BILL ANALYSIS
AB 654
Page 1
ASSEMBLY THIRD READING
AB 654 (Mendoza)
As Amended June 1, 2009
Majority vote
PUBLIC EMPLOYEES 6-0 APPROPRIATIONS 17-0
-----------------------------------------------------------------
|Ayes:|Hernandez, Furutani, |Ayes:|De Leon, Nielsen, |
| |Beall, Conway, Nestande, | |Ammiano, |
| |Torrico | |Charles Calderon, Davis, |
| | | |Duvall, Fuentes, Hall, |
| | | |Harkey, Miller, |
| | | |John A. Perez, Price, |
| | | |Skinner, Solorio, Audra |
| | | |Strickland, Torlakson, |
| | | |Krekorian |
|-----+--------------------------+-----+--------------------------|
| | | | |
-----------------------------------------------------------------
SUMMARY : Revises, in the Teachers' Retirement Law (TRL), 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 a penalty on late contribution
reports, in accordance with regulations to be established by
AB 654
Page 2
the TRB. The penalty 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)Allows a person or entity assessed a penalty to appeal the
assessed penalty using the existing appeal process established
in the TRL.
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 (FY) 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 : According to the Assembly Appropriations
Committee:
1)Interest and penalty provisions would result in about $3
million annual revenues to CalSTRS retirement fund.
2)Automation of interest and penalties would require one-time
expenditures by CalSTRS of about $1 million.
COMMENTS : The following information was provided by the
sponsor, CalSTRS:
AB 654
Page 3
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
systems. The actuarially assumed rate of return on investments
for CalSTRS in the 2008-09 FY 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 10 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 10 days
following last day of the pay period when the compensation was
earned. The minimum penalty for late reports is $500.
Analysis Prepared by : Karon Green / P.E., R. & S.S. / (916)
319-3957 FN:
0001279