BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 654|
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THIRD READING
Bill No: AB 654
Author: Mendoza (D)
Amended: 6/1/09 in Assembly
Vote: 21
SENATE PUBLIC EMP. & RET. COMMITTEE : 7-0, 6/22/09
AYES: Correa, Ashburn, Benoit, Ducheny, Liu, Padilla,
Wiggins
SENATE APPROPRIATIONS COMMITTEE : 13-0, 8/27/09
AYES: Kehoe, Cox, Corbett, Denham, Hancock, Leno, Oropeza,
Price, Runner, Walters, Wolk, Wyland, Yee
ASSEMBLY FLOOR : 77-0, 6/2/09 - See last page for vote
SUBJECT : State teachers retirement
SOURCE : State Teachers Retirement System
DIGEST : This bill revises, in the State Teachers
Retirement System 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.
ANALYSIS :
Existing State Teachers' Retirement System (STRS) Law:
CONTINUED
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1. 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
percent).
2. 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withdrawn contributions, installment payments for member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.
3. 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.
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.
2. Specifies that "regular interest" will be applied to the
installments that employers make when paying for
retirement enhancements for their employees.
3. Includes an appeals process for a person or entity that
reports directly to STRS that is assessed penalties or
interest.
4. Requires STRS to assess interest on late remittances of
contributions, providing that "regular interest" will be
charged on any delinquent contributions.
5. 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
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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.
Comments
The following information was provided by the bill's
sponsor, STRS:
"The interest rate used by CalSTRS when members redeposit
previously withdrawn contributions to the DB [Defined
Benefit] 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 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
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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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
Senate Appropriations Committee staff indicates that
according to STRS, the cost of system modifications to
automate the penalties and interest calculation processes
is estimated at approximately $1 million. This bill 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 fiscal year, penalties and
interest for late contributions and late contribution
reports would have been approximately $3 million.
SUPPORT : (Verified 9/1/09)
State Teachers' Retirement System (source)
California School Board Association
California Teachers Association
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Tom
Berryhill, Blakeslee, Blumenfield, Brownley, Buchanan,
Caballero, Charles Calderon, Carter, Chesbro, Conway,
Cook, Coto, Davis, De La Torre, De Leon, DeVore, Duvall,
Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuentes,
Fuller, Furutani, Gaines, Galgiani, Garrick, Gilmore,
Hagman, Hall, Harkey, Hayashi, Hernandez, Hill, Huber,
Huffman, Jeffries, Jones, Knight, Krekorian, Lieu, Logue,
Bonnie Lowenthal, Ma, Mendoza, Miller, Monning, Nava,
Nestande, Niello, Nielsen, John A. Perez, V. Manuel
Perez, Portantino, Price, Ruskin, Salas, Silva, Skinner,
Smyth, Solorio, Audra Strickland, Swanson, Torlakson,
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Torres, Torrico, Tran, Villines, Yamada, Bass
NO VOTE RECORDED: Bill Berryhill, Block, Saldana
DLW:mw 9/1/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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