The IRS is playing the part of Nero fiddling when it comes to US cities finances and their ability to reduce the pension costs that are destroying them.
As The Curmudgeon reported, cities and counties got a breath of fresh air last week when the bankruptcy judge handling Detroit’s bankruptcy ruled that the city could cut current pensions and rewrite their unions’ contracts to reduce future costs.
Just at the time when there appears a glimmer of light that could begin to put municipal governments onto a more sound financial footing, along comes the Obama administration – in the form of the IRS – to try to save the unions’ bloated defined benefit contracts. Never let a crisis go to waste.
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.
One of the keys to putting municipal financing on sound footing is getting out of defined benefit pension plans. Based on actuarial studies the cities, counties, and states are currently in a position where their retirement plans are underfunded by up to $3 trillion. Detroit is barely the tip of the iceberg, the Chicago and the State of Illinois aren’t far behind.
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. In August, Ms. Sanchez told the press that the American Federation of State, County and Municipal Employees and others are unhappy because clarification of the tax issue would spur more cities to move current employees into hybrid plans that feature defined contribution options.
Public employee unions own the Democratic Party, they own the Obama administration lock, stock, and barrel, and they pretty much have final say in the Washington bureaucracy no matter which party is in power. That means that any reform of the IRS regulations will have to go over the top of the unions’ dead bodies (metaphorically speaking of course).
“Cities and counties all over America are losing their grip on solvency, and pension costs are often a factor,” says [Orange County Supervisor John M.W.]. Moorlach. “Offering employees a cheaper plan is a way to curb costs while attempting to sidestep what’s really the only other option: a showdown” with unions rather than a negotiated settlement like the one in Orange County. Ms. Sanchez has put it more simply: “We don’t want to end up like Detroit.”
While I’m sure the House Oversight Committee will toss this on their to-do list relative to the IRS, the probability of getting anything done in the next three years is zero, given the agency’s success at stonewalling their investigations. They’ve not only thumbed their nose at the Committee, they’ve been busily expanding their harassment of conservative organizations.
When somebody as outright dumb, unethical, and bought by the unions as Loretta Sanchez can figure this out, what’s stopping the so-called smartest president ever?