Agenda Item 10
December 6, 2016
Public Hearing
MEMORANDUM
December 2, 2016
TO:
FROM:
SUBJECT:
County Council
Robert H. Drummer, Senior Legislative Attorney
t:J
Public Hearing:
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions, sponsored by Lead Sponsors
Council Vice President Berliner and Councilmember Navarro and Co-Sponsor Councilmember EIrich,
was introduced on October 25, 2016. A Government Operations and Fiscal Policy (GO) Committee
worksession is tentatively scheduled for January 26,2017 at 10:30 a.m.
Bill 44-16 would restrict the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees from investing in certain businesses holding the largest amount of fossil
fuel reserves under certain circumstances. The Bill would also require both Boards to research and adopt
a socially responsible policy for investing.
Background
The Board of Investment Trustees (BIT) manages prudent investment programs for the trust fund
established to pay retirement benefits guaranteed under the Employees' Retirement Plans. The
Consolidated Retiree Health Benefits Trust Board of Trustees (CRHBT) Board is responsible for investing
the funds designated to pay for all or a portion of benefits provided under the County retiree benefit plans
or a County-funded agency retiree benefit plan, such as retiree health insurance.
Bill 44-16 would be the third time the County enacted a law requiring the BIT to sell certain types
of investments to further important government objectives. In 1986, the Council, in Bill 23-86, restricted
certain investments in companies doing business in the Republic of South Africa or Namibia due to the
apartheid laws mandating racial segregation in those nations. This restriction on certain investments was
repealed when those nations repealed their apartheid laws. The Maryland Court of Appeals upheld a
similar restriction on investments in companies doing business in the Republic of South Africa and
Namibia in
Board ofTrustees
v.
Mayor
&
City Council ofBaltimore City,
317 Md. 72 (1989).
In
2008, the Council, in Bill 3-08, restricted certain investments in companies doing business in
Sudan in order to influence the Government of Sudan to end the atrocities in Darfur. State and local laws
requiring the divestment of holdings in companies doing business in Sudan or other nations had been
challenged in court on the basis of Federal preemption. The Supreme Court struck down a Massachusetts
statute that required the state
to
boycott certain companies doing business with or in Burma in
Crosby
v.
National Foreign Trade Council,
530 US 363 (2000). The Supreme Court held that the Massachusetts
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law was preempted by federal statutes imposing sanctions on Burma and therefore violated the Supremacy
Clause of the u.S. Constitution. Similarly, the u.S. District Court in Illinois issued an injunction against
the Illinois Sudan Act in
National Foreign Trade Council
v.
Giannoulias,
523 F.Supp.2d 731 (N.D. Ill.
2007). The Illinois statute in question prohibited the state from depositing funds in any financial
institution unless it could certify that it did not loan money to the government of Sudan or certain
companies doing business in Sudan and also prohibited state and local pension funds from investing in
certain companies doing business in Sudan. The Court held that this statute violated the Supremacy Clause
and the Foreign Commerce Clause of the u.S. Constitution.
In response to these decisions, Congress enacted the Sudan Accountability and Divestment Act of
2007. The President signed this Act into law on December 31,2007. The Act expressly authorizes state
and local governments to divest in companies doing business in Sudan and grants investment managers
who implement these laws immunity from suit under certain circumstances. The Act establishes
guidelines for the state or local government to follow in taking these divestment actions. The Act also
requires a state or local government to submit written notice describing a Sudan divestment law to the
Attorney General of the United States within 30 days after the enactment of the law. Bill 3-08 was
consistent with the guidelines for divestment laws authorized by the Sudan Accountability and Divestment
Act of2007.
Unlike the laws restricting investments in companies doing business in the Republic of South
Africa or Sudan, the investment restrictions in Bill 44-16 is unrelated to any actions by a foreign
government formally opposed by the United States Government.
It
would be the first time the Council
restricted an investment in a company due to the type of business a company was engaged in.
Both the BIT and the CRHBT Board hire professional investment managers to buy and sell
securities. Bill 44-16 would limit the restriction to actively managed separate accounts and would exclude
investments in an index fund, private equity fund, real estate fund, mutual fund, or other commingled or
passively managed fund. The Bill would define a fossil fuel company as:
...
a company listed in the 200 publicly traded coal, oil, and gas companies that hold
reported fossil fuels reserves with the largest potential carbon emissions, as ranked in the
Fossil Free Indexes US (FFIUS) published by Fossil Free Indexes LLC or a successor
index, as updated annually.
The Bill would also require the Boards to divest in these companies gradually over the next 5 years
and would permit the Boards to delay the sale of any individual security if necessary due to its fiduciary
duty.
The Lead Sponsors, Council Vice President Berliner and Councilmember Navarro explained their
reasons for introducing Bill 44-16 in ©8-9.
The County Attorney's Office (OCA) prepared a comprehensive bill review memorandum fmding
that Bill 44-16, as introduced, may be held unlawful for several reasons. OCA found that the Bill contains
an unlawful delegation oflegislative authority to a private third party by requiring the Boards to rely on a
list of fossil fuel companies published by Fossil Free Indexes LLC. OCA also found that prohibiting a
company to lobby government officials in order to avoid these investment restrictions would violate the
company's First Amendment rights. Finally, OCA found that the provision permitting the Board to delay
divestment in a company was inconsistent with the statutory fiduciary duty imposed on the Boards in other
2
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provisions of the Code. For a complete discussion of these issues, see the OCA opinion at ©1O-17. OCA
suggested that these legal issues could be resolved by amending the Bill. These issues will be discussed
at the GO worksession scheduled for next month. Finally, the Board ofInvestment Trustees and the Board
of Trustees for the Consolidated Retiree Health Benefits Trust adopted a resolution opposing Bill 44-16.
See ©18.
This packet contains:
Bill 44-16
Legislative Request Report
Berliner and Navarro Memorandum
County Attorney Bill Review Memorandum
BIT and CRHBT Resolution
Circle #
1
7
8
10
18
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3
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Bill No.
44-16
Concerning: Retirement - Fossil Fuel
Investments - Restrictions
Revised: October 21,2016 Draft No. _5_
Introduced:
October 25,2016
Enacted:
April 25, 2018
Executive: _ _ _ _ _ _ _ __
Effective: -:--_ _ _ _ _ _ _ __
Sunset Date:
_--:-:-=--~::--
_ _ __
Ch. _ _ Laws of Mont. Co. _ __
I
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
Lead Sponsors: Council Vice President Berliner and Councilmember Navarro
Co-sponsor: Councilmember EIrich
AN
ACT
to:
(1)
prohibit the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees from investing in certain businesses holding certain
amounts of fossil fuel reserves under certain circumstances;
require the Boards to research and adopt a socially responsible investing policy; and
generally amend the law governing the investment of funds held in trust for the
employees' retirement system and the consolidated retiree health benefits
trust.
(2)
(3)
By adding
Montgomery County Code
Chapter 33, Personnel and Human Resources
Section 33-60C
By amending
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-61A and 33-165
Boldface
Undel1ining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act,·
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BILL
No. 44-16
1
Sec.
1.
Section 33-60C is added and Sections 33-61A and 33-165 are
amended as follows:
33-60C. Fossil Fuel Investments
~
2
3
4
5
6
=
Restrictions
~
Definitions.
In this Section, the following words have the meanings
indicated:
Actively managed separate account
means assets held in
separate
Actively
7
8
account
Qy
an investment manager hired
Qy
the Boards.
managed separate account
does not include an index fund, private equity
9
10
11
fund, real estate fund, mutual fund, or other commingled or passively
managed fund.
Boards
means the Board of Investment Trustees established
Qy
Section
12
13
33-59 and the Consolidated Retiree Health Benefits Trust Board of
Trustees established
Qy
Section 33-160.
Company
means any sole proprietorship, organization, association,
14
15
16
17
18
19
20
21
22
23
corporation, partnership, joint venture, limited partnership, limited
liability partnership, limited liability company, or other entity or business
association, including any wholly-owned subsidiary, majority-owned
subsidiary, and parent company of any of them, or business association,
that exists for profit-making purposes.
Divest
means selling, redeeming, transferring, exchanging, or otherwise
disposing
Qb.
and refraining from further buying
Qb.
certain investments.
Fossil Fuel Company
means
~
company listed in the 200 publicly traded
coal, oil, and gas companies that hold reported fossil fuels reserves with
the largest potential carbon emissions, as ranked in the Fossil Free
Indexes US (FFIUS) published
Qy
Fossil Free Indexes LLC or
~
successor
index, as updated annually.
24
25
26
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BILL
No. 44-16
27
Trustfunds
means the assets held for the Employees' Retirement System
and the assets held for the Consolidated Retiree Health Benefits Trust.
28
29
30
31
32
33
34
35
36
37
(hl
Review
Q[
investments.
Each Board must review the investment holdings
in each actively managed separate account ofthe trust funds and identify
each investment in any fossil fuel company. Each Board must review its
investment holdings in these accounts periodically and update the list of
fossil fuel companies at least every
§
months.
(£)
Divestment.
Except as provided in subsection
@1
each Board:
ill
within
1
year after the date this law takes effect, must divest at least
20% of its investments in fossil fuel companies held in an actively
managed separate account as of the date this Act takes effect:
38
39
40
ill
within
2
years, must divest at least 40% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect;
41
ill
within
1
years, must divest at least 60% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect;
42
43
44
45
ill
within
.1
years, must divest at least 80% of its investments in fossil
fuel companies held in an actively managed separate account as of
the date this Act takes effect; and
46
47
48
ill
®
@
within
~
years, must divest 100% of its investments in fossil fuel
companies held in an actively managed separate· account; and
must not make any new investment in an actively managed
separate account in any fossil fuel company.
49
50
51
52
53
Divestment delay.
Nothing in this Section must require
~
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
G--
-
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BILL
No. 44-16
54
55
56
57
fiduciary responsibilities of the Board described in Section
33-61C
or
Section 33-163. If the Board determines that
~
delay in divesting from
~
fossil fuel company is necessary due to its fiduciary
~
the Board must
report this delay within 30 days to the Executive and the Council along
with an estimated timeline for the resumption of divestment.
58
59
W
Research on socially responsible investing.
Each Board must:
60
61
ill
ill
ill
ill
review academic and professional literature
responsible investing;
on
socially
62
63
64
65
66
investigate the benefits and disadvantages of socially responsible
investing of public trust funds; and
adopt
~
Socially Responsible policy for investments.
Exemption.
The divestment or investment prohibition under this Section
must not
mmlY
to
~
company that can demonstrate that it:
67
68
ill
ill
ill
has stopped exploring for new hydrocarbons;
agrees contractually to not develop or sell 80% of its current
proven fossil fuel reserves; and
has stopped lobbying or attempting to influence government
officials to preserve its special treatment, including subsidies, tax
breaks, or competitive advantage with respect to clean, renewable
energy.
69
70
71
72
73
74
75
(g)
Notice.
Each Board:
ill
before divesting from
~
fossil fuel company under this Section,
76
77
must provide written notice and an opportunity to comment in
writing to each company subject to the action;
78
79
ill
must not divest until 90 days after written notice is provided to the
company; and
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BILL
No.
44-16
80
81
82
ill
®
must not divest if the company shows that
divestment under subsection
ffi
i1
is exempt from
Report.
The Board must report annually to the Council and Executive on
83
84
85
86
87
88
89
90
91
the operation of and compliance with this Section. The report must:
ill
identify each investment in
~
fossil fuel company held in an
actively managed separate account of the trust funds;
list each
taken under this
- - -
divestment action
- - -
Section
describe each decision to delay investment under Subsection
@1
and
®
33-61A.
(a)
calculate the administrative cost of compliance.
Indemnification of trustees
Authorized.
The County must indemnify every member ofthe Board who
92
93
94
is or may become a party to any action, suit, or proceeding, including
administrative and investigative proceedings, because of service as a
member of the Board, including any action taken to comply with
[Section] Sections 33-60A and 33-60C, subject to the conditions stated in
this Section.
95
96
97
98
*
(a)
*
*
33-165. Indemnification
of Board
Members.
99
General.
The County must indemnify each member of the Board who is
100
101
102
103
104
105
106
or may become a party to any legal action, including any administrative
or investigative proceeding, because of service as a Board member,
including any action taken to comply with Sections 33-60A and 33-60C,
subject to the conditions
in
this Section.
*
*
*
Sec. 2. Initial review.
Each Board must complete its initial review of the
investment holdings in all actively managed separate accounts of the trust funds and
(9
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BILL
No. 44-16
107
108
identify all investments in fossil fuel companies within 90 days after the date this Act
takes effect.
Approved:
109
110
Nancy Floreen, President, County Council
111
Date
Approved:
112
Isiah Leggett, County Executive
Date
113
This is a correct copy ofCouncil action.
114
Linda M. Lauer, Clerk ofthe Council
Date
G
F:\LAWlBILLS\I644 Retirement - Fossil Fuel Investments - Restrictions\BilI5.Docx
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LEGISLATIVE REQUEST REPORT
Bill 44-16
Retirement
-
Fossil Fuel Investments
-
Restrictions
DESCRIPTION:
Bill 44-16 would restrict the Board of Investment Trustees and the
Consolidated Retiree Health Benefits Trust Board of Trustees from
investing in certain businesses holding the largest amount of fossil fuel
reserves under certain circumstances. The Bill would also require both
Boards to research and adopt a socially responsible policy for
investing.
Investing in fossil fuel companies is inconsistent with the County's
established policies to be environmentally responsible.
Encourage fossil fuel companies to move into more environmentally
responsible renewable energy sources.
Board of Investment Trustees, Office of Human Resources, County
Attorney.
To be requested.
To be requested.
To be requested.
To be researched.
Robert H. Drummer, Senior Legislative Attorney
Not applicable.
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
None.
F:\LAW\BILLS\1644 Retirement - Fossil Fuellnvestments - Restrictions\LRR.Docx
(j)
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MEMORANDUM
October 11,2016
TO:
Council President Nancy Floreen
Council Colleagues
Council Vice President Roger Berliner
GO Chair Nancy Navarro
Fossil Fuel Divestment and Socially Responsible Investing
FROM:
SUBJECT:·
Colleagues, we are writing to ask for your support for legislation we plan on introducing
that more closely aligns our values with our role as a major financial investor of nearly $4 billion
--
without sacrificing the returns on those investments.
We would do this in two distinct ways:
(1)
directing the county's Board ofInvestment Trustees (BIT) to divest from the 200 publicly
traded fossil fuel companies that hold reported reserves with the largest potential carbon
emissions; and (2) directing the BIT to study adopting a Socially Responsible Investing screen
for its portfolio.
We are proposing this measure fully aware of the Board's fundamental fiduciary
responsibilities. Our legislation would address this explicitly by allowing the BIT to waive the
divestment requirement if the Board were to certify to the Council that in its judgment alternative
investments in non-fossil fuels are not available that would meet or exceed the returns of the $65
million in fossil fuel stocks currently in its portfolio. Given the strength of portfolios without
fossil fuels, and the relatively poor performance of fossil fuel stocks, we are confident that the
Board will be able to harmonize our county's values with its fiduciary duties.
We are also very mindful of the "slippery slope" argument - i.e., that there are a host of
serious moral and ethical issues that have been put forward over the years as a justification for
divestment, and we have said no. We believe climate change is different: it represents an
existential threat to the entire planet. It is, in our view, in a class by itself, and its correlation
with the companies principally responsible for creating climate change is direct. We know it is
caused by the burning of carbon-heavy oil, coal, and natural gas.
It
is why our Council has
passed literally dozens of measures to support clean energy and energy efficiency. We should
not be investing in the very companies that undermine our commitment to sustainability.
Specifically, this legislation would prohibit the BIT from purchasing any new stocks or
bonds in the fossil fuel industry and phase in over a 5 year time line divestment of the $65
million worth of holdings in the coal, oil and gas companies in the Carbon Underground 200, a
list of fossil fuel companies ranked by their potential carbon emissions. As noted, the 5 year
phase-in would be subject to an off-ramp if the Board can certify divesting these funds would
reduce the return of the portfolio.
®
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More broadly, this legislation would also address longer tenn issues related to how we
invest our money by requiring the BIT to study the impact on its portfolio of adopting a Socially
Responsible Investing (SRI) approach, expanding on its current policies in this area. This
approach considers environmental, social and corporate governance issues in detennining
whether to make an investment while seeking to maintain strong returns for investors. It is
widely used today by investors: more than $6.57 trillion in the United States is already invested
using socially responsible practices.
SRI is based on the beliefthat we should use our investments to bring about positive
change by aligning our investments with companies that achieve good returns by being a good
corporate citizen. Given the ever increasing role corporations have in our world today,
exercising that prerogative is important. The latest example ofthis can be seen in the Wells
Fargo scandal in which more than 2 million bank accounts or credit cards were opened without
customers' knowledge or pennission.
An
SRI "screen" could result in shifting investments from
companies like Wells Fargo to more socially responsible companies, and that would be a good
thing.
We thank you in advance for your consideration of this legislation and we look forward
to working with you as it moves forward.
Roger Berliner
Nancy Navarro
~
.
'.
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·.·.· .·
.
. ··••···.·.···•·
· ...
n'
._.ssiilii
.
.
Council Vice President
Chair, GO Committee
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...
-:....-:-
.~._
..
_
...
-
._
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--.-
.. .
,
OFFICE OF THE COUNTY ATIORNEY
'
Isiah
Leggett
County Executive
Marc P. Hansen
County Attorney
MEMORANDUM
TO:
Linda Herman, Executive Director
Montgomery County Employee Retirement Plans
Marc P. Hansen
mIlA?
County Attorney
VIA:
II~
FROM:
Edward
B.
Lattner, Chief
Division of Government Operations
£Bo'­
/~~;L
Amy Moskowitz
fI'
Associate County Attorney
DATE:
RE:
November 15, 2016
Bill 44-16, Retirement- Fossil Fuel Investments - Restrictions
m
Bill 44-16 prohibits the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees (collectively referred to as ''the Boards") from investing
in
fossil
fuel companies-businesses holding the largest amount of fossil fuel reserves. We conclude the
Bill, as presently drafted, (1) unlawfully delegates legislative authority
to
a private third party to
determine whether an entity is a fossil fuel company, (2) violates the unconstitutional conditions
doctrine by permitting the Boards
to
invest in a fossil fuel company if it gives up certain First
Amendment rights, and (3) is inconsistent with,the Boards' present statutorily-imposed fiduciary
duties. But all ofthese infirmities can be remedied by amendment. We also have some suggested
technical amendments.
I.
BACKGROUND
The BiH would prohibit the Boards from investing in businesses holding the largest amount
of fossil fuel reserves.
1
A fossil fuel company is defined as
"a:
company listed in the 200 publicly
traded
coal, oil, and gas companies
that
hold reported fossil fuels reserves with the largest potential
carbon emissions,
as
rariked in the Fossil Free Indexes US (FFIUS) published by Fossil Free
Board hires professional investment managers
to
buy and sell secwities. Bill 44-16 would limit the
prohibition
to
actively managed separate accounts and would exclude investments in an index fund, private
equity
fund, real estate fund, mutual fund, or other commingled or passively managed fund.
101 Monroe Street, Rockville, Maryland 20850-2580
(240) 777-6735 •
TrY
(240) 777-2545 • FAX (240) 777-6705 • Edward.Lattner@montgomervcountyrnd.gov
1
Each
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Linda Herman
November 15,2016
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions
Page 2
Indexes LLC or a successor index, as updated annually.,,2 The Bill would also require the Boards
to divest
in
these companies gradually over the next
5
years and would permit the Boards to delay
the sale of any individual security if necessary due to its fiduciary duty.
A fossil fuel company
can
avoid· the investment prohibition/divestment
if
it can
demonstrate that it.(l)
has
stopped exploring for new hydrocarbons; (2) agrees contractually to not
develop or sell 80% of its current proven fossil fuel reserves; and (3)
has
stopped lobbying or
attempting to influence government officials to preserve its special treatment, iDcluding subsidies,
tax
breaks, or competitive advantage with respect to clean, renewable energy.
The Bill would also require the Boards to research and adopt a socially responsible policy
for investing.
II.
ANALYSIS
A.
Delegation Of Legislative Authority
The Bill's reliance upon a private third party to determiIie when a company is a "fossil fuel
company" represents an impermissible delegation of legislative authority. Subject to certain
exceptions, a legislature may· not delegate its lawmaking function to others.
See Pressman
v.
Barnes,
209 Md. 544 (1956).
The Maryland courts have allowed legislative bodies to delegate rule making authority to
executive branch officials.
Pressman,
209 Md. 544, 552 (the Director of Traffic, who was
appointed by the Mayor, could prescribe speed limits for Baltimore streets);
see also, Andy's Ice
Cream
v.
City ofSalisbury,
125 Md. App. 125,
cert. denied,
353 Md. 473 (1999). But delegations
ofrulemaking authority to executive officials must be limited. Insofar as a delegation "requires the
exercise of a certain amount of discretion which may be regarded as part ofthe police power ... ,
such discretion [must be] guided and restrained by standards sufficient to protect the citizens
against arbitrary or unreasonable exercise thereof."
Pressman,
209 Md. at 552;
see also West
. Montgomery Citizens Association
v.
Maryland-National Capital Park and Planning Commission,
309 Md. 183 (1987).
Although the concept of delegating government authority to executive branch officials is
well established, the premise of delegating government power to private persons does not rest on
a similarly
firm
constitutional foundation. The Maryland Court of Appeals
has
discussed the
concept of whether government power may be "lodged
in
and permitted to private persons ...."
Board ofTrustees ofthe Employees' Retirement System
v.
Mayor and City Council ofBaltimore
According to
its
website, Fossil Free Indexes LLC is a company
that
delivers research, consulting and
investment solutions to investors concerned about climate and environmental
risk.
It
publishes the "Carbon
Underground 200" on
its
website, a list ofthe 100 largest public oil and gas and the 100 largest public coal companies
globally, as measured by the potential C02 emissions of their reported fossil fuel reserves.
It
is updated quarterly and
serves as the basis for a negative screen on the S&P 500 to create the FFlUS Index, a fossil free index.
2
@
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·._.~_
...: .·.1 ... "...__._____:_ ..
_~_:_
...;:...
~._:.._':._._.:.::...
. ..:.:.. __ ::..:.::..:...:.._..:... ..__
._'._~.
_·,..
~.""
__ c·__ ..
,_._.~
____ .. _'--·
----'--'~
_____
.~_.
_ _ __
..
.•,____ ,..• , __
._.~._..
---c..·­
Linda Herman
November 15, 2016
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions
Page 3
City~
317 Md. 72, 94 (1989). In
Board ofTrustees,
the Court addressed a challenge to a Baltimore
City ordinance instructing the City's retirement system to divest its investment holdings, in
companies doing business in South Africa Aniong various challenges to this ordinance, the
plaintiffs challenged as an unconstitutional delegation of government power to private persons a
provision in the ordinance that companies doing business in South Africa "shall be identified by
reference to the most recent annual report ofthe Africa Fund entitled 'Unified List ofUnited States
'
Companies with Investments or Loans in South Africa and Namibia'"
[d.
at 81.
The Court began its analysis of the delegation issue by noting
that
''the legislature acts in
the exercise of a power conferred upon it by the people."
[d.
at 93. The Court observed that "this
principle follows from the nature of representative democracy" and that the "City Council
members generally have no authority to substitute the judgment of others for their ownjudgment"
[d.
at 94. The Court acknowledged that "our cases have long sanctioned delegations of legislative
power to administrative officials where sufficient safeguards are legislatively provided for the
guidance of the agency
in
the administration of the
statu~e."
[d.
With respect to the delegation of
authority to private persons or entities, however, such delegation is "strictly scrutinized
because~
unlike governmental officials or agencies, private persons will often be wholly unaccountable to
the general public."
[d.
In this context, the Court cited with approval aNew York case,
Finkv.
Cole,
302 N.Y. 216,
224, (1951), where the New York Court of Appeals struck down a statute that vested the Jockey
Club with authority to license owners, trainers, and jockeys at horse races
in
the state.
[d.
n. 23.
The Maryland Court of Appeals went on to note that legislation may sometimes incorporate fixed
standards created by private entities,3 but with respectto delegating future revision of regulatory
standards to a private entity, the courts have only, approved such delegation "in limited
circumstances such as where the standards are issued by a well-recognized, independent authority
... [that] provide guidance on technical and complex matters within the entity's area of expertise."
[d.
at 96. This type of delegation usually involves accreditation programs established by
professional organizations, 'such as the accreditation of law schools by the American Bar
Association.
As currently drafted, Bill 44-16 is an unconstitutional delegation of the Council's
legislative power because it prohibits the Boards from investing, and requires them to divest, from
any company identified
in
the Fossil Free Indexes US (FFIUS) published by Fossil Free Indexes
LLC or a successor index, as updated annually. This delegation of discretion is similar to the
authority invalidly transferred
to
the Jockey Club to license horse trainers and jockeys, and is far
removed from the delegation of authority
to
a "well-recognized, independent authority" that '
"provides guidance on technical and complex matters within the entity's area of expertise." It is
in
short, permitting a private party to determine what investments are in the public interest-a
practice condemned by the Court of Appeals in
Board ofTrustees ofthe Employees' Retirement
example of incorporation of a fixed standard created
by
a private entity can be found
in
§
22-14, which
requires the Fire Chief
to
recommend that the Executive adopt by regulation parts of the National Fire Code as
published by the National Fire Protection Association.
.
3
An
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Linda Herman
November 15,2016
Bill 44.,.16, Retirement - Fossil Fuel Investments - Restrictions
Page 4
System
v.
Mayor and City Council ofBaltimore City,
317
Md.
at 94.
But, this infirmity can be remedied.
InBoard ofTrustees,
the court saved the city ordinance
by interpreting it to require the Trustees to
refer
to a list prepared by a private organization of
companies doing business in South Africa, rather than blindly follow that list. Thus, the list
amounted to a mere reference, which the Trustees could accept or reject
ld.
at 97-98. Bi1l44-16
could be amended to similarly provide that the Boards may
use
the Fossil Free Indexes US as a
reference rather
than
a mandated list of prohibited companies.
Fossil Fuel Company means a publicly traded coal. oil. and gas companY holding
fossil· fuel reserves with one of the 200 largest potential carbon emissions. The
Boards may refer to the Fossil Free Indexes US (FFIUS) published by Fossil Free
Indexes LLC or a successor index, as updated annually, to determine if a company
iS,a fossil fuel company. In addition, the Boards may hire a consultant to assist in
identifying Fossil Fuel Companies.
By making the Fossil Free Indexes a mere reference, this amendment should eliminate any issue
surrounding an unlawful delegation of legislative authority.
B.
First Amendment Issues.
Bill 44-16 violates the ''unconstitutional conditions" doctrine when it allows a fossil fuel
company to avoid the divestment/investment prohibition by giving up its right to petition the
government The "unconstitutional conditions" doctrine provides that the government may not
deny
a
benefit to a person on a basis that infringes his constitutionally protected freedom of speech.
Perry
v.
Sindermann,
408 U.S. 593, 597 (1972). The doctrine recognizes that constitutional
violations may arise from the deterrent, or chilling, effect of governmental efforts that fall short of
a direct prohibition against the exercise of First Amendment rights.
Lairdv. Tatum,
408 U.S. 1, 11
(1972).
For at least a quarter-century, this Court has made clear that even though a person
has
no right to
Ii
valuable governmental benefit and even though the government
may deny
him
the benefit for any number of reasons, there are some reasons upon
which the 'government may not rely.
It
may not deny a benefit to a person on a basis
that infringes his constitutionally protected interests--especially, his interest in
freedom of speech. For if the government could deny a benefit to a person because
of his constitutionally protected speech or associations, his exercise of those
freedoms would in effect be penalized and inhibited. This would allow the
government to produce a result which it could not command directly. Such
interference with constitutional rights is impermissible.
Perry,
408
u.s.
at 597 (internal citations and quotations omitted). Thus, "[a] predicate for any
unconstitutional conditions
daim
is that the governrilent could not have constitutionally ordered
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Linda Herman
November 15,2016
Bill 44-16, Retirement- Fossil Fuel Investments - Restrictions
Page 5
the person asserting the claim to do what it attempted to pressure that person into doing."
Koontz
v.
St. Johns River Water Mgmt. Dist.,
133 S .Ct. 2586, 2598 (2013).
As noted above, the Bill provides a fossil fuel company with a means of avoiding the
divestment/investment prohibition.· The divestment or investment prohibition does not apply to a
company that can demonstrate that
it
(1) has stopped exploring for new hydrocarbons; (2) agrees
contractually to not develop or sell 80% of its current proven fossil fuel reserves; and (3)
has
stopped lobbying or attempting to influence government officials to preserve its special treatment,
including subsidies,
tax
breaks, or competitive advantage with respect to clean, renewable energy.
It
is this latter requirement, codified as
§
33-60C(f)(3), that infringes on the First Amendment's
guarantee of freedom of speech, including the freedom to petition the government.
The First Amendment protects the right to lobby legislators and administrators.
See, e.g.,
Cal. Motor Transport Co.
v.
Trucking Unlimited,
404
U;S~
508, 510 (1972). Certainly, the County
could not enact a viewpoint-based prohibitJon against petitioning the goveniment to preserve
certain
tax
breaks. When the government targets not subject matter, but particular views taken by
speakers on
a
subject, the violation ofthe First Amendment is
all
the more blatant
Rosenberger
v.
Rector
&
VisitorsofUniv. of Va.
,
515 U.S. 819, 829 (1995).
The government does have greater leeway to regulate private conduct when those
restrictions are attached to the use public funds.
4
For example, in
Regan
v.
Taxation With
Representation,
461 U.S. 540 (1983)
(TWR),
the Court held that an IRS provision that only granted
tax exemptions to non-profit corporations that did not lobby (501(c)(3) organizations) did not
violate TWR's First Amendment rights because "Congress chose not to subsidize lobbying as
extensively as it chose to subsidize other activities that non-profit organizations undertake to
promote the public welfare."
Id.
at 544. Moreover, TWR was not subject to a blanket prohibition
on lobbying. The Court noted that it could create a separate 501 (c)(4) organization to conduct its
lobbying activities, so long as the 501(c)(3) organization did not subsidize the 501(c)(4)
organization; otherwise, public funds might be spent on an activity Congress chose not to
subsidize.ld. at 544. Likewise, in
Rust
v.
Sullivan,
500 U.S. 173 (1991), the Court upheld certain
conditions on federal funds for family planning services that required that service providers not
use those funds to advocate for abortion or provide abortion counseling; the service providers were
not subject to a blanket prohibition on providing abortion-related services.
But Bill 44-16 does not present a situation where the government is limiting the use of
public funds spent to subsidize a particular program.
In
fact, it is not a subsidy program at all.
Rather, it is a the provision ofa benefit (participation in the Boards' investments) conditioned upon
the limitation of
~rtain
First Amendment rights (lobbying or attempting to influence government
officials to adopt policies favoring a specific viewpoint). This is impermissible.
constitutionality of government subsidization ofexpression
is
one of the most frustrating
tasks ... of the First Amendment."
Martin
H. Redish
&
08l)'1 Kessler,
Government Subsidies and Free Expression,
80
Minn.
L.
Rev. 543,544 (1996).
4
''Determining the
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November 15,2016
Bill 44-16, Retirement - Fossil Fuel Investments- Restrictions
Page 6
The remedy, however, is rather straightforward. The unconstitutional provision in
§
33­
60C(t)(3) must be deleted.
C.
Fiduciary Issues.
1.
Standard of Care.
The Maryland Court of Appeals has recognized that while a trustee is not blindly obligated
to maximize the return on investment, a social investment policy thathas a greater
than
de minimis
impact upon return on investment may violate a trustee's duty of prudence and loyalty.
We.
understand that Bill 44-16 may have a greater
than
de minimis
impact upon return on investment
and is therefore inconsistent with the duty of prudence and loyalty currently impressed upon the
Boards in the County Code. Assuming more
than
a greater then de
minimis
impact, the Council
must either amend that statutory duty to allow for investment decisions driven, in part, by the
presence of fossil fuels or the Council can preserve the investment policy underlying Bill 44-16
by incorporating the Department of Labor's guidance for the use of economic, social, and
governance factors when making investments for retirement plans.
County Code Sections 33 ..61C and 33-163 set forth the standard of care under which the
Boards operate the
trust
funds. Among other requirements these provisions
require
that the Boards
make investments ''with the care, skill, prudence, and diligence under the circumstances that a
prudent person acting in a similar capacity and familiar with the same matters would use to conduct
a similar enterprise with similar purposes" and "only in the best interest of the participants and
their beneficiaries." Although the Employee Retirement Income Security Act (ERISA) does not
apply to governments, the standard of care in County Code Sections 33-61C and 33-163 are
virtually identical to the standard applicable to ERISA fiduciaries, set forth in ERISA Section 404.
In
BoardofTrustees ofthe Employees' Retirement System ofthe City ofBaltimore
v.
Mayor
and City Council ofBaltimore City,
317 Md. 72 (1989), the Court ofAppeals held that legislation
requiring divestment of investments in South Africa did not interfere with these fiduciary duties
because of certain factors, the most significant factor being that the cost ofthe social investing was
de minimis.
The initial cost of divestment
was
$750,000, or 1/16
th
of 1% ofthe fund's value. The
on-going cost was $1.2 million per year, or 1/1O
th
ofl
%
ofthe fund's total value. Thus, only ifthe
impact to the ERS and CRHBT would be
de minimis,
will the Boards satisfy their fiduciary
standards under the County Code. But we understand that divestment under Bill 44-16 is likely to
cause more
than
a
de minimis
impact to the trusts.
By requiring divestment from ''fossil fuel companies, Bill 44-16 compels the Boards to
deviate from the currently applicable prudent investor standard and duty of loyalty standard
Therefore, the legislation should modify the standard of care and expressly state that the Council
intends that the Board is authorized
to
ignore the prudent investor staiJ.dard and duty of loyalty
standard in order to comply with the divestment requirement ofthe
legislatio~.
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November 15,2016
Bill 44-16, Retirement - Fossil Fuel Investments - Restrictions
Page 7
Alternatively, rather
than
amend the fiduciary duty applicable to the Boards, the Council
can preserve the investment policy underlying Bi1l44-l6 by incorporating Department of Labor's
(DOL) recent guidance for the use of economic, social, and governance factors when making
investments.for retirement plans. Over the years, DOL, the agency which regulates ERISA, has
published guidance with regard to investments which allow fiduciaries take into account non­
economic factors and still satisfy their fiduciary duties. Most recently the DOL issued Interpretive
Bulletin 2015-01 in which the DOL states that fiduciaries can take into account economic, social
and governance (ESG) issues when making investment decisions, as the DOL recognized that
these factors can influence investment performance. ESG factors should not be the sole
consideration in making the investment,. but may be. considered in addition to other factors
influencing risk
andreturn~
The DOL also stated that the fiduciaries' focus is the plan's financial
returns so that fiduciaries cannot use plan assets to promote social, environmental, or other public
policy causes at the expense of the plan's participants. In other words, fiduciaries may not accept
lower returns in order to obtain collateral benefits.
Because CoUnty law uses the same standard ofcare as ERISA, it may be presumed that the
County should adhere to the DOL's guidance for the use ofESG factors when making investment
decisions. Although the DOL guidance is not binding, a court may recognize that the DOL
guidance regarding ESG issues was issued· subsequent to
Board of Trustees of the Employees'
Retirement System ofthe City ofBaltimore
and take the DOL guidance into consideration. Bill 44­
16 does not satisfy the DOL's interpretation because social and policy factors are the sole reason
for divestment. To iricorporate the Do'L standard, the Bill would have to be amended to provide
that fossil fuel is not be the sole consideration in making the investment, but may be considered in
addition to other factors influencing risk and return. The Boards have adopted an ESGpolicy which
incorporates various ESG factors in evaluating inves:tments and managers since they believe that
these factors may have the potential to influence risk and return characteristics.
.
2.
Discretion.
The legislation (lines 51-58) provides that the Boards must divest unless the Boards
"determine that a delay in divesting from a fossil fuel company is necessary due to its fiduciary
duty." But the Boards' present fiduciary duty is incompatible with the initial decision to divest
from fossil fuel companies. Why would the Boards determine
that
their fiduciary duty requires a
delay in divestment
if
their fiduciary duty would counsel against divestment in the
first
place?
If
the Council wants to impose an investment restriction, the Council should explicitly do so and
alter the Boards' fiduciary duties.
In addition, as required under the County Code, investment managers, not the Boards, make
individual investments. Because the Boards do not make decisions to invest in individual
companies, such as fossil fuel companies, the Boards do not have the knowledge to "determine a
delay in divesting from a fossil fuel company" is necessary due to its fiduciary duty." Investment
managers making investments on behalf of the trusts are
subjec~
to the fiduciary duties set forth
in
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Bill 44-16, Retirement - Fossil Fuellnvestments - Restrictions
Page 8
County Code Section 33-60Cand 33-163. The Boards provide the investment managers with
, guidelines and/or policies. While the Boards could amend the contracts to direct managers
to
divest
from fossil fuel companies, presumably the Board could not give the investment managers
discretion on delaying divestment and requiring the managers to justify the delay. Presumably, if
they would agree, the investment managers would request indemnification and an altered fiduciary
duty standard. Therefore, the Council should delete the "divestment, delay" provision found in
Lines 51-58 of the legislation.
c.
Technical
Issues.
Additional County Code Section:
The legislation adds Section 33-60C (although Line 3 has
33-60A) to the County Code which is in Chapter 33, Article III and contains the Employees'
Retirement System whose investments are overseen by the Board of Investment Trustees.
However, the Section includes the Consolidated Retiree Health Benefits Trust, which provisions
are in Chapter 33, Article XI. To avoid confusion, another Code Section should
be
added to the
Consolidated Retiree Health Benefits Trust and its governing provisions which are
in
Chapter 33,
Article XI.
Definition ofActively Managed Account, Lines 6-10:
Private real assets, private debt funds,
and hedge funds should be added to the definition of actively managed separate accounts.
Divestment; Lines 34-50:
Ibis provision requires divestment of 20% each year. This
provision should specifically provide how divestment should occur. For example, should 20%
from each actively managed separate account be divested, or is it the portfolio as a whole? Also,
due to market fluctuations the percentage will vary, when should the 20% be measured, at the
beginning of each calendar year? The Council should direct how divestment is accomplished.
Divestment, Lines 49-50:
Are reinvestments of dividends considered a new investment?
The Council should Clarify
if
dividends are excluded.
Research on socially responsible investing, Lines
59-64. As noted above, the Boards
adopted an ESG policy which incorporates various ESG factors in evaluating investments and
managers since they believe that these factors may have the potential
to
influence risk and return
characteristics.
cc:
Timothy Firestine, CAO
Bonnie
Kirk1an~
Assistant,CAO
Robert H. Drummer, Senior Legislative Attorney ,
Steve Farber, Council Administrator
ebl
16-008963
BiD 44-16 OCA
analysis
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MONTGOMERY COUNTY EMPLOYEES' RETIREMENT SYSTEM
CONSOLIDATED RETIREE HEALTH BENEFITS TRUST
On November 18,2016 the Board of Investment Trustees for the County's Retirement Plans and
the Board of Trustees for the Consolidated Retiree Health Benefits Trust each unanimously
approved the following resolution on Bill 44-16:
Resolved,
that the Board opposes Bill 44-16, Retirement - Fossil Fuel Investments ­
Restrictions, which mandates divestment from certain fossil fuel companies. The Board
considers the bill legally flawed, as outlined in the November 15, 2016 memo from the Office of
the County Attorney; operationally unworkable; and inconsistent with the fiduciary duties
outlined in the County Code. The Standard of Care requires the Board to act "only
in
the best
interest of the participants and their beneficiaries." The Board requests the Executive Director to
prepare a memo infonning the County Council of its views. The memo should also indicate that
the Board currently considers Environmental, Social and Governance (ESG) factors in its
investment process and monitoring efforts, as set forth in Board policies, and that the bill's
requirement that the Board do so is therefore unnecessary.
101 Monroe Street, 15
th
Floor· Rockville, Maryland 20850
Investments 240.777.8220 Benefits 240.777.8230
Fax 301.279.1424
( /0)
~