Springfield Mayor Charles Ryan, alongside Congressman Richard Neal, Finance Control Board Executive Director Philip Puccia, and City Councilor Bud Williams, announced today that the control board—on behalf of the city—reached an agreement with the Commissioner of Internal Revenue regarding Springfield’s elective payments of health insurance premiums on behalf of its retired employees. (Perhaps the meeting on the subject, scheduled for this afternoon, will instead be a collective sigh of relief?)
For those employees who retired between January 1, 1993 and January 1, 2006, the city did not report the elective payments as taxable amounts (in box 2a of Form 1099-R). The city did not withhold federal income tax regarding these payments, and retirees may not have treated the payments as taxable income prior to 2006.
The city has voluntarily disclosed its errors to the commissioner and (as of last Friday) paid $250,000, which Puccia said is coming from the city’s general fund, thanks in part, he said, to conservative budgeting that allows for unanticipated payments like this one.
The city will report all elective payments as income of retirees as of calendar year 2006 and thereafter "except to the extent otherwise provided by law," the agreement notes, "such as under Code section 402(l)," which appears to apply to public safety officers.
In return, the IRS is not going to penalize the city or seek to "recover taxes, interest or penalties under sections 6651(a) of the Code" with regard to the elective payments. The retirees are free and clear for 2004 and 2005 on this specific matter; Puccia estimates this agreement saves individual city retirees somewhere in the neighborhood of $750 to $1,000 each depending on their personal financial circumstances.
Following is a transcript of the press conference where this announcement was made.
Mayor Charles Ryan: The subject of today’s press conference is to announce an excellent settlement with the Internal Revenue Service on the issue of whether or not there’s any liability on our retirees for the payment of health insurance in previous years, without the retirees being burdened with additional taxes. This has been a complex matter and I’m delighted to say it’s been settled, and in a very happy way, thanks to the significant interest and activity on the part of Congressman Neal, Phil Puccia, and Chairman [Alan] LeBovidge of the control board. We’re indebted to each and every one of those individuals for what they’ve done. The long and the short of it is that the city has paid, as of last Friday, $250,000 of city funds to the IRS. And as a result of that, we have a signed contract, which provides that any liability of the retirees on this issue has been forgiven. Now, with respect to 2006, the reporting is going to be done properly, and of course that’s a separate issue for all retirees. But there will be no retroactive activity or penalty or interest owed by any of these retirees for a mistake that clearly was made by the city in 1993, and was carried forward all those years since that time. I would like to ask Congressman Neal to come forward, because he and his office played a very significant role in reaching this desired result. Congressman?
Congressman Richard Neal: Thank you, Mr. Mayor. Thanks to the mayor, and the control board, and I think it was the impetus that the mayor brought along with the control board to the issue of trying to provide some relief for almost 2200 retirees, and in fact, I think that the announcement that the mayor offered a couple of moments ago indicates that the city will save up to a million dollars, or a burden that would have been surely shared with the employees and the city. So this agreement with the IRS, and let me thank them as well; they are professional every single day—and not only will this provide relief for them, but I also think it removes the burden from many of our senior citizens who are concerned about an additional tax bill from the IRS. So the credit really goes here to the mayor and the control board and the professionalism of the IRS. My office was glad to assist, and I think in this instance, here, all’s well that ends well.
CR: I’d like to ask Phil Puccia to come forward. Phil was the primary negotiator of this entire transaction. We appreciate the great work he did. Phil?
FCB Executive Director Philip Puccia: Thank you, sir. Thank you, Congressman Neal. I’d like to say a particular thanks to Kevin Kennedy from Congressman Neal’s office—
RN: Oh, don’t thank the staff.
[laughter]
PP: I find it best to thank the staff! And my deputy, Steve Lisauskas, for the economic analysis that we think helped convince the IRS of our case. The biggest challenge that we face on a regular basis at City Hall is to uncover these things and to make sure that they don’t happen again. We hope this is the last sort of thing related to employee payroll and benefits that we will uncover, but it’s something we continue to work at every day. As the gentlemen said before me, there will be no liability for the retirees on those years, and this should be a closed matter after this. Thank you.
CR: This would have been an enormously disruptive and painful situation for these retirees. It would have meant going through and trying to amend complicated tax returns, let alone coming up with money. I think the feeling that we had from the beginning, that this was something that was done by error, by the city, in 1993, it was the city’s fault, we should not really look to these innocent retirees to have to bear the burden. And again, Phil has said it, but I’d like to underscore the excellent attitude of the IRS in coming forward and allowing us to have this kind of agreement. It’s wonderful to see the government acting in a way that is responsive to citizens and really helping us to get through what was a very, very difficult problem. So it’s one of these nice announcements where everybody did what they should have done, we get a great result, and we go on from here. And questions from any of the participants?
Q: What percentage of the $250,000 is the total tax liability? In other words, how much did the IRS end up forgiving here?
PP: I’ll do my best to answer that question. There’s a range, depending on the equation that the IRS would use. It represents anywhere from, you know, 33 percent, to something like 20, depending on the range of the tax that they figured, would have been paid by the retirees. So I don’t have an exact answer for you. And that was one of the things going into the discussion of the settlement, would have been the difficulty in assessing the actual dollars in the settlement.
Q: Where does the funding come from, the $250,000?
PP: It came from the city’s operating funds.
Q: General fund?
PP: Yes.
Q: How was it made available, was it just sort of reserve funds or something?
PP: I don’t have a specific account, Pete, but, you know, part of the way we manage the budget, the mayor and I, is to budget conservatively, which allows us to deal with rainy days like this, to be able to have some money held in reserve for these types of events, whether it’s this, or funding the fire station at Massreco Street, or other things. It’s sort of our budget approach that allows us to have the resources available.
Q: Congressman Neal, why did the IRS do this? Could you speak about it?
RN: I’d like to suggest it’s their good nature, but we know that not to be the case. I think, in this instance, here, that what is pretty clear is that the people that were involved in this were really innocent victims. I think the mayor outlined that very clearly. And they were as surprised as I think the city was to discover all of a sudden that this liability was in front of them. And, maybe, behind them, as well. So I think that the IRS, since about 1994, 1995, through a series of initiatives undertaken by the Congress—including the burden of proof, which has shifted—they’ve attempted, now, to be much more cooperative with the citizenry. And I have found them, during the 19 years that I’ve been in the House of Representatives, to try very hard to work with the citizenry on individual cases. Just to share an interesting statistic with you, that I think is terribly important: America enjoys a voluntary tax compliance that is better than 90 percent. That means that 90 percent of American taxpayers voluntarily and on time pay their taxes. And much of that has to do, I think, with the idea that the IRS is out there, and we should be mindful of it. But there’s no nation on earth that comes close to the voluntary tax compliance ratio that we have here in America. And through the use of what is known now as a taxpayer advocate—there is an opportunity to have an advocate actually inside of the IRS, and it’s worked quite well for all of us. And, lastly, if you demonstrate good will—I think Phil would acknowledge that—if you demonstrate good will, and the mayor would note, if you’re really desirous of finding a solution, I think the IRS will go out of its way to be cooperative. One of the great problems that the consumer faces, or that the individual taxpayer faces, in dealing with the IRS, it’s the interest in penalties. And they quickly begin to accrue, and it becomes very difficult for average people, I think, to get out from under them, once that clocks starts ticking, so this is really a significant achievement today. Most importantly, it saves the city, as the mayor indicated, and Phil indicated a few moments ago, probably at least a million dollars.
Q: What about an idea of what it saves an average retiree. I know they retired at different times, it might be hard to say—
PP: It’s hard to say, but probably around $750 to $1,000, depending, again, on the person and their income. One of the reasons I think that the IRS was accepting of our analysis is that we could demonstrate that most city retirees have a pension income of less than $15,000. And that was an important part of the discussion.
CR: Thank you very much.
Update: Mayor Ryan additionally released a statement on the city’s Web site today regarding this announcement. It reads:
Statement of Mayor Charles V. Ryan, March 19, 2007
I am pleased to announce today that I along with the Finance Control Board have reached an agreement with the Internal Revenue Service that guarantees city retirees will not be held personally liable for amended tax returns for 2004 and 2005.
The agreement relieves retirees of that liability as it relates specifically to matters of the City’s elective payments of health insurance premiums.
I, along with the Control Board, uncovered the problem several months ago when we learned that the City had not reported elective payments of health insurance premiums since 1993.
Nor did the City withhold federal income tax for those payments.
We also learned that the elective payments may not have been treated as taxable income by retirees before 2006.
Those troubles from city leadership of the past threatened to now impact retirees, conceivably forcing them to personally make up the difference, which in many cases would have equaled thousands of dollars.
Thanks to the hard work of Control Board Chairman Alan Lebovidge, its Executive Director Phil Puccia, and Congressman Richard Neal, the City was able to reach an agreement with the Internal Revenue Service to resolve a fair agreement for what we all understood was potentially an unfair burden for retirees.
The closing agreement underscores the fact that retirees are not at fault and that they are resolved of all issues including taxation, interest and penalties as it relates to the elective payments.
