BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 654
Lou Correa, Chair Hearing date: June 22, 2009
AB 654 (Mendoza) as amended 6/01/09 FISCAL: YES
STRS: MODIFICATION OF "REGULAR INTEREST" AND ASSESMENT OF
INTEREST AND PENALTIES ON EMPLOYERS
HISTORY :
Sponsor: California State Teachers Retirement System
(STRS)
Prior legislation: SB 1466 (Senate PE&R Committee)
Chapter 655 of 2006
SB 1074 (Senate PE&R Committee)
Chapter 939 of 1999
ASSEMBLY VOTES :
PER & SS 6-0 4/22/09
Appropriations 17-0 5/28/09
Assembly Floor 77-0 6/02/09
SUMMARY :
Would revise, in the STRS 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.
BACKGROUND AND ANALYSIS :
1) Existing STRS law :
a) defines "regular interest" as interest that is
compounded based on the annual equivalent of the prior
year's average yield to maturity on the investment-grade
fixed income securities and also requires the rate to be
adopted annually by the Teachers Retirement Board (the
regular interest rate for fiscal year 2008-09 is 5.25%),
David Felderstein
Date: 6/03/09 Page 1
b) does not specify that "regular interest" is to be
charged when employers pay for retirement enhancements for
their employees such as retirement incentives (such as
Golden Handshakes), member redeposits of previously
withdrawn contributions, installment payments for member
purchases or redeposits or service credit, or penalty
interest, and
c) authorizes STRS to assess interest on late remittances
of contributions and penalties for late contribution
reports; however, the STRS Law does not set a clear basis
for when interest or penalties should be assessed.
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Date: 6/03/09 Page 2
2) This bill :
a) 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,
b) specifies that "regular interest" will be applied to
the installments that employers make when paying for
retirement enhancements for their employees,
c) includes an appeals process for a person or entity that
reports directly to STRS that is assessed penalties or
interest,
d) requires STRS to assess interest on late remittances of
contributions, providing that "regular interest" will be
charged on any delinquent contributions, and
e) requires STRS to assess penalties on late contribution
reports, in accordance with regulations to be established
by the Teachers Retirement Board, providing that 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 STRS,
with a minimum fee of $500.
FISCAL EFFECT :
Unknown.
COMMENTS :
1) Arguments in support
The following information was provided by the sponsor, STRS:
"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
David Felderstein
Date: 6/03/09 Page 3
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 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.
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Date: 6/03/09 Page 4
"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."
2) SUPPORT :
California School Board Association (CSBA)
California Teachers Association (CTA)
3) OPPOSITION :
None to date
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Date: 6/03/09 Page 5
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Date: 6/03/09 Page 6