BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  SB 1234|
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                                 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





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           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 







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          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 







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          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 







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             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 







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                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. 







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          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. 







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          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 







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          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 







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          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







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           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 







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            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 







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          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

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