The wrong idea at the wrong time: 6 things you need to know about SB 2758
Senate Bill 2758 establishes a brand new governmental entity with a brand new governmental function: to establish and administer a “mostly mandatory” IRA retirement savings program for private-sector workers.
Senate Bill 2758 establishes a brand new governmental entity with a brand new governmental function: to establish and administer a “mostly mandatory” IRA retirement savings program for private-sector workers. It mandates the cooperation of businesses with 25 or more employees that have no retirement program for their employees. It mandates that every employee of a participating employer give up 3 percent of their paycheck to an automatic payroll deduction for payment into the program, unless the employee expressly opts out. The intent of the legislation – its one redeeming feature – is to promote greater retirement savings for private-sector employees.
The bill also establishes the Illinois Secure Choice Savings Program Fund and the Illinois Secure Choice Administrative Fund. These are separately held, nonappropriated funds held by the state treasurer.
1. The timing couldn’t be worse
With the state facing one of its worst fiscal crises ever, the current focus must be on how to cut spending and reduce the size of government, not on creating new responsibilities that require new financial and human resources. The state treasurer and the director of the Office of Management and Budget, or OMB, (lead members of the new board) have their hands full right now with basic duties. The state is overwhelmed with managing its own public retirement programs. Creating a new program for the private sector is a troubling distraction from the real governmental work at hand.
2. The bill ignores cost
The state treasurer’s fiscal note indicates startup cost over two years will range from $15 million to $20 million. But the OMB’s note indicates no fiscal impact on the theory that private interests or the federal government will fund the program. That said, the bill allows the program to receive state funds, and you can bet the pressure will come to finance startup costs with general-fund appropriations.
3. This is not a job for the state; encourage the private sector
State government does not have to create new bureaucracy and run a new state program to “promote greater retirement savings for private-sector employees.” It can encourage others to do it. Running private investment pools is a commercial activity; it is not the work of state government. If this truly is a breakthrough program for retirement savings, there should be financial institutions, business associations or even unions that would sponsor such a program without the state’s involvement beyond being a cheerleader. An association could team up with a financial institution and sponsor such a program to earn revenue.
4. Mandates are the motives for the program
Two motives seem to underlie this proposal, the first being to make participation by employers mandatory and to make participation by employees presumptive. In fact, it imposes financial penalties upon employers who don’t properly implement the law. The second motive is to mandate a brand new role for state government – a role that is not truly governmental. The bill would hardly be necessary if it didn’t call for mandatory employer participation in a program that, in reality, should be fully optional. The blessing of the state would be unnecessary for a voluntary program. And, if the program is something widely sought by both businesses and employees, the private sector would be eager to provide the service. Again, it would be a perfect program for a small business association to sponsor with the help of a financial institution.
5. Governmentally, the program is flawed
First, as noted earlier, running a private investment pool is not a public, governmental function. The bill calls for the state to be deeply involved. It places fiduciary duties upon the board, its staff and its financial advisors. SB 2758 establishes a permanent state board with a permanent program staff of state employees, which is to be financed through a nonappropriated, separately held administrative account over the long-term by a 0.75 percent administration fee.
The state treasurer, the state comptroller and the OMB director are ex officio board members. And gubernatorial appointees must be approved by the treasurer and confirmed by the state Senate. The state officers will have to take their focus away from their core responsibilities in order to do justice to this program. The other members are expected to do their work for free.
This “state” board has significant fiduciary responsibility to see that the fund is properly administered, and yet the bill provides, “The State shall have no duty or liability to any party for the payment of any retirement savings benefits accrued by any individual under the Program,” and “no state board … is liable for any loss or deficiency resulting from particular investments selected under this act.”
SB 2758 creates an investment fund for IRA contributions managed by the board, and declares that the amounts deposited in the fund are not property of the state and that the fund shall not be construed to be an entity of the state.
It also creates an administrative fund for the program through which the administrative expenses of the board will be paid. This fund is separately held in the state treasury, and requires no appropriation to spend. This creates significant accountability issues. In a sense, the staff of the board are “off the books.” And because they fill non-civil service positions, they are not covered by the same personnel code as typical state employees. This means they will be given no civil service protection and no protection from hiring and firing based on political considerations. They can easily be used as political operatives as they conduct their state business.
6. There is a constitutional quirk
If this is a retirement program administered by the state, do the participants have the same protection under the Illinois Constitution that members of the other public retirement systems have? The clause in question reads:
“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Is this a pension or retirement system of the state? One could argue that it is.