BILL ANALYSIS
AB 221
Page 1
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6)Provides that these provisions will be repealed once both of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
AB 221
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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
AB 221
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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
AB 221
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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.
AB 221
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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
FN: 0002801