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April 22, 2012

Lawmakers ready to kill TERI system

Incentive for retiring state workers morphed into plan criticized as ‘double dipping.’

The TERI program is likely dead.

What started out as an incentive to persuade quality teachers to stay in the classroom has ballooned into a symbol of government waste and greed. Since its inception in 2000, the TERI program has been the target of at least a dozen bills to kill it and one lawsuit that went all the way to the state Supreme Court.

But now, with the state retirement system’s deficit at $14 billion and climbing, lawmakers are rallying to end the program. A bill has already passed the House that would eliminate TERI for new hires. And four of the six senators on a subcommittee crafting retirement legislation — two Democrats and two Republicans — say they want to close the TERI program.

“In retrospect, I think we made a little bit of a mistake,” when lawmakers approved TERI, said Sen. Phil Leventis, D-Sumter, a member of the Senate retirement subcommittee.

But supporters say the TERI program makes the state money and gives people a reason to work in state government when they could have a higher salary in the private sector.

“If the goal here is to make a political statement and be punitive to employees then the goal is accomplished,” said Carlton Washington, executive director of the South Carolina State Employee Association. “If the goal is to take care of our most sacred resources, state employees, then I wouldn’t think that eliminating the TERI plan would be the way to go.”

TERI — which stands for Teacher and Employee Retention Incentive — allows state workers to retire but continue working for up to five years. They earn their full salary and their full retirement benefits at the same time. Their benefits are held in trust by the state, earning interest. When the five years are up, the state worker gets his or her benefits in a lump sum, minus the interest.

TERI started in 2000, when the state had a teacher shortage of 6,000. Lawmakers envisioned TERI as a way to keep quality teachers in the classroom for an extra five years.

But critics say that’s not what happened. Instead of keeping employees longer, it encouraged them to retire earlier than they would have. In the first year of TERI’s existence, state agencies were flooded with retirement requests and had to pay out an unexpected $16 million in unused sick and vacation days.

“Anything that gives people an incentive to draw retirement earlier puts stress on the retirement system,” Leventis said.

The program has worked for retaining teachers, according to Beth Phibbs, director of governmental affairs for the South Carolina Association of School Administrators. But because teachers are on the same system as state and local government workers, it has to be made available to everyone — which only compounds the problem.

TERI had financial problems at the start. Once employees entered the TERI program, they kept their salaries but stopped contributing to the retirement system. Having more people taking money from the system without contributing to the system contributed to the system’s growing deficit.

In 2005, lawmakers fixed that by requiring TERI employees to contribute to the system. Now, when employees enters the TERI program, they pay 6.5 percent of their salaries into the system without earning more service credit. They also earn interest on their retirement benefit checks, which stays with the state. (Last year, the state kept $28 million in interest from TERI accounts).

“The retirement system has two sources of revenue for which the employee gets nothing, and so that is a net addition to the retirement system,” said Rep. B.R. Skelton, a former Clemson economics professor who is a strong supporter of the TERI program.

But the interest and the contribution are not enough to cancel out the retirement benefit the system has to pay the employee, said David Avant, managing legal counsel for the state retirement system.

“It mitigates the cost of TERI, but it doesn’t undo it,” he said.

It’s unclear how much money TERI, on its own, has cost the system. An analysis by the South Carolina Retirement System found that the TERI program, along with reducing the retirement eligibility to 28 years from 30 years, added $2 billion to the deficit.

Still, most critics complain not that TERI costs too much, but that it is unfair. They view someone being able to earn a retirement benefit while continuing to work as “double dipping” with tax dollars — something most private sector workers cannot do.

I just think sometimes these folks don’t understand what it is like in the private marketplace right now,” said Don Weaver, president of the South Carolina Association of Taxpayers. “These folks still have a very, very good pension where a lot of folks don’t even have a pension today.”

Even Sen. Darrell Jackson, who as a Richland County Democrat represents a lot of state workers and often defends their benefits, said TERI has to go. He said the biggest complaint he hears from state workers is when someone who is not in TERI loses a job to budget cuts while an employee who is in TERI keeps his or her job.

“It has ballooned into something no one imagined it would become,” Jackson said. “And, quite honestly, I think that it has probably been somewhat abused.”

A bill approved by the House would close the TERI program for anyone hired after July 1, 2012. But some state senators say that is not good enough. Leventis, the Democratic senator on the retirement subcommittee, wants to phase out the TERI program over eight or 10 years.

The last time lawmakers changed the TERI program, in 2005, it led to a class action lawsuit. The state lost and had to pay $31.8 million to 14,000 working retirees, plus interest and attorneys’ fees.

But Dick Harpootlian, who sued the state on behalf of those employees, said lawmakers would have “a strong argument” for closing the program for current workers.

“It depends on how they do it,” he said. “With this Legislature, given a chance to screw it up they will.”

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