IRS Allows Full Transference of Employee Benefit Portability

from Pubic Works Financing
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The Internal Revenue Service (IRS) and U.S. Dept. of Labor this month approved a request by Milwaukee to allow a regional sewerage authority’s privatized workers to remain in the city’s generous public employee pension system without compromising its status as a governmental plan.

Despite a full-court press from Wisconsin’s congressional delegation, the IRS took 15 months to publish its narrowly drafted private-letter ruling. The five-page memo deals specifically with the facts of Milwaukee Metropolitan Sewerage District’s (MMSD) 10-year management contract with United Water Services, which was signed on Jan. 5, 1998 (PWF 1/98 p. 1). It does not apply to any new hires in Milwaukee, who would be covered by United Water’s private pension program. The federal ERISA law governing pensions allows an employer to have different plans for employees as long as coverage and participation tests are met.

Obtaining this first, favorable ruling on pension portability fulfills a promise made by United Water to the four unions that represent MMSD’s workers, who are part of the city’s retirement system. And it allows United Water to avoid the extra cost of setting up and administering a private plan to deliver equivalent benefits to the 280 MMSD employees who transferred to the private side last spring. At that time, the contract operator estimated running a parallel system would add 8% to its labor costs.

(The city failed to invest the pension payments made to a separate account by United Water during the 15-month wait for the IRS ruling. Who will make up the lost investment earnings has not been determined.)

As it has in Milwaukee, the IRS ruling may ease local labor concerns about privatization by providing a way for tenured municipal workers in other cities to keep their public pensions if they become private-sector employees.

Contract operators of municipal water/wastewater plants generally agree to provide equal or better pay and "reasonably comparable" pension benefits to municipal utility workers who transfer to private jobs. Few, if any, match the generosity of public pension systems, however. The City of Milwaukee’s defined-benefit pension plan, which covers about 25,000 workers, pays benefits equal to 62% of a worker’s final average compensation.

The IRS ruling does not apply to all qualified management contracts for municipal outsourcing. Its response to the city’s 15-page application reveals little of the agency’s thinking, says Brian Kopp, a pension expert at Nixon, Hargrave, Devans & Doyle, which drafted the city’s application. He advises other cities that want to follow Milwaukee’s lead to seek their own rulings in order to be certain that their public retirement system is not compromised by accepting private contributions.

A key point made by the IRS in its ruling is that the independent authority’s 300-page contract with United Water Services leaves MMSD with full oversight control of its assets, operations, staffing and capital investment. The contract also states that district workers who transfer to United Water will become MMSD employees at the end of the contract term.

"We tried to fill all the holes" in this first attempt to write a contract that would meet the complex federal pension rules, says Steven Breitner, an attorney with United Water Management and Services. "There may be room for a looser connection" in subsequent privatizations, he says.