The Legislature has killed a bill that would have banned California's two public pension funds from investing in real estate deals that rely on freeing up rent-controlled housing.

The defeat of Assembly Bill 2337 in a Senate committee Monday will likely have little practical effect in the short run. The two pension funds, the California State Teachers' Retirement System and the California Public Employees' Retirement System, already have policies banning such investments.

But tenants' advocates were angered by the defeat anyway. Dean Preston, executive director of advocate group Tenants Together, said the internal policies are fine but the bans "had to have the force of law." Otherwise, the funds could easily rescind the bans, he said.

The bill was introduced following disclosures that CalPERS and CalSTRS had invested a combined $700 million on deals that relied on higher rents from rent-controlled housing in New York and East Palo Alto.

Generally speaking, the only way to raise rents on such properties is when new renters come in, and longtime tenants in both cities complained they were being driven out.

The New York and East Palo Alto deals collapsed when the real estate market imploded. The pension funds lost their entire investments and some of their reputation as socially responsible investors, particularly CalPERS.

AB 2337 was defeated 4-1 Monday in the Senate Public Employment and Retirement Committee, with one abstention. The bill had passed the Assembly.

Preston blamed the bill's defeat on committee Chairman Lou Correa, D-Santa Ana, saying he had been influenced by campaign donations from real estate and landlord interests.

Correa said in an in interview, "The fact of the matter is, it only received one vote in the committee. I'm honored that they think I killed the bill."

The senator said he voted against the bill because of his long-standing opposition to rent control – and any legislation that would tie the pension funds' hands. CalPERS and CalSTRS can adopt their own policies, but "it's not for me to determine how they should invest," he said.

Correa said campaign donations don't influence his votes.

The California Association of Realtors lobbied against the bill. Its political action committee gave Correa $7,800 in donations a year ago – long before the bill was introduced.

Quintin Mecke, spokesman for bill author Assemblyman Tom Ammiano, D-San Francisco, said it was mystifying that the bill would die even though CalPERS and CalSTRS took neutral positions on the legislation.

"You had CalSTRS and CalPERS not even opposed to the bill, and they were the ones directly affected by it," Mecke said.

CalPERS spokesman Brad Pacheco said, "We agree that this is an important issue, and we're confident our new policy will ensure that CalPERS capital won't inappropriately displace households in rent-regulated units."

Ricardo Duran of CalSTRS had no comment on the bill's defeat but said, "We did write it into policy."