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Battered San Diego Fund Also Finds Potential Tax Woes
They were two of the five separate potential problems with the Internal Revenue Service (IRS) code officials have found that stem from the way the $4-billion San Diego City Employees’ Retirement System takes in and puts out the cash, the Voice of San Diego reported.
Discovered after an internal city review, the violations
come as part of an era in which the deficit-plagued
pension system became a focus of the Justice Department
and the Securities and Exchange Commission (SEC).
Tax attorneys for the system were expected to file a
bundle of corrective actions in the hopes of rectifying
the five tax violations it has self-reported to the
IRS.
The move is one of a laundry list of items the pension system and the city council must finish to sort out the numerous legal and accounting irregularities that sprout from the pension crisis.
“There are easily two dozen issues or more that are
recommended remediation or changes, all of which are
being closely tracked by the mayor’s administration,”
Fred Sainz, spokesman for Mayor Jerry Sanders, told the
newspaper.
Paying a Health Care Benefit
Paying the $33-million bill would make up for
past tax violations related to the retiree health care
benefit, the news report said.
The problem stems from the city’s move in 1982 to grant a
health care allowance to retirees. But rather than set up
a separate fund and cover the cost from the city’s annual
budget, officials began siphoning off the retirement
fund’s investment earnings and using them to pay a part
of the retiree health care benefit, among other things.
For tax purposes, the city should have set up a separate
trust to handle the distribution of the benefit, and the
benefits should have been paid for from a source other
than investment earnings, the news report said.
Investment earnings were used in part to pay the benefit
from 1985 until 1992 and then again from 1997 until 2005.
Administrators set up a trust in 1997, which provided the
fund with the proper structure to administer the benefit
under the tax code, the report said.
But attorneys for the pension system have ruled that
the city owes $8.2 million in backlogged costs because the
pension system
– not the city
–
paid for the benefit. Not only that, the pension system
should also bill the city $1.5 million for the
administrative costs of handling the city’s work, attorneys
said. Because the costs were incurred beginning in 1982,
the price tag for interest is $24.1 million.
Other self-reported IRS violations include technical
aspects of administering the pension system. One also
touches on the presidential leave benefits, and it was
thought to have violated the IRS code because it allowed
unions to pay contributions into the pension fund.
Typically, only the city would pay such employer
contributions.
Another part of the IRS code forbids pension systems
from paying out pension benefits above a certain level,
which one official calculated at about $13,000 a
month
–
or $156,000 a year.
However, with employees sometimes making six-figure
salaries and spending three decades working
for the city, reaching such a level is hardly
unattainable. As such, officials said they will likely have
to ask the city to either set up a separate fund to pay any
benefits above and beyond this level or simply pay the
annual sum from the appropriate city budget.
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