TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 9, 2013

The IRS Throws a Wrench Into Public Pension Reform

IRS Logo 2Wall Street Journal op-ed:  The IRS Throws a Wrench Into Public Pension Reform, by Steven Malanga (Manhattan Institute):

Financially troubled cities got some good news this week when a federal judge ruled that the pensions of Detroit's employees could be cut in a bankruptcy proceeding. The leverage provided by Judge Steven Rhodes's decision may help bring public unions elsewhere to the bargaining table, but cities face another obstacle to pension reform: the IRS.

For more than three years the IRS has failed to clarify a rule on changes to public pension systems that would allow municipalities to shift workers into new, less-expensive plans without losing any tax advantages they had under the old plan.

The issue flared up in 2009, when officials in California's Orange County negotiated an agreement with their union that included giving workers the option of moving from their expensive, defined-benefit pension into a hybrid plan featuring a less-costly defined-benefit combined with a 401(k). The plan saves the county money—at least $10 million annually and potentially much more, depending on how many workers sign up—and it also increases worker take-home pay by cutting employee contributions to the plan.

The Orange County Employees Association accepted the new plan to let workers choose more take-home pay now, but there was an unexpected glitch. Local government contributions into a defined-benefit pension aren't counted as part of an employee's taxable wages. However, officials discovered that thanks to a murky ruling a few years earlier, the IRS might decide that a portion of the employees' pension contributions are taxable if a worker moves into a plan such as the one offered by Orange County. Such a ruling would remove a key tax-savings for the employee and probably cause most workers to avoid the new plan. ...

Earlier this year, several members of Congress introduced a bill that would amend the IRS code to permit the kinds of changes enacted by San Jose and Orange County. "The federal government should not be standing in the way of states, cities and counties that are attempting to take the initiative in solving their own deficit problems," co-sponsor John Campbell, a Republican representing part of Orange County, said when the bill was introduced in January. The bill has bipartisan backing, including Democrat Loretta Sanchez, who also represents one of Orange County's congressional districts. But so far the bill has gone nowhere, in part because of union opposition. ...

The IRS has failed, for years, to resolve the pension issue. It has appeared several times on an annual list of priorities the IRS says it intends to address, but that has yet to result in any ruling. And the IRS doesn't comment on pending matters. Why are the bureaucrats sitting on their hands? Some critics believe the delay is thanks to the big government unions in Washington. The IRS is part of the U.S. Treasury, and from what he has been able to learn, Orange County Supervisor John M.W. Moorlach believes these unions "have a stranglehold on the Treasury Department."

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Lets go for the fair tax option & get rid of the IRS once & for all

Posted by: William | Dec 10, 2013 11:24:40 AM

How long will the American People allow the IRS to hold us hostage?
They suppress voting by intimidating the political opposition, they discourage effective pension reform by hanging on to mindless rules, and they thumb their noses at what little oversight is tried by The Congress.
Repeal the 16th-Amendment as just another in a long list of failed Early 20th-Century Progressive "reforms", and dismantle the IRS.

Posted by: askeptic | Dec 10, 2013 11:43:32 AM

This is one of the better arguments against public unions. Civil servants forget they work for the Administration and taxpayers NOT the union.

Posted by: Rhoda R | Dec 10, 2013 2:00:52 PM