. In the letter, the  
          organizations expressed grave concerns with their report.  The  
          letter states the faulty premise and inflammatory title of the  
          report and the data upon which it was based present a distorted  
          and misleading picture of the states and their pension funds.   
          The letter concludes with a suggestion that it, "?may prove far  
          easier and more productive in the long run for the federal  
          government to direct appropriate prohibitions and sanctions  
          against the companies engaging in activities determined to be  
          contrary to national security interests, rather than against  
          U.S. investors.  This would avoid the imposition of unnecessary  
          and potentially ineffectual punishment on U.S. investors, to say  
          nothing of the U.S. employees who work for the companies in  
          activities which are entirely unrelated to the subject  
          behavior." 

           United States Department of State  :  The U.S. Department of State  
          has identified Iran as a state that sponsors terrorism.  State  
          sponsors of terrorism, as defined by the State Department,  
          provide critical support to non-state terrorist groups.  The  
          U.S. State Department identifies the following terrorist states:  
          Cuba, Iran, Libya, North Korea and Syria.  Iran remains subject  
          to U.S. economic sanctions and export controls because of its  
          continued involvement in sponsoring terrorism.

          The Nonproliferation Act of 2000 was amended on June 28, 2005,  
          and renamed the Iran and Syria Nonproliferation Act.  This  
          Executive Order blocks the property of specially designated  
          weapons of mass destruction proliferators and members of their  
          support networks, effectively denying those parties access to  
          the U.S. financial and commercial systems. The Act prohibits any  
          U.S. citizen or permanent resident alien, U.S. company including  
          their foreign branches, and any person or company in the U.S.,  
          from engaging in any transaction or dealing with any with the  
          parties identified under the Executive Order.

           Opposition  :  Both the CalPERS and Casters boards oppose the  
          bill, mainly on the grounds that it infringes on their fiduciary  
          responsibility to manage their investments, maximize investment  
          returns for their members, and make their own determinations of  
          geopolitical risks. As noted in the fiscal section, both systems  
          argue that divestments reduce investment options, increase  
          earnings volatility, and can reduce the earnings of the fund.  








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          Representatives of the two pension systems also assert that they  
          can be more effective in accomplishing change in corporate  
          practices by continuing to hold shares and engaging the  
          companies' managements and boards.

           
          Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916)  
          319-3957 




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