The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill, upon the passage of a federal law that imposes sanctions on Turkey for failure to acknowledge the Armenian Genocide, would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing those sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing those sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would specify that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments. The bill would repeal these provisions if a determination is made by the Department of State or the Congress of the United States, or another appropriate federal agency, that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill, upon the passage of a federal law imposing that imposes sanctions on Turkey for failure to acknowledge the Armenian Genocide, would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing those sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing those sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would specify that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments. The bill would repeal these provisions if a determination is made by the Department of State or the Congress of the United States, or another appropriate federal agency, that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill bill, upon the passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide, would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing those sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing those sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would provide specify that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments. The bill would repeal these provisions if a determination is made by the Department of State or the Congress of the United States, or another appropriate federal agency, that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would provide that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments.

The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would provide that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments.

The California Constitution grants the retirement board of a public employee retirement system plenary authority and fiduciary responsibility for investment of moneys and administration of the retirement fund and system. The California Constitution qualifies this grant of powers by reserving to the Legislature the authority to prohibit investments if it is in the public interest and the prohibition satisfies standards of fiduciary care and loyalty required of a retirement board. Existing law prohibits the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making investments in certain countries and in thermal coal companies, as specified, subject to the boards plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

This bill would prohibit the boards of administration of the Public Employees Retirement System and State Teachers Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey. The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would provide that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments.

GOVERNOR'S VETO

GV Bill Id:AB 1597

Author:(Nazarian)

As Enrolled Ver:September 11, 2018

2/3 vote

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 in the government of Turkey and certain financial instruments of the sovereign state, if the federal government of the United States (U.S.) sanctions Turkey for failing to acknowledge the Armenian Genocide.

The Senate amendments:

1) Update investment data regarding the holdings of CalPERS and CalSTRS in certain financial instruments of the government of Turkey in the legislative findings and declarations.

2) Establish that CalPERS and CalSTRS must divest from any investment vehicle in the government of Turkey immediately upon the passage of federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. CalPERS and CalSTRS also are prohibited from making additional, new, or renewing existing investments in any investment vehicle in Turkey.

3) Require CalPERS and CalSTRS to liquidate investments in Turkey within six months of passage of a federal law imposing sanctions on Turkey for its failure to acknowledge the Armenian Genocide.

4) Require CalPERS and CalSTRS to file a report with the Legislature within one year after passage of federal law imposing sanction on Turkey for its failure to acknowledge the Armenian Genocide.

5) Establishes a repeal of the provisions of this measure if a determination is made by the U.S. State Department or the U.S. Congress, or another appropriate federal agency, that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

EXISTING LAW:

1. Provides, pursuant to California Constitution Article XVI, Section 17, that the boards of California's public retirement systems have "plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system."
2. Provides under the California Constitution that "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 administrating the system…[and] the board shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent to do so."
3. Provides under the California Constitution that the Legislature retains its 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."
4. Prohibits CalPERS and CalSTRS under previous legislative mandates from making or holding certain investments in Iran, Sudan, in businesses discriminating against Israel related to the Arab Boycott of Israel, and in thermal coal companies.

FISCAL EFFECT: According to the Senate Appropriations Committee:

1. CalSTRS indicates that it would incur minor costs to monitor whether federal sanctions have been enacted. If this happens, CalSTRS would incur first-year costs of $405,000, and $43,200 annually thereafter, resulting from a) transaction costs for liquidating securities, and b) additional costs for research services.
2. CalPERS would also incur minor costs to monitor whether federal sanctions have been enacted. If federal sanctions are enacted, CalPERS indicates that its one-time divestment costs would depend on the number of its holdings that meet the bill's criteria, and could reach $2 million. In addition, CalPERS would experience an annual increase in transaction costs of approximately $1.3 million to create and implement ex-Turkey custom bond benchmarks. An unknown portion of these costs would be prorated to local contracting public agencies.
3. The bill would result in unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.
4. All of the fiscal impacts described above would only occur upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. Those fiscal impacts would cease upon a federal determination that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide

COMMENTS: According to the author, "California has a clear policy of Armenian Genocide recognition, as demonstrated by decades of legislative resolutions and gubernatorial proclamations. Contrary to our state's policy, the Turkish government fosters the teaching of genocide denial in its public schools, and continues to discriminate against Armenians and other minorities. Despite these facts, our state's pension systems – CalPERS and CalSTRS – have invested in Turkish government holdings, thereby indirectly subsidizing Turkish denial of the Genocide. The purpose of this bill is to achieve a policy objective of not financially rewarding and investing in governments which routinely violate human rights or which promote policies contrary to investing in governments which routinely violate human rights or which promote policies contrary to our own. Enactment of this bill would make it clear that California will stand on principle and make our state's investment choices consistent with our values and policies, such as Armenian Genocide recognition."

GOVERNOR'S VETO MESSAGE:

This bill, which only goes into effect if the Federal Government imposes sanctions on Turkey, would require our pension funds to sell all bonds or investment vehicles issued by the Turkish government.

The horror of the Armenian Genocide is something no Californian should ever forget. To that end, our school curriculum requires the study of the Armenian Genocide and this year I proclaimed April 24, 2018, as "Day of Remembrance of the Armenian Genocide". In addition, the state extended the statutory deadline for genocide victims or their heirs to seek legal redress.

While this subject is profoundly important, the bill as written is mostly symbolic. Moreover, I am reluctant to force yet another disinvestment measure on our already stressed pension systems.

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957 FN: 0005305

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1597

Author:(Nazarian)

As Amended Ver:August 24, 2018

Majority vote

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 in the government of Turkey and certain financial instruments of the sovereign state, if the federal government of the United States (U.S.) sanctions Turkey for failing to acknowledge the Armenian Genocide.

The Senate amendments:

1. Update investment data regarding the holdings of CalPERS and CalSTRS in certain financial instruments of the government of Turkey in the legislative findings and declarations.
2. Establish that CalPERS and CalSTRS must divest from any investment vehicle in the government of Turkey immediately upon the passage of federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. CalPERS and CalSTRS also are prohibited from making additional, new, or renewing existing investments in any investment vehicle in Turkey.
3. Require CalPERS and CalSTRS to liquidate investments in Turkey within six months of passage of a federal law imposing sanctions on Turkey for its failure to acknowledge the Armenian Genocide.
4. Require CalPERS and CalSTRS to file a report with the Legislature within one year after passage of federal law imposing sanction on Turkey for its failure to acknowledge the Armenian Genocide.
5. Establishes a repeal of the provisions of this measure if a determination is made by the U.S. State Department or the U.S. Congress, or another appropriate federal agency, that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

EXISTING LAW:

1. Provides, pursuant to Section 17 of Article XVI of the California Constitution, that the boards of California's public retirement systems have "plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system."
2. Provides under the California Constitution that "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 administrating the system…[and] the board shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent to do so."
3. Provides under the California Constitution that the Legislature retains its 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."
4. Prohibits CalPERS and CalSTRS under previous legislative mandates from making or holding certain investments in Iran, Sudan, in businesses discriminating against Israel related to the Arab Boycott of Israel, and in thermal coal companies.

FISCAL EFFECT: According to the Senate Appropriations Committee:

1. CalSTRS indicates that it would incur minor costs to monitor whether federal sanctions have been enacted. If this happens, CalSTRS would incur first-year costs of $405,000, and $43,200 annually thereafter, resulting from a) transaction costs for liquidating securities, and b) additional costs for research services.
2. CalPERS would also incur minor costs to monitor whether federal sanctions have been enacted. If federal sanctions are enacted, CalPERS indicates that its one-time divestment costs would depend on the number of its holdings that meet the bill's criteria, and could reach $2 million. In addition, CalPERS would experience an annual increase in transaction costs of approximately $1.3 million to create and implement ex-Turkey custom bond benchmarks. An unknown portion of these costs would be prorated to local contracting public agencies.
3. The bill would result in unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.
4. All of the fiscal impacts described above would only occur upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. Those fiscal impacts would cease upon a federal determination that the government of Turkey has officially acknowledged its responsibility for the Armenian Genocide

COMMENTS: Please see the policy committee analysis for a full discussion of this bill.

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957 FN: 0005147

 THIRD READING  

Bill No: AB 1597

Author:

:

Vote:

SENATE PUBLIC EMP. & RET. COMMITTEE: 4-0, 6/25/18

AYES: Pan, Morrell, Leyva, Portantino

NO VOTE RECORDED: Moorlach

SENATE JUDICIARY COMMITTEE: 5-0, 6/26/18

AYES: Jackson, Anderson, Hertzberg, Monning, Stern

NO VOTE RECORDED: Moorlach, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 5-0, 8/16/18

AYES: Portantino, Beall, Bradford, Hill, Wiener

NO VOTE RECORDED: Bates, Nielsen

ASSEMBLY FLOOR: 67-0, 6/1/17 - See last page for vote

SUBJECT: Public employee retirement systems: prohibited investments: Turkey

SOURCE: Author

DIGEST:

This bill prohibits the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) from investing in Turkey, as specified, upon passage of a federal law that imposes sanctions on Turkey for failing to acknowledge the Armenian Genocide.

Senate Floor Amendments of 8/24/18 make a small technical amendment to add Assembly Member Gabriel as principal coauthor.

ANALYSIS:

Existing law:

1. Provides under Article XVI, Section 17 of the California Constitution that the boards of California’s public retirement systems have “plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system.”
2. Provides under the California Constitution that “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 administrating the system…[and] the board shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent to do so.”
3. Provides under the California Constitution that the Legislature retains its 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.”
4. Prohibits CalPERS and CalSTRS under previous legislative mandates from making or holding certain investments as specified in Iran, Sudan, in businesses discriminating against Israel related to the Arab Boycott of Israel, and in thermal coal companies.

This bill:

1. Prohibits CalPERS and CalSTRS, immediately upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide, from making additional or new investments or renew existing investments of public employee retirement funds in any investment issued by, owned, controlled, or managed by the government of Turkey.
2. Makes certain definitions, as specified, for the “Government of Turkey”, “Turkey”, “Board”, and “Public employee retirement funds”.
3. Requires CalPERS and CalSTRS to liquidate all investments issued by, owned, controlled, or managed by the government of Turkey within six months of the passage of a federal law that imposes sanctions on Turkey for failure to acknowledge the Armenian Genocide.
4. Requires CalPERS and CalSTRS, within one year of the passage of federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide, to file a report with the following information to the Legislature:
   1. A list of investments in Turkey of which the board has liquidated.
   2. A list of investments in Turkey of which the board has not liquidated as a result of a determination by the board that divestment would be inconsistent with its fiduciary duties pursuant to California Constitution Article XVI Section 17, and the board's findings adopted in support of that determination.
5. Specifies that nothing in this bill requires CalPERS or CalSTRS to take action unless they determine in good faith that the action is consistent with their fiduciary duties, as specified.
6. Provides that the required mandate shall be repealed upon a determination by either the Department of State or the Congress of the United States, or other appropriate federal agency that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.
7. Indemnifies from the General Fund and holds harmless the present, former and future board members, officers and employees of, and investment managers under contract with those retirement systems.
8. Makes legislative findings and declarations regarding the Armenian Genocide and the Republic of Turkey's refusal to acknowledge its responsibility of the Armenian Genocide, to reach resolution on its obligations under international treaties and human rights laws, and to return properties, as specified, to their rightful owners, among others.
9. States that divesting these funds would ensure that the State of California is in no way complicit in the continued denial of the Armenian Genocide by the government of Turkey and encourages said government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations for the survivors of the Armenian Genocide.

Background

CalPERS and CalSTRS have significant unfunded actuarial liabilities of approximately $139 billion and $107 billion respectively. Divestment mandates or investment prohibitions worsen those liabilities because they create lost investment opportunities that translate into reduced investment return. According to the Assembly Appropriations Committee, “a 2015 analysis by Wilshire Associates found that previous divestment efforts have collectively reduced the present value of the CalPERS portfolio by a range of $3.8 to $8.3 billion.” The effective loss in value requires increases in employer and member contributions to make up for the loss.

Related/Prior Legislation

SJR 24 (Jackson, 2018), failed passage in the Assembly Committee on Public Employees, Retirement and Social Security, would have required CalPERS to engage with companies in which it is invested that produce or sell firearms to determine a reasonable method for those companies to withdraw from the production and sale of firearms.

SB 459 (Portantino, 2017), which died in the Assembly Committee on Public Employees, Retirement and Social Security, would have required CalPERS to divest from retailers or wholesalers of banned weapons, as specified.

AB 20 (Kalra, Chapter 575, Statutes of 2017) required CalSTRS and CalPERS to report to the Legislature and the Governor, information regarding investments in, and engagement with, companies constructing or funding the construction of the Dakota Access Pipeline. The bill also required CalSTRS and CalPERS to consider factors related to tribal sovereignty and indigenous tribal rights when selecting or rejecting investments.

AB 946 (Ting, 2017), which died in the Assembly Committee on Public Employees, Retirement and Social Security, would have prohibited CalPERS and CalSTRS from investing in companies engaged in business related to building a border wall.

AB 2650 (Nazarian, 2016) and AB 1410 (Nazarian, 2015) were similar to AB 1597. Both were held on the Assembly Appropriations Committee’s Suspense File.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• CalSTRS indicates that it would incur minor costs to monitor whether federal sanctions have been enacted. If this happens, CalSTRS would incur first-year costs of $405,000, and $43,200 annually thereafter, resulting from (1) transaction costs for liquidating securities, and (2) additional costs for research services.
• CalPERS would also incur minor costs to monitor whether federal sanctions have been enacted. If federal sanctions are enacted, CalPERS indicates that its one-time divestment costs would depend on the number of its holdings that meet this bill’s criteria, and could reach $2 million. In addition, CalPERS would experience an annual increase in transaction costs of approximately $1.3 million to create and implement ex-Turkey custom bond benchmarks. An unknown portion of these costs would be prorated to local contracting public agencies.
• This bill would result in unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.
• All of the fiscal impacts described above would only occur upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. Those fiscal impacts would cease upon a federal determination that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

SUPPORT: (Verified 8/27/18)

All-Armenian Student Association

Alliance of Armenians Against Genocide

American Hellenic Council

Armenian Assembly of America

Armenian National Committee of America - Western Region

Assyrian American Association of Southern California

City of Montebello

Councilmember Ara Najarian, City of Glendale

Councilmember Paul Krekorian, Los Angeles City

Councilmember Vartan Gharpetian, City of Glendale

Counting House

Former Lieutenant Governor of California, Cruz Bustamante

Glendale City Clerk, Ardy Kassakhian

Glendale Unified School District, Board of Education Member, Shant Sahakian

Honorable Adam Schiff, Member of the United States Congress

Honorable Anna G. Eshoo, Member of the United States Congress

Honorable Brad Sherman, Member of the United States Congress

Honorable Grace Napolitano, Member of the United States Congress

Honorable Jackie Speier, Member of the United States Congress

Honorable Jim Costa, Member of the United States Congress

Honorable Ro Khanna, Member of the United States Congress

Honorable Salud Carbajal, Member of the United States Congress

Honorable Tony Cárdenas, Member of the United States Congress

Honorable Zoe Lofgren, Member of the United States Congress

Mayor Patrick J. Furey, City of Torrance

Mayor Zareh Sinanyan, City of Glendale

OPPOSITION: (Verified 8/27/18)

Association of California School Administrators

California Police Chiefs Association

California Public Employees’ Retirement System

California Retired Teachers Association

California Special Districts Association

California State Association of Counties

California State Teachers’ Retirement System

California Turkish Alliance

Consul General, Los Angeles, Republic of Turkey

League of California Cities

Peace Officers Research Association of California

School Employers Association of California

Turkish Coalition of America

ARGUMENTS IN SUPPORT: According to the author, the purpose of this bill is “to address the issue of Turkey’s denial of the systematic killing of 1.5 million Armenian victims during World War I.” The author states that California’s investment in Turkish government bonds indirectly subsidizes Turkish denial of the Armenian Genocide.

According to the Armenian National Committee of Armenia – Western Region:

The policy objective of AB 1597 is to prevent financially rewarding and encouraging a government notorious for human rights violations. Enactment of this bill would prove that California will take a principled stand to ensure that our investment choices align with our human rights policies, and that California will not indirectly subsidize the Turkish Government’s ongoing denial of the Armenian Genocide by enabling it to use our funds to finance its denialist propaganda campaign. It is not an attack on the Turkish people or nation, and does not impact investments in Turkish businesses or California businesses which invest in Turkey. Rather it is limited to Turkish government investment vehicles.”

ARGUMENTS IN OPPOSITION: According to the California State Teachers’ Retirement System:

The board’s policy is to oppose legislation that infringes on the investment authority of the board or is inconsistent with the investment policy adopted by the board as presented in the CalSTRS Investment Policy and Management Plan.

The League of California Cities writes:

To date, CalPERS estimates that divestitures have cost the fund roughly $8 billion dollars. To cover the losses, employer and employee contributions have risen and CalPERS continues to liquidate valuable assets to pay the bills. While the fiscal impact is still unknown, CalPERS estimated in previous legislation on this topic approximately $521 million in costs and unknown ongoing costs from future General Fund pressure to augment contributions to defined benefit programs. Therefore, AB 1597 could be expected to contribute to increased employee and employer contributions and further decrease the pension fund status.

ASSEMBLY FLOOR: 67-0, 6/1/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Chu, Cooley, Cunningham, Dababneh, Dahle, Daly, Eggman, Flora, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Jones-Sawyer, Kalra, Lackey, Levine, Limón, Low, Maienschein, Mathis, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Patterson, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Mark Stone, Thurmond, Ting, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Bigelow, Choi, Cooper, Fong, Frazier, Irwin, Kiley, Mayes, Melendez, Obernolte, Quirk, Steinorth, Voepel

Prepared by:

8/27/18 19:30:23

**** END ****

 THIRD READING  

Bill No: AB 1597

Author:

:

Vote:

SENATE PUBLIC EMP. & RET. COMMITTEE: 4-0, 6/25/18

AYES: Pan, Morrell, Leyva, Portantino

NO VOTE RECORDED: Moorlach

SENATE JUDICIARY COMMITTEE: 5-0, 6/26/18

AYES: Jackson, Anderson, Hertzberg, Monning, Stern

NO VOTE RECORDED: Moorlach, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 5-0, 8/16/18

AYES: Portantino, Beall, Bradford, Hill, Wiener

NO VOTE RECORDED: Bates, Nielsen

ASSEMBLY FLOOR: 67-0, 6/1/17 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill prohibits the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) from investing in Turkey, as specified, if the federal government sanctions Turkey for failing to acknowledge the Armenian Genocide.

ANALYSIS:

Existing law:

1. Provides under Article XVI, Section 17 of the California Constitution that the boards of California’s public retirement systems have “plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system.”
2. Provides under the California Constitution that “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 administrating the system…[and] the board shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent to do so.”
3. Provides under the California Constitution that the Legislature retains its 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.”
4. Prohibits CalPERS and CalSTRS under previous legislative mandates from making or holding certain investments as specified in Iran, Sudan, in businesses discriminating against Israel related to the Arab Boycott of Israel, and in thermal coal companies.

This bill:

1. Prohibits CalPERS and CalSTRS, immediately upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide, from making additional or new investments or renew existing investments of public employee retirement funds in any investment issued by, owned, controlled, or managed by the government of Turkey.
2. Makes certain definitions, as specified, for the “Government of Turkey”, “Turkey”, “Board”, and “Public employee retirement funds”.
3. Requires CalPERS and CalSTRS to liquidate all investments issued by, owned, controlled, or managed by the government of Turkey within six months of the passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide.
4. Requires CalPERS and CalSTRS, within one year of the passage of federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide, to file a report with the following information to the Legislature:
   1. A list of investments in Turkey of which the board has liquidated.
   2. A list of investments in Turkey of which the board has not liquidated as a result of a determination by the board that divestment would be inconsistent with its fiduciary duties pursuant to California Constitution Article XVI Section 17, and the board's findings adopted in support of that determination.
5. Specifies that nothing in this bill requires CalPERS or CalSTRS to take action unless they determine in good faith that the action is consistent with their fiduciary duties, as specified.
6. Provides that the required mandate shall be repealed upon a determination by either the Department of State or the Congress of the United States, or other appropriate federal agency that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.
7. Indemnifies from the General Fund and holds harmless the present, former and future board members, officers and employees of, and investment managers under contract with those retirement systems.
8. Makes legislative findings and declarations regarding the Armenian Genocide and the Republic of Turkey's refusal to acknowledge its responsibility of the Armenian Genocide, to reach resolution on its obligations under international treaties and human rights laws, and to return properties, as specified, to their rightful owners, among others.
9. States that divesting these funds would ensure that the State of California is in no way complicit in the continued denial of the Armenian Genocide by the government of Turkey and encourages said government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations for the survivors of the Armenian Genocide.

Background

CalPERS and CalSTRS have significant unfunded actuarial liabilities of approximately $139 billion and $107 billion respectively. Divestment mandates or investment prohibitions worsen those liabilities because they create lost investment opportunities that translate into reduced investment return. According to the Assembly Appropriations Committee, “a 2015 analysis by Wilshire Associates found that previous divestment efforts have collectively reduced the present value of the CalPERS portfolio by a range of $3.8 to $8.3 billion.” The effective loss in value requires increases in employer and member contributions to make up for the loss.

Related/Prior Legislation

SJR 24 (Jackson, 2018), failed passage in the Assembly Committee on Public Employees, Retirement and Social Security, would have required CalPERS to engage with companies in which it is invested that produce or sell firearms to determine a reasonable method for those companies to withdraw from the production and sale of firearms.

SB 459 (Portantino, 2017), which died in the Assembly Committee on Public Employees, Retirement and Social Security, would have required CalPERS to divest from retailers or wholesalers of banned weapons, as specified.

AB 20 (Kalra, Chapter 575, Statutes of 2017) required CalSTRS and CalPERS to report to the Legislature and the Governor, information regarding investments in, and engagement with, companies constructing or funding the construction of the Dakota Access Pipeline. The bill also required CalSTRS and CalPERS to consider factors related to tribal sovereignty and indigenous tribal rights when selecting or rejecting investments.

AB 946 (Ting, 2017), which died in the Assembly Committee on Public Employees, Retirement and Social Security, would have prohibited CalPERS and CalSTRS from investing in companies engaged in business related to building a border wall.

AB 2650 (Nazarian, 2016) and AB 1410 (Nazarian, 2015) were similar to AB 1597. Both were held on the Assembly Appropriations Committee’s Suspense File.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• CalSTRS indicates that it would incur minor costs to monitor whether federal sanctions have been enacted. If this happens, CalSTRS would incur first-year costs of $405,000, and $43,200 annually thereafter, resulting from (1) transaction costs for liquidating securities, and (2) additional costs for research services.
• CalPERS would also incur minor costs to monitor whether federal sanctions have been enacted. If federal sanctions are enacted, CalPERS indicates that its one-time divestment costs would depend on the number of its holdings that meet this bill’s criteria, and could reach $2 million. In addition, CalPERS would experience an annual increase in transaction costs of approximately $1.3 million to create and implement ex-Turkey custom bond benchmarks. An unknown portion of these costs would be prorated to local contracting public agencies.
• This bill would result in unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.
• All of the fiscal impacts described above would only occur upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. Those fiscal impacts would cease upon a federal determination that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

SUPPORT: (Verified 8/17/18)

All-Armenian Student Association

Alliance of Armenians Against Genocide

American Hellenic Council

Armenian Assembly of America

Armenian National Committee of America - Western Region

Assyrian American Association of Southern California

City of Montebello

Councilmember Ara Najarian, City of Glendale

Councilmember Paul Krekorian, Los Angeles City

Councilmember Vartan Gharpetian, City of Glendale

Counting House

Former Lieutenant Governor of California, Cruz Bustamante

Glendale City Clerk, Ardy Kassakhian

Glendale Unified School District, Board of Education Member, Shant Sahakian

Honorable Adam Schiff, Member of the United States Congress

Honorable Anna G. Eshoo, Member of the United States Congress

Honorable Brad Sherman, Member of the United States Congress

Honorable Grace Napolitano, Member of the United States Congress

Honorable Jackie Speier, Member of the United States Congress

Honorable Jim Costa, Member of the United States Congress

Honorable Ro Khanna, Member of the United States Congress

Honorable Salud Carbajal, Member of the United States Congress

Honorable Tony Cárdenas, Member of the United States Congress

Honorable Zoe Lofgren, Member of the United States Congress

Mayor Patrick J. Furey, City of Torrance

Mayor Zareh Sinanyan, City of Glendale

OPPOSITION: (Verified 8/20/18)

Association of California School Administrators

California Police Chiefs Association

California Public Employees’ Retirement System

California Retired Teachers Association

California Special Districts Association

California State Association of Counties

California State Teachers’ Retirement System

California Turkish Alliance

Consul General, Los Angeles, Republic of Turkey

League of California Cities

Peace Officers Research Association of California

School Employers Association of California

Turkish Coalition of America

ARGUMENTS IN SUPPORT: According to the author, the purpose of this bill is “to address the issue of Turkey’s denial of the systematic killing of 1.5 million Armenian victims during World War I.” The author states that California’s investment in Turkish government bonds indirectly subsidizes Turkish denial of the Armenian Genocide.

According to the Armenian National Committee of Armenia – Western Region:

The policy objective of AB 1597 is to prevent financially rewarding and encouraging a government notorious for human rights violations. Enactment of this bill would prove that California will take a principled stand to ensure that our investment choices align with our human rights policies, and that California will not indirectly subsidize the Turkish Government’s ongoing denial of the Armenian Genocide by enabling it to use our funds to finance its denialist propaganda campaign. It is not an attack on the Turkish people or nation, and does not impact investments in Turkish businesses or California businesses which invest in Turkey. Rather it is limited to Turkish government investment vehicles.”

ARGUMENTS IN OPPOSITION: According to the California State Teachers’ Retirement System:

The board’s policy is to oppose legislation that infringes on the investment authority of the board or is inconsistent with the investment policy adopted by the board as presented in the CalSTRS Investment Policy and Management Plan.

The League of California Cities writes:

To date, CalPERS estimates that divestitures have cost the fund roughly $8 billion dollars. To cover the losses, employer and employee contributions have risen and CalPERS continues to liquidate valuable assets to pay the bills. While the fiscal impact is still unknown, CalPERS estimated in previous legislation on this topic approximately $521 million in costs and unknown ongoing costs from future General Fund pressure to augment contributions to defined benefit programs. Therefore, AB 1597 could be expected to contribute to increased employee and employer contributions and further decrease the pension fund status.

ASSEMBLY FLOOR: 67-0, 6/1/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Chu, Cooley, Cunningham, Dababneh, Dahle, Daly, Eggman, Flora, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Jones-Sawyer, Kalra, Lackey, Levine, Limón, Low, Maienschein, Mathis, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Patterson, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Mark Stone, Thurmond, Ting, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Bigelow, Choi, Cooper, Fong, Frazier, Irwin, Kiley, Mayes, Melendez, Obernolte, Quirk, Steinorth, Voepel

Prepared by:

8/20/18 10:32:43

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 1597 (Nazarian) - Public employee retirement systems: prohibited investments: Turkey

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 1597 would prohibit the boards of administration of the California Public Employees’ Retirement System (CalPERS) and State Teachers’ Retirement System (STRS) from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey, if specified criteria are met.

Fiscal Impact:

• CalSTRS indicates that it would incur minor costs to monitor whether federal sanctions have been enacted. If this happens, CalSTRS would incur first-year costs of $405,000, and $43,200 annually thereafter, resulting from (1) transaction costs for liquidating securities, and (2) additional costs for research services.
• CalPERS would also incur minor costs to monitor whether federal sanctions have been enacted. If federal sanctions are enacted, CalPERS indicates that its one-time divestment costs would depend on the number of its holdings that meet the bill’s criteria, and could reach $2 million. In addition, CalPERS would experience an annual increase in transaction costs of approximately $1.3 million to create and implement ex-Turkey custom bond benchmarks. An unknown portion of these costs would be prorated to local contracting public agencies.
• The bill would result in unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.
• All of the fiscal impacts described above would only occur upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. Those fiscal impacts would cease upon a federal determination that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide

Background:

Under existing provisions of Section 17 of Article XVI of the California Constitution, as amended by Proposition 162 of 1992, the CalSTRS board and CalPERS board have plenary authority and fiduciary responsibility over the investment of retirement plan assets and are required to discharge their duties solely in the interests of the members and beneficiaries for the exclusive purpose of providing benefits. The boards must invest the assets of the plan with care, skill and diligence of a prudent person engaged in a similar enterprise so as to maximize the investments and minimize the risk of loss. The Constitution does allow the Legislature by statute to prohibit certain investments by a retirement board when it is in the public interest to do so and provided the prohibition satisfies the standards of fiduciary care and loyalty required of the retirement board.

Other measures have been enacted by the Legislature to prohibit certain investments by public pension funds. For instance, AB 221 (Anderson, Chapter 671, Statutes of 2007) prohibits CalPERS and CalSTRS from investing in companies that have specified energy or defense-related operations in Iran, AB 2941 (Koretz, Chapter 442, Statutes of 2006) prohibits CalPERS and CalSTRS from investing public employee retirement funds in a company with business operations in the Sudan, as specified, and SB 185 (De Leon, Chapter 605, Statutes of 2015) prohibits CalPERS and CalSTRS from investing public employee retirement funds in thermal coal companies.

Proposed Law:

This bill would, among other things, do the following:

• Prohibit CalPERS and CalSTRS from making any new or additional investments, or renewing any existing investments in any investment vehicle issued by, owned, controlled, or managed by the government of Turkey, as defined, immediately upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide. However, the bill does not define “sanctions”.
• Require CalPERS and CalSTRS to liquidate prohibited Turkish investment vehicles within six months of the passage of such a federal law.
• Require CalPERS and CalSTRS, within one year of the passage of such a federal law, to file a report with the following information to the Legislature:
  • A list of investments in Turkey of which the board has liquidated.
  • A list of investments in Turkey of which the board has not liquidated as a result of a determination by the board that divestment would be inconsistent with its fiduciary duties pursuant to California Constitution Article XVI Section 17, and the board's findings adopted in support of that determination.
• Specify that nothing in this bill would require CalPERS or CalSTRS to take action unless they determine in good faith that the action is consistent with their fiduciary duties, as specified.
• Indemnify from the General Fund and holds harmless the present, former and future board members, officers and employees of, and investment managers under contract with those retirement systems.
• Repeal the provisions of this bill upon a determination by either the Department of State or the U.S. Congress, or other appropriate federal agency, that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

Related Legislation:

• SJR 24 (Jackson) would have required CalPERS to engage with companies in which it is invested that produce or sell firearms to determine a reasonable method for those companies to withdraw from the production and sale of firearms. The measure failed passage in the Assembly Committee on Public Employees, Retirement and Social Security.
• SB 459 (Portantino) would require CalPERS to divest from retailers or wholesalers of banned weapons, as specified. The bill is currently pending in the Assembly Committee on Public Employees, Retirement and Social Security.
• AB 20 (Kalra, Chapter 575, Statutes of 2017), requires CalSTRS and CalPERS to report to the Legislature and the Governor, information regarding investments in, and engagement with, companies constructing or funding the construction of the Dakota Access Pipeline. This bill also requires CalSTRS and CalPERS to consider factors related to tribal sovereignty and indigenous tribal rights when selecting or rejecting investments.
• AB 946 (Ting, 2017) would prohibit CalPERS and CalSTRS from investing in companies engaged in business related to building a border wall. The bill failed passage in the Assembly Committee on Public Employees, Retirement and Social Security.
• AB 2650 (Nazarian, 2016) and AB 1410 (Nazarian, 2015), were similar to this bill. Both were held under submission on the Suspense File of the Assembly Appropriations Committee’s Suspense File.

Staff Comments:

CalSTRS currently has $911,000 invested in debt securities issued by the government of Turkey; additionally, its global equities and currency investments subject to possible divestment have a potential combined market value of up to $54 million. CalPERS data indicates that is holdings of Turkish government-controlled securities amount to $652 million, comprised of $505 million in fixed income products, and $146 million in equity products.

Both CalPERS and CalSTRS may incur opportunity costs as a result of this bill if suitable alternative investments are unavailable, or if such alternative investments do not provide an investment return that meets or exceeds those of the divested securities. Under these scenarios, the potential result would be (1) an increase the pension systems’ unfunded liabilities, and (2) an increase in the state pension contributions. A 2015 analysis by Wilshire Associates found that previous divestment efforts have collectively reduced the present value of the CalPERS portfolio by up to an estimated $8.3 billion.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: AB 1597 (Author:Nazarian)

Version: June 11, 2018

Hearing Date: June 26, 2018

Fiscal: Yes

Urgency: No

Consultant: MEC

SUBJECT

Public employee retirement systems: prohibited investments: Turkey

DESCRIPTION

This bill would prohibit the boards of administration of the Public Employees’ Retirement System and State Teachers’ Retirement System from making additional or new investments, or renewing existing investments, of public employee retirement funds in an investment vehicle in Turkey that is issued by the government of Turkey or that is owned, controlled, or managed by the government of Turkey.

The bill would require the boards to liquidate existing investments in Turkey in these types of investment vehicles within 6 months of the passage of a federal law imposing sanctions on Turkey. The bill would require these boards, within one year of the passage of a federal law imposing sanctions on Turkey, to make a specified report to the Legislature and the Governor regarding these actions. The bill would provide that its provisions do not require a board to take any action that the board determines in good faith is inconsistent with its constitutional fiduciary responsibilities to the retirement system. The bill would indemnify from the General Fund and hold harmless the present, former, and future board members, officers, and employees of, and investment managers under contract with, the boards, in connection with actions relating to these investments.

On June 25, 2018, after 5:00 PM, the Senate Committee on Public Employees, Retirement, and Social Security passed the bill with a set of amendments to be taken in the Senate Committee on Judiciary on June 26, 2018. See Comment 3.

BACKGROUND

California has statutorily recognized the Armenian Genocide and provides in the code that April 24 of each year shall be the “California Day of Remembrance of the Armenian Genocide” and the period beginning on the Sunday before that day through the following Sunday shall be the days of remembrance in this state, and shall annually be so proclaimed by the Governor, in memory of the 1,500,000 victims who were subjected to torture, starvation, and murder, including death marches into the Syrian desert, by the rulers of the Ottoman Turkish Empire and the exile of more than 500,000 innocent people during the period from 1915 to 1923, inclusive, and in honor of the survivors of those crimes against humanity. (Govt. Code Sec. 6720.)

The Legislature has passed bills to require the California Public Employee’s Retirement System and California State Teacher’s Retirement Systems to divest from South Africa during Apartheid, from Sudan, from Iran, and from coal. This bill would make various findings and declarations regarding the Armenian Genocide including that the State of California, through its Public Employees’ Retirement System (PERS) and its State Teachers’ Retirement System (STRS), directly invests public funds in the government of Turkey, which then reaps profits while actively denying the Armenian Genocide, funding its continued campaign of denial, at least in part, through these investments in its economy. And, that by investing public funds in the government of Turkey, the State of California as the embodiment of its citizens contradicts its longstanding, just position of recognizing the Armenian Genocide and urging the government of Turkey to acknowledge its responsibility and work toward a just resolution by honoring its obligations under international treaties and human rights laws.

The aim of this legislation seems to be to put pressure on the Turkey government to acknowledge the Armenian Genocide and until then, ensure that California’s investment priorities match California’s longstanding position of encouraging Turkey to recognize the Armenian Genocide and work towards justice for the victims.

CHANGES TO EXISTING LAW

Existing law, the California Public Divest from Iran Act, generally prohibits the Public Employees’ Retirement System and the Teachers’ Retirement System from investing public employee retirement funds in a company which has business operations in Iran. (Gov. Code Sec. 7513.7.)

Existing law prohibits the boards of administration of the Public Employees’ Retirement System and State Teachers’ Retirement System from making investments in certain countries (Sudan, Iran) and in thermal coal companies, as specified, subject to the boards’ plenary authority and fiduciary responsibility for investment of moneys and administration of the systems.

Existing law provides that the Legislature encourages all state and local professional development activities to provide teachers with content background and resources to assist them in teaching about civil rights, human rights violations, genocide, slavery, the Armenian Genocide, and the Holocaust. (Educ. Code Sec. 51226.3(c).)

Existing law provides, for purposes of the above, “Armenian Genocide” means “Armenian Genocide” means the torture, starvation, and murder of 1,500,000 Armenians, which included death marches into the Syrian desert, by the rulers of the Ottoman Turkish Empire and the exile of more than 500,000 innocent people during the period from 1915 to 1923, inclusive. (Educ. Code Sec. 51226.3(i).)

Existing law provides that April 24 of each year shall be the “California Day of Remembrance of the Armenian Genocide,” and the period beginning on the Sunday before that day through the following Sunday shall be the days of remembrance in this state, and shall annually be so proclaimed by the Governor, in memory of the 1,500,000 victims who were subjected to torture, starvation, and murder, including death marches into the Syrian desert, by the rulers of the Ottoman Turkish Empire and the exile of more than 500,000 innocent people during the period from 1915 to 1923, inclusive, and in honor of the survivors of those crimes against humanity. (Gov’t. Code Sec. 6720.)

This bill would provide that the Legislature finds and declares that the State of California has officially recognized the Armenian Genocide each year for decades and has repeatedly urged the Republic of Turkey to acknowledge the facts of the Armenian Genocide and work toward a just resolution, honor its obligations under international treaties and human rights laws, end all forms of religious discrimination and persecution, and return Christian church properties to their rightful owners.

This bill would provide that the Legislature finds and declares that genocide is defined by the United Nations as an act “committed with intent to destroy, in whole or in part, a national, ethnical, racial or religious group.”

This bill would provide that the Legislature finds and declares that genocide denial is widely viewed as among the final stages of genocide and serves to perpetuate the effects of genocide even after the active phases of extermination, massacres, forced marches, and deportation have ended.

This bill would provide that the Legislature finds and declares that the government of Turkey has engaged and continues to engage in an ongoing campaign of genocide denial and historical revisionism by refusing to acknowledge its responsibility for the Armenian Genocide, refusing to compensate its victims, and actively pursuing a well-funded political lobbying campaign throughout the United States, including in California, to rewrite history and defeat legislation recognizing the Armenian Genocide.

This bill would provide that the Legislature finds and declares that the government of Turkey has engaged, and continues to engage, in efforts to effect Armenian cultural erasure since the founding of the Republic of Turkey, including, but not limited to, ethnic cleansings and the destruction of sacred Armenian religious sites.

This bill would provide that the Legislature finds and declares that reference in Turkey by any scholar, journalist, or other person to the massacre and deportation of Armenians in 1915 to 1923, inclusive, as genocide can be criminally prosecuted under Article 301 of the Turkish Penal Code.

This bill would provide that the Legislature finds and declares that State of California is home to the largest Armenian American population in the United States, and Armenians living in California, most of whom are direct descendants of the survivors of the Armenian Genocide, have enriched our state through their leadership and contributions in business, agriculture, academia, government, and the arts, yet continue to suffer the effects of the continued denial campaign by the government of Turkey.

This bill would provide that the Legislature finds and declares that the State of California, as the world’s eighth largest economy, and in accordance with principles of human rights and justice, has taken the lead in adopting legislation to divest from South Africa for its policy of apartheid, Sudan for its genocide in Darfur, and Iran for its support of international terrorism, imposing economic consequences upon regimes that engage in conduct and policy that violate human rights or constitute crimes against humanity.

This bill would provide that the Legislature finds and declares that the State of California, through its Public Employees’ Retirement System (PERS) and its State Teachers’ Retirement System (STRS), directly invests public funds in the government of Turkey, which then reaps profits while actively denying the Armenian Genocide, funding its continued campaign of denial, at least in part, through these investments in its economy.

This bill would provide that the Legislature finds and declares that by investing public funds in the government of Turkey, the State of California as the embodiment of its citizens contradicts its longstanding, just position of recognizing the Armenian Genocide and urging the government of Turkey to acknowledge its responsibility and work toward a just resolution by honoring its obligations under international treaties and human rights laws, to end all forms of religious discrimination and persecution, and to return Christian church properties to their rightful owners.

This bill would provide that the Legislature finds and declares that it is the government of Turkey, not the people of Turkey, that is responsible for Turkey’s continued egregious violations of human rights and active pursuit of genocide denial, cultural erasure, and historical revisionism.

This bill would provide that the Legislature finds and declares that PERS currently has investment holdings in bonds directly issued by the Republic of Turkey in excess of $185,000,000.

This bill would provide that the Legislature finds and declares that STRS currently has investment holdings in bonds directly issued by the Republic of Turkey in excess of several hundred million dollars.

This bill would provide that the Legislature finds and declares that investment in the Republic of Turkey enables its government to continue to deny justice to the Armenian people.

This bill would provide that the Legislature finds and declares that divesting these funds would ensure that the State of California is in no way complicit in the continued denial of the Armenian Genocide by the government of Turkey and would encourage said government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations for the survivors of the Armenian Genocide.

Existing law, the California Constitution, provides that the board has the sole and exclusive responsibility to administer the retirement system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries. The assets of a public pension or retirement system are trust funds and shall be held for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system. (Cal. Const., art. XVI, sec. 17.)

 This bill would define the following terms as follows:

• “Board” means the Board of Administration of the Public Employees’ Retirement System or the Teachers’ Retirement Board of the State Teachers’ Retirement System, as applicable;
• “Government of Turkey” means the government of Turkey or its instrumentalities or political subdivisions;
• “Government of Turkey” also includes any and all investment vehicles, government bonds, or financial institutions and entities that are owned, controlled, or operated by the government of Turkey;
• “Public employee retirement funds” means the Public Employees’ Retirement Fund described in Section 20062 and the Teachers’ Retirement Fund described in Section 22167 of the Education Code; and
• “Turkey” means the Republic of Turkey or any territory under the administration or control of Turkey.

This bill would provide that the board shall not make additional or new investments or renew existing investments of public employee retirement funds in any investment vehicle in Turkey that meets either of the following criteria:

• the investment vehicle is issued by the government of Turkey; or
• the investment vehicle is owned, controlled, or managed by the government of Turkey.

This bill would provide that the board shall liquidate investments in Turkey in an investment vehicle described in subdivision (b) within six months of the passage of a federal law imposing sanctions on Turkey.

This bill would provide that within one year of the passage of a federal law imposing sanctions on Turkey, the board shall file a report with the Legislature, in compliance with Section 9795, and the Governor, that shall include the following:

• a list of investment vehicles in Turkey of which the board has liquidated its investments pursuant to subdivision (c); and
• a list of investment vehicles in Turkey of which the board has not liquidated its investments as a result of a determination made pursuant to subdivision (e) that a sale or transfer of investments is inconsistent with the fiduciary responsibilities of the board as described in Section 17 of Article XVI of the California Constitution and the board’s findings adopted in support of that determination.

This bill would provide that the Legislature finds and declares that nothing in this section shall require a board to take action as described in this section unless the board determines in good faith that the action described in this section is consistent with the fiduciary responsibilities of the board described in Section 17 of Article XVI of the California Constitution.

This bill would provide that present, future, and former board members of the Public Employees’ Retirement System or the State Teachers’ Retirement System, jointly and individually, state officers and employees, research firms described in subdivision (d) of Section 7513.6, and investment managers under contract with the Public Employees’ Retirement System or the State Teachers’ Retirement System shall be indemnified from the General Fund and held harmless by the State of California from all claims, demands, suits, actions, damages, judgments, costs, charges,  and expenses, including court costs and attorney’s fees, and against all liability, losses, and damages of any nature whatsoever that these present, future, or former board members, officers, employees, research firms as described in subdivision (d) of Section 7513.6, or contract investment managers shall or may at any time sustain by reason of any decision to restrict, reduce, or eliminate investments pursuant to the above provisions regarding divestment from Turkey. 

COMMENT

1. Stated need for the bill

According to the author:

California has a clear policy of Armenian Genocide recognition, as demonstrated by decades of legislative resolutions and gubernatorial proclamations. Contrary to our state’s policy, the Turkish government fosters the teaching of genocide denial in its public schools, and continues to discriminate against Armenians and other minorities. Despite these facts, our state’s pension systems – CalPERS and CalSTRS – have invested in Turkish government holdings, thereby indirectly subsidizing Turkish denial of the Genocide. The purpose of this bill is to achieve a policy objective of not financially rewarding and investing in governments which routinely violate human rights or which promote policies contrary to investing in governments which routinely violate human rights or which promote policies contrary to our own. Enactment of this bill would make it clear that California will stand on principle and make our state’s investment choices consistent with our values and policies, such as Armenian Genocide recognition.

2. Opposition

The California Teachers Association, in opposition, writes:

The CTA believes that Ottoman Empire’s genocide of the Armenian people, which began on the eve of World War I through 1922, was an atrocity that the world must never forget. The tremendous conflict encompassing this region of the world left the Armenians in a perilous position of being targeted by the very government that should have protected them. The eventual collapse of the Ottoman Empire led to the creation of Turkey as we know it. Unfortunately, the Turkish government has had a history of denying the actions of the Ottoman government and their collective responsibility for the actions of the past.

The CTA believes that the Armenian genocide must be acknowledged by all residents of the world. The CTA also does not believe that solely educators and public employees should be held fiscally responsible for the actions of Turkey. We would request that AB 1597 (Nazarian) be amended to require engagement, rather than divestment as a more proactive tool for facilitating long-term systemic change without doing harm to the fiscal solvency of the funds.

While the overarching principle that this measure is trying to achieve, providing pressure on the Turkish government, the practical impact will have a negative financial impact on CalSTRS which could ultimately mean teachers, school districts, and the State may bear the direct fiscal costs of this bill.

California State Teachers’ Retirement System, in opposition, writes:

The board’s policy is to oppose legislation that restricts its ability to invest in specific areas because, as described in its divestment policy, such restrictions could impair the board’s ability to exercise its fiduciary obligation to act exclusively for the benefit of the retirement plan members and beneficiaries. Divestment carriers the risk of adversely affecting the CalSTRS investment portfolio by reducing diversification and altering the investment strategy adopted by the board. This is especially concerning as investment returns affect the 2014 funding plan (AB 1469-Bonta), which placed CalSTRS on a trajectory toward full funding.

City of Vista writes the following in opposition:

The City of Vista opposes any efforts that will add further financial burden, causing impact to our delivery of services.

[ . . . ]

To date, CalPERS estimates that divestitures have cost the fund roughly $8 billion dollars. To cover the losses, employer and employee contributions have risen and CalPERS continues to liquidate valuable assets to pay the bills.

Given the significant losses experienced by CalPERS by way of divestments and the significant pension contribution increases local governments will experience throughout the next decade, the City of Vista opposes any measures that hinder the ability of CalPERS to meet its financial commitments to its members in adherence to its fiduciary responsibilities.

California Public Employees’ Retirement System (CalPERS) writes the following in opposition:

Generally, CalPERS prefers constructive engagement to divesting as a means of affecting the conduct of entities in which it invests. Divesting appears to almost invariably harm investment performance, such as by causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds), compromising investment strategies, and reducing portfolio diversification.

AB 1597 could have a significant fiscal impact on CalPERS. The CalPERS Board of Administration invests pension assets for the exclusive purpose of paying benefits to the plan participants. Limiting investment opportunities or reducing diversification results in lower than expected investment returns which leads to higher employer contribution rates and may jeopardize the ling-term sustainability of the fund.

The opposition arguments center around concerns that the pension funds will suffer losses and those losses will be passed on to the PERS/STERS employer.

3. Amendments from the Public Employees, Retirement, and Social Security Committee

On June 25, 2018, after 5:00 PM, the Senate Committee on Public Employees, Retirement, and Social Security passed the bill with a set of amendments to be taken in the Senate Committee on Judiciary on June 26, 2018.

• An amendment changes the provision in the bill that currently provides that the “board shall not make additional or new investments or renew existing investments of public employee retirement funds in any investment vehicle in Turkey…” to instead provide that the prohibition is triggered “immediately upon passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide.
• An amendment changes the provision that provides that the “board shall liquidate investments in Turkey in an investment vehicle” described above “within six months of the passage of a federal law imposing sanctions on Turkey,” to instead provide that the federal law needs to be one that imposes sanctions on Turkey for failure to acknowledge the Armenian Genocide.
• An amendment changes the provision in the bill that currently provides that within “one year of the passage of a federal law imposing sanctions on Turkey; the board shall file a report with the Legislature,” to instead provide that it is “within one year of the passage of a federal law imposing sanctions on Turkey for failure to acknowledge the Armenian Genocide…”

The final amendment would add the following:

• (f) This section shall be repealed upon a determination by either the United States Department of State or the Congress of the United States, or other appropriate federal agency, that the Government of Turkey has officially acknowledged its responsibility for the Armenian Genocide.

4. Additional Amendments

The bill contains the following assertion under the findings and declarations:

PERS currently has investment holdings in bonds directly issued by the Republic of Turkey in excess of $185,000,000.

The Committee may wish to amend the bill to ensure that a more accurate amount is reflected. PERS currently has investment holdings in bonds directly issued by the Republic of Turkey in excess of $700,000,000.

The bill contains the following assertion under the findings and declarations:

STRS currently has investment holdings in bonds directly issued by the Republic of Turkey in excess of several hundred million dollars.

The Committee may wish to amend the bill to ensure that a more accurate amount is reflected. STRS currently has investment holdings in bonds directly issued by the Republic of Turkey of approximately $70,000,000.

Support: All-Armenia Student Association; Alliance of Armenians Against Genocide; American Hellenic Council; Ara Najarian, Glendale City Councilmember; Ardashes Kassakhian, City Clerk of Glendale; Armenian Assembly of America; Armenian Youth Federation; Ashod Mooradian, City Treasurer for City of Montebello; Armenian National Committee of America-Western Region; Assyrian American Association of Southern California; City of Los Angeles; City of Vista; League of California Cities; Paul Krekorian, Los Angeles City Councilmember; Patrick J. Furey, Mayor of the City of Torrance; Shant Sahakian, Glendale Unified School District Board of Education Member; Varten Gharpetian, Mayor of the City of Glendale; Yvette Vartanian Davis, Board Trustee of the Glendale Community College; Zareh Sinanyan, City of Glendale Councilmember

Opposition: Association of California School Administrators; California Special Districts Association; California State Teachers’ Retirement System; California Teachers Association; California Police Chiefs Association; California Retired Teachers Association; Peace Officers Research Association of California; School Employers Association of California;

HISTORY

Source: Author

Related Pending Legislation: None Known

Prior Legislation:

AB 20 (Kalra, 2017) requires CalPERS and CalSTRS to submit a report to the Legislature and Governor regarding investments in, and engagement activities with, companies constructing, or funding, the construction of the Dakota Access Pipeline.

AB 946 (Garcia, 2017) would prohibit CalPERS and CalSTRS from investing public employee retirement funds in companies engaged in business related to the ‘border wall’ proposed by the Trump Administration. This bill is pending in the Assembly Public Employees, Retirement and Social Security Committee.

AB 1410 (Nazarian, 2015) would have prohibited CalPERS and CalSTRS from investing public employee retirement funds in specified investments issued by, owned, controlled, or managed by the government of Turkey. This bill was held on suspense in the Assembly Appropriations Committee.

AB 1551 (Allen, 2015) would have required public retirement funds, on or after January 1, 2017, to make no additional investments or renew existing investments in business firms or financial institutions that engage in business practices in furtherance of the boycott of Israel, among other provisions. This bill was held in the Assembly.

AB 2283 (Calderon, 2015) would have required CalPERS and CalSTRS to evaluate their investments in securitized home rental properties and ensure certain requirements were met, as specified, prior to investing or reinvesting in securitized home rental properties, among other provisions. This bill was held in the Assembly Public Employee, Retirement and Social Security Committee.

AB 2650 (Nazarian, 2015) would have prohibited CalPERS and CalSTRS from investing public employee retirement funds in specified investments issued by, owned, controlled, or managed by the government of Turkey. This bill was held in the Assembly Appropriations Committee.

SB 185 (De León, Ch. 605, Stats. 2015) prohibits CalPERS and CalSTRS from investing public employee retirement funds in thermal coal companies, as specified.

AB 761 (Dickinson, 2013) would have prohibited CalPERS and CalSTRS from investing in companies that manufacture firearms or ammunition for a recipient other than the U.S. military, subject to a process specified in the bill and consistent with previous divestment legislation, but subject to the board's fiduciary duties. This bill was held in the Assembly Appropriations Committee.

SR 18 (Leno, 2013) encouraged CalPERS and CalSTRS, whenever feasible and consistent with their fiduciary responsibilities, to cease making direct investments in Russia and to encourage companies in which employee retirement funds are invested and that are doing business in Russia not to take actions that promote or otherwise enable human rights violations in Russia. This resolution was adopted.

AB 1151 (Feuer, Ch. 441, Stats. 2011) clarifies that CalPERS and CalSTRS must divest pension funds, as specified, unless to do so would fail to satisfy their fiduciary responsibility. The law also modifies the types of companies that fall within the Act’s scope and requires certain findings and determinations be made in noticed public hearings.

SB 903 (Anderson, 2011) would have amended the California Public Divest From Iran Act to clarify the criteria and process that the boards of CalPERS and CalSTRS must use to invest in Iran. This bill was held in the Senate Appropriations Committee.

AB 2337 (Ammiano, 2010) would have prohibited CalPERS and CalSTRS from participating in predatory real estate investment practices related to rent-regulated housing that results in excessive rent increases, the displacement of tenants, or conversion of rent-regulated housing to market rate units. This bill was held in Senate Public Employment and Retirement Committee.

AB 221 (Anderson, Ch. 671, Stats. 2007) prohibits CalPERS and CalSTRS from investing in companies that have specified energy or defense-related operations in Iran.

AB 2941 (Koretz, Ch. 442, Stats. 2006) prohibits CalPERS and CalSTRS from investing public employee retirement funds in a company with business operations in Sudan, as specified.

SB 424, (Poochigian, Ch. 9, Stats. 2005) established April 24 of each year as the “California Day of Remembrance of the Armenian Genocide” and the period beginning on the Sunday before that day through the following Sunday as the days of remembrance of the Armenian Genocide.

SJR 2 (Speier, Ch. 22) designated April 24, 2005, as the “California Day of Remembrance for the Armenian Genocide of 1915-1923” and also memorialized the United States Congress to act likewise to commemorate the Armenian Genocide.

AB 107 (Knox, 2000) would have prohibited new or additional investments in tobacco companies by CalPERS and CalSTRS on and after January 1, 2001, and would have required divestment from existing investments by July 1, 2002. This bill was held in the Assembly with concurrence pending.

AB 2251, (Margolin, Ch. 1351, Stats. 1992) prohibits 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, Ch. 1254, Stats. 1986) prohibits the use of state trust funds or state monies to make additional or new investments, or renew existing investments in firms doing business with or in South Africa, as of January 1, 1987.

Prior Vote:

Assembly Floor (Ayes 67, Noes 0)

Assembly Appropriations Committee (Ayes 12, Noes 0)

Assembly Public Employees, Retirement, and Social Security Committee (Ayes 5, Noes 0)

**************

SENATE COMMITTEE ON

PUBLIC EMPLOYMENT AND RETIREMENT

Dr. Richard Pan, Chair

2017 - 2018 Regular

Bill No: AB 1597 Hearing Date: 6/25/18

Subject: Public employee retirement systems: prohibited investments: Turkey

SOURCE: Author

ASSEMBLY VOTES:

DIGEST: This bill, irrespective of federal sanctions and in violation of the U.S. and California Constitutions, would require California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) to cease making any new or additional investments, or renewing any existing investments in any investment vehicle owned, controlled, managed, or issued by the government of Turkey, as specified. The bill would also require the two systems to divest of any existing investments in Turkey within six months of the passage of a federal law imposing undefined sanctions on Turkey and within one year issue a report, as specified.

ANALYSIS:

Existing federal law:

1. Preempts state law, as specified, and particularly in the field of foreign policy under the U.S. Constitution’s Supremacy Clause (U.S. Const. art. VI, cl. 2).
2. Holds, in Movsesian v. Victoria Versicherung AG, 670 F.3d 1067, 1071 (9th 3 Cir. 2012) (en banc), that foreign policy with Turkey with respect to the Armenian Genocide is within the exclusive jurisdiction of the federal government and that California state statute attempting to affect that policy is preempted.
3. Holds, in National Foreign Trade Council v. Giannoulias, (523 F.Supp. 2d 731), that Illinois state statute requiring state public pension funds to divest investments in companies with ties to Sudan violated 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, and enjoined state officials from enforcing the act.

Existing state law:

1. Provides under Article XVI, Section 17 of the California Constitution that the boards of California’s public retirement systems have “plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system.”
2. Provides under the California Constitution that “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 administrating the system…[and] the board shall diversify the investments of the system so as to minimize the risk of loss and to maximize the rate of return unless under the circumstances it is clearly prudent to do so.”
3. Provides under the California Constitution that the Legislature retains its 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.”
4. Established in 1913, just before the outbreak of the First World War, CalSTRS to provide for the retirement security of certificated school and university employees, as specified, and which enabled many extended families of teachers to survive the hardships and deprivations of the Great Depression and the Second World War, through benefits paid through the prudent saving and investment of the fund’s assets.
5. Established in 1932 during the Great Depression, a time of terrible poverty and social dislocation, CalPERS to provide for the retirement security of California’s public employees through a system of prefunding, mutual contribution, and investment of trust assets.

This bill:

1. Prohibits CalPERS and CalSTRS from making any new or additional investments, or renewing any existing investments in any investment vehicle issued by, owned, controlled, or managed by the government of Turkey.
2. Defines "Government of Turkey" as the government of Turkey or its instrumentalities or political subdivisions. “Government of Turkey” also includes any and all investment vehicles, government bonds, or financial institutions and entities that are owned, controlled, or operated by the government of Turkey.
3. Defines “Turkey” as the Republic of Turkey or any territory under the administration or control of Turkey.
4. Requires CalPERS and CalSTRS to liquidate all investments issued by, owned, controlled, or managed by the government of Turkey within six months of the passage of a federal law imposing sanctions on Turkey. However, this bill does not define “sanctions”.
5. Requires CalPERS and CalSTRS, within one year of the passage of federal law imposing sanctions on Turkey, to file a report with the following information to the Legislature:
   1. A list of investments in Turkey of which the board has liquidated.
   2. A list of investments in Turkey of which the board has not liquidated as a result of a determination by the board that divestment would be inconsistent with its fiduciary duties pursuant to California Constitution Article XVI Section 17, and the board's findings adopted in support of that determination.
6. Specifies that nothing in this bill would require CalPERS or CalSTRS to take action unless they determine in good faith that the action is consistent with their fiduciary duties, as specified.
7. Indemnifies from the General Fund and holds harmless the present, former and future board members, officers and employees of, and investment managers under contract with those retirement systems.
8. Makes legislative findings and declarations regarding the Armenian Genocide and the Republic of Turkey's refusal to acknowledge its responsibility of the Armenian Genocide, to reach resolution on its obligations under international treaties and human rights laws, and to return properties, as specified, to their rightful owners, among others.
9. States that divesting these funds would ensure that the State of California is in no way complicit in the continued denial of the Armenian Genocide by the government of Turkey and would encourage said government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations for the survivors of the Armenian Genocide. However, this bill does not require the divestment of funds held by other departments of the State or its political subdivisions.

Background

Committee Concerns

1. Timing of Application of Prohibitions on Certain Investments

The bill’s advocates have at times represented that the bill only takes effect if federal sanctions are passed. However, the bill would have immediate effect on January 1, 2019, to prevent CalPERS and CalSTRS from making any new or additional investments, or renewing any existing investments in any investment vehicle owned, controlled, managed, or issued by the government of Turkey (and its local administrative units) regardless of whether federal sanctions are imposed. This provision would prevent CalPERS and CalSTRS from even making changes in their holdings to adjust for bond duration or asset rebalancing to conform to asset allocation benchmarks and would thus immediately impair the funds’ respective investment operations.

Also, the bill’s advocates have claimed that the bill only targets Turkish government bonds in the funds’ portfolio. Yet, the bill’s definitions prohibit investments that are far more extensive and could include, among other assets, private equity partnerships in which merely a participation interest is owned by any Turkish administrative instrumentalities or some undefined entity operated by those instrumentalities.

1. Divestment versus Prohibited Investment

The bill’s advocates have also characterized AB 1597 as not a divestment bill, arguing that the measure only prohibits CalPERS and CalSTRS from increasing or renewing their investment positions in bonds issued by the Turkish government. This misconstruction continues to cloud an accurate description of the bill’s effect despite a year of discussion on the present bill and over three years of discussion on similar proposals in 2016 and 2015 (AB 2650, Nazarian, 2016 and AB 1410, Nazarian, 2015). Accepting for the sake of argument that a prohibition against investments is not a divestment mandate, the bill nevertheless requires the funds to divest if undefined federal sanctions against Turkey are passed:

Sec. 2. Section 7513.76 (c)

The board shall liquidate investments in Turkey in an investment vehicle described in subdivision (b) within six months of the passage of a federal law imposing sanctions on Turkey.

“A federal law imposing sanctions on Turkey” is not defined. AB 1597 does not require that the federal law prohibit U.S. funds from investing in Turkey. Unlike the federal laws that prohibited investments in Sudan and Iran, any federal law imposing any kind of sanction on Turkey would trigger the divestment required by this provision. For example, the provision in the annual federal defense authorization bill prohibiting certain military sales to Turkey or a possible imposition of a tariff on Turkish imports related to the current Administration’s trade policies are “sanctions” that could trigger the divestment provision in this bill. Committee staff has repeatedly requested to no avail that the author amend the bill to narrowly define the “sanctions” that would trigger the bill’s divestment provisions.

The bill also continues to make reference to divestment as follows:

Sec. 1. (o) Divesting these funds would ensure that the State of California is in no way complicit in the continued denial of the Armenian Genocide by the government of Turkey and would encourage said government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations for the survivors of the Armenian Genocide.

Sec. 1. (h) The State of California, as the world’s eighth largest economy, and in accordance with principles of human rights and justice, has taken the lead in adopting legislation to divest from South Africa for its policy of apartheid, Sudan for its genocide in Darfur, and Iran for its support of international terrorism, imposing economic consequences upon regimes that engage in conduct and policy that violate human rights or constitute crimes against humanity.

Thus, the bill’s stated goal and practical effect is to require the retirement funds to divest assets for a political purpose; pressuring Turkey to acknowledge and accept responsibility for the Armenian Genocide.

1. Potential General Fund Liabilities

AB 1597 could very likely lead to litigation similar to that in Movsesian and National Foreign Trade Council v. Giannoulias which would trigger the bill’s indemnification clause. That clause indemnifies present, future, and former CalPERS and CalSTRS board members as well as several other individuals and firms. The bill would require the State to reimburse the protected individuals, boards, and firms from the General Fund for any and all claims, demands, suits, actions, damages, judgments, costs, charges, expenses, court costs, attorney’s fees, liability, losses, and damages of any nature sustained by reason of any decision to restrict, reduce, or eliminate investments pursuant to this bill.

1. Broad and Vague Definitions

This bill contains broad or vague definitions for otherwise straightforward concepts such as “Government of Turkey”, or the “Republic of Turkey” while including no definitions of key terms such as “investment vehicle”, “entity”, “operated”, or “controlled”. Thus, it is difficult to know whether the pension funds would be prohibited from purchasing debt, securities, or other ownership interests in partnerships or companies conducting business in Northern Cyprus, portions of Syria, or of Azerbaijan, or in entities whose business activities were somehow managed or operated by some division of a Turkish public authority, for example a hotel chain, an airline, or a job-training program for Syrian refugees (Currently, Turkish entities are caring for 3-4 million Syrian refugees. Those entities may be operated by local Turkish authorities, which the World Bank reports are seeking innovative, business oriented financing to promote economic opportunities to address the impact of the large growth of Syrian refugees in Turkey).

1. Financial Impact on Pensions’ Funded Status and Effect on Employer and Member Costs

CalPERS and CalSTRS have significant unfunded actuarial liabilities of approximately $139 billion and $107 billion respectively. Divestment mandates or investment prohibitions worsen those liabilities because they create lost investment opportunities that translate into reduced investment return. According to the Assembly Appropriations Committee, “a 2015 analysis by Wilshire Associates found that previous divestment efforts have collectively reduced the present value of the CalPERS portfolio by a range of $3.8 to $8.3 billion.” The effective loss in value requires increases in employer and member contributions to make up for the loss.

1. Constitutionality - California State Constitutional Law and Pension Systems’ Plenary Authority

AB 1597 violates the California Constitution because it mandates CalPERS and CalSTRS take actions that are clearly inconsistent with their fiduciary duties.

Article XVI, Section 17 of the California Constitution grants the boards of California’s public retirement systems “plenary authority and fiduciary responsibility for [the] investment of monies and administration of the system” and requires them to “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."

Although the California Constitution provides that the Legislature retains its authority to continue to prohibit certain investments by a retirement board where it is in the public interest to do so, that power is conditioned on the proviso that the prohibition satisfies the standards of fiduciary care and loyalty required of a retirement board. Given the current condition of the CalPERS and CalSTRS unfunded liabilities, lackluster investment horizon, an aging state workforce, and the cash flow position of CalPERS in particular, it is difficult to imagine that they could find that this statute satisfies their standards of fiduciary care and loyalty, particularly since it is constitutionally infirm at the federal level as discussed below.

1. Constitutionality – Federal Preemption

U.S. Constitution Supremacy Clause- Foreign Affairs Doctrine - Federal Preemption - Movsesian v. Victoria Versicherung AG, 670 F.3d 1067, 1071 (9th 3 Cir. 2012)(en banc).

AB 1597 is unconstitutional under federal law because it attempts to affect foreign policy which is in the exclusive jurisdiction of the federal government.

In a class action case brought by Armenian Genocide victims against various insurers under a California Code of Civil Procedure provision extending the statute of limitation for such claims, the U.S. Court of Appeals for the 9^th Circuit sitting en banc found that the California statute was preempted by the U.S. Constitution under the Foreign Affairs Doctrine. According to the court, the statute “has more than some incidental effect on foreign affairs (citation omitted). The statute expresses a distinct political point of view on a matter of foreign policy. It imposes the politically charged label of ‘genocide’ on the actions of the Ottoman Empire (and, consequently, present-day Turkey) and expresses sympathy for Armenian Genocide victims. The law establishes a particular foreign policy for California – one that decries the actions of the Ottoman Empire and seeks to provide redress for ‘Armenian Genocide victims’ by subjecting foreign insurance companies to lawsuits in California.”

The court cited U.S. Supreme Court case Zschernig v. Miller in noting that “even in the absence of any treaty, federal statute, or executive order, a state law may be unconstitutional if it disturbs foreign relations or establishes its own foreign policy.” The court further noted that the California statute “has a direct impact upon foreign relations and may well adversely affect the power of the central government to deal with those problems.”

Arguments attempting to distinguish AB 1597 from Movsesian because AB 1597 merely restricts the state from investing its own money in Turkey fundamentally misunderstand the nature of California’s pension funds, which are trust funds that hold the earned deferred compensation of system members. The monies cease to be monies of the state upon transfer from the state to the fund or from the local school or public agency to the funds (where in fact, the monies were not the state’s monies even before the transfer) just as they cease to be the state’s monies upon issuance of employee’s paychecks.

Moreover, federal law is clear that a state’s foreign company divestment statute is an unconstitutional intrusion in a field reserved for the federal government. (See, National Foreign Trade Council v. Giannoulias, (523 F.Supp. 2d 731)

AB 1597 impermissibly seeks to influence U.S. foreign policy by bringing economic pressure against the Government of Turkey through a prohibition on CalPERS and CalSTRS investments, and presumably, a wider divestment campaign among public and university institutional funds. This latter point is supported by the bill’s advocates who have engaged in a parallel process to pressure the University of California Retirement System to divest from Turkey.

1. Complexity of Foreign Affairs and Sensitivity of Current U.S. – Turkey Relations Implicates Federal Preemption

Foreign policy is a complex field with myriad, conflicting policy objectives constitutionally reserved for the federal government. The challenge of several states engaging in conflicting policies with foreign governments was a key factor in the failure of the country’s first national government under the Articles of Confederation and the drafting and ratification of the U.S. Constitution, which enabled the new American republic to present a unified voice to foreign powers. Relations between the U.S. and Turkey, which are particularly sensitive at the time of this writing, reflect that complexity.

Since the committee last reviewed AB 1579 a year ago, there have been significant developments in Syria related to the positioning of U.S. and Turkish forces and in U.S. - Turkey relations. As expected, Turkey continues to oppose the presence of Kurdish forces in areas near its border previously held by ISIS forces, and in effect, took control over the town of Afrin from U.S. Kurdish allies, causing increased concerns of open conflict between Turkish and U.S. forces. Instead, earlier this month, Turkey and the United States, honoring their commitments as long-standing allies, endorsed a tentative deal to overcome months of dispute over the nearby town of Manbij, in which the Kurdish YPG militia would withdraw from Manbij and Turkish and U.S. forces would jointly maintain security and stability there. Turkish and U.S. soldiers have just recently started independent patrols in northern Syria along the line separating Turkish-controlled areas from the town of Manbij.

According to the U.S. State Department:

Turkey is an important U.S. security partner. Turkey has been a valued North Atlantic Treaty Organization (NATO) Ally since 1952. Turkey is a leader in the Alliance’s Resolute Support Mission in Afghanistan and serves as NATO’s vital eastern anchor, controlling (in accordance with international conventions) the straits of the Bosporus and the Dardanelles, which link the Black Sea with the Mediterranean.

Turkey is also a vital member of the Counter-ISIS Coalition. Since Turkey opened its military bases to the United States and Coalition partners in July 2015, Incirlik Air Base has been critical in the effort to degrade and ultimately destroy ISIS in Syria and Iraq.

Turkey contributes to international security alongside U.S. forces in Afghanistan, the seas off Somalia, and in the Mediterranean. Turkey borders Iran, Iraq, and Syria, and is a key partner for U.S. policy in the surrounding region.

Syrian Refugees/European Stability

The Syrian refugee crisis continues to create political instability throughout the European Union as millions of Syrian refugees have made their way to Europe in the last few years. Italy has elected a populist, anti-immigrant government and German Chancellor Angela Merkel’s government is under severe pressure from similar anti-immigrant sentiment. The refugee crisis has left thousands dead in the Mediterranean, overwhelmed European authorities, and destabilized European politics. Turkish-European cooperation has been essential to prevent continued large flows of refugees from trying to reach Europe and to provide Syrian refugees food, shelter, and some form of economic opportunity.

According to the Los Angeles Times in 2017:

Many of those trying to reach Europe were Syrians using the shorter route from Turkey to the Greek islands. But the number of arrivals there has plunged since the EU struck a deal with Turkey in March that year to stem the flow. More than 9,200 have made the crossing this year, compared with 158,000 in the first half of 2016.

According to the European Commission:

About 3.2 million registered refugees are living in Turkey making it the largest host of refugees in the world, including Syrians, Iraqis, Afghan, Iranian, Somalian, and other nationalities. Out of the close to 3 million registered Syrian refugees in the country, some 260,000 people are hosted in 26 camps run by the Disaster and Emergency Management Presidency of Turkey (AFAD), where refugees have access to shelter, health, education food and social activities.

In summary, federal preemption law on foreign affairs precisely anticipates the complication of a state pursuing a policy that effectively interferes with federal policy objectives, in this case, the improvement of U.S. - Turkey relations, the protection of U.S. forces in Syria, and the diminution of political instability in Europe arising from the Syrian refugee crisis. Current law solves that problem by subordinating the state to the federal interest.

Related/Prior Legislation

SJR 24 (Jackson, 2018), failed passage in the Assembly Committee on Public Employees, Retirement and Social Security, would have required CalPERS to engage with companies in which it is invested that produce or sell firearms to determine a reasonable method for those companies to withdraw from the production and sale of firearms.

SB 459 (Portantino, 2017), pending in the Assembly Committee on Public Employees, Retirement and Social Security, would require CalPERS to divest from retailers or wholesalers of banned weapons, as specified.

AB 20 (Kalra, Chapter 575, Statutes of 2017), requires CalSTRS and CalPERS to report to the Legislature and the Governor, information regarding investments in, and engagement with, companies constructing or funding the construction of the Dakota Access Pipeline. This bill also requires CalSTRS and CalPERS to consider factors related to tribal sovereignty and indigenous tribal rights when selecting or rejecting investments.

AB 946 (Ting, 2017), died in the Assembly Committee on Public Employees, Retirement and Social Security, would prohibit CalPERS and CalSTRS from investing in companies engaged in business related to building a border wall.

AB 2650 (Nazarian, 2016) and AB 1410 (Nazarian, 2015), were similar to AB 1597. Both were held on the Assembly Appropriations Committee’s Suspense File.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations committee, this bill would result in the following:

1. Significant one-time administrative costs in the range of $2.9 million for CalPERS and CalSTRS to liquidate securities if federal sanctions against Turkey are enacted and ongoing annual costs of $1.3 million each year thereafter.
2. Unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.

SUPPORT:

Salud Carbajal, Member of the United States Congress

Tony Cárdenas, Member of the United States Congress

Jim Costa, Member of the United States Congress

Anna G. Eshoo, Member of the United States Congress

Ro Khanna, Member of the United States Congress

Zoe Lofgren, Member of the United States Congress

Grace Napolitano, Member of the United States Congress

Adam Schiff, Member of the United States Congress

Brad Sherman, Member of the United States Congress

Jackie Speier, Member of the United States Congress

Zareh Sinanyan, Mayor, City of Glendale

Patrick J. Furey, Mayor, City of Torrance

Vartan Gharpetian, City of Glendale Councilmember

Ara Najarian, City of Glendale Councilmember

Paul Krekorian, Los Angeles City Councilmember

Shant Sahakian, Board of Education Member, Glendale Unified School District

Ardy Kassakhian, Glendale City Clerk

Cruz Bustamante, Former Lt. Governor of California

All-Armenian Student Association

Alliance of Armenians Against Genocide

American Hellenic Council

Armenian Assembly of America

Armenian National Committee of America-Western Region

Assyrian American Association of Southern California

City of Montebello

Counting House

OPPOSITION:

Association of California School Administrators

California Police Chiefs Association

California Public Employees’ Retirement System

California Retired Teachers Association

California Special Districts Association

California State Association of Counties

California State Teachers’ Retirement System

California Teachers Association

California Turkish Alliance

Consul General, Los Angeles, Republic of Turkey

League of California Cities

Peace Officers Research Association of California

School Employers Association of California

Turkish Coalition of America

ARGUMENTS IN SUPPORT: According to the author, the purpose of this bill is “to address the issue of Turkey’s denial of the systematic killing of 1.5 million Armenian victims during World War I.” The author states that California’s investment in Turkish government bonds indirectly subsidizes Turkish denial of the Armenian Genocide.

According to the Armenian National Committee of Armenia – Western Region:

The policy objective of AB 1597 is to prevent financially rewarding and encouraging a government notorious for human rights violations. Enactment of this bill would prove that California will take a principled stand to ensure that our investment choices align with our human rights policies, and that California will not indirectly subsidize the Turkish Government’s ongoing denial of the Armenian Genocide by enabling it to use our funds to finance its denialist propaganda campaign. It is not an attack on the Turkish people or nation, and does not impact investments in Turkish businesses or California businesses which invest in Turkey. Rather it is limited to Turkish government investment vehicles.”

According to Mayor Zareh Sinanyan and Councilmembers Ara Najarian and Vartan Gharpetian of the City of Glendale:

We must send a clear message to a regime which has imprisoned over 100,000 dissenters, opposition leaders, academicians and journalists who tried to promote democracy and human rights in Turkey that we will not encourage this behavior by investing in Turkish Government investment vehicles and that we will stand in solidarity with the rights and principles which we all hold so dear.

ARGUMENTS IN OPPOSITION:

According to CalPERS:

Generally, CalPERS prefers constructive engagement to divesting as a means of affecting the conduct of entities in which it invests. Divesting appears to almost invariably harm investment performance, such as by causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds), compromising investment strategies, and reducing portfolio diversification.

AB 1547 could have a significant fiscal impact on CalPERS. The CalPERS Board of Administration invests pension assets for the exclusive purpose of paying benefits to the plan participants. Limiting investment opportunities or reducing diversification results in lower than expected investment returns which leads to higher employer contribution rates and may jeopardize the long-term sustainability of the fund.

CalSTRS states:

According to the bill’s author, Turkey violates the human rights of Armenians by continuing to deny the 1915 genocide of Armenians, and divestment would encourage the Turkish government to acknowledge the Armenian Genocide and to reach a fair and just resolution of reparations to the survivors of the Armenian Genocide.

Prior legislation prohibiting investments in Sudan and Iran did not come into constitutional conflict with federal authority because Congress granted authorization to the states to enact such legislation. Congress has not granted similar authority to the states to restrict investments in Turkish investment vehicles.

The board’s policy is to oppose legislation that infringes on the investment authority of the board or is inconsistent with the investment policy adopted by the board as presented in the CalSTRS Investment Policy and Management Plan.

According to the California Teachers Association:

CalSTRS has a fiduciary obligation to protect the fund. The fund currently has a $96.7 billion shortfall based on their 2017 actuarial valuation. Additionally, the Teachers’ Retirement Board recently lowered the rate of return from 7.5 percent to 7.0 percent, anticipating an additional economic decline. If CalSTRS loses either money or opportunity costs from divestment, it is the members, California’s K-12 and community college educators, who will bear the financial and political responsibility of addressing any new shortfall ultimately impacting our students by not being able to attract and retain educators to a profession facing a severe shortage. CalSTRS funding is extremely complex. The current mechanism for addressing the existing shortfall, AB 1469 (Bonta 2014) took almost ten years to create. Any additional gaps in funding are not easily addressed with a myriad of competing funding priorities within the Legislature. If new holes in funding for CalSTRS are created, this will ultimately impact contribution rates for school employers and the State.

The League of California Cities writes:

To date, CalPERS estimates that divestitures have cost the fund roughly $8 billion dollars. To cover the losses, employer and employee contributions have risen and CalPERS continues to liquidate valuable assets to pay the bills. While the fiscal impact is still unknown, CalPERS estimated in previous legislation on this topic approximately $521 million in costs and unknown ongoing costs from future General Fund pressure to augment contributions to defined benefit programs. Therefore, AB 1597 could be expected to contribute to increased employee and employer contributions and further decrease the pension fund status.

The Turkish Coalition of America claims that “AB 1597 has a stated goal of encouraging particular behavior by the government of Turkey. However, the bill will do nothing to achieve it. Rather, it will almost definitely achieve the opposite. For this reason and others, you should decline to support the bill.”

According to the California Police Chief’s Association, “AB 1597 will further the level of state liabilities, leaving local government to make up the difference. This will result in local governments being forced to reduce public services in order to pay increasing costs to CalPERS.”

The California Association of School Administrators states that “These investment losses have a direct impact on school districts and their employees. Reduced investment returns are often made up through increased employer and employee contributions. Any future increases would place additional strain on school districts and employees who have already absorbed dramatic contribution rate increases over the past several years.”

According to the California State Association of Counties, “Divestment policies pose harm to investment performance which, in turn, may result in either increased employer contributions, increased employee contributions, or both.”

ASSEMBLY THIRD READING

ATR Bill Id:AB 1597

Author:(Nazarian)

As Introduced Ver:February 17, 2017

Majority vote

SUMMARY: Prohibits the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) from investing in any investment vehicle issued by, owned, controlled, or managed by the government of Turkey. Specifically, this bill:

1. Makes legislative findings and declarations regarding the Armenian Genocide and the Republic of Turkey's refusal to acknowledge its responsibility of the Armenian Genocide, to reach resolution on its obligations under international treaties and human rights laws, and return properties, as specified, to their rightful owners, among others.
2. Defines "Government of Turkey" as the government of Turkey or its instrumentalities, political subdivisions, investment vehicles, government bonds, or financial institutions that are owned, controlled or operated by the government of Turkey.
3. Prohibits CalPERS and CalSTRS from investing public employee retirement funds in any investment vehicle issued by, owned, controlled, or managed by the government of Turkey.
4. Requires the boards to liquidate investments in Turkey, as specified.
5. Requires the boards, within one year of the passage of federal law imposing sanctions on Turkey, to file a report with the following information to the Legislature:
   1. A list of investments in Turkey of which the board has liquidated.
   2. A list of investments in Turkey of which the board has not liquidated as a result of a determination by the board that divestment would be inconsistent with its fiduciary duties pursuant to California Constitution Article XVI Section 17, and the board's findings adopted in support of that determination.
6. Specifies that nothing in this bill would require the boards to take an action unless the board determines in good faith that the action is consistent with its fiduciary duties, as specified.
7. Indemnifies from the General Fund and holds harmless the present, former and future board members, officers and employees of, and investment managers under contract, with those retirement systems.

EXISTING LAW: As provided in the California 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 its 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."

Existing state law prohibits CalPERS and CalSTRS from investing in companies with active business operations in Sudan and Iran.

FISCAL EFFECT: According to the Assembly Appropriations Committee, this bill will result in:

1. Significant one-time administrative costs in the range of $2.9 million for CalPERS and CalSTRS to liquidate securities if federal sanctions against Turkey are enacted, and ongoing annual costs of $1.3 million each year thereafter.
2. Unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. The CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.

COMMENTS: According to the Assembly Public Employees, Retirement and Social Security Committee:

1. Impacts of Divestment: CalPERS and CalSTRS are among the largest public pension systems in the country, and each invests billions across asset classes as a means of helping to sustain their respective funds towards ensuring solvency, and providing retirement and benefits to their respective members.

To achieve social, moral or political purposes, divestment by the systems requires the removal of all investments in a company or government. Divestment adversely affects the retirement fund portfolios, the solvency of the systems, including increasing unfunded liabilities, and removes opportunities for them to advance positive change through active engagement as a shareholder. Divestment also results in exponential negative downstream effects on public agencies, school districts, present and future retirees, the state budget, businesses, and taxpayers.

1. Foreign Policy Decisions: Federal constitutional provisions preclude states from taking actions that interfere with the federal government's authority over foreign affairs and commerce with foreign countries. Divestment legislation such as this one may be considered an entry into the arena of foreign affairs, and substitute pension fund foreign policy for Untied States state department foreign policy while investors are neither equipped nor empowered to make foreign policy decisions. A federal court in Illinois ruled on this issue several years ago.
2. Illinois Lawsuit: In National Foreign Trade Council v. Giannoulias, (523 F.Supp. 2d 731), the federal court overturned an Illinois statute requiring state public pension funds to divest investments in companies with ties to Sudan. In this action, the court ruled that the act violated 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, and enjoined state officials from enforcing the act.
3. Please see the policy committee analysis for a full discussion of this bill.

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957 FN: 0000511

Date of Hearing: May 3, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 1597

Author:(Nazarian) – As Introduced Ver:February 17, 2017

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill prohibits the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) from making additional or new investments or renewing investments, in any investment vehicle issued, owned, controlled, or managed by the government of Turkey, contingent on a federal law that imposes comprehensive or selective economic sanctions on Turkey or any territory under the administration of Turkey.

FISCAL EFFECT:

1. Significant one-time administrative costs in the range of $2.9 million for CalPERS and CalSTRS to liquidate securities if federal sanctions against Turkey are enacted and ongoing annual costs of $1.3 million each year thereafter.
2. Unknown impact on public retirement system portfolios if federal sanctions against Turkey are enacted. CalSTRS and CalPERS may incur opportunity costs if alternative investments do not generate greater investment returns than divested securities would have generated.

COMMENTS:

1. Purpose. According to the author, California’s investment in Turkish government bonds indirectly subsidizes Turkish denial of the Armenian Genocide. This bill is intended to address the issue of Turkey’s denial and to encourage Turkey to take accountability for the systematic killing of 1.6 million Armenian victims in World War I.
2. Impact of divestment on CalPERS portfolio. A 2015 analysis by Wilshire Associates found that previous divestment efforts have collectively reduced the present value of the CalPERS portfolio by a range of $3.8 to $8.3 billion. Divestment targets that were included in this study were South African securities, tobacco-related securities, California Iran and Sudan Act lists, and firearm-related companies. The largest driver of this negative portfolio impact was the divestment from tobacco, which Wilshire Associates found to have reduced the CalPERS portfolio by an estimated $2 to $3 billion.
3. Recent legislation. AB 2650 (Nazarian) and AB 1410 (Nazarian), both of the 2015-16 Legislative Session, were similar to this bill. Both were held on this committee’s Suspense File.
4. Related legislation. AB 20 (Kalra) requires CalPERS and CalSTRS to submit a report to the Legislature and Governor regarding investments in, and engagement activities with, companies constructing, or funding the construction of the Dakota Access Pipeline, and is pending in this committee. AB 946 (Ting) prohibits CalPERs and CalSTRS from investing in companies engaged in business related to building a border wall, is currently pending in the Assembly Committee on Public Employees, Retirement, and Social Security.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081