BILL ANALYSIS AB 221 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 221 (Anderson) As Amended September 4, 2007 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |75-0 |(June 5, 2007) |SENATE: |36-0 |(September 6, | | | | | | |2007) | ----------------------------------------------------------------- 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. AB 221 Page 2 6)Provides that these provisions will be repealed once both of the following have occurred: a) Iran has been removed from the U.S. Department of State's list of countries which have been determined to have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 AB 221 Page 3 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 AB 221 Page 4 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 AB 221 Page 5 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 AB 221 Page 6 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. AB 221 Page 7 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 FN: 0002801