The state Supreme Court on Friday upped the stakes in a lawsuit filed by four TERI employees, ruling the case applies to all of the state’s 22,000 working retirees.

The ruling comes as attorneys for the state are preparing a high-stakes strategic move by trying to link the TERI lawsuit with a separate case involving how pensions are taxed.

The move is a gamble because government lawyers are trying to give justices only two options:

• Rule in favor of the state in both cases

• Saddle taxpayers with a $500 million tab — crippling the state budget and the $25 billion retirement system in the process

“That would put the state in financial chaos,” Budget and Control Board spokesman Mike Sponhour said . “Make no mistake, these lawsuits affect every citizen in the state who pays taxes.”

More than 300,000 South Carolinians pay into or collect benefits from the retirement system — but taxpayers also bankroll it to the tune of more than $600 million a year.

The legal maneuvering — and intensified rhetoric from state officials — is the latest chapter in the struggle over how far the General Assembly can go in making changes to the state’s debt-ridden pension system.

NEW LAW

The TERI lawsuit centers on a new law passed by the General Assembly that requires all state retirees who continue to work to start making a 6.25 percent contribution to the retirement system.

The law also raised retirement contribution rates for working state employees and employers.

The additional money was part of a compromise plan designed to save annual cost-of-living adjustments given to 90,000 state retirees.

But four TERI employees filed a lawsuit, claiming the state is violating the terms of their employment contract by asking them to make pension payments.

The Supreme Court has fast-tracked the case and ordered all contributions from the 14,000 TERI employees and 9,000 other working retirees to be placed in an escrow account.

State lawyers now say the contractual questions raised in the TERI lawsuit go to the heart of an unresolved 1998 case that challenged the state’s decision to deduct income taxes from state pensions.

Both lawsuits, they say, are about the General Assembly’s ability to make necessary changes to the retirement system.

OPPOSING VIEWS

If the state loses the income tax case, officials say that it would have to pay all retirees $500 million immediately and that the state would lose an additional $50 million in state income tax revenues every year.

If it loses the TERI lawsuit, the retirement system would lose $55 million annually it had earmarked for cost-of-living adjustments.

Budget and Control Board spokesman Sponhour said that would mean either a massive taxpayer bailout, steeper payroll deductions for working state employees, or cuts in retirement benefits.

“If (the TERI retirees) are successful, the retirement system will become financially unsound,” Sponhour said.

Columbia attorney Cam Lewis, who represents plaintiffs in both the TERI and income tax lawsuits, isn’t buying it.

He accuses the state of resorting to “scare tactics” to pressure the court. He says that while both cases are about broken promises, they are not related legally and should be heard separately.

“The legal questions are totally different,” he said. The state is “trying to scare the court by saying it’s going to cost too much. That’s what they do all the time.”

Lewis also says the state’s retirement system, which has $25 billion in assets, might be in better shape than officials claim and questions state actuarial reports that show it bumping up against a 30-year debt ceiling.

Lewis provided no documentation to back up that claim.

But others say there is real reason to worry about the financial repercussions if the state fails to sway the court.

The S.C. Chamber of Commerce plans to file a legal brief on behalf of the state, arguing that ruling against the state could set a dangerous precedent.

“Employers, whether public or private, should have the authority to make changes (to pension systems) as conditions change,” chamber president Hunter Howard said. “If (the plaintiffs) win, it’ll be taxpayers that end up picking up the tab.”

Also of major concern, Howard said, is whether economic development efforts would be hampered by an unfavorable ruling.

“People could start looking elsewhere if they think our pension system is unsound,” he said.

Reach Stensland at (803) 771-8358 or jstensland@thestate.com