BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 1967
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          Date of Hearing:   April 9, 2008

                              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  
          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  

          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  

          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  



           Service Employees International Union (Sponsor)
          Service Employees International Union, Local 1000


           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)