Report 2017-116 Recommendation 13 Responses

Report 2017-116: Community Child Care Council of Santa Clara County: Because It Disadvantaged Some Families and Misused State Funds, It Could Benefit From Increased Monitoring by the California Department of Education (Release Date: April 2018)

Recommendation #13 To: Community Child Care Council of Santa Clara County

To ensure that beneficiaries do not have restrictions limiting their ability to transfer their retirement funds, 4Cs should, by October 2018, move the funds for its primary and supplemental retirement plans out of the restrictive securities to the extent possible without incurring additional charges for beneficiaries. For any subsequent new participants, 4Cs should assign funds only to securities that do not have extensive charges associated with transferring or rolling over the funds.

Annual Follow-Up Agency Response From November 2020

The State Auditor did not receive an updated response to this recommendation from 4Cs since the previous annual follow up in 2019. According to Education, 4Cs ceased operations in June 2020.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

Although it is unclear whether 4Cs took additional action to address this recommendation, we are classifying the recommendation as having been resolved based on 4Cs' inactive status.

Annual Follow-Up Agency Response From October 2019

The agency fully implemented the Primary Retirement Plan, a defined contribution retirement plan, with Mutual of Omaha for all eligible plan participants, effective July 1, 2019. The plan is in full compliance with the recommendations as set forth in the JLAC report and in full compliance with the Employee Retirement Income Security Act (ERISA).

The former restrictive securities under the old plan with Life Insurance of the Southwest (LSW) were surrendered. Any surrender fees imposed to participants by LSW were replenished to the participants' accounts using assets from the ERISA account from the Qualified Retirement Plan per ERISA guidelines.

For future distributions, to include withdrawals, transfers and roll overs, plan participants will not incur penalties other than those mandated or required by IRS guidelines.

The agency's Supplemental Retirement Plan - the Non-Qualified Retirement Plan - remains a pending matter under the current pending federal lawsuit concerning the agency's previous retirement plan - a defined benefit plan - with the Life Insurance of the Southwest (LSW) (a named defendant in the referenced pending federal lawsuit).

The corrective actions undertaken by 4Cs, in coordination with the counsels of the pending federal lawsuit, the agency's new retirement plan consultants and in compliance with ERISA, fulfilled the recommendations outlined by the JLAC under their Recommendation # 13 with the implementation of the new retirement plan, a defined contribution plan - with Mutual of Omaha.

Documents Submitted:

-Letter to current Retirement Plan Participants dated May 30, 2019

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Although the letter that 4Cs provided indicates that it established a new primary retirement plan, it did not provide evidence to demonstrate that this plan does not assign funds to securities that do not have extensive charges associated with transferring or rolling over the funds. Further, 4Cs indicates in its response that it has not yet resolved the issues regarding its supplemental retirement plan because of the pending lawsuit.

1-Year Agency Response

The agency is moving forward with setting up a new retirement plan for employees that is in full compliance with the recommendations as set forth in the JLAC report. The target date for full implementation is from June to July 2019 after the required notifications have been sent to all appropriate parties.

Attachment: Letter dated April 4, 2019 from Tad Devlin of Kaufman Dolowich & Voluck, LLP

California State Auditor's Assessment of 1-Year Status: Pending

The letter that 4Cs references indicates its intent to move forward with the process of setting up a new retirement plan that will address the issues discussed in the report.

6-Month Agency Response

While we have started the process of developing a new retirement plan that meets the requirements set out in the Joint Legislative Audit Committee's Report, we cannot implement a new plan absent approval of both the plaintiffs in the currently pending federal lawsuit and, where required, the federal court. We anticipate starting an alternative dispute resolution process with either mediation or a settlement conference with a federal magistrate judge once the pleadings are set. All defendants have filed Motions to Dismiss the federal lawsuit that are currently set for hearing on September 25, 2018. Assuming that no further motions to dismiss are filed, a mediation or settlement conference could be held as early as December 2018. However, the timing of mediation or a settlement conference is dependent on the participation of all parties, which we cannot control. If a resolution is reached at that time, an additional 90 to 120 days would be required to obtain any approval of that settlement by the Court and to begin the process of transitioning the current plan to a new plan. Supporting Documentation: "CDE Addendum-Corrective Action Plan - CSA Audit Report - Employee Retirement Plan Update September 10 2018"

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

4C Council is reviewing plan options.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2017-116

Agency responses received are posted verbatim.