BILL ANALYSIS Ó AB 1248 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1248 (Hueso) As Amended May 21, 2012 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |52-24|(May 27, 2011) |SENATE: |22-13|(August 27, | | | | | | |2012) | ----------------------------------------------------------------- Original Committee Reference: H.& C.D. SUMMARY : Requires the City of San Diego to provide Social Security coverage to all its employees not covered under a defined benefit retirement plan and grandfathers in an employers' defined contribution plan in place on July 1, 2012. The Senate amendments : 1)Limit the applicability of the bill to the City of San Diego. 2)Grandfather in an employers' defined contribution plan in place on July 1, 2011. 3)Make legislative findings and declarations as to the necessity of a special statute for the City of San Diego. AS PASSED BY THE ASSEMBY , this bill was substantially similar to the version approved by the Senate. FISCAL EFFECT : Unknown. This bill is keyed non-fiscal by the Legislative Counsel. COMMENTS : The Social Security Act of 1935 excluded state and local government employees from coverage because of concerns about the federal government's right to impose a tax on state governments and because many state and local employees were already covered by public pension plans. In 1950, 1954, and 1956, amendments were adopted to the Social Security Act allowing states to enter into voluntary agreements with the Social Security Administration (SSA) in order to elect Social Security coverage for their public employees. These amendments also permitted states that had entered into such agreements to elect to withdraw from the Social Security program. These agreements were called Section 218 Agreements because they are AB 1248 Page 2 authorized under Section 218 of the Social Security Act. In 1983, Congress removed the authority of states and localities to withdraw from the program, but retained their ability to voluntarily participate. In 1990, Congress mandated Social Security for all state and local employees who are not members of a public retirement system and not covered by a Section 218 Agreement beginning July 2, 1991. State and local retirement systems that do not participate in Social Security must provide comparable benefits to the retirement, disability, and survivors' benefits provided by Social Security. For mandatory Social Security coverage purposes, a public retirement system is a pension plan maintained by a public employer that meets specified requirements of the Internal Revenue Code and specified Internal Revenue System regulations. These requirements must be met for a retirement system to be used as an alternative to mandatory Social Security coverage. A public retirement system is not required to be a qualified plan within the meaning of the Employees' Retirement Income Security Act of 1974 (ERISA). The employee may be a member of any type of retirement system, including a nonqualified system as long as the plan provides a minimum level of benefits, as specified by law, under that system. The public retirement system may be either a defined benefit retirement system which is based on a guaranteed minimum benefit or a defined contribution retirement system, which is based on a required contribution from the employee. In order for a defined benefit retirement system to be considered a public retirement system, benefits must be measured by and based on various factors including years of service rendered by the employee, compensation earned by the employee and the age of the employee at retirement. In order for a defined contribution retirement system to be considered a qualified plan, the worker must be covered in a plan in which at least 7.5% of his or her income is placed into a retirement plan. This contribution can be any combination of employer and employee contributions, but must total a minimum of 7.5% of his or her pay, and cannot include any credited interest in the calculation. The plan may include any plan described in Section 401(a), an annuity plan or contract under Section 403(b) or a plan described in Section 457(b) or (f) of the Internal AB 1248 Page 3 Revenue Code. According to the author, "In 1981, San Diego determined to opt out of Social Security and provide its employees its own defined benefit pension plan. Today, San Diego would like to eliminate the defined benefit pension plan by vote of the people and replace it with a 401(k) plan?Volatility in the stock market raises concerns about the security of defined contribution retirement systems. This volatility becomes an even larger concern for workers who would not be covered under the federal Social Security system. "Allowing local governments to offer a 401(k) only retirement system will leave workers without a financial safety net in their retirement years and will shift the burden to the state in the long-run. If retired workers require health services, Medi-Cal will have to step in. Our state's budget for Medi-Cal today is $41 billion, $13 billion of which comes directly from the state's general fund. If workers do not have enough money in their 401(k) when they retire, as is common with 401(k) plans, California will have to supplement their income through our already burdened SSI/SSP program. These costs are currently $2.7 billion and already represent the highest figures in the nation. Allowing California workers to participate in the Social Security System will protect them in the future." Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916) 319-3957 FN: 0003746