The US Department of Justice agrees: CalSavers is illegal

Anyone paying attention to California politics knows that our public pension funds are in big trouble. Notwithstanding a vibrant economy, both the California Public Employee Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are tens of billions of dollars in debt.

Unfunded liability, a fancy name for that debt, is not the only problem with publicly administered pension funds. Malfeasance and poor governance have plagued these funds for decades.

Given these problems, why would California choose to intrude itself into private employee pensions? But it has. Three years ago, California launched the CalSavers program. On the surface, it appeared harmless enough: an opt-out program — at least for now — that would enroll private-sector employees who don’t have a retirement plan into a state-run retirement savings account.

Beyond the wisdom of creating a new state-run pension system is an insurmountable legal problem: federal law controls private employment-based retirement savings. Such plans are exclusively governed by the Employee Retirement Income Security Act of 1974 (ERISA).

With the knowledge that programs like CalSavers were pre-empted by ERISA, states that wanted to adopt their own private employee retirement programs hit a roadblock. So they sought — and received — a regulatory interpretation from the Obama administration which, the states argued, granted them an exception from ERISA.

Forgetting for the moment the issue of whether that federal regulation was even legal (a recurring problem for President Obama’s regulatory efforts), it was rescinded shortly after President Trump took office. That stripped CalSavers of its only fig leaf of legal justification.

Howard Jarvis Taxpayers Association is currently litigating in federal court, challenging CalSavers as an unnecessary government program that is patently illegal under federal law. The Social Security system, adequacy aside, is nonetheless backed by the full faith and credit of the federal government. Moreover, under federal law, there are many programs to assist private-sector workers whose employers don’t offer employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how employees can save tax-deferred.

Then there is the inherent risk to taxpayers. Direct costs of the program have been substantial. CalSavers is currently running on a $15 million loan from the general fund. If the program goes defunct or into insolvency, that’s millions that taxpayers will never see again.

HJTA’s lawsuit is now pending before Judge Morrison England in the U.S. District Court for the Eastern District of California. The state filed a motion to have the case dismissed outright, but then the United States Department of Justice (DOJ) weighed in on the side of HJTA.

The DOJ filed a “Statement of Interest” agreeing with HJTA on its legal theory against the CalSavers program. A “statement of interest” is an unusual tool used by DOJ to advance the interests of the U.S. government in litigation where no federal agencies are parties to a case. DOJ’s comprehensive 19-page analysis agrees with HJTA on nearly every substantive point. It is something the trial court cannot ignore, particularly when the case involves the interpretation of a federal statute.

Taxpayers should be pleased that the federal government agrees with HJTA’s position that CalSavers is preempted by federal law. The last thing California needs is yet another wasteful program, especially one that puts taxpayers at enormous risk.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.