Nearly a decade ago, when I served on the Orange County Board of Supervisors, we successfully negotiated offering a lower defined benefit pension plan retirement formula for new hires. Governor Brown replicated this strategy a few years later with his Public Employee Pension Reform Act (PEPRA).
We also negotiated a provision that would allow current employees to adopt the lower formula. The reason an employee would make this decision was due to the reduction in the employee’s portion of the contribution to the pension. It would reduce their payroll check withholdings, thus increasing their net take home pay.
We had a number of Orange County employees that wanted to do this because paying for child care and housing costs was a higher priority. And a reasonable pension, with a portability component, was preferred over the gold-plated plan that was mandated.
Unfortunately, this creative solution was halted by the discovery of Internal Revenue Service (IRS) Revenue Ruling (Rev. Rul.) 2006-43. This faulty ruling denied cities the ability to offer an alternative retirement plan, whether it was a defined contribution or hybrid plan, without realizing the pre-tax benefits that employers and employees have with their defined benefit contributions.
Allow me to provide you with some history on this administrative tax promulgation roadblock, as removing this hurdle can make a major change in the finances of this nation (in reverse date order).
1. When looking back on what I accomplished as a Supervisor (see MOORLACH UPDATE — Supervisor Bartlett — December 3, 2014). :
• 2009 – Negotiated new tier for current hires, only to be stymied by I.R.S. Rev. Rul. 2006-43
2. Included as Goal #3 in my 2014 goallist:
3. A piece by Steve Malanga in The Wall Street Journal, giving this concern national attention:
Two key paragraphs:
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 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.
4. A set up discussion:
5. My treatise on the subject:
6. The national politics involved with my focus on repealing this Rev. Rul.:
7. Why I stressed this tax code modification many years ago:
8. A SD Union-Tribune editorial:
Bottom line? I personally informed the Chair of the House Ways and Means Committee, which is a very big deal for this Certified Public Accountant. Therefore, the Republicans in D.C. are aware of the situation and need to act. My editorial submission in the Voice of OC, the first piece below, provides the recipe for thorough tax reform.
The Laguna Beach Independent announces my upcoming speaking engagement for this Thursday evening in the second piece below.
BONUS: You are cordially invited to our Annual Christmas Open House on December 6th, from 4:00 p.m. to 6:00 p.m. at 940 South Coast Drive, Costa Mesa, Suite 185. Also see MOORLACH UPDATE — Happy Thanksgiving— November 22, 2017.
To RSVP, contact Deborah Sandoval at Deborah.Sandoval or 714-662-0550. Dress is Christmas casual, which means if you wear a Reyn Spooner Christmas shirt, you’ll be provided with extra refreshments.
Moorlach: A Crucial Pension Reform Congress Must Enact
By John Moorlach
Regardless of what else is done, here’s the missing piece Congress and President Trump must add to the tax reform they’re working on: public-employee pension reform. What good is it if you get $500 in tax cuts from the federal government if your state and local taxes rise $1,000 to pay for burgeoning pensions for government workers?
The key: Revoke IRS Revenue Ruling 2006-43. It prevents allowing public employees the option of reducing defined benefit pension benefits in exchange for better pay. Dumping the rule would help not only taxpayers, but the public employees themselves.
I’m the only CPA in the Legislature of the largest state, so please let me explain the situation for our representatives in Washington. In 2009, the County of Orange negotiated a strategy that allowed county employees, at their choice, to move from a traditional defined benefit retirement plan to a hybrid, comprising a lower defined benefit formula, combined with an employer-matching, 401(k) plan of 2 percent of wages.
This reform also would have meant approximately a 7 percent increase in net pay for county employees electing to do so, with no added cost to taxpayers. That especially would have helped struggling young families. And it would have eased the underfunded pension crises now facing the county.
Unfortunately, the intentions of the county and its bargaining units were halted by this revenue ruling. Consequently, in 2013, a bipartisan reform to amend the Internal Revenue Code, through House Resolution 205, was pursued. It was co-sponsored by two local House members, both since retired, Rep. Loretta Sanchez, D-Santa Ana, and Rep. John Campbell, R-Irvine.
According to the congressional summary, it would have permitted “the treatment of certain employer contributions made to public retirement plans as picked up by an employing unit regardless of whether” the plan was a traditional one, or had been converted to a new, hybrid plan for county employees electing to do so. Unfortunately, H.R. 205 died in the House Ways and Means Committee.
All the same, in late 2013 I traveled to Washington to unclog this unnecessary and expensive roadblock. On Dec. 4, Sanchez arranged a meeting with the then-chairman of the House Ways and Means Committee, Rep. Dave Camp, R-Mich. The meeting included Nick Berardino, the general manager of the Orange County Employees Association, and Jennifer Muir, his assistant who succeeded him in 2015 when he retired.
Camp’s district was just North of Detroit. The previous day that large city, once called the Paris of the West, saw Judge Steven W. Rhodes declare that its public-employee pensions would not be protected in federal bankruptcy proceedings.
I told Camp that if there was ever a time to be walking in with a solution for this nation’s cities, counties and states, this was it. While in D.C., I also met with the county’s outside legal counsel, who told me the reform was opposed by the AFSCME and SEIU unions, making the real complication the impenetrable prose of Revenue Ruling 2006-43.
Fast forward to 2017, with so many cities and counties in the nation on the brink of insolvency, it’s time to provide a reasonable and fair solution. And with the rising cost of housing, young employees need some relief, as well.
That’s why revoking Revenue Ruling 2006-43 is crucial now. If Republicans are going to make all these changes to the tax code, let’s make sure they address the biggest financial impediment facing our country’s municipalities by including this vital and simple pension solution.
If Congress doesn’t act, by including this obvious tax clarification, then all this hyperbole and debate over tax reform may just end up being a waste of time and energy.
John Moorlach, R-Costa Mesa, represents the 37th District in the California Senate
Opinions expressed in editorials belong to the authors and not Voice of OC.
Voice of OC is interested in hearing different perspectives and voices. If you want to weigh in on this issue or others please contact Voice of OC Involvement Editor Theresa Sears at TSears
Senator Moorlach Speaks to GOP
State Senator John Moorlach will discuss issues such as the gas tax hike, the state sanctuary movement and pensions as the guest speaker of the Laguna Beach Republicans on Thursday, Nov. 30.
The group meets at Mozambique restaurant 1740 S Coast Hwy, at 5 p.m. to socialize and the meeting gets underway by 6 p.m.
RSVP to highspeed8 as space is limited.
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