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
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