BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       SB 1234|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   THIRD READING 


          Bill No:  SB 1234
          Author:   De León (D), et al. 
          Amended:  5/31/16  
          Vote:     21 

           SENATE PUBLIC EMP. & RET. COMMITTEE:  3-2, 4/11/16
           AYES:  Pan, Beall, Hall
           NOES:  Morrell, Moorlach

           SENATE APPROPRIATIONS COMMITTEE:  5-2, 5/27/16
           AYES:  Lara, Beall, Hill, McGuire, Mendoza
           NOES:  Bates, Nielsen

           SUBJECT:   Retirement savings plans


          SOURCE:    Author
          
          DIGEST:   This bill provides legislative approval for the  
          California Secure Choice Retirement Savings Program (SCRSP) and  
          sets forth recommendations and requirements for the design and  
          implementation of that program.

          ANALYSIS:
          
          Existing law:
          
          1)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 SCRSP.









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          2)Defines who shall be appointed to the Board, the Board's  
            fiduciary role, and entrusts the Board with investment policy  
            oversight and design.

          3)States that the primary objective of the investment policy is  
            to preserve the safety of principle and provide a stable and  
            low-risk rate of return, as specified.

          4)Requires that the program include, as determined by the Board,  
            one or more payroll deposit individual retirement account  
            (IRA) options; requires the Board to annually declare a stated  
            rate of return at which interest shall be allocated to program  
            accounts for the following year; and states that an  
            individual's retirement savings benefit under the program  
            shall be an amount equal to the balance in the individual's  
            account on the date the retirement savings benefit becomes  
            payable.

          5)Defines the Board's duties and powers, in the capacity of  
            trustee to administer and invest the Trust, and 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.

          6)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.

          7)Provides that the state shall not have any liability for the  
            payment of the retirement savings benefit 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.

          8)Clarifies that employers shall not be fiduciaries of the SCRSP  
            nor be liable for employees' investment decisions.

          9)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:







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             a)   Beginning three months after opening of enrollment,  
               employers of 100 or more employees must 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 SCRSP.

           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)          Requires the Board, using private or non-profit  
             funds, to conduct an initial market analysis to determine  
             whether the necessary conditions for implementation of the  
             SCRSP can be met, as specified, and to report to the  
             Legislature on its findings, as specified.

           12)          Provides that the SCRSP will only become operative  
             if the Board determines, based upon the market analysis, that  
             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.

           13)          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 federal Employment  
             Retirement Income Security Act (i.e., ERISA).

          This bill:

          1)Incorporates the findings and recommendations of the Board  
            upon concluding the market analysis authorized in the original  
            version of SB 1234 (De Leon, Chapter 734, Statutes of 2012)  
            and deletes obsolete requirements that are inconsistent with  
            those findings.

          2)Requires that contract administrators and consultants also  







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            discharge their duties as fiduciaries with respect to the  
            program.  (Section 100002)

          3)States that investment policy decisions, including asset  
            allocation and investment options, shall be entrusted to the  
            Board subject to its fiduciary duties; specifies that the  
            primary objective of the investment policy is to leverage  
            economies of scale, lower risks, and provide participants with  
            stable and reasonable rates of return; and eliminates language  
            limiting the Board's options as to which asset categories it  
            may consider.  (Section 100002)

          4)Eliminates language requiring the Board to annually adopt a  
            stated rate of return for the following program year and  
            stating that an individual's retirement savings benefit under  
            the program shall be equal to the balance in the individual's  
            account at retirement.  (Section 100008)

          5)Gives the Treasurer the authority to appoint an executive  
            officer for the program who shall serve at the pleasure of the  
            Board, which may authorize the director to enter into  
            contracts or conduct business on behalf of the Board.  The  
            Treasurer shall determine the duties of the executive director  
            and other necessary staff and set his or her compensation.   
            (Section 100010)

          6)Requires the Board to collaborate with and evaluate the role  
            of insurance and financial advisors in assisting and providing  
            guidance for eligible employers and employees. (Section 10010)  


          7)Eliminates the requirement for 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 and  
            holds the state harmless.  (Sections 100012, 100036)

          8)Changes the timeframes around implementation requirements for  
            employers to the following and allows the Board to extend the  
            timelines if it deems necessary (Section 100032):

             a)   Beginning 12 months after opening of enrollment,  
               employers of 100 or more employees must have an arrangement  
               to allow employees to participate in the SCRSP.
             b)   Beginning 24 months after opening of enrollment,  







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               employers of 50 or more employees must have an arrangement  
               to allow employees to participate in the SCRSP.
             c)   Beginning 36 months after opening of enrollment,  
               employers of five or more employees must have an  
               arrangement to allow employees to participate in SCRSP.

          9)Allows the Board to implement annual automatic escalation of  
            employee contributions subject to the following limitations  
            (Section 100032):

             a)   Contributions subject to automatic escalation cannot  
               exceed 8 percent.
             b)   Automatic escalation cannot amount to more than 1 %  
               annually.
             c)   An employee may opt out of automatic escalation and set  
               his or her contribution rate at a level determined by the  
               employee.

          10)          Allows the Board, unless otherwise specified by the  
            employee, to set the initial employee contribution into the  
            SCRSP between 2% and 5%.  (Section 100032)

           11)Eliminates requirements for the Board to conduct an initial  
             market analysis and to present findings to the Legislature  
             before the SCRSP may be implemented, and related statutes.   
             (Sections 100040, 100042. 100043.5)

           12)Expresses the approval of SCRSP by the Legislature and its  
             implementation as of January 1, 2017, and requires the Board,  
             subject to its fiduciary responsibility, to design and  
             implement SCRSP while utilizing and considering the following  
             parameters (Section 100046):

             a)   For up to three years, the Board may establish managed  
               accounts invested in U.S. Treasuries or similarly safe  
               investments, during which time the Board may develop  
               investment options that address risk-sharing and smoothing  
               market gains and losses, as specified.
             b)   The Board shall minimize participant fees.
             c)   The Board shall strive to implement features that  
               provide maximum income 
          replacement balanced with appropriate risk in an IRA based  
          environment.
             d)   The Board shall determine the default payout method for  







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               retirees.
             e)   The Board, if legally permissible under federal and  
               state laws, shall include quasi-public and quasi-private  
               employees in SCRSP.
             f)   The Board shall structure SCRSP so as to ensure that the  
               state is free from all liability for the program.
             g)   The Board shall determine all necessary costs related to  
               SCRSP, as specified.
             h)   The Board shall partner with employer representatives to  
               create an administrative structure that addresses employer  
               needs, as specified.
             i)   The Board shall include comprehensive worker education  
               and outreach and may collaborate with public and nonprofit  
               agencies and organizations and other entities to develop  
               education and outreach, as specified.
             j)   Gives the Board flexibility to design SCRSP in order to  
               ensure timely implementation and states that the parameters  
               are not conclusive but may be augmented as needed to fully  
               implement the program and comply with the Board's fiduciary  
               duties.
          
           1) Allows the Board to adopt emergency regulations for  the  
             purposes of designing and implementing SCRSP for up to 180  
             days, after which, the regulations would be subject to the  
             standard rule making process.  (Section 100048)

          2)Specifies that a payroll IRA arrangement offered pursuant to  
            SCRSP shall have the same status and be treated consistently  
            with any other IRA qualified under the United State Code for  
            the purpose of determining eligibility or benefit level for a  
            program that uses a means test. (Section 100049)

           3) States that start-up costs for SCRSP may be appropriated  
             from the General Fund as a loan that shall be repaid by SCRSP  
             with interest calculated at the rate of the Pooled Money  
             Investment Account and specifies that administrative costs  
             shall be paid in future from the administrative fund.   
             (Section 100050)
          
           4) Makes other minor, technical, and clarifying changes.

          Background

          In 2012, SB 1234 was passed to create SCRSP and to create and  







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          empower its Board to perform a feasibility study to determine  
          whether the legal and practical conditions for implementation of  
          SCRSP could be met.  The Board approved an approach to the study  
          analysis that included four distinct, but well-coordinated focus  
          areas: program design, market analysis, financial feasibility,  
          and legal feasibility.

          The key findings in the report are the following:

          1)About 6.8 million workers are potentially eligible for the  
            California Secure Choice Retirement Savings Program.
          2)Likely participation rates (70-90%) are sufficiently high to  
            enable the Program to achieve broad coverage well above the  
            minimum threshold for financial sustainability.
          3)Eligible participants in California are equally comfortable  
            with a 3% or 5% contribution rate.  The vast majority of  
            likely participants are also comfortable with auto-escalation  
            in 1% increments up to 10%.
          4)To start, the program should offer a default investment option  
            consisting of a diversified portfolio with long-term growth  
            potential and the choice to opt into a low-risk investment.
          5)Given its inherent portability, the Program should have a  
            lower incidence of rollovers and cash-outs than  
            employer-sponsored 401(k) plans, which often force workers  
            with low balances to close their accounts.  At the same time,  
            pre-retirement withdrawals are likely to be higher for the  
            Program given eligible workers' income profile.
          6)The Program launch should include a concerted public education  
            campaign focused on workers and small businesses.
          
          The report in its entirety can be found on the SCRSP webpage on  
          the Treasurer's website.   
          http://www.treasurer.ca.gov/scib/report.pdf

          Related/Prior Legislation


          SB 1234 (De León, Chapter 734, Statutes of 2012) created the  
          initial statutory framework for SCRSP and required the Board to  
          perform a market analysis and feasibility study to determine if  
          SCRSP could be implemented and to publish its findings and bring  
          a recommendation to the Legislature for approval.









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          FISCAL EFFECT:   Appropriation:    Yes         Fiscal  
          Com.:YesLocal:   No

          According to Senate Appropriations Committee:

             An accurate depiction of exact costs to operate the Program  
             cannot be ascertained in advance. Costs would be determined  
             by several factors that are currently unknown, including (1)  
             the number of employers participating in the Program, (2) the  
             number of employees participating in the Program, (3) costs  
             related to recordkeeping, (4) the investment performance of  
             the Program, and, (5) the level of contributions made by  
             participants to the Program. In addition, the Employment  
             Development Department would incur costs associated with  
             program operation, and the Board would require staff and  
             office space.

             Modeling done by the market analysis firm that performed the  
             feasibility study indicates that up to $134 million would be  
             required to finance implementation of the Program and assure  
             that participants would not be subject to administrative fees  
             exceeding 100 basis points. As noted previously, though the  
             Board has determined that the Program could ultimately be  
             operated solely from Program assets, a loan would be required  
             to develop and implement the program during the first few  
             years of operation. Options for startup financing include a  
             line of credit or a General Fund loan.


          SUPPORT:   (Verified5/31/16)


          John Chiang, California State Treasurer
          American Association of Retired Persons
          American Retirement Association
          Asian Business Association
          California Advocacy Network for Aging Latinos
          California Asset Building Coalition
          California Association of Nonprofits
          California Capital Financial Development Corporation
          California Council of Churches IMPACT
          California Commission on Aging
          California Conference Board of the Amalgamated Transit Union
          California Conference of Machinists







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          California Labor Federation
          California Secure Choice Retirement Savings Investment Board
          California Teamsters Public Affairs Council
          Congress of California Seniors
          Corporation for Enterprise Development
          Courage Campaign
          Earned Assets Resource Network
          Engineer & Scientists of California, Local 20, IFPTE Local 20,  
          AFL-CIO
          Fresno Metro Black Chamber of Commerce
          Insight Center for Community Economic Development
          International Longshore and Warehouse Union
          Latin Business Association
          Los Angeles Latino Chamber of Commerce
          National Council of La Raza
          Pico Rivera Chamber of Commerce
          PolicyLink
          Professional & Technical Engineers, IFPTE Local 21, AFL-CIO
          Riverside County Black Chamber of Commerce
          San Francisco Office of the Treasurer and Tax Collector
          Service Employees International Union, Local 1000
          Service Employees International Union, State Council
          Small Business Majority
          Social Action Commission of the African Methodist Episcopal  
          Church
          South Asian Business Alliance Network
          State Building and Construction Trades Council of California
          UNITE-HERE, AFL-CIO
          United Domestic Workers of America, American Federation of  
           State, County and Municipal Employees, Local 3930
          United Ways of California
          Utilities Workers Union of America, Local 132, AFL-CIO
          Vasquez & Company, LLP
          Ward Economic Development Corporation
          Women's Institute for a Secure Retirement


          OPPOSITION:   (Verified5/31/16)


          California Asian Pacific Chamber of Commerce
          California Building Industry Association
          California Business Roundtable
          California Chamber of Commerce







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          California Farm Bureau Federation
          California Framing Contractors Association
          California Grocers Association
          California Lodging Industry Association
          California Manufacturers & Technology Association
          California Professional Association of Specialty Contractors
          California Travel Association
          Camarillo Chamber of Commerce
          Culver City Chamber of Commerce
          Fresno Chamber of Commerce
          Financial Services Institute
          National Federation of Independent Business
          North Orange County Chamber
          Oxnard Chamber of Commerce
          Palm Desert Area Chamber of Commerce
          Redondo Beach Chamber of Commerce
          Residential Contractors Association
          Santa Maria Chamber of Commerce & Visitor and Convention Bureau
          Securities Industry and Financial Markets Association
          South Bay Association of Chambers of Commerce
          The Greater Conejo Valley Chamber of Commerce
          Western Carwash Association
          Western Electrical Contractors Association
          Western Growers Association

          ARGUMENTS IN SUPPORT:  From the SCRSP Board:

               In accordance with Government Code Section 100040, the  
               California Secure Choice Retirement Savings Investment  
               Board finds the Secure Choice Retirement Savings Program to  
               be a feasible, sustainable, and legally permissible program  
               that could help 6.8 million workers start saving for their  
               future.

               We encourage the Legislature and the Governor to move  
               forward with Secure Choice.  While the preliminary work for  
               this endeavor has come to a close, there is much more to  
               do.  We must continue to collaborate with members of the  
               Legislature, workers, businesses and other stakeholders to  
               improve the Program as it develops.  California continues  
               to be a thought leader on this front and believes that  
               every worker deserves the option to retire with dignity.
                                          
          From the author:







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               Social Security is the foundation of retirement income for  
               the vast majority of retirees in California, but these  
               payments alone-today averaging $1,328 per month-are simply  
               not enough to sustain workers in retirement. Although  
               Social Security has reduced the poverty rate among retirees  
               in general, women and minorities are disproportionately  
               represented among retirees living in poverty and among  
               low-income retirees.  In California, approximately 2/3 of  
               the retirees living in poverty are women. 

               On February 24, 2016, AARP and Small Business Majority  
               released an opinion poll that revealed that two-thirds of  
               small business owners in California support the creation of  
               a state retirement savings program that would help small  
               businesses and their employees save for retirement.  In  
               addition, nearly three-fourths (73%) of the respondents  
               expressed the belief that offering such a program would  
               give their business a competitive edge. 

               Overall, the lack of retirement savings impacts all  
               Californians, as seniors without sufficient retirement  
               income will need to rely on government assistance for  
               housing, health care and other basic necessities.  The  
               California Secure Choice Program will provide participants  
               with a professionally-managed, lifelong retirement savings  
               system that offers them the opportunity to build their  
               assets and achieve financial stability when they can no  
               longer work.


          ARGUMENTS IN OPPOSITION:     According to the Financial Services  
          Institute:



               Financial advisors provide group retirement plans to  
               private employers and individual plans to employees who  
               lack access to an employer provided retirement plan.  These  
                                                     advisors work closely with clients to develop  
               individually-tailored retirement plans that are much better  
               suited to achieving the client's retirement goals than a  
               "one size fits all" approach.  In contrast, necessity  
               demands that state-run retirement vehicles be managed in  







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               the best interest of the group instead of the individual  
               participants.  A state-run retirement plan for private  
               employees will disrupt the pre-existing market of  
               retirement plan providers already serving businesses of all  
               sizes, including self-employed and non-profit  
               organizations.  The existing market of retirement plan  
               providers consists of qualified independent financial  
               advisors and is robust, healthy, and competitive.


          In addition, a coalition of the California Chamber of Commerce  
          and 26 other entities state that the current legislation does  
          not address concerns regarding ERISA, liability, and costs in a  
          specific enough manner, and leaves too much discretion to the  
          Board to design the Program.  While the organizations recognize  
          the importance of encouraging people to save for retirement,  
          they are concerned that the SCRSP, as proposed in this bill,  
          could create costs to the state and employer liabilities.  They  
          state that these and other issues should be more narrowly  
          defined in legislation and not left to the Board to determine.   
          They also object to allowing the Board to use the emergency rule  
          making procedures.



          Prepared by:Pamela Schneider / P.E. & R. / (916) 651-1519
          5/31/16 20:45:47


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