California Plans to Challenge Pension Interest Award

October 8, 2007 ( - Faced with a lean state budget, the Sacramento Bee reports that the Schwarzenegger administration will ask the California Supreme Court to cut millions of dollars in interest owed to a special teachers' retirement fund.

In August, the California Third District Court of Appeal upheld a lower court ruling ordering the state to pay the California State Teachers’ Retirement System (CalSTRS) $500 million plus interest withheld in 2003 (see  Court Hands CalSTRS Victory in $500M Funding Battle ).   That settlement – plus interest that CalSTRS had estimated could exceed $200 million – was to be deposited in a Supplemental Benefit Maintenance Account that funds quarterly payments to approximately 63,000 retired educators and their survivors when inflation erodes their monthly benefit below 80% of its original consumer purchasing power.  

Interest Rate Challenge

Now the Bee reports that the governor’s Department of Finance wants the state high court to reduce the interest obligation by more than $40 million.    The state is asserting that the interest rate should not be 10% – as CalSTRS and the California Retired Teachers Association argued in appellate court – but rather 7%, as the Sacramento Superior Court originally determined in its ruling. Both sides are using decisions in past cases to support their arguments.  

The dispute began four years ago when falling state tax revenues left the state with a record $34 billion budget deficit. Lawmakers and then-Governor Gray Davis withheld a $500 million payment to CalSTRS, one of many budget-cutting moves, according to the Bee.   CalSTRS later sued in Sacramento Superior Court and won the right to recover the funds, plus 7% annual interest, totaling about $155 million today.

Finance Department spokesman H.D. Palmer said officials plan to file an appeal by Tuesday, according to the Bee. The Supreme Court would have about two months to decide whether it will review the case.