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 requires every public investment fund, including any fund of any public pension or retirement system, to require each alternative investment vehicle in which it invests to make prescribed annual financial disclosures.

This bill, if consistent with fiduciary responsibilities of a public investment fund as determined by its board, would restrict new, additional, or renewed investments by require a public investment fund to require an alternative investment vehicle where, if the investment vehicle is managed by an investment manager, the investment manager has adopted and committed to comply with a race and gender pay equity policy consistent with requirements established in the bill. The bill would require an investment manager, beginning September 1, 2019, to submit to report at least once annually to the public investment fund a certified report regarding compliance. Because a certified report would be required to be verified under penalty of perjury, this bill would expand the crime of perjury, thereby imposing a state-mandated local program. The bill would require each contractually enforceable instrument for additional or new investments or renewal of existing investments with an investment manager to require that the investment manager take prescribed actions consistent with the bill as a material term of the instrument. certain information concerning specified hospitality employers relating to race and gender pay equity and sexual harassment. The bill would require a public investment fund to disclose race and gender pay equity reporting and sexual harassment information provided to it pursuant to the bill at least once annually to the State Auditor and in a report presented at a meeting open to the public. The bill would define terms for its purposes. public and would require the fund to provide the report upon request to a member of the Legislature. The bill would authorize the Department of Fair Employment and Housing to issue regulations for the implementation of these reporting requirements. The bill would define terms for purposes of the reporting provisions and repeal the reporting provisions on January 1, 2022.

Because this bill would impose new requirements on local entities, relating to the implementation of the bill, including the collection of information and its presentation at a meeting open to the public, it would impose a state-mandated local program.

The California Constitution requires local agencies, for the purpose of ensuring public access to the meetings of public bodies and the writings of public officials and agencies, to comply with a statutory enactment that amends or enacts laws relating to public records or open meetings and contains findings demonstrating that the enactment furthers the constitutional requirements relating to this purpose.

This bill would make legislative findings to that effect.

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 requires every public investment fund, including any fund of any public pension or retirement system, to require each alternative investment vehicle in which it invests to make prescribed annual financial disclosures.

This bill, if consistent with fiduciary responsibilities of a public investment fund as determined by its board, would restrict new, additional, or renewed investments by a public investment fund to an alternative investment vehicle where, if the investment vehicle is managed by an investment manager, the investment manager has adopted and committed to comply with a race and gender pay equity policy consistent with requirements established in the bill. The bill would require an investment manager, beginning September 1, 2019, to submit at least once annually to the public investment fund a certified report regarding compliance. Because a certified report would be required to be verified under penalty of perjury, this bill would expand the crime of perjury, thereby imposing a state-mandated local program. The bill would require each contractually enforceable instrument for additional or new investments or renewal of existing investments with an investment manager to require that the investment manager take prescribed actions consistent with the bill as a material term of the instrument. The bill would require a public investment fund to disclose pay equity reporting information provided to it pursuant to the bill at least once annually to the State Auditor and in a report presented at a meeting open to the public. The bill would define terms for its purposes.

Because this bill would impose new requirements on local entities, relating to the implementation of the bill, including the collection of information and its presentation at a meeting open to the public, it would impose a state-mandated local program.

The California Constitution requires local agencies, for the purpose of ensuring public access to the meetings of public bodies and the writings of public officials and agencies, to comply with a statutory enactment that amends or enacts laws relating to public records or open meetings and contains findings demonstrating that the enactment furthers the constitutional requirements relating to this purpose.

This bill would make legislative findings to that effect.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for specified reasons.

Date of Hearing: April 18, 2018

ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT, AND SOCIAL SECURITY

Freddie Rodriguez, Chair

ABPCA Bill Id:AB 2571 (

Author:Gonzalez Fletcher) – As Amended Ver:April 11, 2018

SUBJECT: Public employee retirement systems: investments: race and gender pay equity

SUMMARY: Requires a public investment fund to require an alternative investment vehicle (AIV) to, at least annually, report specified information relating to hospitality employers pertaining to race and gender pay equity, and sexual harassment, among other provisions. Specifically, this bill:

1. Makes legislative findings and declarations regarding the following:
   1. The Equal Pay Act of 1963; the Civil Rights Act of 1964; pay inequality among race and gender; sexual harassment; and, that these issues are particularly acute and well-documented in a key and growing part of the state and national economies: the hospitality sector.
   2. The purpose of this measure is to ensure that alternative investment vehicles in which public investment funds invest, report specified information concerning these issues, as specified.
   3. That the information required to meet the reporting obligations is readily available, consistent with federal reporting requirements, and do not impose an unreasonable burden on those required to prepare reports.
2. Provides that public investment funds are not required to take any action that the board determines to be inconsistent with its fiduciary responsibilities, pursuant to Section 17 of Article XVI of the California Constitution.
3. Requires every public investment fund to require each AIV in which it invests to, at least annually, report information concerning any subsidiary entity of the AIV that is a hospitality employer, and any such employer with which any subsidiary entity contracts to operate a facility owned by the subsidiary entity. This applies to hospitality employers that employ 100 or more individuals whom which the employer exercises control over wages, hours, or working conditions.

a) Regarding race and gender pay equity, the report must include:

• • 1. The annual mean compensation of employees, by gender, ethnic or racial group.
    2. The number of employees employed in each job category, by gender, for each ethnic or racial group, and the average annual compensation of employees, as specified.

b) Regarding sexual harassment, the report, excluding the name or identifying information concerning the person alleging sexual harassment unless the complaint was filed in court, as specified, or an administrative agency, must include:

1. The existence, case identifying information including case number, and current status of any complaint alleging sexual harassment filed in a state or federal court or administrative agency within the past 5 years by a current or former employee against the hospitality employer.
2. The existence and financial terms of any settlement entered into by the hospitality employer within the past five years in which the payment of monetary compensation was made to a current or former employee in exchange for a release of liability concerning an allegation of sexual harassment.

c) The name and location of each hospitality employer that information is reported, as specified.

4) Requires AIVs to use the job categories and ethnic or racial groups included in the EEO-1 form used by the federal Equal Employment Opportunity Commission (EEOC) and the Office of Federal Contract Compliance. However, if the EEO-1 form is either no longer in use or no longer includes job categories or ethnic or racial groups, the Department of Fair Employment and Housing (DFEH) is required to issue regulations determining the job categories and ethnic or racial groups to be used for reporting, and must, to the extent possible, match those of any similar federal reporting requirements applicable to firms, as specified.

1. Provides that if compensation data is for three or fewer employees, the AIV must not report the specified data.
2. Permits the DFEH to issue regulations consistent with, and necessary for, implementation of the reporting requirements.
3. Requires, at least once annually, disclosure of specified information provided by AIVs to public investment funds to be presented in an open meeting to the public and made available upon request to any Member of the Legislature.
4. Specifies that the requirements for reporting by AIVs apply to all new contracts entered into by public investment funds on or after January 1, 2019, and existing contracts where the public investment fund commits new capital on or after the same date.
5. Defines the following terms:

a) “Alternative investment vehicle” to mean a limited partnership, limited liability company or similar legal structure through which a public investment fund invests in a private equity fund, venture fund, hedge fund, absolute return fund, real estate fund, joint venture, coinvestment vehicle, comingled investment, direct investment, or any other investment that is not a public traded security or debt fund.

b) “Compensation” to mean the gross income reported on a W-2 form, including wages, salaries, fees, commissions, tips, taxable fringe benefits, and elective deferrals provided that the DFEH has the authority to issue regulations that provide an alternative definition of “compensation” to align, to the extent possible, with any rule adopted by the federal EEOC requiring reporting of employee compensation data applicable to employers covered, as specified.

c) “Employee” to mean a person employed by a hospitality employer or employed by an individual or entity that supplies workers to perform labor within the hospitality employer’s usual course of business.

d) “Gender” to refer to a person’s self-identified gender identity.

e) “Hospitality employer” to mean any individual or entity in the United States that acts as an employer in the hospitality sector, including operators of hotels, motels, and resorts as well as operators of restaurants and bars located on the premises of hotels, motels and resorts, but does not mean an investment firm.

f) “Public investment fund” to mean any fund of any public pension or retirement system, including that of the University of California to the extent consistent with the State Constitution, as specified.

g) “Sexual harassment” to mean sexual harassment as defined under applicable state or federal law.

h) “Subsidiary entity” to mean any business organization, including, but not limited to, a corporation or limited liability company over which an alternative investment vehicle managed by an investment manager exercises, or has the right to exercise control through ownership or control of shares of the business organization processing more than 50 percent of voting power, whether directly or indirectly through one or more other subsidiary entities.

10) Repeals these provisions on January 1, 2022.

11) Provides for indemnification, jointly and severally, from the State General Fund and holds harmless, specified individuals and research firms for specified legal actions, costs, liability or losses that may be sustained, also as specified.

12) Makes specified legislative findings and declarations regarding the right of public access to meetings of local public bodies or writings of public officials, and that information in the disclosures is necessary to ensure the public confidence and integrity of investments made by public investment fund boards in AIVs.

13) Provides for severability if any provision is held invalid.

14) Provides that reimbursement is not required, as specified, because the only costs that may be incurred by a local agency or school district would result from a legislative mandate, as specified.

EXISTING LAW:

1) Pursuant to the federal Equal Pay Act of 1963 and the California Fair Pay Act (CFPA), an employer is prohibited from paying its employees wages that are lower than those paid to employees of the opposite sex, or of another race or ethnicity. The CFPA permits differences in wages based on specified factors, including a bona fide factor other than sex, race or ethnicity.

2) Pursuant to Section 17 of Article XVI of the State Constitution, provides in part that, the retirement board of a public pension or retirement system has plenary authority and fiduciary responsibility for investment of moneys and administration of the system, subject to the following:

a) Having sole and exclusive fiduciary responsibility over the assets of the public pension or retirement system, and that the assets are trust funds to be held for the exclusive purposes of providing benefits to participants in the system and their beneficiaries and defraying reasonable expenses of administering the system.

b) Discharging 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…, and defraying reasonable expenses of administering the system. The board’s duty to its participants and their beneficiaries take precedence over any other duty.

c) Discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character with like aims.

d) Diversifying the investments of the system to minimize the risk of loss and to maximize the rate of return, unless under the circumstances it is clearly not prudent to do so.

FISCAL EFFECT: Unknown. This bill is flagged fiscal by Legislative Counsel.

COMMENTS: According to the author, “Assembly Bill 2571 would require private equity firms with hospitality industry assets to report pay differential data of their employees if they are owned in any part by public pension investment funds.

‘With CalPERS and CalSTRS, California is home to the top two largest public employee pension funds in the country, with their combined assets totaling over $575 billion. California must demonstrate its core values by using our state’s financial strength to address the realities of gender and racial pay disparities in private equity and the hospitality industry.

‘While pay discrimination by race and gender has been illegal in the United States, pay inequities continue to be rampant, particularly in these two industries. By requiring private equity firms and hospitality employers that public money is invested in to provide transparency in pay differentials by race and gender, [this bill] would provide one modest step towards reducing pay inequity in one of California’s fastest growing industries.”

1) Comments by Supporters

According to the sponsor, UNITE HERE Local 11, “…requiring common-sense transparency measures, [this bill] would represent a significant step forward to address the gender and race pay gap [that exists in the hospitality industry].

‘[This bill] would require public pension funds to ensure that alternative investment vehicles with subsidiaries in the hospitality sector annually disclose basic race and gender pay equity data. Such data can help to ensure the State of California does not subsidize unequitable pay practices and that the boards of public pension funds have the information they need to assess the risks that festering pay inequity poses for their investments.”

Several other supporters offer similar comments, including the National Employment Law Project (NELP) which also provided statistical data relating to women, and particularly, women of color in this sector. Written correspondence from NELP shows that women in the lodging sector earned less than the mean income, and that Black, Latina and Asian women workers in housekeeping and cleaning earned less than their white male counterparts.

2) Comments by Opponents

Numerous opponents, including the California Chamber of Commerce, jointly express that “[t]he provisions of the bill could create a false impression of wage discrimination, unequal pay or of a hostile work environment where none exists, and therefore, subject employers to unfair public criticism, expose employer to litigation costs to defend against meritless claims and impose costs on the public funds to collect and report the data.

‘It also creates a privacy concern for employees and the disclosure of their wages as well as the public disclosure of their activity as a victim of sexual harassment. The report made by the hospitality company is required for all employees in the United States, a requirement that may not be able to comply with due to sexual harassment, pay disclosure and privacy laws in other states.” Further, “[t]he goal of the CalPERS Investment Program is acting as fiduciaries first and foremost to achieve long-term, sustainable, risk-adjusted returns consistent with fiduciary duty. The demand by a public retirement fund for the information required by [this bill] appears inconsistent with the core mission of public retirement funds, especially if investment manager do not include hospitality companies in their portfolio that would provide beneficial investment returns.”

3) Committee Staff Comments and Suggested Author’s Amendments

a) Committee Staff Comments

While this measure requires the gathering of specified data from AIVs, there exists a possibility, however remote, that AIVs might be adverse to being required to provide the data specified by this measure, among other data currently required by existing laws, or regulations independently promulgated by the respective boards. This might result in AIVs being hesitant to providing to, or foregoing continued or future business with, California’s public retirement boards, or seeking a means to withdraw from existing contracts for providing investment services to the boards, in what might be an otherwise lucrative investment, however minimal.

If this occurs, the respective investment portfolio of each public investment fund may incur a loss while the public pension funds are legally mandated, in accordance with fiduciary standards and duties, to prudently invest and diversify the investment portfolio, towards increasing their respective funded status.

b) Suggested Author’s Amendments

i) Fiduciary Standards

The language on page 4, in lines 5 through 8, inclusive, regarding fiduciary responsibility of the board could be construed to expand fiduciary responsibility, which would be inconsistent with provisions contained in Section 17 of Article XVI of the State Constitution, and likely impermissible as this measure does not propose a Constitutional Amendment.

Therefore, to be consistent with the constitution, and similar provisions contained in the Government Code, the following amendment is suggested:

• On page 4, strike out lines 5 through 8, inclusive, and insert: “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.”

The suggested amendment is consistent with provisions that are in Sections 75136 (k), 7513.7 (k), 7513.72 (d), and 7513.75 (f) of the Government Code.

ii) Application of this Measure to All Existing Contracts

While retirement boards are constitutionally mandated to “defray reasonable expenses to the system” as discussed under “Existing Law” supra, the language on page 7, in lines 16 through 19, inclusive which makes the gathering of data apply to all new and existing contracts could result in increased administrative costs and impact the operations of public retirement funds subject to these provisions.

Therefore, to be consistent with constitutional responsibility regarding costs, committee staff suggests the following amendments:

• On page 7, in line 17 after “2019,” remove the “,” and insert “.”
• On page 7, in line 17, remove “and to all”
• On page 7, strike out lines 18 and 19.

Understanding that it might be beneficial to obtain the data sought for all existing contracts, when considering the number of public retirement systems in California, and further, the number of existing contracts that each might have for the specified sector, the current provisions could result in an administrative burden and increase costs to each system while each is required to “defray reasonable expenses to the system.”

These amendments, while not reaching data that might otherwise be found in existing contracts, would apply the provisions of this measure to new contracts as of the date certain. This would help to ease administrative burden and defray reasonable expenses to public retirement systems, while maintaining the goal of this measure.

REGISTERED SUPPORT / OPPOSITION:

Support

UNITE HERE, Local 11 (Sponsor)

Bendick and Egan Economic Consultants, Inc.
California Federation of Teachers, AFT, AFL-CIO
Central American Resource Center
National Employment Law Project

Opposition

California Business Properties Association
California Chamber of Commerce
California Hotel and Lodging Association
California Lodging Industry Association
California Restaurant Association
California Special Districts Association
California State Association Of Counties
California Travel Association
County of Riverside Board Of Supervisors
League of California Cities

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