BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1234| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1234 Author: De León (D) and Steinberg (D), et al. Amended: 8/20/12 Vote: 21 SENATE PUBLIC EMPLOY. & RETIRE. COMM. : 3-1, 4/16/12 AYES: Negrete McLeod, Padilla, Vargas NOES: Gaines NO VOTE RECORDED: Walters SENATE LABOR & INDUST. RELATIONS COMM. : 4-1, 4/25/12 AYES: Lieu, DeSaulnier, Leno, Yee NOES: Wyland NO VOTE RECORDED: Padilla, Runner SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/24/12 AYES: Kehoe, Alquist, Lieu, Price, Steinberg NOES: Walters, Dutton SENATE FLOOR : 23-13, 5/30/12 AYES: Alquist, Calderon, Corbett, Correa, De León, DeSaulnier, Evans, Hancock, Hernandez, Kehoe, Leno, Lieu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio, Steinberg, Vargas, Wolk, Wright, Yee NOES: Anderson, Berryhill, Blakeslee, Cannella, Dutton, Emmerson, Fuller, Gaines, Harman, Huff, La Malfa, Walters, Wyland NO VOTE RECORDED: Liu, Runner, Simitian, Strickland SUBJECT : Retirement savings plans CONTINUED SB 1234 Page 2 SOURCE : Author DIGEST : This bill establishes the California Secure Choice Retirement Savings Investment Board (Board), as defined, and the California Secure Choice Retirement Savings Trust (Trust), a continuously appropriated fund, for the purpose of creating a statewide program known as the California Secure Choice Retirement Savings Program (SCRSP). SCRSP will exist to provide a statewide retirement savings plan for private workers who do not participate in any other type of employer sponsored retirement savings plan. Contributions by employers and employees will be voluntary. In order for SCRSP to become operational, this bill requires that the Board conduct a market analysis to determine various factors in regard to implementing the SCRSP and to report to the Legislature on its findings; the analysis may be done only if sufficient funds to do so are made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation. Once created, administrative costs for the SCRSP shall be paid for from earnings on investments into the trust and shall be no more than 1%, annually, of the total program fund assets. Assembly Amendment (1) authorize rather than require the Board to establish a Gain and Loss Reserve Account; (2) specify risk management act and investment policies that the Board will be subject to regarding administration of the program; (3) require the Board to ensure that an insurance, annuity, or other funding mechanism is in place at all times that protects the value of individuals' accounts; (4) specify that upon sufficient funds being made available through a nonprofit or private entity or federal funding, require the Board to conduct a market analysis to determine whether the necessary conditions for implementation can be met; (5) require moneys make available to conduct the market analysis to be deposited in the Secure Choice Retirement Savings Program Fund created by the bill; (6) clarify language concerning opt-out provisions; and (7) prohibit the Board from implementing the program if the Individual Retirement Arrangement (IRA) arrangements offered fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs SB 1234 Page 3 under the Internal Revenue Code (IRC), or if it is determined that the program is an employee benefit plan under the federal Employee Retirement Income Security Act (ERISA). ANALYSIS : Existing federal law provides for tax-qualified retirement plans and individual retirement accounts or individual retirement annuities by which private citizens may save money for retirement. Existing state law: 1. Establishes California Public Employees' Retirement System (CalPERS), the state's largest public retirement system with over $239 billion in assets, providing worker and employer funded retirement benefits for over 1.6 million public workers, retirees, and their survivors and dependents. 2. Empowers CalPERS with exclusive authority and fiduciary responsibility to invest the Public Employees' Retirement Fund in order to ensure the payment of benefits for members and their survivors and to control costs for participating employers. 3. Prohibits, in the Constitution, the state from creating debt or liability, as specified, without a vote of the people. 4. Allows individuals to save for retirement on a pre-tax basis through payroll deductions when the employee is eligible to enroll in an employer-sponsored retirement savings plan. 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 SB 1234 Page 4 retirement plan at work. This bill establishes the Board, as defined, and the Trust, a continuously appropriated fund, for the purpose of creating a statewide program known as the SCRSP. SCRSP will exist to provide a statewide retirement savings plan for private workers who do not participate in any other type of employer sponsored retirement savings plan. Contributions by employers and employees will be voluntary. In order for SCRSP to become operational, this bill requires that the Board conduct a market analysis to determine various factors in regard to implementing the SCRSP and to report to the Legislature on its findings; the analysis may be done only if sufficient funds to do so are made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation. Once created, administrative costs for the SCRSP shall be paid for from earnings on investments into the trust and shall be no more than 1%, annually, of the total program fund assets. This bill: 1. Establishes the Board to consist of the State Treasurer, the Director of Finance (or his/her designee), the State Controller, an individual with retirement savings and investment expertise appointed by the Senate Rules Committee, 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 SCRSP can be met, as specified. 3. Provides that the SCRSP will only become operative if the Board notifies the Director of Finance that, based upon the market analysis, the SCRSP 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 SB 1234 Page 5 findings of the market analysis to the Chair of the Senate Labor and Industrial Relations Committee, the Chair of the Assembly Labor and Employment Committee, the Chair of the Senate Public Employment and Retirement Committee, and the Chair of the Assembly Public Employees, Retirement and Social Security Committee. 5. Establishes the SCRSP to include one or more IRA arrangements for private sector employees to operate under the following parameters: A. The Board, prior to July 1 of the initial SCRSP year and annually thereafter, to adopt a SCRSP amendment in coordination with the investment management entity or entities to declare the stated rate at which interest shall be allocated to accounts for the following year. B. Provides that an individual's retirement savings benefit under the SCRSP shall be an amount equal to the balance of an individual's program account on the date the retirement savings account becomes payable. C Requires the Board to set minimum and maximum investment levels in accordance with contribution limits set forth for IRAs by the IRC. D. Authorizes the Board to allow participating employers to use the SCRSP 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 IRC and would not cause the program to be treated as an employee benefit plan under the ERISA. 6. Provides that after the Board opens the SCRSP for enrollment, any employer may choose to have a payroll deposit retirement savings arrangement to allow employee participation in the SCRSP. Thereafter the following timeline would apply: A. Beginning three months after opening of enrollment, employers of 100 or more employees must SB 1234 Page 6 have an arrangement to allow employees to participate in the SCRSP. 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 SCRSP. 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 SCRSP. 7. Requires the Board, prior to opening the SCRSP for enrollment, to disseminate an employee information packet and disclosure form to employers that, among other things, clearly articulates that the SCRSP is privately insured and not guaranteed by the State of California and includes an opt-out form for eligible employees. 8. Provides that an employer who, without good cause, fails to allow its employees to participate in the SCRSP within 90 days after being notified of failure to comply by the Employment Development Department (EDD), 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 SCRSP 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 SCRSP (which may be adjusted by the Board to between 2% and 4%). 11.Establishes the 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. SB 1234 Page 7 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. 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 SCRSP, or for the investment decisions of employees. 15.Provides that employers shall not be a fiduciary over the SCRSP and shall bear no responsibility for the administration, investment, or investment performance of the SCRSP. 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 earned by SCRSP participants. Any financial liability for the payment of benefits in excess of funds available shall be borne by entities with whom the Board contracts to provide an insurance, annuity, or other funding mechanism to protects the returns earned by SCRSP participants. The state, and any of the funds of the state, shall have no obligation for payment of the benefits arising from the SCRSP. 18.Requires the Board to ensure that an insurance, annuity or other funding mechanism is in place at all times that protects the value of individuals' accounts. Such funding mechanism shall protect, indemnify and hold the state harmless at all times against any and all liabilities in connection with funding retirement benefits under the SCRSP. The costs of the funding mechanism shall be paid out of the funds held in the Trust and shall not be attributed to the administrative costs of the Board in operating the Trust. SB 1234 Page 8 19.Requires the Board (prior to opening the SCRSP 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. 20.Contains specific requirements for vendors to participate and register in the Clearinghouse, and a process for the addition and removal of vendors. 21.Requires the Board to include notice of the existence of the Clearinghouse on a notice to eligible employers disseminated through EDD. 22.Provides that the Board and the SCRSP are not responsible for or liable for the adequacy of information on the Clearinghouse, as specified. 23.Provides that the Board shall not implement the SCRSP if the IRA arrangements offered fail to qualify for the favorable federal income tax treatment ordinarily accorded IRAs under the IRC, or if it is determined that the SCRSP is an employee benefit plan under the ERISA. 24.Makes related and conforming changes to implement the provisions of this bill. 25.Makes related legislative findings and declarations. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Assembly Appropriations Committee, the SB 1234 Page 9 initial study and approval phase of this bill would result in costs in excess of $1 million. Implementation costs would potentially exceed $10 million, but would eventually be recouped from fees. Ongoing costs are estimated to be multi-million annual expenses to be paid from earnings on the Trust. SUPPORT : (Verified 8/27/12) AARP-California AFSCME, AFL-CIO American Society of Pension Professionals and Actuaries Association of California School Administrators California Alliance for Retired Americans California Association of Professional Scientists California Association of Psychiatric Technicians California Communities United Institute California Faculty Association California Federation of Teachers, AFL-CIO 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 College Greenlining Institute JERICHO Latinos for a Secure Retirement Little Armenia Neighborhood Association Los Angeles County Federation of Labor, AFL-CIO National Conference on Public Employee Retirement Systems National Hispanic Council on Aging Paramount Contractors and Developers, Inc. Peace Officers Research Association of California Professional Engineers in California Government SEIU Local 1000 SEIU Local 99 SEIU United Long Term Care Workers State Association of County Retirement Systems State Building and Construction Trades Council of SB 1234 Page 10 California 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 : (Verified 8/27/12) 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 and Technology Association California Retailers 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 Orange Chamber of Commerce Pacific Life Insurance Company Personal Insurance Federation of California Plumbing-Heating-Cooling Contractors Association of California Principal Financial Group Securities Industry and Financial Markets Association State Farm The Standard Western Electrical Contractors Association SB 1234 Page 11 ARGUMENTS IN SUPPORT : The author states the following: Today, due to inadequate retirement savings, nearly 50% of middle-income California workers will face living in or near poverty during their senior years. Social Security payments alone are simply not enough to cover basic life necessities, and over seven million workers in the private sector currently do not have access to a retirement savings plan through their jobs. Ensuring that all workers have the opportunity to save for retirement will benefit all of society-in addition to promoting personal responsibility and providing Californians with a pathway to self-sufficiency in retirement, it will alleviate the strain on our already overburdened safety net programs as California's population ages." Senate Bill 1234 seeks to create a vital supplement to Social Security through the establishment of a retirement savings plan for the seven million private sector workers in California that lack a workplace retirement plan. The proposed California Secure Choice Retirement Savings Plan would be a cash balance-type plan, similar to the Defined Benefit Supplement Program currently offered by the California State Teachers' Retirement System (CalSTRS). This type of retirement savings plan has a guaranteed rate of return, and participants would not be exposed on the individual market and vulnerable to the volatility of the unpredictable stock market. The guaranteed benefit would be closely tied to the Treasury-bond (T-bond) rate, which is modest yet superior to the interest rate currently offered by regular savings accounts. The conservative and stable nature of the T-bond rate ensures that the guarantee is extremely low-risk and underwriters would provide insurance for the funding liability. Also, since the retirement contributions would be pooled and have an investment horizon that spans multiple lifetimes, the professionally-managed fund will be able to have a balanced portfolio and leverage economies of scale to SB 1234 Page 12 offer a retirement plan that is reliable, low-cost, and completely portable for the participants. In addition, I would like to highlight that the proposed California Secure Choice Retirement Savings Plan would be governed by the California Secure Choice Retirement Savings Investment Board, a statewide governing board chaired by the State Treasurer. This administration and oversight is modeled after ScholarShare, California's 529 College Savings Plan, which is a professionally-managed fund that has grown to over $4.4 Billion in assets and offers families an opportunity to build savings to cover the costs of higher education. As stated by AARP, "Social Security is the bedrock of all retirement plans. For most Americans, Social Security is the only defined-benefit plan they can count on to provide an income stream that lasts a lifetime. But it isn't enough. Some are fortunate to have an employer-sponsored pension plan to supplement Social Security, but most do not. Saving for retirement on your own can be an expensive, risky proposition. With inadequate investment expertise, high fees charged by money managers, and a volatile stock market, this is rarely a road to financial security in retirement. This measure will provide a solid retirement savings option for the many Californians." According to the Greenlining Institute, "Today, millions of Californians do not have the option to save for retirement through payroll deductions. Approximately six million Californians, roughly 43% of the state's workforce, work at a job that does not offer them a pension or a retirement savings plan to Supplement Social Security. As a result, around 40% of today's baby boomer retirees rely on Social Security benefits for more than 90% of their income. However, Social Security payments alone, which average $1,081 per month, will not be enough to sustain Californians in their retirement." ARGUMENTS IN OPPOSITION : Opponents, including the Securities Industry and Financial Markets Association, 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 SB 1234 Page 13 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. 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. DLW:k 8/29/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****