BILL ANALYSIS
AB 1967
Page 1
Date of Hearing: April 9, 2008
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Ed Hernandez, O.D., Chair
AB 1967 (Torrico) - As Introduced: February 14, 2008
SUBJECT : Public employee retirement: investments: sovereign
wealth funds.
SUMMARY : Prohibits the California Public Employees' Retirement
System (CalPERS) and the California State Teachers' Retirement
System (CalSTRS) from making new, additional, and/or renewed
investments in private equity companies owned in whole or in
part by sovereign wealth funds (SWFs), or in private equity
funds managed directly or indirectly by a private equity company
owned in whole or in part by a SWF, affiliated with countries
that have not signed or become a party to at least 5 or 6
specified treaties covering basic human rights. Specifically,
this bill :
1)Enacts the Responsible Private Equity Investment Act of 2008
(Act) which prohibits CalPERS and CalSTRS from investing in a
private equity company, that is not publicly traded and is
wholly or partially owned by a SWF, or in a private equity
fund managed directly or indirectly by a private equity
company that is owned in whole or in part by a SWF, if the SWF
is affiliated with a country that is not a signatory or a
party to the terms of at least 5 or 6 specified international
human rights treaties (i.e., treaties protecting economic,
social, and cultural rights; civil and political rights;
rights against race discrimination; rights against sex
discrimination; rights to be protected from torture; and
children's rights).
2)Specifies that this prohibition does not apply if the United
States Department of State (State Department), in the most
recent human rights report prepared, as specified, has
determined that the country with which the SWF is affiliated
generally respects human rights or the country is not reviewed
in that report.
3)Specifies that if the prohibition does not apply, CalPERS and
CalSTRS must do the following before making new, additional,
or renewed investments in a private equity firm owned in whole
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or in part by a SWF, or in a private equity fund managed by
such a company:
a) Evaluate the SWF using publicly available information,
or information obtained using its best efforts, concerning
specified aspects of the following:
i) Transparency;
ii) Political stability;
iii) Productive labor practices;
iv) Corporate social responsibility;
b) Prepare a detailed written report of the evaluation and
make it publicly available at least 60 days prior to making
a final investment decision.
c) Consider the evaluation in deciding whether to make or
renew an investment in the private equity fund;
4)If the evaluation shows deficiencies in any of the key areas,
CalPERS and CalSTRS must do both of the following:
a) Not make the investment unless the Board of the
retirement system determines that not doing so would be
inconsistent with its fiduciary responsibilities.
b) State in writing its decision with respect to proceeding
with the investment. This statement is considered a public
record, as specified.
5)Requires, on or before January 1, 2010, and annually
thereafter, CalPERS and CalSTRS to report to the Legislature
on the investment decisions made under these provisions.
6)Specifies that nothing in these provisions require the
retirement boards to take action that is contrary to their
fiduciary responsibilities.
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 made in
compliance with the Act.
8)Specifies that these provisions are severable and if any
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provision is held invalid, that invalidity will not affect
other provisions of the bill.
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
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."
FISCAL EFFECT : Unknown.
COMMENTS : According to the sponsor, the Service Employees
International Union (SEIU), "This groundbreaking bill makes
sense for responsible investors: It takes basic human rights
and related risk factors into account while ensuring that
CalPERS and CalSTRS abide by their fiduciary responsibilities?
SEIU represents over 670,000 working men and women in California
who believe that their retirement funds should not be used to
earn profits for governing regimes that deny basic human rights
to people anywhere in the world. Partnering with SWFs from
countries that don't meet minimum standards for the treatment of
workers, women, and children is not an acceptable means of
meeting a retirement system's assumed rate of return."
The sponsor concludes, "This bill does not require divestment
from any existing limited partnerships or ask CalSTRS or CalPERS
to do anything inconsistent with their fiduciary duties.
Because CalSTRS and CalPERS retain the ability to do what is
required by their fiduciary responsibilities, calculations of
billions of dollars in lost investment returns are ungrounded.
California's pension funds have repeatedly led the way when
human rights and investment policy intersect, most notably by
divesting from companies that operated in South Africa during
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the immoral and oppressive apartheid regime. Those who said
that was a stand we could not afford to take were wrong; our
actions helped foster a peaceful transition to democracy and
equality. The Responsible Private Equity Investment Act
challenges us not to turn a blind eye to egregious human rights
abuses in order to generate investment returns to fund public
servants' retirement. We are at a crossroads and it is time,
once again, to take the lead."
Sovereign Wealth Funds: SWFs are investment funds owned and
managed by national governments. Originally created in the 1950s
by oil and resource-producing countries to help stabilize their
economies against fluctuating commodity prices, and to provide a
source of wealth for future generations, they have proliferated
considerably in recent years. Although their lack of
transparency makes estimating SWF investment levels difficult,
it is estimated that they currently manage between $1.9 and $2.9
trillion. Estimates of their growth over the next several years
vary with Morgan Stanley projecting their growth will reach $12
trillion by 2015.
SWFs can be funded through a variety of means, including profits
from the sale of commodities (such as oil) or a current account
surplus. SWFs can be established to serve several different
objectives. These may include diversifying national assets,
stabilizing the domestic economy against volatile commodity
prices, saving for future generations, getting a better return
on investment than traditional foreign exchange reserves, and
promoting political or strategic interests.
According to information provided by CalSTRS, SWFs have a
variety of management styles: the Abu Dhabi Investment Authority
(ADIA), for example, is actively managed by members of the Abu
Dhabi royal family (one of several royal families in the United
Arab Emirates (U.A.E.)); the Stabilization Fund of the Russian
Federation is managed by Russia's Ministry of Finance; and the
Kuwait Investment Authority outsources management to
professional fund managers.
In terms of market power, SWFs constitute significant sources of
investment capital. The U.S. Congressional Joint Economic
Committee lists 39 SWFs with over US$1 billion in assets as of
fall 2007. All together, these 39 SWFs hold $3.2 trillion in
assets. The largest SWFs are maintained by countries with
significant oil revenue, such as the U.A.E., Norway, Saudi
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Arabia, and Kuwait, as well as countries with significant excess
foreign reserves, such as Singapore and China. Three of the SWFs
with over $14 billion in assets are U.S.-based: the Alaska
Permanent Fund, the New Mexico State Investment Office Trust
Funds, and the Permanent Wyoming Mineral Trust Fund.
CalPERS and CalSTRS Private Equity Investments : According to
CalPERS, "Private equity investments are managed through the
CalPERS Alternative Investment Management (AIM) Program. Since
inception in 1990 to September 30, 2007, the AIM Program has
generated $12.6 billion in profits for CalPERS. Over the last 10
years (through September 30, 2007), the AIM Program generated an
annual return of 14.1% compared to an annual return of 6.6% for
the Wilshire 2500 ex-tobacco index. The AIM Program's goal is to
perform as "an investor of choice" by partnering with the
world's leading private equity firms in order to achieve
superior risk-adjusted returns. The AIM Program currently has
relationships with over 100 private equity firms. Some of these
firms have sold minority equity stakes to outside investors,
including SWFs. On a few occasions, CalPERS has itself invested
in private equity companies. In all instances of which CalPERS
is aware, outside investors only have minority, non-controlling,
passive ownership stakes. To date, the firms that have been able
to attract outside capital are among the most successful private
equity firms in the industry."
According to CalSTRS, "The Private Equity (called Alternative
Investments, or AI, at CalSTRS) portfolio is the 'high octane'
of the CalSTRS investment fund, with a present investment
commitment of $13 billion. The Investment Committee added AI to
the portfolio in 1991 with a target allocation of 2 percent as a
means of increasing the overall rate of return, and in 2000, the
target allocation was increased to nine percent. In 2007, the AI
portfolio was the highest returning asset class with a 33
percent return. It is also the highest returning asset class
over the past five years at 25.875 percent. Compared to other
pension systems, CalSTRS has the second highest performing AI
portfolio in the United States.
Foreign Policy Issues : According to CalSTRS, "The U.S.
Constitution provides sole purview of foreign relations and
policy to the federal government. There are several federal
cases pending in other jurisdictions with respect to recent
Sudan and Iran divestment efforts, and similar divestment
efforts have previously been struck down by federal courts."
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CalPERS contends, "Legitimate concerns relating to SWFs such as
transparency, human rights, and national security, etc., are
best left to the federal government to address. CalPERS does not
have the expertise to analyze and address these concerns. The
federal government, not state governments, oversees
international trade and foreign policy issues and has the power
to negotiate and enforce international agreements on trade and
investment."
Information provided to the Committee by CalPERS indicates that
the Treasury Department, along with finance ministries from the
rest of G8, has asked the International Monetary Fund (IMF) and
the Organization for Economic Cooperation and Development (OECD)
to begin working on best practices relating to SWFs. The IMF
recommendations, due this fall, are expected to focus on
enhancing SWF transparency in order to increase the number of
SWFs that publish annual accounts and provide outsiders some
insight into governance and investment strategies. The OECD has
begun working on best practices for host countries, and in
particular the processes of host country review of SWF
investments.
The U.S. Congress has created a bipartisan task force to
investigate SWFs potential effect on geopolitics, and the U.S.
and international economy. Possible policy proposals the task
force may consider include the adoption of new transparency
rules. Similarly, the European Union has called on SWFs to sign
up to a voluntary code of conduct that includes "a set of
principles for transparency, predictability and accountability."
CalSTRS Opposition : The Teachers' Retirement Board has taken an
oppose position on the bill stating, "AB 1967 arbitrarily
restricts CalSTRS' and CalPERS' investment opportunities;
infringes on the federal government's constitutional role to
create foreign policy and federal legislation governing direct
foreign investment; and would increase the unfunded actuarial
obligation by several billion dollars in the next five years."
CalSTRS estimates the lost revenue from just the two current
investments impacted by the bill, Carlyle Group and Apollo
Management, to be at a minimum $1.5 billion over five years with
potential increase in lost returns of up to $5.3 billion over
five years.
CalPERS Concerns : Although the CalPERS Board of Administration
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has not taken a position on the bill yet, an agenda item
presented to the Board in March of this year indicated the
following concerns, " If CalPERS is prohibited from investing in
private equity firms partially owned by an SWF, the investment
performance of the AIM program will be materially adversely
affected. CalPERS currently has relationships with private
equity firms that have SWFs as minority owners. Collectively
these firms manage in excess of $9 billion on behalf of AIM, or
approximately 20% of the assets in the AIM Program. If CalPERS
had not invested in funds sponsored by the private equity
companies targeted by AB 1967, its investment gains would have
been $3 billion less. CalPERS staff believes that many other
top-quartile private equity companies may sell minority equity
stakes to SWFs in the near to interim term. This would further
restrict the universe of funds in which the AIM Program could
invest. In an investment environment where there is competition
among limited partners for the opportunity to invest in the best
performing funds, this likely would have a material impact on
the performance of the AIM Program."
Prior enacted legislation impacting the investment authority of
CalPERS and CalSTRS :
AB 221 (Anderson), Chapter 671, Statutes of 2007, prohibits the
retirement systems from investing in companies that have
specified energy- or defense-related operations in Iran.
AB 2941 (Koretz), Chapter 442, Statutes of 2006, prohibits the
retirement systems from investing public employee retirement
funds in a company with business operations in the Sudan, as
specified, and requires the boards of these retirement systems
to sell or transfer any investments with these companies and
report to the Legislature regarding these investments, as
specified.
AB 2251 (Margolin), Chapter 1351, Statutes of 1992, prohibited
state trust fund and state money investments in business firms
or financial institutions that engage in discriminatory business
practices after January 1, 1994 relating to the Arab League's
economic boycott of Israel.
AB 134 (Waters), Chapter 1254, Statutes of 1986, prohibited the
use of state trust funds or state moneys to make additional or
new investments, or to renew existing investments in firms doing
business with or in South Africa as of January 1, 1987. SB 1285
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(Watson), Chapter 30 Statutes of 1994, repealed these
provisions.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Employees International Union (Sponsor)
Service Employees International Union, Local 1000
Opposition
Advanced Micro Devices
Association of California School Administrators
California Chamber of Commerce
California Retired Teachers Association
California State Teachers Retirement System
California Teachers Association
Financial Services Forum
Organization for International Investment
Private Equity Council
Securities Industry and Financial Markets Association
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957