Rep: Subsidy hikes may threaten system's tax exemption

but the plan could be targeted by the IRS.

A bill before his committee would end the subsidy increases, which public workers unions say will devastate many public retirees who are already financially-strapped. They say the current subsidy structure does not violates federal tax law.

Burling explained in an interview his committee has been presented with conflicting legal opinions on the issue -- one by an attorney for the retirement system and another by an attorney for a coalition representing retired public workers.

"The consequences, if we follow the wrong advice, can be catastrophic," Burling said. "If the IRS decides to get grumpy, we could lose the tax-free status of the New Hampshire retirement benefit, so 21,000 retirees could start to get taxed on their benefit."

Burling said he favors removing the increase, as proposed in House Bill 1645, to be safe and to defer to the legal opinion backed by the retirement system board of trustees.

He said if the subsidy increase is determined later to be in compliance with IRS law, "We could put it back, but in the meantime, we won't risk disqualification" and they will not be forcing a "53 percent rate increase on the cities and towns.

"I'm trying to be very conservative," Burling said. "I don't want to risk a catastrophic financial impact on the taxpayers or the people who are retired and are counting on us to find a solution."

Burling, who is an attorney, explained that federal tax law "suggests that pension systems are only allowed under the internal revenue code to provide pension benefits, and pension benefits are traditionally treated as those things that provide a post-work life payment. Included with that sort of work life payment is the concept of the cost-of-living increase," which, he said, the IRS allows.

But, he explained that the attorney hired by the retirement system has given the board an opinion that "medical benefits, the right to have some medical costs picked up by someone else, are not pension benefits. Yet, under our system, some people who are retired have been getting a medical supplement.

"Is that payment part of the pension system or not? If it's not then and that's the way we've been doing it, that's a problem," Burling said.

Burling said the retirement system board "believes it is a problem, based on its attorney's advice that New Hampshire use of a trust device to transfer money from the pension system to a medical subsidy program was not consistent with federal law."

Burling explained that the trustees decided last fall "that they had to terminate the practice of transferring funds to a special account."

But he said that at a hearing on the bill last week, an attorney hired by the unions opposing the bill gave an opinion that the board's attorney was wrong "and there is no problem, so why do anything?"

Burling said he doubts that it is the Legislature's job "to determine which set of lawyers is correct" when the board has made its determination.

He said lawmakers should instead "stay focused on a solution to guarantee the availability of a robust retirement fund to the extent we can do that."