BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 125
Lou Correa, Chair Hearing date: June 22, 2009
AB 125 (De Leon) as amended 6/18/09 FISCAL: YES
PERS: AUTHORIZE THE CREATION OF THE CALIFORNIA EMPLOYEE
SAVINGS PROGRAM FOR PRIVATE SECTOR EMPLOYEES
HISTORY :
Sponsor: New America Foundation
AARP
Prior legislation: AB 2940 (De Leon) 2008
Died Senate Appropriations Committee
ASSEMBLY VOTES :
PER & SS 4-2 4/01/09
Appropriations 12-5 5/28/09
Assembly Floor 47-30 6/03/09
SUMMARY :
Would create the California Employee Savings Program
(CalESP), under the administration of the California Public
Employees Retirement System (PERS) to provide retirement
savings opportunities to California's private sector
employees through various types of IRAs.
BACKGROUND AND ANALYSIS :
1) Existing state law establishes PERS to provide pension
and health benefits to a variety of public employees,
including state, local agency, and classified school
employees.
2) Existing federal law provides for tax-qualified
retirement plans and individual retirement accounts or
individual retirement annuities by which private citizens can
save money for retirement.
David Felderstein
Date: 6/18/09 Page 1
3) This bill :
a) requires the PERS Board to offer one or more IRAs under
the CalESP, including traditional IRAs, payroll deduction
IRAs, SIMPLE IRAs, or other IRAs authorized under Sections
408, 408A and 408 (p) of the Internal Revenue Code,
b) allows the PERS Board to select from among several
possible structures and/or features of the IRAs offered
under the Program,
c) allows California private-sector or non-profit
employers that do not have a retirement plan to participate
in the CalESP, to automatically enroll their employees, and
make contributions to their employees' IRA accounts,
d) requires employers that do not participate in the
CalESP to allow individual employees to designate a portion
of their wages be processed and forwarded by the employer
to the Program,
e) authorizes the PERS Board to market the CalESP to
employers and employees, and provide retirement education
services to participants,
f) authorizes the PERS Board to provide cost-effective
assistance to participating employers and employees to
facilitate compliance of the IRAs offered under the CalESP
with the Internal Revenue Code, including tax
qualification, or, where applicable, ERISA, or any other
legal or accounting requirements,
g) authorizes, but does not require, the State Employment
Development Department (EDD) to participate in the
development and administration of the CalESP,
h) provides that provisions of AB 125 become operative
only if funds are appropriated in the annual Budget Act or
made available through federal funding, a nonprofit or
private entity in amounts sufficient to allow the PERS
Board to initiate, study, develop, and obtain the approvals
necessary to implement the CalESP,
David Felderstein
Date: 6/18/09 Page 2
i) requires all CalESP expenses and obligations to be
funded by its contributions, returns, and assets, except as
the Legislature may appropriate funds for this purpose, and
prohibits the use of funds in PERS' defined plans, health
and welfare plans, or its supplemental income plans for
public employers/employees,
j) requires the PERS Board to seek funding at three
specified points in the implementation process,
specifically: 1) to study the viability of the CalESP; 2)
to design the CalESP and seek the necessary approvals from
the appropriate oversight agencies or departments of the
federal government, and 3) to actually implement the
CalESP,
k) requires that, upon the PERS Board's determination that
all the specified conditions necessary to implement the
CalESP have been satisfied, require the PERS Board shall
report to the Legislature regarding the expectations of the
Program, an outline of the Program, and details regarding
the administration and projected cost of the Program,
l) requires that upon the PERS Board's determination that
all the specified conditions cannot be satisfied, it shall
report to the Legislature details supporting its
conclusion, including the legal, financial, regulatory, and
administrative considerations and obstacles, and actions
taken to address those concerns. It shall also include
suggested changes that the PERS Board believes would make
it feasible to implement the CalESP,
m) requires that, upon implementation of the CalESP, the
PERS Board shall file annual reports to the Legislature on
the status of the Program, including outreach, investments,
and solvency,
n) requires the PERS Board to submit a report to the
Legislature at least 90 days prior to any suspension or
discontinuation of the CalESP that would address any
conditional changes that need to be made by the Legislature
in order to continue or improve the Program, and address
any of the Board's concerns,
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Date: 6/18/09 Page 3
o) requires the PERS Board to report to the Legislature on
the feasibility of creating a defined benefit (DB) plan
option available to employers, only if a budget
appropriation is made, or sufficient funds are provided by
a nonprofit or private entity, to allow the Board to study,
develop, and obtain the approvals necessary to implement
the DB option,
p) requires the PERS Board, as a condition of implementing
the CalESP, to seek all necessary approvals, rulings,
determinations, etc. from federal entities, including, but
not limited to, the IRS, the Department of Labor, and the
SEC, to ensure the Program's IRAs adhere to all federal
requirements regulating the operation of retirement plans
and the offering, sale, or distribution of securities under
those plans,
q) provides the PERS Board discretionary authority to
decide whether or not to implement any IRA arrangement or
other retirement plan subject to ERISA,
r) requires suspension of the CalESP implementation or
ongoing operations if the PERS Board does not obtain
satisfactory approval from federal agencies that the IRA
plans or arrangements offered under the CalESP do not
jeopardize or alter the current federal tax or legal status
of PERS operations, ensure any payroll deposit IRA offered
is not subject to ERISA, obtain offers from well-qualified
and experienced financial service providers to administer
the recordkeeping, investment, and compliance functions, or
determine the CalESP will be self-sustaining,
s) provides that participating employees are not PERS
members,
t) provides that the exemptions in law provided to public
retirement plans shall not apply to the implementation and
administration of the CalESP,
u) provides that authority and responsibility for the
CalESP is with the PERS Board, and not the retirement
system,
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Date: 6/18/09 Page 4
v) prohibits CalESP initiation, development,
implementation, or administration expenses from being paid
by any funds in PERS' defined plans, health and welfare
plans, or its supplemental income plans for public
employers and employees,
w) prohibits state claims resulting from the operation of
the CalESP from being paid by any funds in PERS' defined
benefit plans, health and welfare plans, or its
supplemental income plans for public employers and
employees,
x) provides that no claims, tax liens, etc. by the state,
its agencies or instrumentalities may apply against any IRA
accounts or CalESP assets,
y) provides the PERS Board, PERS employees and contracting
investment managers with indemnification from the State
General Fund for acts related to the implementation and
administration of the CalESP,
z) requires that, if adequate funding is made available
through an appropriation from the Legislature, federal
government, private-sector, or non-profit entities,
requires the PERS Board shall conduct a feasibility study
to determine whether the bill's specified conditions
necessary to allow it to offer IRA plans or arrangements to
private-sector employees can be satisfied, and report its
findings to the Legislature,
aa) provides that, upon completing a study and reaching
the conclusion that the CalESP is feasible, the PERS Board
may accept either an appropriation from the Legislature,
federal government, private-sector, or non-profit funding
necessary for it to design the Program, seek federal
waivers and approvals, and report its findings to
Legislature,
bb) provides that, upon obtaining adequate an
appropriation from the Legislature, federal government,
private-sector, or non-profit funding necessary for it to
implement and administer the Program until it becomes
self-sustaining, the PERS Board may hire staff and/or
David Felderstein
Date: 6/18/09 Page 5
develop RFPs to contract with third-party administrators,
investment providers, marketing professionals, to implement
and administer the CalESP, and
cc) provides that PERS can delay the start of the study,
development and approval process until completion of their
PERS Pension System Resumption Project.
FISCAL EFFECT :
1) According to the Assembly Appropriations Committee:
"Costs associated with this bill can be divided into three
phases:
a) The initial study and approval phase . This initial
phase takes effect only when sufficient funds are
appropriated in the annual state budget or are made
available from a nonprofit or private entity to allow
CalPERS to initiate a feasibility study and to obtain the
federal approvals necessary to implement the program.
Costs for this phase would be between $400,000 and $1.7
million over two years. The amount would depend, in part,
on findings from initial marketing surveys and other
studies on the financial feasibility of the program.
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Date: 6/18/09 Page 6
b) Implementation phase . If the program is determined to
be feasible and is implemented, the state will incur
additional start up costs, potentially exceeding $10
million, to market the program to workers and to implement
recordkeeping, collections, and processing functions.
These costs would eventually be recouped from fees deducted
from participants' contributions, but they would initially
need to be covered from an appropriation or a loan from the
General Fund or other sources.
c) Ongoing phase . Costs during this phase would be
covered by fees deducted from participants' contributions.
COMMENTS :
1) Arguments in support
The following information was provided by the author:
"Currently, more than 70 million American workers do not
participate in an employer-sponsored retirement savings
plan. The numbers are more staggering for Californians.
Today, six million California employees, 41% of the state's
workforce, work at a job that does not offer a pension or a
retirement savings plan to supplement Social Security.
"As a result, approximately 40% of today's baby boomers
rely on Social Security benefits for more than 90% of their
income. However, Social Security payments alone, which
average to $1,081 per month in California, will not be
enough to sustain Californians in their retirement. This
lack of retirement savings may equate to a higher cost for
government services, as seniors without savings will be
more likely to require government assistance with housing,
medical care and other necessities.
"Particularly, investments in savings accounts from small
business, low-income, and/or short-tenured and transferable
employees are exceptionally low. Only 48% of part-time
workers participate in a retirement savings plan. Nearly
65% of low-income workers, those earning less than $40,000,
do not participate in employer plans.
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Date: 6/18/09 Page 7
"Often, complexity and cost on administering retirement
systems prevent many small companies from creating
retirement plans for their employees. A majority of firms
with fewer than 500 employees nationwide do not offer
retirement savings options.
"Moreover, though some workers may currently participate in
a retirement plan, if that worker moves into a new job with
a new business, they often lose access to that same plan.
The result is gap coverage.
"Workers today are spending more than they are saving,
relying more on credit, and thus accruing debt and risking
their future financial security. Nationally, the personal
savings rate for individuals has fallen to 0.5% of one's
income for 2007. At this rate, even with Social Security
benefits, Californians will not be able to afford
retirement.
"Our savings habits must change, and even a small monthly
contribution can create a great financial advantage for
Californians. For example, if a 25 year-old saved $100 a
month, or $1,200 annually, with a 6.9% rate of return she
would have $233,474 at age 65.
"California workers need a seamless, lifelong retirement
savings system, providing them with the opportunity to
build their assets and help attain their financial
stability through a secure, portable savings account. The
CalESP will create an option and system to do so,
supplementing existing savings options for its workers, at
no cost to taxpayers. While a few states have begun
assessing these possibilities (e.g.,Washington, Illinois)
California would be the first state in the nation to
implement and provide this opportunity."
2) Arguments in opposition
Opponents applaud the Legislature for considering initiatives
to increase retirement plan coverage, but have concerns about
establishing a state-run system. Instead, the opponents
believe that making people aware of existing private sector
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Date: 6/18/09 Page 8
options is both more cost-efficient and effective and state
agencies and state agencies and state legislators can play a
helpful role in efforts to expand coverage by increasing
public awareness about the retirement plan options that are
already available to small employers.
3) PERS is neutral on this bill
The committee is advised that, with the inclusion of the June
18, 2009, amendments, PERS has taken a "neutral" position on
this bill .
4) SUPPORT :
American Federation of State, County and Municipal
Employees (AFSCME)
California Communities United Institute
City of Los Angeles
New Economics for Women
Small Business California
5) OPPOSITION :
Association of California Life and Health Insurance
Companies (ACLHIC)
American Council of Life Insurers (ACLI)
National Association of Insurance and Financial Advisors
of California (NAIFA)
National Federation of Independent Business (NFIB)
Securities Industry and Financial Markets Association
(SIFMA)
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David Felderstein
Date: 6/18/09 Page 9