The IRS Could Force a Quicker $100M San Diego city Pension Payment

September 7, 2007 (PLANSPONSOR.COM) - The city of San Diego could have to plug $100 million into its troubled pension system as part of its ongoing talks with federal tax agency officials on keeping its status as a qualified plan.

A San Diego Union-Tribune news report indicated that the Internal Revenue Service (IRS) has taken issue with thecity’s 20-year plan to pay off the pension system’s $1 billion unfunded liability. The tax agency warned the city in March that it is not appropriate to consider the $100 million as part of that total.

IRS officials asserted that the $100 million needs to be paid at a faster rate, according to correspondence between the system and the IRS that was obtained by the newspaper. At one point, the agency says, “Five years is just too long,” and counters with 18 months, according to the report.

Lawyers for the system told the IRS that the city’s budget process would not allow for quicker repayment of the money, which is owed because San Diego once improperly tapped $63 million in pension funds to cover the costs of health coverage for retirees, the news report said. The remainder of the $100 million is accrued interest.

However, according to the newspaper, pension board President Thomas Hebrank said fears about the $100 million debt are unfounded. He said IRS officials have assured system administrators that they accept that the money does not need to be repaid on an accelerated schedule.

In addition, Hebrank said, the fund could be a month away from receiving the all-clear from the IRS.

The pension system has been consulting with IRS officials since early 2005, when board members voted to join the tax regulator’s voluntary compliance program.

A March 20 letter from three of the system’s attorneys outlines some of the exchanges between the system and the IRS. The attorneys, from Ice Miller, an Indianapolis firm, quoted passages from IRS critiques in the letter and offered responses on behalf of the pension system.

IRS officials “do not agree” with the system’s contention that the $63 million “is simply a funding shortfall that should be recovered through the plan’s normal funding and actuarial procedures,” according to the letter.

That was one of several areas in which the IRS noted that the retirement fund had fallen short of compliance. Others include disputes over special benefits afforded to city union presidents and how to recover disability payments that had been too large.