Existing law creates the Department of Finance and provides that the department has general powers of supervision over all matters concerning the financial and business policies of the state. establishes the Public Employees Retirement System and the State Teachers Retirement System. These systems provide defined pension benefits to public employees based on age, service credit, and final compensation. The California Constitution confers upon the retirement boards of public retirement systems plenary authority and fiduciary responsibility for the investment of moneys of those systems. Existing law authorizes these public retirement system boards, consistent with their fiduciary duties and the standard for prudent investment, to prioritize investment in an in-state infrastructure project over a comparable out-of-state infrastructure project.

This bill would authorize the Department of Finance to identify infrastructure projects in the state for which the department will guarantee a rate of return on investment for an investment made in that infrastructure project by the Public Employees Retirement System. The bill would create the Reinvesting in California Special Fund as a continuously appropriated fund and would require the moneys in the fund to be used to pay the rate of return on investment. The bill would require the rate of return on investment to be subject to the availability of moneys in the fund. The bill would also state the intent of the Legislature to identify special funds to be transferred into the fund for the purposes of these provisions. By creating a new continuously appropriated fund, this bill would make an appropriation. require specified staff of the Public Employees Retirement System to work with appropriate state agencies to produce an annual list, that may be provided to each board, of priority infrastructure projects most suitable for funding.

Existing law creates the Department of Finance and provides that the department has general powers of supervision over all matters concerning the financial and business policies of the state.

The Public Employees Retirement Law (PERL) creates the Public Employees Retirement System (PERS) and provides a defined benefit to its members based on age at retirement, service credit, and final compensation. PERL vests management and control of PERS in the Board of Administration of the Public Employees Retirement System, including the exclusive control of the investment of the retirement fund, and requires the board and its officers and employees to discharge their duties with respect to this system solely in the interest of the participants and beneficiaries.

This bill would authorize the Department of Finance to identify infrastructure projects in the state for which the department will guarantee a rate of return on investment for an investment made in that infrastructure project by the Public Employees Retirement System. The bill would create the Reinvesting in California Special Fund as a continuously appropriated fund and would require the moneys in the fund to be used to pay the rate of return on investment. The bill would require the rate of return on investment to be subject to the availability of moneys in the fund. The bill would also state the intent of the Legislature to identify special funds to be transferred into the fund for the purposes of these provisions. By creating a new continuously appropriated fund, this bill would make an appropriation.

SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION

Senator Bill Dodd

Chair

2017 - 2018 Regular

Bill No: AB Hearing Date: 6/27/2017

SUBJECT:

DIGEST: This bill authorizes the Department of Finance (DOF) to identify infrastructure projects in California where DOF will guarantee a rate of return on investments made by the California Public Employees’ Retirement System (CalPERS), as specified.

ANALYSIS:

Existing law:

1. Creates DOF and provides that the department has general powers of supervision over all matters concerning the financial and business policies of the state.
2. Creates CalPERS, through the Public Employees’ Retirement Law (PERL), which provides a defined benefit to its members based on age at retirement, service credit, and final compensation.
3. Specifies that the Board of Administration of CalPERS manages and controls CalPERS, including exclusive control of the investment of the retirement fund, and requires the board and its officers and employees to discharge their duties with respect to this system solely in the interest of the participants and beneficiaries.
4. Authorizes CalPERS, subject to, and consistent with its fiduciary duties and the standard for prudent investment, to prioritize investment in an in-state infrastructure project over a comparable out-of-state project.
5. Allows the Legislature, by statute, to prohibit certain investments where it is in the public interest to do so, and provided that the prohibition does not conflict with the board’s duties and standards of fiduciary care and loyalty to members and participating employers.

This bill:

1. Authorizes DOF to evaluate and identify infrastructure projects in California for which DOF shall guarantee a rate of return on investments for an investment made in that infrastructure project by CalPERS.
2. Establishes the Reinvesting California Special Fund (Fund) in the State Treasury to be used to pay the rate of return guaranteed by DOF.
3. Specifies that the guaranteed rate of return is subject to the availability of money in the Fund.
4. Prohibits General Fund moneys from being deposited in the Fund.
5. States that it is the intent of the Legislature to identify special fund moneys, including trust fund moneys that can be used for these purposes.

Background

Purpose of the bill. The author’s office notes that, “AB 161 will improve public pension investment in California-based infrastructure projects by allowing DOF to identify infrastructure projects where DOF can guarantee a rate of return for CalPERS. This bill creates no requirements on CalPERS or DOF. Instead, this bill creates a potential tool that can be used to increase investment in California-based infrastructure projects.”

According to the author’s office, “California has a large infrastructure funding gap that is growing every day. California Forward estimates the state will need to spend $835 billion over the next decade to meet our water, transportation, and K-12 infrastructure needs. The U.S Environmental Protection Agency has put California at the top of the list for water system needs.”

Lastly, the author’s office contends that, “public pension funds invest in California infrastructure, but in very limited amounts. CalPERS has established policies recognizing the benefit of investing in infrastructure. However, to date, CalPERS has invested little in California infrastructure. Only 0.0003 percent of CalPERS holdings are invested in California infrastructure. Private pension funds have established policies that allow them to meet their financial responsibilities and make substantial investments in infrastructure that grow opportunities for their members. This bill encourages similar investments by public employee pension funds.”

CalPERS. The California Public Employees’ Retirement System manages retirement and health benefits for roughly 1.8 million California public employees, retirees, and their families. CalPERS is one of the largest investors in the world, with $295 billion in assets as of June 30, 2016. Established by legislation in 1931, CalPERS became operational in 1932 for the purpose of providing a secure retirement to State employees who dedicate their careers to public service.

CalPERS is governed by a 13 member Board of Administration. The Board is made up of six elected members, three appointed members, and four ex-officio members.

As previously noted, the California Constitution provides that the Board shall have plenary authority and fiduciary responsibility for the investment of moneys and administration of the system, is charged with the sole and exclusive fiduciary responsibility over the assets of the system, and is granted the sole and exclusive responsibility for administering the system in a manner that will assure prompt delivery of benefits and related services to system members and beneficiaries.

CalPERS investment in California. CalPERS searches for infrastructure opportunities in sectors including transportation, energy, and water, investing both directly, and in partnership with third-party investment managers. CalPERS considers infrastructure investments to have the potential to benefit local economic development and provide essential community services within the state.

According to the 2016 CalPERS for California report, within the CalPERS investment portfolio, 9.3 percent, or $27.3 billion, is invested in California, supporting local jobs across the state. The market value of CalPERS’ California portfolio decreased 1.8 percent in the 12 months since June 30, 2015. Specifically, the report notes that, as of June 30, 2016, CalPERS invested $345.7 million in four California-based infrastructure projects, which support 4,400 jobs in California.

CalPERS transportation investment. On May 4, 2016, CalPERS announced that its Infrastructure Program has made its first U.S. transportation investment, purchasing a 10 percent share of the Indiana Toll Road Concession Company LLC (ITRCC) from global fund manager IFM Investors.

This bill seeks to help increase similar investment in California-based infrastructure projects by guaranteeing a rate of return for those projects allowing them to be lower-risk investments.

AB 2348 (Levine, 2016). This bill is identical to AB 2348 (Levine, 2016), which was vetoed by Governor Brown. The Governor’s veto message stated that “this bill authorizes DOF to identify infrastructure projects for investment by the Public Employees' Retirement System and then guarantee those investments a certain rate of return. This bill makes the state a guarantor of CalPERS investments. In the event that any such investment fails to meet the expected return, the state General Fund would be forced to make up the difference. That's not prudent.”

It should be noted that this bill specifically states that no General Fund moneys shall be deposited into the fund used to pay the rate of return on investment.

Prior/Related Legislation

AB 2348 (Levine, 2016) would have authorized the DOF, to identify infrastructure projects in California where DOF can guarantee a rate of return on investments for an investment made in that infrastructure project by the CalPERS, as specified. (Vetoed by Governor Brown)

SB 185 (De León, Chapter 605, Statutes of 2015) prohibited CalPERS and California State Teachers’ Retirement System (CalSTRS) from investing public employee retirement funds in thermal coal companies, as specified.

SB 955 (Pavley, Chapter 760, Statutes of 2012) authorized CalPERS and CalSTRS to prioritize investment in in-state infrastructure projects over alternative out-of-state project if the investments are consistent with its fiduciary responsibility.

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

SUPPORT:

California Special Districts Association

Coalition of Adequate School Housing

State Building and Construction Trades Council of California

OPPOSITION:

None received

ARGUMENTS IN SUPPORT: According to the State Building and Construction Trades Council of California, “AB 161 would allow DOF to identify infrastructure projects which the state could provide a guaranteed rate of return to public pension investment. Providing this tool will encourage greater voluntary investment in California infrastructure from CalPERS. Additional investments in these projects mean more California jobs and economic growth as well.”

ASSEMBLY THIRD READING

ATR Bill Id:AB 161

Author:(Levine)

As Introduced Ver:January 13, 2017

Majority vote

SUMMARY: Authorizes the Department of Finance (DOF) to identify infrastructure projects in California where DOF can guarantee a rate of return on investments made by the Public Employees' Retirement System. Specifically, this bill:

1. Authorizes DOF to evaluate and identify California infrastructure projects for which they can guarantee a rate of return on investments made in the project by the Public Employees' Retirement System.
2. Establishes the Reinvesting in California Special Fund (Fund) in the State Treasury to be used to pay the rate of return guaranteed by DOF.
3. Requires that all moneys in the Fund be continuously appropriated without regard to fiscal years.
4. Specifies that the guaranteed rate of return is subject to the availability of money in the Fund.
5. Prohibits General Fund monies from being deposited into the Fund.
6. States that it is the intent of the Legislature to identify special fund monies, including trust fund monies that can be used for these purposes.

EXISTING LAW: Authorizes the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS), subject to, and consistent with their fiduciary duties and the standard for prudent investment, to prioritize investment in an in-state infrastructure project over a comparable out-of-state project.

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

1. Significant ongoing costs to the DOF in the range of $1.0 million annually if DOF chose to run the proposed program, as specified. The DOF does not currently have the in-house expertise required to identify infrastructure projects that would generate sizable returns for CalPERS, and the hiring and retention of investment staff would be a major cost driver.
2. Cost pressures on unidentified special funds. The bill specifies that, through the annual Budget Act, special fund dollars would be deposited into the California Fund to pay the guaranteed rate of return if infrastructure investments themselves do not produce them.
3. Potential growth to the CalPERS portfolio if CalPERS chooses to invest in the projects identified by DOF and these investments generate a higher rate of return than alternative investments.

COMMENTS: This bill is substantially similar to AB 2348 (Levine) of 2016, which was vetoed by the Governor last year. The Governor's veto message stated that, "This bill makes the state a guarantor of PERS investments. In the event that any such investment fails to meet the expected return, the state General Fund would be forced to make up the difference. That's not prudent."

Analysis Prepared by: Michael Bolden / P.E.,R., & S.S. / (916) 319-3957 FN: 0000510

Date of Hearing: April 26, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 161

Author:(Levine) – As Introduced Ver:January 13, 2017

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

SUMMARY:

This bill creates an infrastructure investment program through a partnership with the Department of Finance (DOF) and the California Public Employees’ Retirement System (CalPERS). Specifically, this bill:

1. Authorizes DOF to evaluate and identify infrastructure projects in California for which DOF can guarantee a rate of return of investment for an investment made by CalPERS.
2. Creates the Reinvesting in California Special Fund (California Fund), which will be used to pay the guaranteed rate of return if funds are available.
3. Specifies that no General Fund moneys may be deposited in to the Fund and that it is the intent of the legislature to identify and deposit special fund money into the Fund through the Budget Act.

FISCAL EFFECT:

1. Significant ongoing costs to DOF in the range of $1.0 million annually if DOF chose to run the proposed program, as specified. DOF does not currently have the in-house expertise required to identify infrastructure projects that would generate sizable returns for CalPERS, and the hiring and retention of investment staff would be a major cost driver.
2. Cost pressures on unidentified special funds. The bill specifies that, through the annual Budget Act, special fund dollars would be deposited into the California Fund to pay the guaranteed rate of return if infrastructure investments themselves do not produce them.
3. Potential growth to the CalPERS portfolio if CalPERS chooses to invest in the projects identified by DOF and these investments generate a higher rate of return than alternative investments.

COMMENTS:

1. Purpose. According to the author, AB 161 will encourage greater investment in California’s infrastructure and generate job growth. The author notes that only .0003% of CalPERS holdings are invested in California infrastructure, and this bill will set up a structure for the pension fund to invest in, and get returns on, investments in state projects.
2. Guaranteed rate of return. AB 161 creates a dedicated source of funds to guarantee a rate of return for CalPERS investments in California infrastructure. However, this guaranteed rate of return is contingent on there being sufficient moneys in the California Fund, and this bill does not guarantee such moneys will be available. It is unclear whether CalPERS would participate in this program given this uncertainty.
3. Veto of similar legislation. AB 161 is substantively similar to AB 2348 (Levine), 2016, which was vetoed by the Governor, whose veto message stated: “This bill authorizes the Department of Finance to identify infrastructure projects for investment by the Public Employees' Retirement System and then guarantee those investments a certain rate of return. This bill makes the state a guarantor of PERS investments. In the event that any such investment fails to meet the expected return, the state General Fund would be forced to make up the difference. That's not prudent.”

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