February 14, 2012

Chapter 3: The Trouble With Being “Governmental” – Falling On The Wrong Side Of This Definition Could Hurt

Last fall, the IRS announced that it would begin the process of issuing regulations to clarify what is a “governmental plan” under Internal Revenue Code section 414(d) and asked interested parties to comment on the general approach it was taking with respect to the regulation. February 6, 2012 was established as the deadline for submitting comments on the Service’s Advanced Notice of Proposed Rulemaking (also known as Announcement 2011-78).

Because we deal with so many different types of public agencies in our practice, and have sought IRS guidance on this issue on numerous occasions, we know that the process of developing a helpful and administrable definition of a governmental plan will be challenging and difficult. More importantly, based on what we have seen so far, we think that many, many organizations and entities that currently view themselves as governmental for retirement plan purposes could be in for rude awakenings when the final rule comes out. For example, we know that the IRS has had difficulty in the past in deciding whether some of the following types of entities would qualify as governmental plan sponsors:

  • A joint powers authority consisting of both governmental subdivisions and public nonprofit organizations;
  • Certain charter schools; and
  • Certain auxiliary organizations connected with State and community colleges and universities.

Along with many other organizations, we filed comments with the IRS. If you care to view them, click here.

If you are involved with a public agency that is not 100% sure of its governmental status, you most likely are aware of the potential problems that could arise if the agency were determined to be not a governmental plan sponsor. Lurking among the possible parade of horribles are:

  • What happens to your past and future participation in a State retirement system like CalPERS or CalSTRS?
  • Will your agency’s tax qualified retirement plans be retroactively disqualified because you adhered to the wrong set of qualification rules?]
  • What will become of your Social Security replacement plan, and the fact that you and your employees have not been paying into Social Security for years?
  • Could your participation, along with many other “nongovernmental” employers, ruin the tax-exempt status of CalPERS or CalSTRS?
  • What about that section 457(b) plan of yours? Remember, you’ve been operating under the governmental rather than the
    tax-exempt set of rules.
  • If the IRS’s final rules would treat your entity as nongovernmental, is there any chance you would be grandfathered under the
    pre-existing rules, or be eligible for some type of transition relief?

Obviously, there is a lot to think about, particularly if you know you exist in that gray area of the law. If you believe you could be adversely affected by the final rules, you should look into joining forces with other similarly-situated entities and letting the IRS know about your concerns. The IRS rulemaking process is just beginning and there is still much that can be done to address some of the difficult issues raised here.

Tagged , | Comments Off
December 28, 2011

Chapter 2: Don’t Stand Around Asking If The Sky Is Falling – The Wrong Question Is More Dangerous Than The Wrong Answer

Since the Stanford Institute For Economic Policy Research (SIEPR) issued its latest report on California’s public pension spending, a fair amount has been written by those who are seriously concerned about the potentially enormous size of the unfunded liability of California’s principal public retirement system and those who believe that such reports are alarmist and politically motivated. For others, the debate makes for interesting reading and conversation. However, for those of us who regularly work with public agencies and their retirement obligations, the tendency to discuss “the pension crisis” at the macroeconomic level allows taxpayers and impacted agencies to rationalize that: (a) if the sky is truly falling, there is nothing we can do about it; or (b) yes, there may be signs of a serious problem, but they involve other parts of the State and other agencies, not us.

The fact of the matter is that the overall problem – the problem at the macro level – is too much for most people to get their heads around. As a result, it will be very difficult, if not impossible, for the California Legislature to deal with any of the underlying issues in a meaningful way. Let’s face it, the Legislature has serious problems resolving annual budget issues involving a fraction of the dollars.

So debating whether the SIEPR study is correct is the more dangerous “wrong question.” Forget the “macro” and focus on the “micro.” The right question, which needs to be asked at the State agency and local level basis, is “Will our pension demands allow us to serve our critical mission and support our retirees in the future, and if not, what do we need to do?”

Most, if not all, public agencies have some sense of what their unfunded pension liabilities are. Those who don’t, or haven’t at least looked into it, are serving neither their employees nor taxpayers. After all, CalPERS is simply an aggregate of the retirement benefits and funding of hundreds of agencies.

What happens when we rephrase the question on a micro level?

  • By focusing on whether there’s a problem at the public agency level, we can more easily see whether the “problems” are individualized or are common to all agencies. We suspect that there is a very wide variety of benefit/funding issues and it is this diversity that is making it hard to come up with global fixes to the situation.
  • More can be done, and more quickly, at that level. For example, a CalPERS participating agency can (without the need for our legislators to act):
    • Renegotiate its collective bargaining agreements to provide for increased employee contributions towards pension benefits;
    • Consider terminating its CalPERS contract;
    • Seek re-amortization of its current CalPERS liabilities; or
    • Establish a new tier of benefits.

We know that many agencies and particularly many cities have already been taking many of these actions. Much of this activity has been driven by the budgeting process and the collective bargaining process. However, we also know that many CalPERS agencies have done little or nothing to determine not only where they stand, but what options may be available to them – once they determine that they too must address the same astronomical economic challenges as non-CalPERS agencies.

 

 

Tagged , , | Comments Off
December 1, 2011

Chapter 1: New Lessons From The O.C. – State And Local Governments Must Learn To “Express” Themselves

On November 21, 2011[1], the California Supreme Court answered a question posed to it by the United States Court of Appeals for the Ninth Circuit[2] as part of ongoing federal litigation between the County of Orange and its retirees. In its response, the California Supreme Court concluded that, “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”

The issue in the federal case is whether the County violated the federal and state Constitutions when it changed the method by which retirees’ health insurance premiums had historically been determined, resulting in increased retiree health premiums.  Because the County had never “officially” promised the more favorable rate determination in the form of a resolution, MOU or ordinance, it felt justified in making this change – arguing that it should only be held accountable for its official commitments.  The retirees have argued that the County’s longstanding practice of providing subsidized retiree health premiums created an implied contract, which the County could not legally impair.

The news media, various pundits, and benefits practitioners (including yours truly) are already beginning to put their spins on the ruling. The Sacramento Bee opened its coverage of the ruling by stating, “In a development that may help Sacramento County retirees regain lost health-care subsidies….”

While we’re sure the ruling will encourage public agency retirees who believe that their retiree health benefits may have been illegally curtailed or taken from them, this ruling has several practical ramifications for California’s public employers:

  1. Because a vested right to retiree health benefits can be implied from a public employer’s course of dealings, it is critical for all California public employers to examine and determine the nature and scope these types of commitments (for retiree health, active employee health, pensions, etc.). For more about this process, see What’s A District To Do? 
  2.  For those benefits where the public employer’s “actions” in providing certain levels of benefits may be different (that is, more generous) than its “official” resolutions or ordinances, the employer must act immediately to clarify and document its intentions with respect to such benefits on an “expressed” basis – in writing and not leaving gaps for interpretation.
  3.  In some cases, in order to avoid disputes or litigation with its employee groups, it may become necessary for a public employer to “grandfather” certain employee groups as it strives to clearly define who is entitled to what, and when. In other cases, it may be  that the benefit commitments were never intended to rise to the level of “vested rights,” but are more like “terms of employment” subject to the collective bargaining process. That should be made clear to employees. This more employer-oriented view was espoused by the federal Ninth Circuit in its 2009 ruling.[3]
  4.  The larger, federal case is not over. Although the California Supreme Court answered the narrow question of whether a vested right to retiree health benefits can arise by implication, it did not decide whether the course of dealings between the County and its retirees actually gave rise to such an implied contract.

Stay tuned for the next episode of the O.C.

[1] Retired Employees Association Of Orange County, Inc. v. County of Orange, (11/21/11), Cal. LEXIS 12109 (Cal. Supreme Ct.)

[2] Retired Employees Association Of Orange County, Inc. v. County of Orange, (9th Cir. 2010), 610 F.3d 1099; California Rules of Court, rule 8.548.

[3] San Diego Police Officers’ Association v. San Diego City Employees’ Retirement System (2009) 568 F.3d 725.

Tagged , | Comments Off