BILL ANALYSIS
AB 654
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Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON PUBLIC EMPLOYEES, RETIREMENT AND SOCIAL
SECURITY
Ed Hernandez, Chair
AB 654 (Mendoza) - As Amended: March 24, 2009
SUBJECT : State teachers' retirement.
SUMMARY : Revises, in the Teachers' Retirement Law, the
definition of "regular interest" and establishes a consistent
basis for the assessment of interest and penalties for late
payment of contributions, late submissions of reports, and
delayed reports of compensation. Specifically, this bill :
1)Changes, as of July 1, 2010, the definition of "regular
interest" to mean interest that is equal to the actuarially
assumed rate of return on investments on assets of the
California State Teachers' Retirement System's (CalSTRS)
Defined Benefit (DB) Program.
2)Specifies that regular interest will be applied to the
installments that employers make when paying for retirement
enhancements for their employees.
3)Requires CalSTRS to assess interest on late remittances of
contributions, for both the DB Program and the Cash Balance
(CB) Program, in accordance with regulations to be established
by the Teachers' Retirement Board (TRB). Regular interest
will be charged on any delinquent contributions.
4)Requires CalSTRS to assess penalties on late contribution
reports, in accordance with regulations to be established by
the TRB. Penalties will be assessed based on the total
employer and employee contributions at the regular interest
rate from the time the report was due to when the report was
received by CalSTRS, with a minimum fee of $500.
5)Requires CalSTRS to assess penalties on employers reporting
directly to CalSTRS who include creditable compensation earned
during a prior fiscal year in their monthly reports. Those
penalties will be equal to the contribution rates from the
General Fund to fund the DB Program and related purchasing
power benefits and regular interest will be charged on the
amount of creditable compensation earned in prior fiscal
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years, until the penalty is received in full by CalSTRS.
EXISTING TEACHERS' RETIREMENT LAW :
1)Defines "regular interest" as interest that is compounded
annually based on the annual equivalent of the prior year's
average yield to maturity on the investment-grade fixed income
securities attributable to the DB Program. The law also
requires the rate to be adopted annually by the TRB as a plan
amendment with respect to the DB Program. The regular
interest rate for fiscal year 2008-09 is 5.25%.
2)Does not specify that regular interest is to be charged when
employers pay for retirement enhancements for their employees
such as retirement incentives, member redeposits of previously
withdrawn contributions, installment payments for member
purchases or redeposits or service credit, and penalty
interest.
3)Authorizes CalSTRS to assess interest on late remittances of
contributions and penalties for late contribution reports;
however, the law does not set a clear basis for when interest
or penalties should be assessed. According to CalSTRS,
penalties and interest are monitored for all employers, but
they are assessed on a case-by-case basis.
FISCAL EFFECT : Unknown.
COMMENTS : The following information was provided by the
sponsor, CalSTRS:
The interest rate used by CalSTRS when members redeposit
previously withdrawn contributions to the DB Program or make
installment payments either for those redeposits or to purchase
service credit is comparable to what CalSTRS earns from
corporate debt, consistent with the concept that the installment
purchase is a debt to CalSTRS. This method of determining the
interest rate is unique among public pension systems.
Changing the method used to calculate regular interest for
redeposits, installment payments, and penalties to equal the
actuarially assumed rate of return on investments would reflect
the total opportunity cost that redeposits, installment
payments, and late reports and remittances have on the overall
program. This approach is more commonly used by pension
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systems. The actuarially assumed rate of return on investments
for CalSTRS in the 2008-09 fiscal year is 8%. Applying this
higher rate of interest specifically to service credit purchases
would general about $10 million over a 30 year period.
Currently, CalSTRS is authorized to assess interest on late
remittances of contributions and penalties for late contribution
reports. Contribution payments are due from the employers five
working days following the pay period in which the compensation
was earned under the DB Program, and ten working days following
the last day of the pay period in which the compensation was
earned under the CB Benefit Program. After those deadlines,
contributions are considered delinquent.
Contribution reports under the DB Program are considered
delinquent if they are not submitted 45 calendar days
immediately following the month in which the compensation was
earned. Contribution reports under the CB Benefit Program are
considered delinquent if they are not submitted ten days
following last day of the pay period when the compensation was
earned. The minimum penalty for late reports is $500.
Beginning next fiscal year, the state proposes to not pay
contributions on compensation reported after the fiscal year in
which the compensation is earned, and there is currently no
recourse to recover these lost contributions.
While there is no registered opposition to the bill, a number of
concerns have been raised by various impacted parties. In an
effort to address those concerns, the Committee recommends that
the following amendments be made to AB 654:
1)Include an appeals process for a person or entity that reports
directly to CalSTRS that is assessed penalties or interest
under the provisions of this bill.
2)Insert language requiring an entity that reports directly to
the system to be assessed penalties only for creditable
compensation reported more than one fiscal year after the
fiscal year in which it was earned.
3)Require creditable compensation reported for the immediately
preceding fiscal year to be subject to the state contribution
rates.
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REGISTERED SUPPORT / OPPOSITION :
Support
California State Teachers' Retirement System (Sponsor)
California Teachers' Association
Opposition
None on file
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957