ROANOKE TIMES

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, July 9, 1994                   TAG: 9407120032
SECTION: NATIONAL/INTERNATIONAL                    PAGE: A1   EDITION: METRO 
SOURCE: By DAVID M. POOLE STAFF WRITER
DATELINE: RICHMOND                                 LENGTH: Long


PENSIONERS TO DECIDE FATE OF TAX SETTLEMENT ISSUE

Federal and military retirees whose pensions were overtaxed in the late 1980s could start looking in their mailboxes for refund checks in 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 legislature's decision to tinker with Social Security adjustments on state tax forms that could raise taxes for some 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 chapters of the National Association of Retired Federal Employees.

It may be February before the state Tax Department knows how many retirees accept the settlement.

The three-day special assembly 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 with the changes in Social Security 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 a 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 Allen to finance his agenda to eliminate parole and to institute educational 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 gird 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 a settlement with federal retirees and tax cuts.

Democrats hoped to get some political mileage from the tax relief granted to Social Security recipients, a windfall fashioned by House Majority Leader 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 seniors. Last year the GOP mailed tens of thousands of fliers featuring the photograph of an old woman, pointing a bony finger at the camera, who accused 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 1985-88, 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 after 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 fellow Republican Attorney General Jim Gilmore 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 Moss, 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 legislature. But he also credited himself and Allen for 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 are the fees for Michael J. Kator, a Washington attorney 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 are 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.''


Memo: strip

by CNB