BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1234
                                                                  Page  1

          Date of Hearing:   July 3, 2012

            ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL 
                                      SECURITY
                              Warren T. Furutani, Chair
                    SB 1234 (De Leon) - As Amended:  June 27, 2012

           SENATE VOTE  :   23-13
           
          SUBJECT  :   Retirement savings plans.

           SUMMARY  :   Establishes the California Secure Choice Retirement 
          Savings Program (Program) to operate as a state-administered 
          retirement savings plan for private sector workers who do not 
          participate in any other type of employer-sponsored retirement 
          savings plan  Specifically,  this bill  :   

          1)Establishes the California Secure Choice Retirement Savings 
            Investment Board (Board) to consist of the State Treasurer, 
            the Director of Finance (or his or her designee), the State 
            Controller, an individual with retirement savings and 
            investment expertise appointed by the Senate Committee on 
            Rules, a small business representative appointed by the 
            Governor, a public member appointed by the Governor, and an 
            employee representative appointed by the Speaker of the 
            Assembly.

          2)Requires the Board to conduct an initial market analysis to 
            determine whether the necessary conditions for implementation 
            of the Program can be met, as specified.

          3)Provides that the Program will only become operative if the 
            Board notifies the Director of Finance that, based upon the 
            market analysis, the Program can be self-sustaining and only 
            if implementation costs are made available from a nonprofit or 
            private entity, the federal government, or a budget 
            appropriation.

          4)Requires the Board to forward and offer to present the 
            findings of the market analysis to the Chair of the Senate 
            Committee on Labor and Industrial Relations, the Chair of the 
            Assembly Committee on Labor and Employment, the Chair of the 
            Senate Committee on Public Employment and Retirement, and the 
            Chair of the Assembly Committee on Public Employees, 
            Retirement and Social Security.








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          5)Establishes the Program to include one or more individual 
            retirement account (IRA) arrangements for private sector 
            employees to operate under the following parameters:

             a)   Individual accounts under the program shall be nominal 
               accounts and contributions shall be treated as credits to 
               an individual's account along with interest and any 
               additional earnings.

             b)   The balance of the credits in an individual's account 
               shall determine the amount to which they are entitled under 
               the Program upon termination.

             c)   Requires the Board, prior to July 1 of the initial 
               Program year and annually thereafter, to adopt a Program 
               amendment to declare the stated rate at which interest 
               shall be credited to accounts for the following year.

             d)   Provides that an individual's retirement savings benefit 
               under the Program shall be an amount equal to the balance 
               of the credits in the individual's program account on the 
               date the retirement savings account becomes payable.

             e)   Requires the Board to set minimum and maximum investment 
               levels in accordance with contribution limits set forth for 
               IRAs by the Internal Revenue Code.

             f)   Authorizes the Board to allow participating employers to 
               use the Program to contribute to their employees' 
               individual retirement accounts on their employees' behalf 
               or match their employees' contributions, provided that the 
               contributions would be permitted under the Internal Revenue 
               Code and would not cause the program to be treated as an 
               employee benefit plan under the Employee Retirement Income 
               Security Act (ERISA).

          6)Provides that after the Board opens the Program for 
            enrollment, any employer may choose to have a payroll deposit 
            retirement savings arrangement to allow employee participation 
            in the Program.  Thereafter the following timeline would 
            apply:

             a)   Beginning three months after opening of enrollment, 
               employers of 100 or more employees must have an arrangement 








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               to allow employees to participate in the Program.

             b)   Beginning six months after opening of enrollment, 
               employers of 50 or more employees must have an arrangement 
               to allow employees to participate in the Program.

             c)   Beginning nine months after opening of enrollment, 
               employers of five or more employees must have an 
               arrangement to allow employees to participate in the 
               Program.

          7)Requires the Board, prior to opening the Program for 
            enrollment, to disseminate an employee information packet and 
            disclosure form to employers that, among other things, clearly 
            articulates that the program is privately insured and not 
            guaranteed by the State of California.

          8)Provides that an employer who, without good cause, fails to 
            allow its employees to participate in the Program within 90 
            days after being notified of failure to comply by the 
            Employment Development Department, shall pay a penalty of $250 
            per eligible employee.  If the employer if found to be in 
            willful noncompliance 180 days after the notice shall be 
            subject to an additional penalty of $500 per eligible 
            employee.

          9)Requires each eligible employee to be enrolled in the Program 
            unless the employee opts out as specified, and provides for an 
            open enrollment period.

          10)Provides that, unless otherwise specified by the employee, a 
            participating employee shall contribute 3% of their annual 
            salary or wages into the Program (which may be adjusted by the 
            Board to between 2% and 4%).

          11)Establishes a trust (Trust) to be administered by the Board 
            and requires moneys to be segregated into a program fund and 
            an administrative fund.  Annual expenditures from the 
            administrative fund shall not exceed more than 1% of the total 
            program fund.

          12)Establishes guiding principles and restrictions for 
            investment policy of Trust assets, and limits the types of 
            investments which shall be permitted for the investment of 
            funds.








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          13)Provides that equities shall not exceed 50% of the overall 
            asset allocation of the fund. 

          14)Provides that employers shall not have any liability for an 
            employee's decision to participate or opt out of the Program, 
            or for the investment decisions of employees.

          15)Provides that employers shall not be a fiduciary over the 
            Program and shall bear no responsibility for the 
            administration, investment, or investment performance of the 
            Program.  An employer shall not be liable with regard to 
            investment returns, program design, and benefits paid to 
            participants.

          16)Requires the Board to submit an annual independently-audited 
            financial report, as specified.

          17)Provides that the state shall not have any liability for the 
            payment of the retirement savings benefit guaranteed to 
            Program participants.  Any financial liability for the payment 
            of benefits in excess of funds available shall be borne by 
            insurance underwriters pursuant to a contract entered into 
            with the Board, as specified.  The state, and any of the funds 
            of the state, shall have no obligation for payment of the 
            guaranteed benefits arising from the program.

          18)Requires the Board (prior to opening the Program for 
            enrollment), if there is sufficient interest by vendors to 
            participate and provide the necessary funding, to establish a 
            Retirement Investments Clearinghouse ("Clearinghouse") on its 
            Internet Web site.  The Clearinghouse, among other features, 
            would contain the following:

             a)   Information about employer-sponsored retirement plans, 
               and payroll deduction individual retirement accounts and 
               annuities offered by private sector providers.

             b)   Specified other information, including investment 
               performance, fees, and other information.

          19)Contains specific requirements for vendors to participate and 
            register in the Clearinghouse, and a process for the addition 
            and removal of vendors.









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          20)Requires the Board to include notice of the existence of the 
            Clearinghouse on a notice to eligible employers disseminated 
            through EDD.

          21)Provides that the Board and the Program are not responsible 
            for or liable for the adequacy of information on the 
            Clearinghouse, as specified.

          22)Makes related and conforming changes to implement the 
            provisions of this bill.

          23)Makes related legislative findings and declarations.

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   This bill would establish a supplemental retirement 
          savings program for California's private sector workers that do 
          not have access to retirement plans through their jobs.  The 
          author states that the program created by this bill would 
          provide a reliable, affordable and completely portable 
          retirement savings plan for the millions of Californians without 
          access to a workplace retirement plan. 

          For private sector employees, the American retirement system has 
          traditionally relied upon a three-prong approach - Social 
          Security benefits, private savings and employer-provided 
          pensions.  Therefore, a large component of the traditional 
          retirement system was an employer-based retirement component, 
          which was generally provided through a defined benefit pension 
          where the benefit was defined by years of service and the final 
          wages of the employee.  By some estimates, as recently as 25 
          years ago more than 80% of large and mid-sized employers offered 
          a defined benefit pension.  Today, less than a third of such 
          employers offer such a pension.

          In recent decades, employer-sponsored defined benefit pensions 
          have been largely replaced by defined contributions pensions 
          such as 401(k) and 457 retirement plans.  In these plans, 
          employees generally make their own decisions about how the funds 
          are invested, taking on the entirety of the risk of their own 
          retirement savings.  While these plans are portable and have 
          certain tax advantages, critics have pointed out that the nature 
          of the risk shift leaves workers with the sole responsibility of 
          making investment decisions (for which they may or may not be 
          prepared) and leaves nest eggs vulnerable to shifts in the stock 








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          market (of which recent retirees are painfully aware).

          According to a recent report by the University of California, 
          Berkeley Center for Labor Research and Education, Meeting 
          California's Retirement Security Challenge (October 2011), 62% 
          of private sector workers in California do not participate in an 
          employer-sponsored retirement plan, compared to 57% in the 
          United States as a whole.  Also, workers in small and medium 
          sized firms are disadvantaged in their access to 
          employer-sponsored retirement plans-in California, 84% of people 
          working for employers with 25 or fewer workers do not 
          participate in a retirement plan at work.

          As introduced, the Program proposed under this bill would have 
          most closely followed the structure of a cash-balance retirement 
          type plan.  With a cash-balance retirement plan, the plan tries 
          to blend components of a defined benefit and defined 
          contribution plan by providing a guaranteed benefit, but tying 
          that guaranteed benefit to a balance in the account.

          However, with recent amendments the author has specified that 
          the retirement savings program designed by the Board would be 
          individual retirement accounts or individual retirement 
          annuities, with employee contribution limits which are the same 
          as IRAs.  The amendments also specify that voluntary employer 
          contributions would only be allowed if they are permitted under 
          the Internal Revenue Code and would not cause the Program to be 
          treated as an employee benefit pension plan under ERISA.

          Similar to the CalSTRS cash-balance type retirement plan, this 
          bill also requires the creation of a Gain and Loss Reserve 
          Account, which brings in money during good years and disburses 
          money during bad years in order to credit the rate of interest 
          set by the Board.  Such decisions would be based on an annual 
          actuarial valuation.  Additionally, this bill requires the Board 
          to purchase insurance against any loss and secure underwriting 
          to insure that the benefits are paid to participants.

          The actual day-to-day operation of the Program is left largely 
          unspecified in the bill.  There are allowances for the 
          appointment of a Program Administrator and staff, but there is 
          also the flexibility to retain or contract with CalPERS and/or 
          private financial institutions "as necessary".  Finally, there's 
          also a catch-all to allow for collaboration with CalPERS and 
          private entities for outreach and administration.








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          This bill provides that each eligible employee shall be enrolled 
          in the Program unless the employee elects not to participate.  
          An eligible employee may elect to opt out of the Program by 
          making a notation on an exemption certificate produced by EDD.  
          The bill also provides that, at least once every two years, 
          participating employers shall designate an open enrollment 
          period during which eligible employees that previously opted out 
          of the Program shall be enrolled unless the employee again 
          elects to opt out.

          The bill provides that an employee who elects to opt out of the 
          Program who subsequently wants to participate through the 
          employer's payroll deposit retirement savings arrangement may 
          only enroll during the employer's designated open enrollment 
          period or if permitted by the employer at an earlier time.  
          Finally, an eligible employee may also terminate his or her 
          participation in the Program at any time in a manner prescribed 
          by the Board and thereafter by making a notation on the 
          exemption certificate produced by EDD.

          According to the author, the opt-out nature of this bill 
          conforms to recent research that suggests that individuals need 
          a "nudge" in the form of automatic enrollment in retirement 
          savings programs.  According to information submitted by the 
          author, in one study comparing opt-in to automatic enrollment, 
          researchers found that participation rates in opt-in plans were 
          just 20% after three months, increasing to 65% after 36 months.  
          With automatic enrollment, by contrast, the rates were 90% and 
          98%, respectively.

          The author states the following in support of this bill:

               "Across the United States, millions of workers will retire 
               into poverty because they will not have enough in assets to 
               meet their basic needs in their senior years.  Here in 
               California, nearly one-half of workers will face 
               significant economic hardship in retirement, with incomes 
               below 200% of the federal poverty threshold.  The most 
               at-risk groups are young workers age 25-44 and low-income 
               workers, but even middle-income workers will be at 
               substantial risk of not having enough retirement income to 
               be self-sufficient.

               Since the nation's personal savings rate is extremely low 








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               and retirement planning is now largely controlled by 
               private for-profit Wall Street investment firms, the United 
               States is staring at an economic time bomb that left 
               unaddressed will overwhelm taxpayer-funded entitlement and 
               other safety net programs.  The lack of retirement savings 
               affects all Californians, as seniors without sufficient 
               retirement savings will more likely need to rely on 
               government assistance for housing, health care and other 
               basic necessities.

               California workers in the private sector need a lifelong 
               retirement savings system that provides them with the 
               opportunity to build their assets and achieve financial 
               stability in retirement.  The California Secure Choice 
               Retirement Savings Program would provide a vital supplement 
               to Social Security income by offering participants a 
               low-risk, low-cost, and completely portable retirement 
               savings plan that will have a guaranteed interest rate on 
               their retirement savings.

               Employers that want to offer their employees a retirement 
               savings plan also need a way to help their employees save 
               for retirement.  Private sector employers often face 
               significant barriers in setting up their own workplace 
               retirement plans-in addition to the costs of hiring service 
               providers and paying service fees, plans such as 401(k)s 
               can be complex to maintain and administer, employers must 
               accept fiduciary responsibility, and they are subject to an 
               array of rules and regulations.

               Under the California Secure Choice Retirement Savings 
               Program, voluntary contributions from employees and 
               employers would be pooled into a professionally-managed 
               retirement fund that leverages economies of scale and 
               longer investment horizons to offer every California worker 
               the chance to enroll in a retirement savings plan.

               Here in California, over 6.3 million private sector workers 
               do not have access to a retirement plan at their place of 
               employment.  If these workers contributed 3% of their 
               earnings towards a retirement fund, the fund would have 
               over $6 billion to invest in the first year alone."

          The author also contends that this bill contains the following 
          protections for California taxpayers:








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               "Prior to the development of the California Secure Choice 
               Retirement Savings Program, direct the Board to conduct a 
               market analysis to determine the viability of 
               implementation, including the assessment of likely 
               participation rates, contribution levels, and the 
               feasibility of investment vehicles.

               The market analysis would only be conducted if sufficient 
               funds are made available through a non-profit or private 
               entity, federal funding, or an annual Budget Act 
               appropriation for this purpose.

               Following the market analysis, forward the Board's findings 
               to the Chairs of the Senate Public Employment and 
               Retirement Committee and the Assembly Public Employees, 
               Retirement and Social Security Committee.

               The implementation of the California Secure Choice 
               Retirement Savings Program would only move forward if the 
               Board notifies the Director of Finance that based on the 
               market analysis the program will be completely 
               self-sustaining.

               Before studying, developing and obtaining the necessary 
               approvals to fully implement the California Secure Choice 
               Retirement Savings Program, the Board would have to receive 
               sufficient funding to cover start-up costs through a 
               non-profit, private entity, federal funding, or an annual 
               Budget Act appropriation.

               Once fully implemented, the California Secure Choice 
               Retirement Savings Trust would be self-sustaining and 
               extremely low-risk due to the modest guaranteed benefit 
               (likely tied to the 30-year Treasury-bond rate) and long 
               investment horizon.  In guaranteeing the rate of return for 
               the retirement savings plans, ensure zero-liability to the 
               state by requiring the Board to secure private underwriting 
               and reinsurance to manage risk.

               There would be no state liability for the retirement 
               savings benefit that is guaranteed to program participants. 
                Any financial liability for the payment of benefits that 
               exceeds the funds available in the program would be borne 
               by the private underwriters pursuant to the contract 








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               entered into with the Board on behalf of program 
               participants."

          The author also argues that the bill contains the following 
          protections for employers and employees:

               "Employees would receive a program information packet with 
               a disclosure form that includes the benefits and risks of 
               making retirement contributions, the mechanics of how to 
               participate or opt out of the program, the process for the 
               withdrawal of retirement savings, and how to obtain 
               additional information about the program.

               The disclosure form would clearly inform employees that 
               employers are not liable for their decisions whether to 
               participate in or opt out of the program, or for employee 
               investment decisions, and state that their employer is not 
               a fiduciary of the California Secure Choice Retirement 
               Savings Trust or program, the employer does not bear 
               responsibility for how the program is administered, and the 
               employer is not liable with regard to investment returns 
               and benefits paid to program participants.

               In addition, the disclosure form would notify employees 
               that their employers are not in a position to provide 
               financial advice, and that they should contact financial 
               advisors if they want to seek financial advice.  

               To notify employees that the state is not liable for the 
               retirement savings benefit, the form would also specify 
               that the program fund is privately insured and is not 
               guaranteed by the State of California.  Employees would be 
               required to sign and date the disclosure form acknowledging 
               that they have read all of the disclosures and understand 
               their content."

          Opponents, including the Securities Industry and Financial 
                                                            Markets Association, (in a letter submitted before the most 
          recent amendments) argue that California already faces hundreds 
          of billions of dollars in unfunded pension liability for its 
          public sector workers.  They contend that now is not the time 
          for the state to create and assume liability for any new plan 
          for private sector employees.  Moreover, they contend that the 
          legislation is unnecessary as California already has a robust 
          and highly competitive retirement savings market.








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          Opponents contend that, among other things, this bill could 
          create undue pressure on the General Fund, could create a 
          multi-billion dollar liability for the state, unnecessarily 
          enters the federal government's domain, and is inconsistent with 
          the Administration's efforts to reduce government.

          Opponents also argue that this bill continues to raise problems 
          for the small employers by imposing a mandated benefit rather 
          than giving employers the flexibility to offer the mix of 
          compensation and benefits that best meets the needs of their 
          employees.  They note that this bill seeks to eliminate an 
          employer's potential federal liability and responsibility but do 
          not believe that a state bill has that authority under federal 
          law (ERISA or the Internal Revenue Code).  

          Opponents also state that recent amendments reduce but do not 
          eliminate the employers' operational responsibilities and 
          compliance costs.  Employers will still have to distribute 
          information, answer questions, collect opt-out forms, and 
          transfer contributions to the Program. 

          Opponents object that this bill raises "serious cost issues."

               "Initial costs to study and develop the program and to 
               obtain the necessary federal approvals will likely be 
               significant.  Such costs will increase dramatically if the 
               program faces a legal challenge.  While this bill sets 
               aside one percent (1%) of the total program fund to 
               administer the program trust on an ongoing basis, it is 
               highly likely that administrative, compliance, insurance, 
               premiums and other costs will exceed that amount."

          Opponents contend that the guaranteed rate of return on 
          investment creates the very real possibility that the state will 
          have to fill the gap between the promised and the realized rates 
          of return. Insurance - which, of course, comes at a cost - may 
          assist in this process, but the ultimate responsibility rests 
          with the state, either as an explicit or "implied" guarantee.

          With respect to potential "funding shortfalls" opponents state 
          the following:

               "As with any defined benefit plan, the employer/plan 
               sponsor bears investment risk.  Changes in the value of the 








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               plan's investments (usually managed by the employer or an 
               investment manager) generally do not affect the amount of 
               benefits owed to participants.  The funding rules for 
               defined benefit plans also apply to cash balance plans.  
               Under a cash balance plan, funding obligations are 
               determined actuarially based on the plan's benefit 
               commitments which include interest credits, the value of 
               the plan's asset and expected plan demographic experience.  
               Required contributions do not necessarily equal the sum of 
               contributions to the hypothetical accounts. Under the 
               Program, based on annual actuarial valuations of plan 
               assets, if participant contributions to the plan do not 
               equal the required minimum funding obligation for a year 
               based on the funding rules, then additional contributions 
               must be made."

               "Under the bill, the Board is directed to annually adopt a 
               statement of investment policy and to select an investment 
               management entity or entities.  However, it does not 
               address who is responsible for any funding shortfalls.  
               Generally, under the Ýfederal law] provisions applicable to 
               multiple employer plans, each employer is treated as 
               maintaining a separate plan for purposes of minimum funding 
               standards.  This would suggest that each participating 
               employer will be left liable for any funding deficiencies.  
               What if a participating employer has gone out of business?  
               What if the employer no longer employs any participating 
               employees?"

               "Sponsors of the bill counter that an insurance policy will 
               address this issue.  The state assumes the existence of an 
               insurance policy that would cover market risk regarding the 
               assets, longevity risk (because defined benefit plans must 
               offer an annuity form of payment), benefit guarantees set 
               by the Board, and a risk regarding administration.  If this 
               type of coverage is available, we expect it will be very 
               expensive.  This expense would also likely be paid from the 
               administrative fund, which has the 1% limit on expenses 
               cited above.  Note however, that even if an insurer did 
               cover these costs, ERISA would not shift liability to the 
               insurer; the participating employer would retain liability 
               for payment of any underfunding. This is significant 
               because in the event the insurance contract is discontinued 
               or for some reason the specifics of the contract do not 
               require payment in any case, the participating employer is 








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               the entity who would be left responsible for these amounts 
               under the federal tax code."

          Opponents conclude that, "In the case of a market downturn, such 
          as occurred in 2008, a devastating funding shortfall would be 
          likely.  The liability will be left to a state which is already 
          struggling financially, or to California employers who were 
          forced to participate.  We do not believe that an insurance 
          contract is enough to address these significant concerns."

          This bill is similar to AB 125 (De Leon) of 2009, and AB 2940 
          (DeLeon) of 2008, both of which would have created a California 
          Employee Savings Program to be administered by CalPERS.  Both 
          bills were held in the Senate Committee on Appropriations.

           REGISTERED SUPPORT / OPPOSITION  :

           Support  
          AARP-California
          American Federation of State, County and Municipal Employees, 
          AFL-CIO
          Association of California School Administrators
          California Association of Highway Patrolmen
          California Association of Professional Scientists 
          California Association of Psychiatric Technicians
          California Communities United Institute
          California Faculty Association
          California Federation of Teachers
          California Labor Federation, AFL-CIO
          California Professional Firefighters
          California Retired County Employees Association
          California School Employees Association
          California Teachers Association
          California-Nevada Conference of Operating Engineers
          Congress of California Seniors
          Earned Assets Resource Network
          East Hollywood Chamber of Commerce
          Faculty Association of California Community Colleges
          Greenlining Institute
          JERICHO
          Latinos for a Secure Retirement
          Little Armenia Neighborhood Association
          National Conference on Public Employee Retirement Systems
          National Hispanic Council on Aging
          Numerous individuals 








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          Peace Officers Research Association of California
          Professional Engineers in California Government
          SEIU United Long Term Care Workers
          Service Employees International Union Local 721
          Service Employees International Union Local 1000
          Service Employees International Union Local 99
          State Association of County Retirement Systems
          TELACU
          United Food and Commercial Workers Local 1428
          United Teachers Los Angeles
          Western Prelacy Armenian Schools
          Workers United-SEIU Western States Regional Joint Board
           
            Opposition 
           Allstate Insurance Company
          American Council of Engineering Companies of California
          American Council of Life Insurers
          Association of California Life and Health Insurance Companies
          California Association of Health Underwriters
          California Chamber of Commerce
          California Farm Bureau Federation
          California Framing Contractor's Association
          California Grocers Association
          California Independent Grocers Association
          California Manufacturers & Technology Association
          California Retailers Association
          California Small Business Association
          Financial Planning Association
          Financial Services Institute
          Fullerton Chamber of Commerce
          Garden Grove Chamber of Commerce
          Hispanic Engineers Business Corporation
          Howard Jarvis Taxpayers Association
          ING
          Insurance Brokers and Agents of the West
          Investment Company Institute
          Long Beach Area Chamber of Commerce
          National Association of Insurance and Financial Advisors of 
          California
          National Federation of Independent Business
          Orange Chamber of Commerce
          Pacific Life Insurance Company
          Personal Insurance Federation of California
          Plumbing-Heating-Cooling Contractors Association of California
          Principal Financial Group








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          San Gabriel Valley Legislative Coalition of Chambers
          Securities Industry and Financial Markets Association
          Small Business California
          State Farm
          The Financial Services Roundtable
          Western Electrical Contractors Association

           Analysis Prepared by  :    Karon Green / P.E., R. & S.S. / (916) 
          319-3957