SACRAMENTO, Calif. (AP) — California's Senate on Wednesday passed a bill that would create a guaranteed, government-run retirement savings program catering to private-sector workers of modest means.
Lawmakers passed SB1234 by Sen. Kevin de Leon, D-Los Angeles, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, on a 23-13 vote. It now moves to the Assembly.
Unlike individual retirement accounts, de Leon said his legislation would create a "defined benefit retirement" plan with a guaranteed rate of return. He described the California Secure Choice Retirement Savings Act as a supplement to Social Security for nearly 7 million Californians without access to a workplace retirement plan.
Republican lawmakers opposed the measure, noting that workers whose employers don't offer 401(k) accounts already can establish low-cost private retirement accounts, such as traditional IRAs and Roth IRAs. They say Democrats don't want to upset their union allies by tackling public pension reform as proposed by Democratic Gov. Jerry Brown.
Democrats who control the Legislature have not taken up sweeping reforms to public employee pensions Brown proposed last year. California Public Employees' Retirement System, the state's main pension fund, is underfunded by at least $85 billion.
"This bill essentially is trying to create a retirement program for private-sector employees at a time when the state's own retirement system is going bankrupt," said Sen. Sam Blakeslee, R-San Luis Obispo.
Blakeslee said virtually anyone can set up no-load retirement accounts without the state's involvement.
Sen. Ted Lieu, a Democrat from Torrance, said he was voting yes but remained deeply concerned about the state taking on investment risks for private-sector employees. He said the bill needs oversight on investments and needs better safeguards or taxpayers could be on the hook for huge sums of money.
"The legislation as currently written is one of the most dangerous pieces of legislation I've ever seen because of the potential catastrophic impact on the state general fund," Lieu said.
He said SB1234 assumes the retirement fund will generate money. It guarantees not only the principle invested by employees, but also the interest — something private retirement accounts don't guarantee.
Steinberg acknowledged the bill still needs changes, and de Leon said the bill would require investment risks be insured by private underwriters.
"Even though the legislation says the general fund is not going to pay for this, I doubt a court will believe that," Lieu said. "The court is going to find that we forcibly took private employees' money unless they opted out, invested it for them and then we lost it. It's going to be a fiduciary duty and the state general fund is going to be on the hook for this."
Supporters say it would serve as an affordable retirement program for private-sector workers who make less than $50,000 a year. That segment has largely been ignored by Wall Street and private financial firms, de Leon said.
The bill would establish a seven-member California Secure Choice Retirement Savings Investment Board to administer the retirement trust. The board would be made up of the state treasurer, controller, finance director, a Senate appointee, an Assembly appointee and two gubernatorial appointees.
It would allow CalPERS to bid on the contract to manage the fund.
"We have an opportunity to pull together this very fragmented population, pool their resources together and hopefully we can compound with a solid interest over the course of many horizons and have something for them left during their retirement," de Leon said before the vote.