State must return millions to retirees

S.C. wrongly forced TERI participants to contribute toward pensions, state Supreme Court rules

By RICK BRUNDRETT and JOHN O’CONNOR

rbrundrett@thestate.com johnoconnor@thestate.com

The state wrongly forced thousands of retirees who returned to work under a special program to continue to contribute toward their pensions, the S.C. Supreme Court ruled unanimously Thursday.

The much-anticipated ruling, written by Chief Justice Jean Toal, requires the state to refund the contributions — with interest — to retirees who signed up for the Teacher and Employee Retention Incentive program before July 1, 2005.

Retirees hailed the ruling, while lawmakers raised concerns about its long-term cost.

The ruling returns paid-in money to more than 13,000 participants, most of whom are teachers. Those dollars now are held in escrow.

The court did not decide the issue for another approximately 9,000 working retirees, sending that question to a lower court to review.

Participants who enrolled after July 1, 2005, will continue to have pension contributions deducted from their paychecks, the court said.

“I feel vindicated,” said David FitzGerald, one of four affected workers who filed the initial suit. “Once in a while, it restores your faith in the judicial system.”

Under the program, retirees can work up to five years after they retire and continue to accumulate pension benefits. Their retirement money is held in a no-interest account to be paid out in a lump sum at the end of the program or rolled into a qualifying retirement fund.

The justices said the Legislature breached a contract with the retirees when it amended the program last year to begin requiring pension contributions of 6.25 percent. The amount was set to increase to 6.5 percent in July.

“That’s the difference between going on a vacation and not going on a vacation,” said Cam Lewis, one of the workers’ attorneys.

The retirees contended in a lawsuit against the state retirement system that they weren’t required to make contributions when the program was created in 2001. The high court agreed.

“The old TERI statute fixed obligations, required affirmative actions by both the state and old TERI program participants, and contained contractually significant language,” the justices said.

Columbia lawyer Bobby Stepp, one of the attorneys for the state and the S.C. Retirement System, described the ruling as “bad policy and bad law.”

“This decision will impact the ability of the legislative branch to manage governmental affairs in the future,” he said.

The court verdict likely will leave lawmakers with tough decisions to make about the state’s $25 billion pension system.

The state expected to collect about $45 million a year from the money withheld from affected workers’ paychecks.

The justices rejected the state’s argument that a ruling favoring the enrolled workers would cause the retirement system to “reach near crisis.”

Lawmakers said they did not know how much the court decision could cost. Estimates have varied between $120 million and $500 million in new state liabilities over the next few years.

“It’s obviously going to cost the state a lot of money — we don’t know how much at this point,” said House Ways and Means chairman Dan Cooper, R-Anderson, a member of the State Budget and Control Board.

The payroll contributions of program and other working retirees were important to prevent an unhealthy amount of debt in the system, which could damage the state’s credit rating. Some also said the money was necessary to maintain cost-of-living increases.

To prevent that, lawmakers could increase money coming into the system — requiring higher contributions from employees — or reduce benefits to those in the system.

The justices said they didn’t have enough information to “make the factual or legal inquiry necessary to determine if a binding contract existed” between the state and the workers not covered by the program.

It sent that part of the case to the 5th Circuit Court for a determination. The court said those claims would have to be analyzed on a case-by-case basis.

Those retirees who returned to work before July 1, 2005, were limited to an annual salary of $50,000, though they could receive their pension benefits while they worked, Lewis said.

Gov. Mark Sanford said the ruling emphasizes the need to move from its current retirement system toward a defined contribution pension system. That system would work like a 401(k), in which an employer matches part of an employee’s invested contribution.

Sanford spokesman Joel Sawyer, said most private companies have moved away from retirement plans like the state’s. “In the long term,” Sawyer said, “those plans are not financially viable.”

The justices declined to address several state and federal constitutional issues brought by the plaintiffs.

The court required the disputed contributions to be transferred to an interest-bearing account pending their ruling.