The Arkansas House of Representatives on Monday voted to send to the governor a bill that would require the state treasurer and state and local government entities to divest certain investments with financial services providers on a list maintained by the state treasurer due to the use of environmental, social justice or governance-related metrics.
The House on Monday afternoon voted to concur with two Senate-approved amendments to House Bill 1307 by Rep. Jeff Wardlaw, R-Hermitage, after the two amendments both fell one vote short of approval in the 100-member House. Fifty-one votes are required for approval of the bill in the 100-member House.
The House voted 67-19 to concur with one of the Senate's amendments to the bill and 70-18 to concur with a second Senate amendment to the bill.
Proponents of the legislation say that the bill is aimed at making sure the state does not invest funds with financial service providers that discriminate against the energy, fossil fuel, ammunition and firearms industries.
Opponents of the bill worry it could cost state government's retirement systems millions of dollars.
Wardlaw has maintained the bill has been amended to minimize its impact on these retirement systems.
House Speaker Mathew Shepherd, R-El Dorado, told House members the two amendments to the bill represented a compromise reached with the directors of the state government's retirement systems.
"They brought to me several amendments on the House end which I took to Rep. Wardlaw, and we made every one of those amendments," he said. "And my understanding from coming from that meeting was that we had addressed the issues that were there."
Rep. Les Warren, a co-chairman of the Joint Committee on Public Retirement and Social Security Programs, initially spoke against the two amendments to HB1307, because he said he wants "to make sure that we did not have losses in the retirement funds."
But he reversed course almost two hours later, saying he had "extensive conversations," including with a director of one of the state government's retirement systems, whose identity he did not reveal.
"I have been told that it has been minimized in what would be done to the retirement systems," Warren said. He initially voted against the two amendments to the bill but later did not vote on them in the second vote on the amendments.
Rep. Julie Mayberry, R-Hensley, said she worried the state government's retirement systems could lose millions of dollars.
"These people have been banking on this retirement, and I think we need to slow this down," she said. "If there is another option that can create a similar end effect without hurting the pocketbook of our retirees, then we need to do that."
The House's approval of HB1307 on Monday afternoon came after the Joint Committee on Public Retirement and Social Security Programs on Monday morning endorsed House Bill 1253 of Rep. Mindy McAlindon, R-Centerton.
McAlindon told the committee that her bill is complementary to HB1307, but Sen. Jimmy Hickey, R-Texarkana, said the bill is in conflict with HB1307.
HB1307 would create an ESG oversight committee to determine a list of financial service providers that discriminate against energy, fossil fuel, firearms or ammunition companies or otherwise refuse to deal based on environmental, social justice and other governance-related factors.
Under the bill, the committee would comprise four citizens of the state -- with the governor, attorney general, House speaker and Senate president pro tempore each appointing one citizen -- and the state treasurer or his designee.
The state treasurer would be required to maintain a list of financial service providers as determined by the ESG oversight committee on the state treasurer's website under the bill.
In determining whether to name a financial services provider on the list, the state treasurer, under the direction of the attorney general, would be required to consider and may rely upon specified information under the bill.
The state treasurer also would be required under the bill to divest the state of all direct or indirect holdings with a financial services provider included on the list published on the state treasurer's website, and state and local governments would be required to divest themselves of all direct or indirect holdings with a financial services provider included on the list published on the state treasurer's website.
Wardlaw told a state Senate committee earlier this month the bill includes a provision that states that "discriminating against energy companies" does not include actions by the investment adviser in accordance with the investment-related guidelines, policies or preference of its clients, so that is why he believes the impact of the bill will be minimal on state government's retirement systems.
The bill also exempts "indirect holdings."
Arkansas Teacher Retirement System Executive Director Clint Rhoden told a Senate committee that the system's investment consultant, Aon Hewitt Investment Consulting, has estimated the system could lose $7 million a year as a result of HB1307. The system has $7 billion in direct investments in a total investment portfolio totaling about $20.3 billion, he said at that time.
Officials at the Arkansas Public Employees Retirement System have estimated the system could have a potential loss of $30 million to $40 million per year under HB1307. The system's investments are valued at roughly $10.5 billion.
"At present, we have no exact determination of what entities will be excluded from investments, so it is a very difficult calculation," system Executive Director Amy Fecher said in a written statement earlier this month.
Robyn Smith, executive secretary of the Arkansas State Highway Employees Retirement System, said in an email dated Feb. 22 to Hickey that in "consultation with the other State Systems and review of what has resulted in other states, our conservative estimate of losses could range anywhere from 10 basis points or $20.1 million over 15 years to 70 basis points, which would be about $140.6 million over 15 years."
David Clark, executive director of the Local Police and Fire Retirement System, said in an email dated Feb. 22 to Hickey that "a conservative estimate for LOPFI is a potential cost of $1 million/a year."
In a voice vote with no audible dissenting voices, the Joint Committee on Public Retirement and Social Security Programs advanced HB1253 by McAlindon, which would create the State Government Employee Retirement Protection Act.
HB1253 affects all statewide public employee retirement systems and states that the selection of investments should be made using only pecuniary factors and not for "any purpose to further environmental, social, political or ideological goals," committee actuary Jody Carriero said in a written analysis of the bill.
He said the bill does not appear to significantly change the current investment practices of the statewide retirement plans.
McAlindon told the retirement committee that "this bill basically reiterates and requires that all investing with state pensions must be made solely on the basis of pecuniary interest and not on any social and environmental interest.
"It is what our investors have been doing for the state. They are investing based on the pecuniary interest, but this is just to reiterate and make sure that this is what happens," she said.
HB1253 also would add new requirements about the voting of ownership interests of the investments that are held, according to Carreiro. The responsible board should continue to hold the voting rights of the investment, and the voting rights should only be exercised in a way that is consistent with the fiduciary's obligation to gain the best earnings for the plan and not for other political purposes, he said.
Rep. Andrew Collins, D-Little Rock, questioned whether McAlindon's HB1253 would conflict with Wardlaw's HB1307. McAlindon said her bill is not in conflict with Wardlaw's bill.
Hickey, who is a retired banker, said he has a "huge problem" with Wardlaw's HB1307.
Under her HB1253, McAlindon said "you cannot put the political agenda above the return for the people who are participants in the program."
Hickey said "that's 100 % of what I agree with."
"From my standpoint, I don't care what they are investing in for our members to get those returns, as long as they are maximizing them," he said.
Hickey said McAlindon's bill conflicts with Wardlaw's bill.
Warren told the House committee that McAlindon's bill is a responsible bill in how it handles the investments of state government's retirement systems.
"This is a very responsible way to deal with ESG factors," he said, and he opposes Wardlaw's bill.