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Woman jump-starting a car. From this distance, it could be Loretta.

THIS came to me from Congresswoman Loretta Sanchez’ people yesterday, and it looked like something I should share with you-all. I haven’t been following OC’s pension crisis / negotiations, but I know a lot of you have. So first, the press release from Loretta; and then a little explanatory commentary from a friend of the blog…

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Rep. Loretta Sanchez Urges Treasury Secretary Geithner, IRS, to
Quickly Review, Approve Proposed O.C. Pension Overhaul.

Congresswoman Loretta Sanchez (CA-47), a member of the bipartisan Joint Economic Committee, today sent a letter to U.S. Treasury Secretary Timothy Geithner urging him to expedite the Internal Revenue Service’s (IRS) review of Orange County’s proposed changes to its pension program. The changes, which have the support of Orange County’s largest union and Governor Arnold Schwarzenegger, would help address the significant financial burdens imposed by the County’s current pension formula.

To date, Orange County has not moved forward with the pension overhaul because it is unclear how the proposed reforms might impact the tax burden of thousands of County workers. County officials have repeatedly reached out to the IRS to provide guidance on the issue, but a workable solution has not yet been reached. Rep. Sanchez’s letter urges Secretary Geithner to speed up the IRS review process so the County can either implement its proposed pension changes or assess other means of pension reform.

“The proposed changes to Orange County’s pension program are essential to keeping the County financially stable,” said Rep. Sanchez. “But in order to move forward, we need the IRS to provide concrete guidance on the tax implications of the proposed overhaul. I urge the Treasury Secretary to act quickly to ensure that Orange County’s pension program continues to provide retirement security to local employees.”

A copy of Rep. Sanchez’s letter to Secretary Geithner is available below:

Dear Secretary Geithner:

I am writing to ask for your help on an issue of great importance to the County of Orange, California. As with many public entities around the Country, Orange County is working to address significant financial burdens resulting from the County’s pension obligations. The County and its largest union, Orange County Employees Association (OCEA), have worked together to propose changes to its pension structure that would address this concern and benefit both the County and its employees. This could be a helpful and necessary step in addressing the significant pension burdens of many state and local governments while continuing to provide retirement security to its employees. Governor Schwarzenegger signed urgency legislation in October 2009 to allow the County to implement these changes.

As the County of Orange prepared for implementation, the County became aware of possible negative tax implications for its 13,000 participants and has been diligently working with the Internal Revenue Service (IRS) Employee Plans Division, Fran Sloan, as well as Treasury officials, George H. Bostick, Benefits Tax Counsel, and J. Mark Iwry, Senior Advisor to the Secretary and Deputy Assistant Secretary (Retirement and Health Policy), who have been consistently sympathetic to the issues and have assured the County that they are actively working to provide guidance addressing the matter.

Almost a year has passed, however, and the County is unable to proceed with the new program. I am writing to ask for your assistance in encouraging a swift and positive resolution for this issue, which I believe will promote financial stability for the County of Orange, provide greater flexibility to its employees in their retirement planning, and establish a national model.

Thank you in advance for your help.

Sincerely,

Loretta Sanchez

Member of Congress

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So, I asked our anonymous, occasional blogger “Over But Not Out” – a retired, longtime public employee who writes quite a bit here on these pension topics – for some background.  Here’s what he wrote me:

The story behind this is as follows:

The County and the OCEA crafted, via negotiations, a revised retirement plan that would be offered to newly hired employees. It would not cost the county as much going forward, and the attractiveness to new employees is that the amount of payroll withholding for it would be much less than the “old” retirement plan, giving the newly hired employees more take home pay. So, the county and the newer employees who opted for this retirement plan would gain fiscally.

One problem – the new plan they negotiated ran afoul of IRS law and rules – now I am not sure about the specifics but have heard that under current rules IRS says the county payment into this new retirement fund would be taxable as paid, meaning either the county or the employee (or both) would get hit with income tax on it. That makes it impractical as the potential savings would be more than gobbled up by income tax.

So, in spite of both the county and OCEA beating their chests about having crafted a new retirement plan that would save big taxpayer dollars, it has not been implemented! Supervisor Campbell, and others (perhaps CEO Mauk) have gone back to DC several times to try and get a favorable IRS ruling about this, apparently to no avail. I have heard there was even talk about trying to slip language in the federal budget bill that would legitimize the new county retirement plan. OCEA too has tried to work “contacts” in DC to get this approved.

So, it sounds like Ms. Sanchez is trying to help out her OCEA buddies by pressuring Geithner to get a favorable ruling.

The claims about big savings in the future should this new plan get implemented are doubted by many, but it is being represented that way by the County and OCEA – they are both trying to claim they have the taxpayers’ best interests at heart in negotiating this new plan.

Keep in mind that the new retirement plan would be optional on the employee’s part as I understand it, so while some would opt for it in order to maximize take home pay how many new hires would do so is unknown, thus projected savings is really a wild-ass guess. And, some suspect there is something in this for OCEA that is not being disclosed – perhaps the right to administer this new retirement fund and make some money off it?

Administering these funds would be a lucrative venture that would be contracted out (perhaps to some crony or firm with a powerful lobbyist?) or perhaps would the union (OCEA) be authorized to administer it.  (The thought of union-administered pension funds sends chills up some people’s spines as there is considerable “colorful history” in the USA involving union pension funds!)

Lastly, some county retirees feel anything that reduces the forecast future revenue into the current county retirement system will further exacerbate the unfunded liability – in essence making it worse. Some have even speculated that may be part of a hidden agenda – to drive the current county retirement fund over the cliff.

Bottom line – Loretta is doing what OCEA and County government want – trying to get federal approval for this new county plan. But, it is not a simple matter and there are many behind-the-scenes complications, and it is not really clear if anyone understands them all. This is one in which “follow the money” is a wise bit if advice, but it will be easier said than done.

That is what I know.

… BUT there are questions that need to be answered. For instance – if county employees start opting for this new plan, assuming it gets approved by the Feds, what does that do to the funding of the existing county retirement system? (If there is analysis of that, let’s see it!!)

So!  Who needs to be an expert on everything when you have friends that knowledgeable?  Wait.  I’m still confused.  Readers?