THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, July 9, 1994 TAG: 9407090231
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY DAVID M. POOLE, STAFF WRITER
DATELINE: RICHMOND LENGTH: Long : 113 lines
Federal and military retirees whose pensions were overtaxed in the late 1980s could start looking in their mailboxes for refund checks next April.
The payments will be the first of five installments in a $340 million settlement approved Friday by the General Assembly.
Legislative leaders were confident that the plan would end a five-year battle with the state's 186,000 federal pensioners and short-circuit a lawsuit that had the potential to bust the state budget with a $710 million judgment.
The settlement now depends on the support of pensioners. The General Assembly can walk away from the deal if retirees with claims totaling $20 million press ahead with litigation.
Retiree leaders said they would urge acceptance, despite the Assembly's decision to tinker with Social Security adjustments on state tax forms, a move that could raise taxes for an estimated 30,000 civil service retirees.
``We're going to take some hits for this, but I think we can get around it,'' said Oscar J. Honeycutt, immediate past president of the Virginia chapter of the National Association of Retired Federal Employees.
It may be February before the state Department of Taxation knows how many retirees accept the settlement.
The Assembly's three-day special session, called to settle the pension tax issue, gave legislators a chance to spread the wealth to other politically active groups. State retirees got a 3 percent increase in benefits. Virtually every senior citizen got a windfall withthe Social Security tax revisions.
The House of Delegates passed the package on a 95-0 vote. The Senate approved it 35-2.
The combination of refunds, tax relief and pension benefits will cost $60 million this year, $90 million next year and an estimated $300 million during the two-year budget that begins in July 1996.
The package is expected to soak up nearly half of an anticipated $700 million increase in tax revenue during the next biennium.
It was not lost on the Assembly's Democratic leadership that the costs would make it more difficult for Republican Gov. George F. Allen to finance his agenda to eliminate parole and institute education and welfare reform.
``I'm sure they think it's great fun to be playing those political games with the taxpayers' money,'' Allen said Friday.
Still, Allen said the price tag may be necessary to clean up ``messes that have been ignored'' by two previous Democratic administrations.
Despite the Assembly's near unanimity, there was plenty of partisan positioning as both sides girded for the next year's legislative elections, in which Republicans will seek to break the Democrats' control of the General Assembly.
Before the vote was final, Republican lawmakers were circulating a list of ``talking points'' describing the bill as the culmination of GOP calls for tax cuts and a settlement with federal retirees.
Democrats hoped to get some political mileage from the tax relief granted to Social Security recipients, a windfall fashioned by House Majority Leader C. Richard Cranwell, D-Roanoke County.
Since 1990, Democrats have been on the defensive about a Social Security offset, which reduces the amount of a tax credit claimed by senior citizens. Last year, the GOP mailed tens of thousands of fliers that featured a photograph of an old woman pointing a bony finger at the camera and accusing Democratic lawmakers of taxing her Social Security check.
By eliminating the Social Security offset, Democrats can seek to take credit for what Cranwell called a ``significant tax relief for a vast number'' of older Virginians.
The federal retiree issue grew out of a state policy that taxed the pensions of former federal workers from 1985 to 1988, while exempting the pensions of state retirees.
The U.S. Supreme Court later ruled the policy illegal but left open the question of whether the state must refund the estimated $460 million collected from federal and military retirees. Retirees sued, seeking back taxes and interest when then-Attorney General Mary Sue Terry recommended against refunds.
The issue came to a head last fall when Terry and Allen ran for governor. Allen and his fellow Republican, Attorney General James S. Gilmore III, promised to settle the lawsuit if they were elected.
In April, Allen and Gilmore put forward what they described as a ``final'' offer of $234 million.
Pensioners, upset that they had not been consulted, rebuffed the offer as insufficient.
``House and Senate Democrats were able to pick up the pieces after the administration failed to reach a settlement with federal retirees,'' said House Speaker Thomas W. Moss Jr., D-Norfolk.
Cranwell, meeting behind closed doors with retiree leaders, put together an agreement that became the framework of the bill passed Friday.
Gilmore applauded the work of the Assembly. But he also credited Allen with forcing the issue.
``For five years, my predecessor, Mary Sue Terry, stonewalled the retirees and exposed the commonwealth to a three-quarter billion liability,'' Gilmore said. ``After 90 days in office . . . I put this issue on the table and got things moving.''
One unresolved issue is the fees for Michael J. Kator, a Washington lawyer who negotiated on behalf of major retiree groups.
Kator, who has received some fees from his clients, said he planned to petition a state or federal court to allow him to claim a percentage of the $340 million settlement.
``We have always believed the matter of fees is between Mike Kator and his clients,'' Gilmore said. ``We oppose any effort for a windfall when he represented only 428 clients out of 186,000 retirees.'' ILLUSTRATION: ESTIMATED PAYOUT SCHEDULE
SOURCE: House and Senate Finance Committees
STAFF
[For a copy of the chart, see microfilm on page A1 for this date.]
ADMINISTRATIVE SETTLEMENT
SOURCE: House and Senate Finance Committees
[For a copy of the chart, see microfilm on page A10 for this date.]
KEYWORDS: FEDERAL RETIREES INCOME TAX REFUND by CNB