BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Tom Torlakson, Chairman
2940 (De Leon)
Hearing Date: 8/7/08 Amended: 7/10/08
& as proposed to be amended
Consultant: Maureen Ortiz Policy Vote: P. E. & R. 3-1
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BILL SUMMARY: AB 2940 creates the California Employee Savings
Program (CalESP) which will require the CalPERS Board of
Administration to offer individual retirement accounts or
defined benefit plans to employees of private-sector or
non-profit employers that do not otherwise provide access to
retirement savings plans.
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Fiscal Impact (in thousands)
Major Provisions 2008-09 2009-10 2010-11 Fund
CalPERS study/admin $1,690 $800
$800 General
EDD ----unknown, potentially
multi-millions----- General
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STAFF COMMENTS: SUSPENSE FILE.
The current version of AB 2940 does not provide funding to
CalPERS for its costs to initiate, study, develop, and obtain
the approvals necessary to implement the program, but only
provides that there must first be funds made available through
an appropriation by the Legislature, or through a nonprofit or
private entity. The Employment Development Department has not
completed its fiscal analysis as of this date, however, costs
are expected to exceed $1 million. Although AB 2940 does
authorize EDD to recover all costs, it is not yet known whether
passing those costs on to employers will be feasible.
Although, the intent of AB 2940 is for the Program to be
self-funded and have the costs fully covered by fees deducted
from participants' IRA contributions, it would be necessary for
the State to appropriate or loan funds to the CalPERS Board of
Administration and EDD to cover their costs for the study phase,
the start-up phase and an initial period of operations until the
Program can sustain itself. In addition, the bill allows the
Board to accept funding from non-profit and private sector
entities to fund the various Program phases. Under AB 2940,
CalESP operations can roughly be divided into three phases: (1)
the study/development/approval phase, whereupon the Board
determines whether the necessary conditions for implementation
can be met and the Legislature determines whether it will commit
to funding the Program until it becomes self-sustaining; (2) the
start-up/implementation phase; and (3) the operating/ongoing
administration phase. A rough estimate of CalPERS' study costs
are outlined below.
EDD's costs for the study, start-up and operation phases of the
Program are unknown, but expected to be substantial as they
require the development of an automated system to receive and
process retirement contributions forwarded by participating
employers,
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AB 2940 (De Leon)
and may also entail enforcement functions if AB 2940 continues
to require employers to forward contributions to EDD at their
employees' request. While reporting through the EDD as
envisioned in AB 2940 may streamline procedures for
participating employers, the cost of Program administration
borne by participating employees may actually be higher by
reporting payroll through the EDD system, as additional
liability and plan compliance risks might be implicated. This
determination cannot be made until EDD is able to provide an
estimate of its projected costs under the provisions of AB 2940.
If EDD's costs are exceptional and a suitable alternative to
receive employer contributions can be identified, AB 2940 does
allow the Board to select another service provider. However, it
is possible that the initial costs associated with developing
these functions cannot be recovered through fees charged
participants within a reasonable period.
In addition, AB 2940 would provide indemnity to the Board from
the General Fund for any claim or loss sustained by reason of
any decision or action related to the administration of the
Program.
CalPERS' Study Costs:
CalPERS' estimated study costs would be approximately $1.69
million over an implementation period of approximately 24
months. However, this estimate does not include any EDD study
costs, and CalPERS' actual study costs may be greater. If the
General Fund appropriation or grant from another entity is
insufficient to complete the study, CalPERS will suspend study
efforts until sufficient funding is available. It is necessary
to accomplish all of the following tasks in order to develop a
reasonable estimate of potential program costs and revenues to
determine how long it will take the program to become
self-sustaining.
The initial costs include approximately $75,000 to conduct a
market survey to determine: likely participation rates,
participants' comfort with various investment vehicles and risk
appetite, contribution levels, and the rate of account closures
and rollovers. Also needed will be approximately $500,000 to
secure the services of outside tax and securities counsel to,
among other things, assist CalPERS in obtaining the necessary
federal regulatory approvals to provide traditional IRAs and
payroll deduction IRAs. If CalPERS were to seek approvals for
the authorized ERISA-regulated SIMPLE IRAs and Defined Benefit
Plans, there would be at least $250,000 to $500,000 in
additional legal costs.
The total study cost estimate also includes approximately $1.12
million for 10.4 PYs to carry out the professional and
administrative tasks associated with developing and evaluating
various program elements for consideration by the Board and the
Legislature. These tasks include, but are not limited to:
program design, identifying customer service, participant
education, systems automation, accounting, auditing and
financial reporting costs, developing and administering the
request for proposal (RFP) process for market survey and legal
services, as well as the request for information process to
determine interest and likely costs for third-party
administrator, trustee,
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AB 2940 (De Leon)
investment and marketing service providers. CalPERS anticipates
the costs and expenses charged by this last group of service
providers would be finally determined based on the scope of work
and the bids submitted through an RFP process during the
implementation phase. These fees would be assessed on
participant accounts, in addition to fees associated with the
costs incurred by the program itself.
While it is anticipated by the bill's sponsor that
administrative costs would be recovered through the fees charged
to participants, this would depend upon on the level of
participation and the amount of assets in the program.
Therefore, the costs of both CalPERS and EDD for the start-up
and operational phases will require an appropriation until the
program is self-sustaining. Continuing annual General Fund
appropriations may actually be required for an indefinite period
pending the build-up of assets sufficient to generate fee
revenues off-setting the Program's annual operational costs.
Under the CalESP, participating employers will be required to
forward employee contributions to the program through the
Employment Development Department. Program costs will be funded
solely from contributions to, or investment returns or assets
of, the programs, accounts, IRA plans or defined benefit plans,
and the bill also allows the Legislature to appropriate funds
for this purpose. AB 2940 creates the California Employee
Savings Program Administrative Fund and continuously
appropriates the money in that fund. AB 2940 specificies that
participating employers and their employees do not become
members of, or participants in, the Public Employees Retirement
System, and that the CalESP does not create a new or separate
public pension or retirement system.
Specifically, AB 2940 will require CalPERS to offer one or more
of the following: 1) one or more payroll deposit IRA
arrangements, 2) one of more traditional IRA arrangements, 3)
one or more SIMPLE IRA plans, 4) other IRAs, and 5) defined
benefit plans.
AB 2940 provides the following authorizations to CalPERS in
order to implement this new program:
a) employ staff,
b) retain and contract with private financial institutions,
other financial and service providers, consultants, third-party
administrators and other professionals,
c) collaborate and cooperate with private financial
institutions, service providers, business, financial, trade,
membership, and other organizations to provide maximum outreach
to eligible employers and eligible employees,
d) cause administrative expenses to be paid from contributions
to, or investment returns or assets of the program, except for
expenditures that are provided for through appropriations from
the Legislature,
e) facilitate compliance by the plans and IRAs established
under the program with the Internal Revenue Code requirements,
including providing or arranging for assistance to plan sponsors
and individuals in complying with applicable law and tax
qualifications requirements in a cost-effective manner,
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AB 2940 (De Leon)
f) cause the IRA plans to be established in accordance with
best practices for retirement savings,
g) seek to minimize costs by pooling small employers in
purchasing savings plans,
h) arrange for pooling investment of assets of the IRA plans in
order to facilitate cost savings,
i) provide educational materials relating to savings and
planning for retirement to employers and employees,
j) provide information concerning tax credits to small
business owners, and those available to moderate and lower
income households,
k) submit progress and status reports to participating
employers and eligible employees,
l) determine the eligibility of employers and employees,
m) create a process where employees who wish to participate
contact employers to require them to forward the contributions
through the EDD system currently used to collect payroll taxes,
and require EDD to forward the contribution to the IRA plan, and
n) allow participating employers to contribute to the account
on behalf of employees, or to match employees' contributions.
AB 2940 specifically provides that the program may only be
implemented if the board determines the following conditions are
satisfied:
1)There is an adequate appropriation or loan under appropriate
terms and conditions to the CalESP Administrative Fund
sufficient to fund program development, implementation, and
administrative costs,
2)Approval is received from federal agencies such as the
Internal Revenue Service, the United States Department of
Labor, and the Securities and Exchange Commission, as
specified,
3) The board obtains offers from well-qualified and experienced
financial service providers to administer the recordkeeping,
investment, and compliance functions of any IRA plan or
arrangement offered under the program, and,
4)The program is self-sustaining.
If the board determines that all of the above conditions can be
satisfied, it will file a report to the Legislature that
includes information regarding the expectations of the program,
an outline of the program, and details regarding the
administration and projected cost of the program. The board
shall not implement the program until after the report is
presented to the Legislature, and moneys in an amount sufficient
to fund the projected cost of the program are either
appropriated by the Legislature in an annual Budget Act or made
available through a nonprofit or private entity. Upon
implementation of the CalESP, the board will be required to
submit annual reports to the Legislature on the status of the
program, including outreach, investments, and solvency efforts.
In the event that the board determines that the conditions for
implementation can not be satisfied, it will submit a report to
the Legislature regarding the details of its conclusion,
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AB 2940 (De Leon)
including legal, financial, regulatory, and administrative
considerations and obstacles, and actions taken to address those
concerns.
Additionally, AB 2940 provides that if the board finds it
necessary to suspend or discontinue the program, it shall submit
a report to the Legislature at least 90 days prior to the
discontinuation.
AB 2940 provides that the CalPERS Board must keep separate and
distinct any and all IRA plans or arrangements established under
the program from all programs, funds, or assets maintained by
the system and administered by the board for state and local
government employers and employees. No funds in the system's
defined benefit plans, health and welfare plans, or its
supplemental income plans for state and local government
employers and employees shall be used to initiate, develop,
implement, or administer the program.
Additionally, AB 2940 authorizes state employees to participate
in a deferred compensation program through CalPERS unless
participation by state employees in a specific deferred
compensation plan is subject to the terms of a memorandum of
understanding. This plan is currently only available to
employees of CalPERS' school and contracting public agency
employers. State employees now participate in the Savings Plus
Program that is administered by the Department of Personnel
Administration which offers a variety of investment options.
Staff notes that additionally clarifying amendments would be
necessary in order to accomplish this provision.
Traditional IRAs - Include tax-deferred retirement savings
accounts whereby taxes are not paid on contributions and
investment earnings until withdrawal, and ROTH IRAs , where
contributions are made on an after-tax basis and are not subject
to taxes upon withdrawal. These IRAs are available whether or
not an individual is covered by another
retirement plan, however, the income tax deductibility of their
contributions may be affected if they or their spouse is covered
by an employer retirement plan. The contribution limit is $5000
for 2008. This is the maximum amount that can be contributed in
2008 regardless of whether the contributions are to one or more
traditional IRAs or whether all or parts of the contributions
are nondeductible. A traditional IRA is not sponsored by an
employer so the assets are not considered pension plan assets
subject to the Employee Retirement Income Security Act of 1974
("ERISA"), nor are the contributions made through payroll
deductions.
Payroll Deduction IRAs - These are for employers who do not want
to adopt a retirement plan, but still want to allow their
employees to save through payroll deductions. The decisions
about how much to contribute up to the $5000 limit, and when to
contribute are made by the employee. Although the limits and
the contributions to a payroll deduction IRA are tax-deductible
to the same extent as traditional IRAs, it provides a more
convenient and consistent means for the employee to make these
contributions. Depending upon how the payroll deduction IRA is
set up and level of endorsement by the employer, the IRA assets
may be subject to ERISA.
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AB 2940 (De Leon)
Savings Incentive Match Plans for Employees of Small Employers,
or SIMPLE IRAs - These are a savings option for employers with
100 or fewer employees that allow employees to contribute a
percentage of their salary each pay check and to have their
employer contribute too. Under a SIMPLE IRA, employees can
contribute up to $10,500 annually. Employers can either match
up to 3 percent of an employee's wage or make a fixed
contribution. SIMPLE IRAs are considered pension plan assets
and are subject to ERISA.
Simplified Employee Pensions, or SEP IRAs - Allows employers to
set up an IRA for their employees. Employers are required to
contribute a uniform percentage of pay for each employee, but
they are not required to make contributions each year. An
employer may contribute up to 25 percent of an employee's
compensation up to the annual cap, which is $45,000 in 2008 and
subject to annual cost-of-living adjustments for later years.
SEP IRAs are considered pension plan assets and are subject to
ERISA.
Defined Benefit Plans - Employers and employees make
contributions to the plan, calculated as a percentage of
payroll, which are invested together to provide a fixed benefit
upon the employee's retirement.
Proposed author's amendments authorize the board to use EDD,
financial services companies, and third-party administrators
with the capability to receive and process employee information
and contributions for payroll deduction arrangements.