BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
654 (Mendoza)
Hearing Date: 7/06/2009 Amended: 6/01/2009
Consultant: Maureen Ortiz Policy Vote: PE&R 7-0
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BILL SUMMARY: AB 654 establishes a consistent basis for the
assessment of interest and penalties assessed by CalSTRS for
late payment of contributions, late submissions of reports, and
delayed reports of compensation.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Admin expenses $1,000
Special*
Interest/penalty revenue ---------potentially $3,000
annually------- Special*
*Teachers' Retirement Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense file.
According to CalSTRS, the cost of system modifications to
automate the penalties and interest calculation processes is
estimated at approximately $1 million. AB 654 will result in an
increase in interest revenue for installment payments for member
service credit purchases or redeposits to the Teachers'
Retirement Fund effective July 1, 2010 approximating $10 million
over a 30 year period. Although the actual revenue from
interest and penalties is not known, if the provisions of this
bill would have been in effect during the 2007-08 FY, penalties
and interest for late contributions and late contribution
reports would have been approximately $3 million.
Current law authorizes CalSTRS to assess interest on late
payment of contributions and penalties for late contribution
reports, but does not define the basis for those assessments.
Consequently, penalty assessment is done on a case-by-case
basis. Contribution payments are due from the employers five
working days following the pay period in which the compensation
was earned under the Defined Benefit Program, and ten working
days after the last pay period for the Cash Balance Benefit
Program. Contribution reports must be submitted 45 calendar
days following the month the compensation was earned for the
Defined Benefit Program, and are considered delinquent ten days
following the last pay period. The minimum penalty for late
reports is $500. AB 654 will allow CalSTRS to assess penalties
on late contribution reports based on the total contributions at
the regular interest rate with a minimum penalty of $500.
The current interest rate used by CalSTRS when members redeposit
previously withdrawn contributions to the Defined Benefit
Program and make installment payments
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AB 654 (Mendoza)
either for those redeposits or to purchase service credit is
equivalent to the prior year's average yield on the investment
grade fixed income securities - 5.25% for FY 2008-09. The rate
is adopted annually by the CalSTRS board. AB 654 changes the
definition of "regular interest", effective July 1, 2010, to the
actuarially assumed rate of return on investments - 8% for FY
2008-09.
AB 654 will also allow CalSTRS to charge regular interest when
employers pay for retirement enhancements for their employees
through an installment method.
Contributions to the CalSTRS defined benefit plan are equal to
approximately 18% of employee creditable compensation. Each
employer and employee pays 8%, and the state contributions about
2.5%. Late payments affect the fund's earnings potential as
less money is available to invest when payments are delayed. AB
654 is intended to encourage more timely payment of member
contributions.