Last June, voters in San Jose approved, by a margin of more than two to one, a set of pension reforms affecting benefits for current and future municipal employees. It was a bid to control costs (retirement benefits consume up to 20 percent of the annual city budget) that could threaten the city with bankruptcy. Of course, the unions involved got ready to sue immediately.
But the efforts in San Jose (and elsewhere in California) are also being thwarted by the IRS, as the Mercury News reports:
But a key part of the plan was that the city would also offer its workers an alternative to the higher pension deductions with the choice of a reduced pension benefit for their remaining years on the job. The Internal Revenue Service must certify that this reduced "opt-in" plan meets its requirements for allowing pretax retirement deductions. But more than a year after San Jose voters overwhelmingly passed the pension reforms, the IRS has yet to OK the opt-in plan.
San Jose isn't the only city or county with such a request. Orange County has been waiting five-plus years for an answer. Mayor Chuck Reed, who championed Measure B, has made repeated trips to Washington, D.C., to lobby for IRS approval, and has rallied officials in other cities and counties facing similar issues to join in support. Back east last week visiting family during the council summer break, he said he was "cautiously optimistic" that the IRS will act by the end of the year.
Paul Krugman argues underfunded municipal liabilities don't matter because the national GDP is big (no, seriously), yet even when municipalities are trying to resolve their fiscal crises, the federal government's cut is something that needs its own approval, based on a 2006 rule. The unions argue San Jose's measure breached their workers' "vested rights." The need for IRS approval suggests the feds see their own vested rights as San Jose tries to fix its fiscal house as well.