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F I S C A L I M P A C T R E P O R T

SPONSOR SCONC

ORIGINAL DATE

LAST UPDATED

2/7/08

HB

SHORT TITLE Public Peace, Health, Safety & Welfare

SB 561/SCONCS

ANALYST Aubel

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY08 FY09

FY10 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

See narrative See narrative See narrative Recurring

Educational

Retirement Board

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Educational Retirement Board (ERB)

SUMMARY

Synopsis of Bill

The Senate Conservation Committee Substitute for Senate Bill 561 addresses the type of

investments that are allowed by higher education employees who choose the Alternative

Retirement Plan (ARP). Current statute imposes limits on investments, allowing only annuities.

According to the Educational Retirement Board, SB 561/SCONCS/SCONCS would expand the

permissible investment universe to mutual funds and other investments that could be held in

custodial accounts or in trusts.

FISCAL IMPLICATIONS

ERB notes that SB 561/SCONCS implies additional administrative work for ERB to keep

track of the various investment vehicles that would be offered by the vendors and selected by

ARP members. Typically, the investment companies offer a variety of plans that range from

managed accounts -- where the host (ERB) would do little or no record keeping for a fee -- to

other types of plans that would require ERB to be the trustee for the investments and bear the

cost of the record keeping, with the vendor acting as a custodian. The additional fiscal impact to

the operating budget is unknown, depending on the number of members who choose these

investments and the mix of company-managed or ERB-administered accounts. However, the

impact would appear to be minimal.

Senate Bill 561/SCONCS – Page

2

SIGNIFICANT ISSUES

Diversification is the key to optimum portfolio management. By allowing additional investments

outside the envelope of annuities, ERB suggests that SB 561/SCONCS would open up a huge

portion of the world of investments for ARP participants to maximize their retirement

investment. In addition, ERB states that fees for these types of investments are traditionally

lower and do not include a mortality charge.

ERB also suggests that allowing a wider variety of investments would make the ARP more

competitive with other state plans and should help with recruiting of certain employees

TECHNICAL ISSUES

ERB states that SB 561/SCONCS erroneously references 403(b) as the section of the Internal

Revenue Service (IRS) code for purposes of meeting IRS requirements. The ARP is actually a

401(a) plan and that is the portion of the IRS code that should be referenced. ERB suggests an

amendment be made to correct the IRS code reference.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

ARP members will continue to be limited to investments in annuities.

QUESTIONS

1. What are the limitations imposed on investments according the IRS 401(a) plan requirements.

MA/mt