‘Tens of Millions’ at Stake in Retiree Lawsuit

August 19, 2010

Investigative Reports

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The NerveThe S.C. retirement system owes tens of millions of dollars to an estimated 15,000 retirees who returned to government jobs since July 1, 2005, according to a lawyer for the plaintiffs in a federal lawsuit filed this month.

The lawsuit, filed Aug. 2 in U.S. District Court in Florence by a group of eight state retirees mainly from Darlington County, contends that the class of “working retirees” comprised of teachers, general employees, police officers and other public safety workers had employee retirement contributions deducted from their paychecks without receiving any additional retirement benefits.

“You don’t get an increase in your retirement check or any additional time for retirement,” Columbia lawyer Dick Harpootlian, one of the plaintiffs’ lawyers, told The Nerve this week. “The issue is, should the retirement system take money from people and give no benefit for it?”

The lawsuit seeks to represent all of the affected retirees. Harpootlian couldn’t provide an estimate of how much is owed to the group, noting that the discovery phase of the case has not yet begun, though he added, “It’s tens of millions of dollars.”

Between $19.5 million and $62 million could be at stake, according to state retirement system records provided to The Nerve.  As of June 30, 2009, there were about 24,000 working retirees in the general employee and police officer retirement systems, records show, though it was not known how many of them were rehired after July 1, 2005.

The lawsuit asks a judge to “immediately return to plaintiffs and the class all monies defendants have deducted as contributions to the retirement systems since July 1, 2005.”

As a comparison, the S.C. Supreme Court in 2006 ordered refunds to about 14,000 state retirees who participated in another working retirement program for higher-salaried employees known as the Teacher and Employee Retention Incentive (TERI) program. Court records show that $37.8 million was paid to that group following the 2006 ruling.

Harpootlian and Columbia lawyer Cam Lewis were awarded $1 million in taxpayer-funded legal fees in the TERI case, which did not, per court order, come out of the retirement system. The lawyers are among a group of attorneys representing the plaintiffs in the federal suit.

The attraction of the TERI and working retiree programs is that retired state workers can earn a salary and retirement benefits at the same time. Supporters of the programs contend that they keep experienced workers in agencies and areas of the state that badly needed help; critics claim the programs are a drain on the state budget.

The five-member S.C. Budget and Control Board, which oversees the state retirement system, voted last week to hire Columbia lawyer Bobby Stepp, who defended the retirement system in the TERI case, as the lead attorney to represent the defendants in the federal suit. His hourly rate for the case is $185, BCB spokesman Mike Sponhour told The Nerve.

Besides the retirement system and system director Peggy Boykin, the defendants include BCB Executive Director Frank Fusco and board members Gov. Mark Sanford;  S.C. Treasurer Converse Chellis;  state Comptroller General Richard Eckstrom; Senate Finance Committee Chairman Hugh Leatherman, R-Florence; and House Ways and Means Committee Chairman Dan Cooper, R-Anderson.

Stepp declined comment when contacted this week by The Nerve, referring questions to Sponhour.

BCB attorneys Ed Evans and David Avant told The Nerve this week that the constitutional questions raised in the federal suit were rejected earlier by state courts.

“We believe we have meritorious defenses,” said Evans. “We don’t believe this is a taking of any protected property issues.”

Avant said that given the claims made in the suit, “theoretically, we couldn’t charge any (employee) contributions going forward” unless there were corresponding increases in benefits upon retirement.

Harpootlian told The Nerve that based on a state employee retirement contribution rate of 6.25 percent – which currently is 6.5 percent – and an annual $30,000 salary, the retirement system deducted more than $1,800 annually from the paycheck of a working retiree.  Under a typical “deferred benefits” retirement plan, the worker would not have to pay incomes taxes on the $1,800 while employed but would owe taxes after retiring and receiving benefits, he said.

Under the working retirees’ retirement plan, however, “you pay no taxes because you never get it (the employee contribution after retirement),” Harpootlian said. “It’s an illegal tax.”

The lawsuit contends that the employee deductions violate the 5th and 14th amendments of the U.S. Constitution.

“The working retirees’ earnings are private property entitled to federal constitutional protection from arbitrary and unreasonable governmental action,” the suit says. “The taking and deprivation of this property interest amounts to a taking of the working retirees’ property without just compensation.”

Harpootlian and Lewis also are representing another group of working state retirees in a state lawsuit. It contends that since July 1, 2005, the state has illegally deducted employee contributions of retirees rehired before July 1, 2005.

The S.C. Supreme Court in the 2006 TERI ruling said the state violated a similar “contract” with the TERI retirees but sent the working retirees’ claims back to the lower courts. At that time, there were about 9,000 affected working retirees.

In a June 2009 ruling on that case and another state lawsuit involving the police officers’ retirement system, Circuit Judge James Williams ordered the state to quit deducting the contributions of working retirees rehired before July 1, 2005, and refund all previously withheld amounts. That ruling is pending before the S.C. Supreme Court.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.