BILL ANALYSIS
AB 654
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Date of Hearing: May 13, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 654 (Mendoza) - As Amended: April 23, 2009
Policy Committee: P.E.R. &
S.S.Vote: 6-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill increases interest and penalties for late payment of
contributions, late submissions of reports, and delayed reports
of compensation to the California State Teachers' Retirement
System (CalSTRS) Defined Benefit Program. Specifically, this
bill:
1)Defines "regular interest" to be equal to the actuarially
assumed rate of return on investments on assets of the CalSTRS
Defined Benefit Program (currently 8%), instead of a rate
comparable to what CalSTRS earns on investments in corporate
debt (currently about 5.25%).
2)Requires CalSTRS to assess regular interest on late
remittances of contributions from its school and community
college members for both the defined benefit program and cash
balance program.
3)Requires the state to base its contributions to CalSTRS (which
is equal to 2.5% of creditable compensation of school district
employees' for each fiscal year) be based on creditable
compensation reported by local district for the current year
and prior year.
4)Requires that creditable compensation reported more than one
year late be subject to a penalty equal to the GF's
contribution plus regular interest on the amount of
compensation reported.
FISCAL EFFECT
AB 654
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1)Interest and penalty provisions would result in about $3
million annual revenues to CalSTRS retirement fund.
2)Increased state contribution costs to CalPERS, potentially
several millions of dollars annually, due to requiring the
state's 2.5% contribution to be based on both current year
compensation as well as prior year compensation reported by
school districts.
3)Automation of interest and penalties would require one-time
expenditures by CalSTRS of about $1 million.
COMMENTS
1)Background . Currently, contributions to the CalSTRS defined
benefit retirement fund are equal to slightly over 18% of
"creditable compensation" of its member employees. Of the
total, about 8% is paid by the employer and employee
respectively, and about 2.5% is paid by the state. Late
payments affect the fund's earnings, to the extent the delays
reduce the amount of funds available to the system to invest.
While this is partly compensated by the interest charged on
late payments, the interest rate that CalSTRS is currently
authorized to charge is about 2.75% percentage points less
than its assumed actuarial rate of return.
The state currently bases its 2.5% contribution on the amount
of creditable compensation reported by the school districts on
the last day of the fiscal year. The state does not include in
its contribution calculations the amount of creditable
compensation included on late reports for prior years.
2)Rationale . This bill, which is sponsored by CalSTRS, is
intended to encourage more timely payment of member
contributions, and more fully compensate the CalSTRS
retirement fund for investment earnings that it forgoes as a
result of the late payments. It is also intended to increase
state contributions to the fund, by requiring the state to
include late reports of prior-year creditable compensation for
purposes of applying its 2.5% contribution rate.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081