Originally created 09/26/03

Supreme Court hears case over retiree benefits



COLUMBIA, S.C. -- The state Supreme Court must decide whether federal retirees were treated unfairly when South Carolina gave state retirees a 7 percent increase in benefits to make up for a ruling ordering them to pay taxes on their retirement.

Attorneys for the state and a federal retiree argued the case Thursday, nearly 15 years after the issue first was dealt with by the U.S. Supreme Court.

Cam Lewis, attorney for federal retiree Doris Ward, said it is unfair for the state to order its retirees to be taxed, then turn around and give them the money back through a benefit increase.

"If you say that's all right, I lose," Lewis told the justices.

But Vance Bettis, arguing for the state, said the U.S. Supreme Court ruling only dealt with how benefits were taxed, not how the state doled out the money.

"Equalization of taxation is one thing," Bettis said. "Equalization of distribution is another."

If the justices rule in favor of the federal retirees, the state could be forced to pay more than $200 million worth of tax refunds and could lose $22.5 million each year in tax revenue, said Mike Sponhour, a spokesman for the state Budget and Control Board.

But during Thursday's case, Lewis said the cost if his side wins the suit had not been determined and "the guiding principle is what is right, not whether the perpetrator can afford to reimburse the victim."

The seeds of the suit were sown in 1989, when the U.S. Supreme Court ruled it was unfair for South Carolina and 14 other states to tax federal pensions without taxing state pensions.

South Carolina reacted by starting to tax state retirees. But to cushion the blow, lawmakers agreed to raise state benefits by 7 percent to cover the tax increase.

Lewis, arguing combatively occasionally even interrupting the justices' questions, used testimony from state Budget and Control Board officials and others to show the increase was directly related to the loss of the tax exemption.

That's not right, because the U.S. Supreme Court ruling just didn't say tax exemptions were unfair, but also struck down tax rebates as well, Lewis said.

Several of the justices questioned whether the federal high court ruling went that far and when the state could increase benefits and not have it considered an offset to a tax increase.

"So when can South Carolina come back and increase retirement benefits?" asked Court of Appeals Judge William Howard, sitting in for associate justice Costa Pleicones, who excused himself because of a conflict.

"Any time they don't do it for that reason," Lewis replied.

Only two of the court's five justices heard the case. Along with Pleicones, Chief Justice Jean Toal also refused to hear the case because of a conflict. Associate justice James Moore missed the session because of a medical emergency.

The justices will rule later.