Case Title: Bailey v. State of North Carolina

Citation: 348 N.C. 130

Docket Number: 53PA96

State: north-carolina

Court: North Carolina Supreme Court

Date: 1998-05-08T00:00:00Z

Document:
IN THE SUPREME COURT OF NORTH CAROLINA
No. 53PA96
FILED: 8 MAY 1998
JAMES H. POU BAILEY, A. PILSTON GODWIN, HARRY L. UNDERWOOD, HENRY
L. BRIDGES, ROSALIE T. ADAMS, JESSE M. ALMON, HELEN L. ANDREWS,
WORTH B. SKEW, BILLY A. BAKER, PARKER N. BARE, ARTHUR C. BEAMAN
AND GRACE G. BEAMAN, JOSEPH G. BINKLEY, ROBERT L. BLEVINS, ELLIE
L. BOYLES, CHANCEL T. BROWN AND JOAN W. BROWN, ELIZABETH S.
BUTLER, DOROTHY T. CARMICHAEL, JOHN CARRICKER, HAROLD D. COLEY,
SR., ANNA L. COOPER, CHARLES C. COOPER AND BERTIE S. COOPER, T.J.
DUNCAN AND ESTHER P. DUNCAN, DAN R. EMORY, MARTIN W. ERICSON,
FRED W. GENTRY, IVEY B. GORDON AND IZORIA S. GORDON, LOUIS N.
GOSSELIN, EARL T. GREEN, BOB HAMMONS, DARIUS B. HERRING, RAY F.
HOLCOMB, TILLE M. HOLCOMB, KAY C. HURT, JOHN I. KIGER AND MARIE
K. KIGER, CLARENCE T. LEINBACH, WALTER G. LEMING AND BARBARA C.
LEMING, YATES LOWE, HARRIETTE B. MCCORMICK, VIRGINIA H. MICKEY,
WILLIAM F. MORGAN, HARRIETTA B. MCCORMICK, EARL RAY PARKER,
CALVIN C. PEARCE, MICHAEL PELECH, DIANE S. PEOPLES, MILDRED R.
POINDEXTER, WINNIE D.POTTS, PATSY M. REYNOLDS, GLENN D. RUSSELL,
BLANCHE S. SHIPP, CLYDE R. SHOOK, HAROLD E. SIMPSON, SONNIE B.
SIMPSON, LENORA S. SMITH, FRANCES J. SNOW, CHARLES A. SPEED,
JUSTUS M. TUCKER, WALTER P. UPRIGHT, RALPH B. WALKER AND MARTHA
M. WALKER, JEAN A. WATSON, ROBERT I.WEATHERSBEE, RUBY WEBSTER,
HARRY LEE WILLIAMS, DANIEL W. WILLIAMS, ELIZABETH H. WILSON,
WILBUR G. WILSON, ERNEST B. WOOD, THOMAS S. WORSHAM, Individually
for the benefit and on behalf of all others similarly situated,
Petitioner-Plaintiffs
and
W.K. AUBRY, JR., JAMES BRYAN BARRETT, NORMAN W. CASH, ROBERTA M.
COOK, JOHN ED DAVIS, DANIEL M. DYSON, EDWIN C. GUY, SAMUEL L.
HARMON, JOHN MARSHALL HARTLEY, DONALD ELLIOT HARTLE, MARTHA M.
LAWING, DOUGLAS LAMAR MASON, DELMA DALTON RESPASS, JR., WILLIAM
ELMER RIGGS, PAUL L. SALISBURY, JR., RICHARD A. SHARPE, NELSON
LEROY SHEAROUSE, FRANCIS C. SIMMONS AND MARY E. SIMMONS, NED
RAEFORD SMITH, G. VANCE SOLOMON AND EULALIA T. SOLOMON, THOMAS
LASH TRANSOU AND WILBUR EUGENE YOUNG, 
Additional
Petitioner-Plaintiffs
 v.
STATE OF NORTH CAROLINA, THE NORTH CAROLINA DEPARTMENT OF
REVENUE, JANICE FAULKNER, in her capacity as SECRETARY OF THE
NORTH CAROLINA DEPARTMENT OF REVENUE, THE NORTH CAROLINA
DEPARTMENT OF STATE TREASURER, HARLAN E. BOYLES, in his capacity
as TREASURER OF THE STATE OF NORTH CAROLINA, 
Respondent-Defendants
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On discretionary review pursuant to N.C.G.S. § 7A-31
prior to a determination by the Court of Appeals from an order
for plaintiffs entered by Thompson, J., on 2 June 1995 and an
amended order entered on 25 September 1995 in Superior Court,
Wake County.  Heard in the Supreme Court 12 September 1996.
Womble Carlyle Sandridge & Rice, P.L.L.C., by G. Eugene
Boyce, for petitioner-appellants and -appellees.
Michael F. Easley, Attorney General, by Edwin M.
Speas, Jr., Senior Deputy Attorney General, Norma S.
Harrell, Special Deputy Attorney General, and
Marilyn R. Mudge, Assistant Attorney General, for
respondent-appellants and -appellees.
Marvin Schiller on behalf of The State Employees
Association of North Carolina, Inc., amicus curiae.
LAKE, Justice.
This is an appeal from an order entered essentially in
plaintiffs’ favor by the Honorable Jack A. Thompson in Superior
Court, Wake County, pursuant to assignment and designation of the
case as an exceptional case under Rule 2.1 of the General Rules
of Practice.  Following a two-week trial, including the testimony
of twenty-four witnesses and 1,689 pages of transcript, and
subsequent proceedings before the trial court, a final order on
all issues was entered 25 September 1995. 
This class action was initiated by the filing of
plaintiffs’ complaint on 2 October 1992.  Many of the plaintiffs
in this suit had previously brought a virtually identical suit,
which resulted in certification of the class and partial summary
judgment for plaintiffs.  This ruling was reversed on appeal by
this Court for failure of plaintiffs to comply with mandatory
protest or demand requirements contained in N.C.G.S. § 105-267,
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which the Court held was the exclusive method for challenging
unconstitutional or invalid income taxes in North Carolina. 
Bailey v. North Carolina, 330 N.C. 227, 412 S.E.2d 295 (1991),
cert. denied, 504 U.S. 911, 118 L. Ed. 2d 547 (1992) (“Bailey
I”).  Plaintiffs took a voluntary dismissal in Bailey I before
filing this action.
Plaintiffs’ motion for class certification was again
allowed by an order filed 10 October 1994, certifying a class of
state and local government retirees and beneficiaries with claims
for tax years 1989, 1990 and 1991 who had complied with North
Carolina requirements for refund claims.
The trial court’s judgment for plaintiffs was contained
in two orders, the import of which held that the 1989 legislation
which partially taxed state and local government retirement
benefits was an unconstitutional impairment of contract under the
United States Constitution.  The trial court also ruled that the
taxation was a material breach of contract, was an
unconstitutional retroactive tax, violated judges’ state
constitutional rights not to have their salaries diminished
during office, and violated other state and federal
constitutional provisions.
On 25 September 1995, the trial court entered an
Amended Order in Wake County Superior Court.  The amended order
made further findings of fact and conclusions of law and ruled on
certain of plaintiffs’ claims which were previously unaddressed. 
The amended order also provided for retirees who had five or more
years of retirement system service as of 12 August 1989 to
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recover income taxes paid on retirement benefits since 1989 in
the form of tax credits or refunds, if they had filed timely
“protests.”  It also enjoined defendants to cease collecting
income taxes on state and local government retirement benefits
attributable to service prior to 1989.  The amended order further
provided for fifteen percent of the refund or credit amount for
each plaintiff class member to be paid to a common fund for
payment of plaintiffs’ attorney’s fees and various expenses and
costs, with any excess remaining in the common fund to be paid to
the State Employees’ Association.  Finally, the amended order
stayed, pending appeal, the relief awarded to plaintiffs,
including refunds, credits, and injunctive relief, except for
notice to class members and preservation of relevant records.  
Defendants filed notice of appeal on 25 September 1995. 
On 5 February 1996, defendants filed with this Court a petition
for discretionary review prior to determination by the Court of
Appeals.  This petition was allowed by this Court on 3 April
1996.
The facts relevant to this appeal as established at
trial are as follows.  Beginning in 1939, the North Carolina
General Assembly established numerous programs for the provision
of retirement benefits to North Carolina state and local
government employees.  As of 12 August 1989, the date on which
the General Assembly enacted chapter 792 of the 1989 Session
Laws, the legislation which is the subject of this case, at least
thirteen different public employee retirement systems were
operating for the purpose of providing public servants with
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retirement benefits.  These various systems are set forth in
chapters 58, 120, 127A, 128, 135, 143, 143B, 147 and 161 of the
North Carolina General Statutes (collectively referred to as the
“Retirement Systems”).  The Retirement Systems include three
different benefit and contribution schemes:  mandatory defined
benefit plans with mandatory contribution, optional defined
contribution plans or defined benefit plans to which employees
may contribute, and noncontributory defined benefit plans.
The mandatory defined benefit systems include the
Legislative Retirement System (LRS), the Consolidated Judicial
Retirement System (CJRS), the Teachers’ and State Employees’
Retirement System (TSERS), the Local Government Employees’
Retirement System (LGERS), and the Disability Income Plan (DIP). 
During the period relevant to this appeal, all full-time state
and local government employees had to be a member of at least one
of these systems and were required to contribute a specified
percentage of their salary to the system through payroll
deduction.  Prior to 12 August 1989, an exemption from state and
local taxation was allowed for each of the above systems,
providing:
the right of a person to a pension, an
annuity, or a retirement allowance, to the
return of contributions, the pension, annuity
or retirement allowance itself, any optional
benefit or any other right accrued or
accruing to any person under the provisions
of [the primary deferred benefit retirement
acts], and the moneys in the various funds
. . . are hereby exempt from any state or
municipal tax, and exempt from levy and sale,
garnishment, attachment, or any other process
whatsoever . . . .
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N.C.G.S. § 128-31 (1986) (LGERS); accord N.C.G.S. § 120-4.29
(1986) (LRS); N.C.G.S. § 135-9 (1988) (TSERS); N.C.G.S. § 135-111
(1988) (DIP); N.C.G.S. § 135-52(a) (1988) (CJRS).
The optional defined contribution or defined benefit
plans include the Supplemental Retirement Income Plan (SRIP), the
Deferred Compensation Plan (DCP), and the Supplemental Retirement
Income Plan for State Law Enforcement Officers (SRIPLEO).  For
each of these plans, employees could contribute during the course
of their employment but were not required to contribute.  An
exemption from taxation was allowed for benefits accruing as a
result of participation in these plans prior to 12 August 1989 in
one of the following forms:  “These benefits are . . . exempt
from all State and local taxation,” N.C.G.S. § 147-9.4 (1987)
(DCP), or “[t]he right . . . to the benefits . . . is
nonforfeitable and exempt from levy, sale, garnishment, and the
benefits payable under this Article are hereby exempt from any
State and local government taxes,” N.C.G.S. § 143-166.30(g)
(1987) (SRIPLEO); accord N.C.G.S. § 135-95 (1988) (SRIP).
The noncontributory defined benefit plans include the
National Guard Pension Fund (NGPF), the Register of Deeds
Supplemental Pension Fund (RofDSPF), the Separate Insurance
Benefits Plan (SIBP), and the Sheriffs’ Supplemental Pension Fund
(SSPF).  Employees were neither required to nor allowed to
contribute to these systems, but benefits were offered to all
employees eligible for participation in the plans.  For each of
these systems, an exemption from taxation was allowed prior to 12
August 1989 under one of the following provisions:  “Benefits
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paid under the provisions of this [retirement system] shall be
exempt from North Carolina income tax,” N.C.G.S. § 143-166.85(e)
(1987) (SSPF); accord N.C.G.S. § 127A-40(e) (Supp. 1979) (NGPF);
N.C.G.S. § 161-50.5 (1987) (RofDSPF); or “The right of a
participant . . . to the benefits provided . . . is
nonforfeitable . . . and the benefits payable . . . are exempt
from any State and local government taxes,” N.C.G.S. § 143-
166.60(h) (1987) (SIBP).
Each of these systems contains certain preconditions to
the receipt of benefits.  The primary one is the requirement that
employees work a predetermined amount of time in public service
before they are eligible for retirement benefits.  After
employment for the set number of years, an employee is deemed to
have “vested” in the retirement system.  Thereafter, the employee
generally is guaranteed a percentage payment at retirement based
upon years of service.  Since the inception of the Retirement
Systems, the periods of employment required for vesting have been
shortened.  For example, the LGERS, TSERS and CJRS or their
predecessor systems were shortened over time from twenty years’
service to the present five years’ service.  Plaintiff class
members each completed five or more years of creditable public
service prior to 12 August 1989, retired, and received benefits
under one of the Retirement Systems after their retirement.  
From their inception and until 12 August 1989, the
benefits paid plaintiff retirees from the Retirement Systems were
exempted from state taxation.  Evidence adduced at trial
established that the exemptions were contained in the
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aforementioned retirement statutes, alongside the requirements
for and descriptions of benefits, as opposed to being located
among or within the statutes providing the individual income tax
provisions or other tax statutes.  Numerous employee witnesses
testified that defendants’ agents offered the exemptions as a
type of compensation to employees of state and local governments. 
The testimony reveals that often the exemption of benefits from
taxation was communicated to prospective employees with the
intent of inducing individuals to either begin or continue public
service employment.  Moreover, testimony and exhibits offered at
trial establish that innumerable communications were made to
plaintiff public employees throughout their careers, both orally
and in writing (including multiple unequivocal written statements
in official publications and employee handbooks) that their
retirement benefits would be exempt from state taxation. 
Plaintiffs assert they relied on such statutes and communications
as assuring compensation in the form of such exemption in
exchange for public service.  Upon accepting employment,
plaintiffs also bore the risk that they would receive no benefits
and that their contributions would be returned without interest
should they fail to work the time required for vesting.
The exemption from state taxation on retirement
benefits paid by the State, as provided under the Retirement
Systems, applied only to state and local government employees and
was not available to federal government employees.  This case is
one of many that arose in the wake of the United States Supreme
Court’s ruling in Davis v. Michigan Dep’t of Treasury, 489 U.S.
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803, 103 L. Ed. 2d 891 (1989).  In Davis, the Supreme Court held
that if a state taxes state and local government employees
differently than it taxes federal employees, the state violates
the constitutional doctrine of intergovernmental tax immunity as
well as federal statutory law.  Id. at 817, 103 L. Ed. 2d at 906. 
Under 4 U.S.C. § 111, the federal government expressly “consents
to the taxation [by states] of pay or compensation for personal
service as an officer or employee of the United States . . . if
the taxation does not discriminate against the officer or
employee because of the source of the pay or compensation.”  4
U.S.C. § 111 (1988).  Since the State made different provisions
for taxation of federal employees (i.e., the exemption from state
tax), the exemption was held to be violative as applied.  Davis,
489 U.S. at 817, 103 L. Ed. 2d at 906.
In response to Davis, the North Carolina General
Assembly passed 1989 Session Laws chapter 792, section 3.9 (“the
Act”).  The Act changed the exemption of retired state employees
from taxation on retirement benefits in two important ways. 
First, the Act amended the exemption to provide it to all
governmental employees--state, local and federal.  Second, the
Act placed a $4,000 cap on the amount of annual benefits that
would be exempt from state taxation.  N.C.G.S. § 105-134.6 (1989)
(adjustments to taxable income).
Class plaintiffs are North Carolina state and local
government employees whose retirement benefits vested on or
before 12 August 1989, the ratification date of the Act. 
Plaintiffs assert, inter alia, that the State’s removal of the
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exemption beyond the amount of $4,000 operated unconstitutionally
to deprive them of benefits to which they had a vested right.
In this opinion, we first address whether plaintiffs
have a contractual right to an exemption of their benefits from
state taxation that has been impaired by the Act.  Necessary to a
full consideration of this question is examination of several
subissues, including the legal relationship between vested
members of the Retirement Systems and the State, the
constitutionality of the State’s contracting for a tax exemption,
the factual basis of plaintiffs’ contract claim, and finally the
degree and reasonableness of the State’s impairment of those
contracts.  In the second part of this opinion, we examine
whether the State’s passage of the Act amounts to a taking of
plaintiffs’ property without just compensation.  Next, we
consider whether the trial court erred by enjoining the State
from future collection of the taxes in question.  We then review
the trial court’s creation of a common fund for payment of fees
and expenses incurred by plaintiffs.  Lastly, we address whether
the trial court erred by limiting recovery only to those
plaintiffs who met the statutory requirements for filing a tax
refund lawsuit as opposed to all retirees affected by the Act.
I.  IMPAIRMENT OF CONTRACT
The central issue in this case is whether the
plaintiffs have an enforceable contract right that has been
unconstitutionally impaired by the State of North Carolina. 
Plaintiffs urge this Court to follow the Court of Appeals’
decision in Simpson v. N.C. Local Gov’t Employees’ Retirement
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Sys., 88 N.C. App. 218, 363 S.E.2d 90 (1987), aff’d per curiam,
323 N.C. 362, 372 S.E.2d 559 (1988), which held that the
relationship between the Retirement Systems and state employees
who have vested in those systems is contractual in nature. 
Defendants argue that no contractual relationship exists between
the Retirement Systems and the employees in this case.  This
argument is based on several contentions, notably that:  (1)
Simpson was wrongly decided, and there is no contractual
relationship between vested state employees and the Retirement
Systems; (2) as a general matter, statutes are statements of
policy, and the legislature expressed no intent to create a
contract for a tax exemption through the statute; and (3) the
North Carolina Constitution prohibits contracting away the
State’s sovereign “power to tax” under Article V, Section 2(1). 
Upon analysis, we conclude that plaintiffs did have an
enforceable contract right which has been impaired by the State
through the passage of the Act by the General Assembly.
Article I, Section 10 of the United States
Constitution, the “Contract Clause,” provides in pertinent part,
“No State shall . . . pass any . . . Law impairing the Obligation
of Contracts . . . .”  U.S. Const. art. I, § 10.  In determining
whether a contractual right has been unconstitutionally impaired,
we are guided by the three-part test set forth in U.S. Trust Co.
of N.Y. v. New Jersey, 431 U.S. 1, 52 L. Ed. 2d 92 (1977).  The
U.S. Trust test requires a court to ascertain:  (1) whether a
contractual obligation is present, (2) whether the state’s
actions impaired that contract, and (3) whether the impairment
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was reasonable and necessary to serve an important public
purpose.  Id.
A.  Contractual Obligation
The first step of our analysis is determining whether a
contractual obligation is present between plaintiffs and the
State.  The most pertinent North Carolina case on this subject is
the Court of Appeals’ decision in Simpson.  In Simpson,
plaintiffs were vested members of the North Carolina Local
Government Employees’ Retirement System.  They brought a class-
action suit against the State of North Carolina, the retirement
system and its board of trustees.  Plaintiffs argued that the
State unconstitutionally impaired their contractual rights to a
specific pension plan when the legislature amended the method of
calculating the plan’s benefits, resulting in a reduction of
their benefits.  The Court of Appeals, upon examination of
approaches taken by other states, agreed and held that “the
relationship between plaintiffs and the Retirement System is one
of contract.”  Simpson, 88 N.C. App. at 223, 363 S.E.2d at 93. 
This was based on the premise that retirement benefits are
presently earned but deferred compensation to which employees
have a vested contractual right.  Id. at 223, 363 S.E.2d at 93-
94.  As the Court of Appeals stated:
“A pension paid a governmental employee . . .
is a deferred portion of the compensation
earned for services rendered.”  If a pension
is but deferred compensation, already in
effect earned, merely transubstantiated over
time into a retirement allowance, then an
employee has contractual rights to it.  The
agreement to defer the compensation is the
contract.  Fundamental fairness also dictates
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this result.  A public employee has a right
to expect that the retirement rights
bargained for in exchange for his loyalty and
continued services, and continually promised
him over many years, will not be removed or
diminished.  Plaintiffs, as members of the
North Carolina Local Governmental Employees’
Retirement System, had a contractual right to
rely on the terms of the retirement plan as
these terms existed at the moment their
retirement rights became vested.
Id. at 223-24, 363 S.E.2d at 94 (quoting Great Am. Ins. Co. v.
Johnson, 257 N.C. 367, 370, 126 S.E.2d 92, 94 (1962)) (emphasis
added).
The Court of Appeals and this Court have reaffirmed
this central principle of Simpson in several subsequent cases. 
Faulkenbury v. Teachers’ & State Employees’ Retirement Sys., 345
N.C. 683, 483 S.E.2d 422 (1997) (vested plaintiffs had
contractual right to disability retirement benefits, making
subsequent amendment of calculation method subject to impairment
analysis); Miracle v. N.C. Local Gov’t Employees Retirement Sys.,
124 N.C. App. 285, 477 S.E.2d 204 (1996) (pension terms at time
of plaintiff’s vesting deemed contractual, and subsequent
alteration by the legislature subject to impairment analysis
under Article I, Section 10 of the United States Constitution),
disc. rev. denied, 345 N.C. 754, 485 S.E.2d 57 (1997); Hogan v.
City of Winston-Salem, 121 N.C. App. 414, 466 S.E.2d 303 (pension
term allowing retirement instead of transfer upon injury deemed
contractual, and alteration after plaintiff’s injury deemed
subject to impairment analysis), aff’d per curiam, 344 N.C. 728,
477 S.E.2d 150 (1996); Woodard v. N.C. Local Gov’t Employees’
Retirement Sys., 108 N.C. App. 378, 424 S.E.2d 431 (amendment of
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disability benefits impaired vested member’s contract), aff’d per
curiam, 335 N.C. 161, 435 S.E.2d 770 (1993).
An examination of North Carolina case law, as well as
an analysis of the principles underlying Simpson, confirms that
the contractual relationship approach taken by the Court of
Appeals in Simpson and our subsequent decisions is the proper
one.
Cases arising in North Carolina have long demonstrated
a respect for the sanctity of private and public obligations from
subsequent legislative infringement.  See, e.g., Trustees of the
Univ. of N.C. v. Foy, 5 N.C. 58 (1805); see also Springs v.
Scott, 132 N.C. 548, 44 S.E. 116 (1903) (judgment is a vested
property right that cannot be taken by the legislature); Dunham
v. Anders, 128 N.C. 207, 38 S.E. 832 (1901) (legislature has no
power to destroy or to interfere with vested rights).  In fact,
scholars credit this Court, in the case of Trustees v. Foy, with
being the first state or federal court to interpret the phrase
“due process” as a protection of private rights against the
lawmaking power of the legislature.  Robert F. Utter, Swimming in
the Jaws of the Crocodile:  State Court Comment on Federal
Constitutional Issues when Disposing of Cases on State
Constitutional Grounds, 63 Tex. L. Rev. 1025, 1031-32, 1031 n.28
(1985).  This Court in Foy interpreted the “Law of the Land”
Clause, currently found in Article I, Section 19 of our
Constitution, to mean that “individuals shall not be so deprived
of their liberties or properties, unless by a trial by jury in a
court of justice, according to the known and established rules of
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decision derived from the common law and such acts of the
Legislature as are consistent with the Constitution.”  Foy, 5
N.C. at 88.
This respect for individual rights has manifested
itself through the expansion of situations in which courts have
held contractual relationships to exist, and in which they have
held these contracts to have been impaired by subsequent state
legislation.  In Jones v. Crittenden, 4 N.C. 55 (1814), this
Court afforded protection to a private debtor-creditor contract
by striking down an act of the legislature that temporarily
suspended executions of judgments against debtors.  In Stanmire
v. Taylor, 48 N.C. 207 (1855), this Court extended contractual
protection to a grant of property by the State by declaring
unconstitutional a legislative act that sought to grant land
previously granted by the State to someone else.  This Court held
that the first grant gave to the recipient a contractually based
vested right that could not be impaired by subsequent
legislation.  Id. at 213; see also Ogelsby v. Adams, 268 N.C.
272, 150 S.E.2d 383 (1966) (statutory attempt to raise fee during
term of lease of state property found to impair lease contract). 
In the case of Wilmington & Weldon R.R. Co. v. Reid, 80 U.S. 264,
20 L. Ed. 568 (1871), the United States Supreme Court applied the
contractual analysis to a North Carolina incorporation charter
and determined that the charter, which contained an exemption
from all taxes for the company, created a contract between the
railroad and the State.  Id. at 267-68, 20 L. Ed. at 569.  A
subsequent legislative attempt to tax the property of the
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railroad was, therefore, an unconstitutional impairment of the
contract.  Id. at 268, 20 L. Ed. at 570.  In Broadfoot v. City of
Fayetteville, 124 N.C. 478, 32 S.E. 804 (1899), this Court
extended that contractual analysis to municipal bond obligations. 
In that case, the Court held that the General Assembly’s
establishment of a new city charter that prohibited Fayetteville
from taxing its citizens to pay for plaintiff’s bonds issued
under the old charter was an unconstitutional impairment of
contract.  Id. at 489-90, 32 S.E. at 807; see also Bryson City
Bank v. Town of Bryson City, 213 N.C. 165, 195 S.E. 398 (1938)
(ordinance limiting taxation subsequent to issuance of bonds
constituted impairment of contract to the extent the town was
thereby unable to meet its obligation).  In First Nat’l Bank of
Charlotte v. Jenkins, 64 N.C. 719 (1870), this Court extended
protection from impairment beyond the strict contractual terms
and beyond application to just the offeror and offeree by holding
that equities arising in favor of a creditor out of contract
between the State and the debtor are afforded protection.  Id. at
725.  A more recent and far-reaching case in this area is
Pritchard v. Elizabeth City, 81 N.C. App. 543, 344 S.E.2d 821,
disc. rev. denied, 318 N.C. 417, 349 S.E.2d 598 (1986).  There,
the Court of Appeals held that oral representations to municipal
employees by city officials regarding accrual of benefits, upon
which the employees relied, constituted a contractual agreement
to which the city was bound.  Id. at 551-53, 344 S.E.2d at 826-
27.  The court found no impairment, however, because the act that
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purportedly affected the benefits had not been applied
retroactively.
The basis of the contractual relationship
determinations in these and related cases is the principle that
where a party in entering an obligation relies on the State, he
or she obtains vested rights that cannot be diminished by
subsequent state action.  In Jones v. Crittenden, this Court
stated, “The first principles of justice teach us that he to whom
a promise is made under legal sanctions should signify his
consent before any part of it can be rightfullly canceled by a
legislative act.”  Jones, 4 N.C. at 57 (emphasis added).  In
Stanmire, this Court quoted Chief Justice John Marshall in
underscoring the inviolate nature of vested contractual rights:
“A law,” says Judge Marshall, “annulling
conveyances between individuals, and
declaring that the grantors should stand
seized of their former estates,
notwithstanding those grants, would be as
repugnant to the [c]onstitution[] as a law
discharging the vendors of property[] from
the obligation of executing their contracts
by conveyances.”  Neither can the Legislature
discharge itself from its obligation to
perform its contracts.
Stanmire, 48 N.C. at 213 (quoting Fletcher v. Peck, 10 U.S. 87,
137, 3 L. Ed. 162, 178 (1810)).  In Broadfoot, this Court upheld
vested contractual rights even against the State’s power to
control taxation on the basis that “the power of taxation which
is vested in the Legislature . . . is subject to the
qualification which attends all State legislation--that is, that
it must not be exercised to impair the obligation of contracts,
thereby conflicting with the Constitution of the United States
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and of North Carolina.”  Broadfoot, 124 N.C. at 489, 32 S.E. at
807.  In Ogelsby, this Court again enunciated the underlying
expectational interests safeguarded by the Contract Clause
protection of vested rights:
“The general principle is established in
American jurisprudence that a legislative
grant under which rights have vested amounts
to a contract . . . .”  “[A] legislative
enactment in the ordinary form of a statute
may contain provisions which, when accepted
as the basis of action by individuals or
corporations, become contracts between them
and the State within the protection of the
clause of the Federal Constitution forbidding
impairment of contract obligations; rights
may accrue under a statute or even be
conferred by it, of such character as to be
regarded as contractual, and such rights
cannot be defeated by subsequent legislation.
When such a right has arisen, the repeal of
the statute does not affect the right or an
action for its enforcement.”
Ogelsby, 268 N.C. at 273-74, 150 S.E.2d at 385 (quoting 16 Am.
Jur. 2d 790 Constitutional Law § 442 (1966)) (emphasis added).
Earlier North Carolina decisions involving the
governmental provision of pensions, as well as Simpson, are
similarly rooted in the protection of expectational interests
upon which individuals have relied through their actions, thus
gaining a vested right.  In the case of In re Smith, 130 N.C.
638, 41 S.E. 802 (1902), this Court addressed the issue of
whether pension warrants erroneously issued to pensioners after
their death were property of the pensioners’ estates.  In
concluding that they were not, the Court reasoned that pension
warrants are charitable gifts because they are granted by the
State only on the basis of indigence as defined in the statute. 
-19-
Id. at 639, 41 S.E. at 802.  The Court went on to say, however,
that had the pension warrants been disbursed as reimbursement or
compensation, then they would belong to the estates.  Id.  The
Court also recognized that had the pension warrants been issued
before death but not cashed until after death, then the
pensioners’ estates would also be entitled to the benefits.  Id.
at 639, 41 S.E. at 803.  These determinations imply that
pensioners have vested rights to pension payments that are earned
and have become due.  See R.D. Hursh, Vested Right of Pensioner
to Pension, 52 A.L.R. 2d 437, at 470-71 (1957).  In Dillon v.
Wentz, 227 N.C. 117, 41 S.E.2d 202 (1947), this Court addressed
the question of how assets of a public employees’ pension fund
should be distributed upon dissolution of the fund.  The Court
determined that the members whose claims have accrued at the time
of the dissolution have a “vested interest” in their benefits;
and therefore, those members’ benefits should be paid in full
before distribution of the remainder of the fund.  Id. at 122, 41
S.E.2d at 207.
In Simpson, the same principles were applied.  There,
the Court of Appeals concluded not only that employees relied on
the representations regarding their pension benefits as
consideration for their continued employment, but also that the
pension benefits were “deferred compensation, already in effect
earned.”  Simpson, 88 N.C. App. at 223, 363 S.E.2d at 94.  Thus,
the employees “had a contractual right to rely on the terms of
the retirement plan as these terms existed at the moment their
retirement rights became vested.”  Id. at 224, 363 S.E.2d at 94. 
-20-
Because the holding in Simpson is based on the protection of
vested rights, as were the other cases in which courts found a
contractual relationship, the Simpson court’s determination that
the relationship between employees vested in the retirement
system and the State is contractual in nature is the appropriate
conclusion.
However, this determination does not end our analysis. 
This Court must determine whether the tax exemption was a
condition or term included in the retirement contract.  Our role
in reviewing this issue is limited.  Where the trial is conducted
by the judge sitting without a jury, as occurred in this case,
the trial court’s findings of fact have the force and effect of a
jury verdict and are conclusive on appeal if there is competent
evidence to support them, even though the evidence could be
viewed as supporting a different finding.  Curl v. Key, 311 N.C.
259, 260, 316 S.E.2d 272, 273 (1984).  In the present case, the
trial court found as a fact that “[a] reasonable person would
have concluded from the totality of the circumstances and
communications made to plaintiff class members that the tax
exemption was a term of the retirement benefits offered in
exchange for public service to state and local governments.”  A
thorough review of the record reveals abundant, competent
evidence to support this finding, including inter alia:  creation
of various statutory tax exemptions by the legislature, the
location of those provisions alongside the other statutorily
created benefit terms instead of within the general income tax
code, the frequency of governmental contract making,
-21-
communication of the exemption by governmental agents in both
written and oral form, use of the exemption as inducement for
employment, mandatory participation, reduction of periodic wages
by contribution amount (evidencing compensation), loss of
interest for those not vesting, establishment of a set time
period for vesting, and the reliance of employees upon retirement
compensation in exchange for their services.  Thus, it is clear
the tax exemption was a term or condition of benefits of the
Retirement Systems to which plaintiffs have a contractual right.
Defendants cite Bowers v. City of High Point, 339 N.C.
413, 451 S.E.2d 284 (1994), in support of their argument that
government officials acted ultra vires in communicating to
prospective and employed workers that the tax exemption was a
contractual part of retirement benefits.  However, Bowers is
distinguishable from the present case.  In Bowers, a municipal
official calculated compensation in a manner not authorized by
any state statute, thus exceeding the municipality’s power and
making the official’s act ultra vires.  Id. at 418-19, 451 S.E.2d
at 288-89.  In the case sub judice, the legislature created a
statutorily valid exemption, and therefore, state officials acted
within their power.
Defendants next argue that even if the tax exemption
was a condition of the retirement contracts, the creation of that
condition was unconstitutional.  This assertion is based on their
reading of Article V, Section 2(1) of the North Carolina
Constitution, which provides that “[t]he power of taxation . . .
shall never be surrendered, suspended, or contracted away.”  N.C.
-22-
Const. art. V, § 2(1).  Defendants contend that the exemption
constitutes an unconstitutional contracting away of the power of
taxation because it permanently deprives the State of its
sovereign right to tax retirees.  We find this argument
unpersuasive.
As an initial matter, “‘[t]he rule is well settled that
one who voluntarily proceeds under a statute and claims benefits
thereby conferred will not be heard to question its
constitutionality in order to avoid its burdens.’”  Convent of
Sisters of St. Joseph v. City of Winston-Salem, 243 N.C. 316,
324, 90 S.E.2d 879, 885 (1956) (quoting 11 Am. Jur.
Constitutional Law § 123, at 767 (1937)).  In this case, the
State created the exemption and then proceeded for decades to
represent it as a portion of retirement benefits and to reap its
contractual benefits.  It is clear from the record evidence that
the State used these representations as inducement to employment
with the State, and employees relied on these representations in
consideration of many years’ valuable service to and with the
State.  The State’s attempt to find shelter under the North
Carolina Constitution must be compelling indeed after such a long
history of accepting the benefits of the extension of the
exemption in question.  We find no such compelling case here.
Upon examination of the circumstances surrounding this
case and the Act at issue, we must conclude that the State has
failed to establish that the tax exemption is an unconstitutional
contracting away of the power to tax.  A thorough reading of
Article V, Section 2 of the state Constitution reveals that the
-23-
State is empowered to enter into contracts for tax exemptions. 
As well as ensuring that the power of taxation may never be
contracted away, Article V, Section 2 also contains other
provisions regarding taxing and contracting by the State. 
Subsection (6) provides that, regarding income taxes, “there
shall be allowed . . . exemptions.”  N.C. Const. art. V, § 2(6). 
Subsection (3) further provides that “[n]o taxing authority other
than the General Assembly may grant exemptions, and the General
Assembly shall not delegate the powers accorded to it.”  N.C.
Const. art. V, § 2(3) (emphasis added).  Section 2 also
establishes that the “State . . . may contract with . . . any
person . . . for the accomplishment of public purposes only.” 
N.C. Const. art. V, § 2(7).  We cannot read subsection (1) in
isolation as the State would have us do.  Isolated
interpretations of statutory and constitutional provisions are
contrary to the jurisprudence of North Carolina.  See, e.g.,
State v. Emery, 224 N.C. 581, 583, 31 S.E.2d 858, 860 (1944).  In
light of the interplay between subsections (3), (6) and (1), it
is apparent that the granting of an exemption is not the same
thing as relinquishing the “power” of taxation.  If it were, no
exemptions would be possible--a result incongruous with express
provisions of the Constitution.  Combining these subsections with
the power to make contracts granted in subsection (7), it is
clear that the State may make contracts for exemptions without
contracting away the “power” of taxation as long as the contract
is for a public purpose.  However, once such a contract is made,
the Supremacy Clause of the United States Constitution comes into
-24-
effect in order to prevent subsequent impairment of that
contract.
The sovereign power of taxation is not, as defendants
appear to assert, an inviolable power, the exercise of which the
State may never limit by obligation.  In U.S. Trust, the Supreme
Court draws a distinction between cases involving “reserved
powers” that cannot be contracted away in any manner, such as the
police power and eminent domain, and those powers for which a
state can bind itself to a limitation for the future, such as
taxing and spending.  U.S. Trust, 431 U.S. at 23-25, 52 L. Ed. 2d
at 110-11.  The fact that the contract between the State and its
retirees limits the ability of the State to tax under certain
circumstances, in this instance the benefits of those in whom the
benefits have vested, does not inherently undermine the State’s
sovereign power of taxation.  “The constitutional provision
against impairing contract obligations is a limitation upon the
taxing power, as well as upon all legislation, whatever form it
may assume.  Indeed, attempted state taxation is the mode most
frequently adopted to affect contracts contrary to the
constitutional inhibition.”  Murray v. City Council of
Charleston, 96 U.S. 432, 444, 24 L. Ed. 760, 762-763 (1877)
(emphasis added).  Such a specific limitation as provided here by
conditional exemption, that is, the limitation of a tax levied
(i.e., income tax), does not equate to a limitation of the
general power to levy.
The necessity for the State to be bound to its
contractual obligations is clear when the Act in question is
-25-
compared with the long-established practice of the issuance of
municipal bonds.  The State regularly enters into contracts for
tax exemptions in connection with its issuance of municipal bonds
and the creation of its obligations thereunder.  In exchange for
paying a lower rate of interest, the State agrees by statutory
exemption to forgo taxation of the income or gain on the bonds. 
The State’s policy of entering into a contract for a tax
exemption clearly serves a public purpose by inducing needed
investment for important projects while paying a lower-than-
market rate of interest.
The State’s action here in changing the taxability of
vested retirement benefits is no different than if the State
issued tax-free bonds, collected hundreds of millions of dollars
for their purchase, and then retrospectively repealed investors’
tax-free interest and capital gain advantages.  However, under
application of defendants’ premise, this is precisely what the
State could do.  The basis for prohibiting such action is
fundamental fairness.  As the Pennsylvania Supreme Court so
eloquently stated:
According to the cardinal principle of
justice and fair dealings between government
and man, as well as between man and man, the
parties shall know prior to entering into a
business relationship the conditions which
shall govern that relationship.  Ex post
facto legislation is abhorred in criminal law
because it stigmatizes with criminality an
act entirely innocent when committed.  The
impairment of contractual obligations by the
Legislature is equally abhorrent because such
impairment changes the blueprint of a bridge
construction when the spans are half way
across the stream.
-26-
Hickey v. Pension Bd., 378 Pa. 300, 309-10, 106 A.2d 233, 237-38
(1954).
Here, in exchange for the inducement to and retention
in employment, the State agreed to exempt from state taxation
benefits derived from employees’ retirement plans.  This
exemption certainly was for a public purpose, as it was a
significant difference between governmental and comparable
private employment that helped attract and keep quality public
servants in spite of the generally lower wage paid to state and
local employees.  Thus, the State entered into a contract for,
inter alia, a tax exemption for a public purpose.  As the Oregon
Supreme Court explained in a case similar to the one sub judice:
Government obtained its employees’ services
less expensively because the gross cost of
providing a more nearly adequate pension
amount was lowered by the tax exempt nature
of the benefit payments and of the
contributions put in trust to purchase
annuities payable at the time of each
employee’s future retirement. . . .  Less
expense meant that less tax money was exacted
from the taxpayers in general over past years
to fund a public employee’s salary and
benefits.
Hughes v. Oregon, 314 Or. 1, 43 n.7, 838 P.2d 1018, 1042 n.7
(1992).  Once the commitment is made, and its derivative benefits
enjoyed by the State, the State can no more remove this condition
than it can tax the interest and gain of municipal bond holders. 
“Government proposes to keep the benefit of lower cost, but to
take away the promise that its employees accepted in order to
lower that cost, thereby keeping the benefit of its bargain but
depriving the employees of the benefit of theirs.”  Id.  Such a
-27-
“change in the blueprint” is not acceptable in a government
guided by notions of fairness, consent and mutual respect between
government and man, and certainly not between the government of
this State and its employees.
We therefore hold that the relationship between the
Retirement Systems and employees vested in the system is
contractual in nature, the right to benefits exempt from state
taxation is a term of such contract, and such exemption does not
constitute an unconstitutional contracting away of the State’s
sovereign power of taxation.  Thus, plaintiffs have met their
obligation under the first part of the U.S. Trust test.
B.  Impairment
Having found a contractual relationship and the
existence of a valid exemption in the contract, we now turn our
focus to the second prong of the U.S. Trust test, whether the
contract was impaired by the Act in question.  U.S. Trust, 431
U.S. at 17, 52 L. Ed. 2d at 106.  When examining whether a
contract has been unconstitutionally impaired, the “inquiry must
be whether the state law has, in fact, operated as a substantial
impairment of a contractual relationship. . . .  Minimal
alteration of contractual obligations may end the inquiry at
[this] stage.”  Allied Structural Steel Co. v. Spannaus, 438 U.S.
234, 244-45, 57 L. Ed. 2d 727, 736-37 (1978).  Defendants contend
that the tax exemption provision is only incidental to the basic
contract for retirement benefits.  We disagree.
The legislative amendment placed a $4,000 annual
exemption cap on retirement benefits.  While this will affect
-28-
retirees in differing degrees depending on their individual
benefit levels, the overall impact is substantial.  The record
evidence reveals that, at last count, losses to retirees in
expected income will be in excess of $100 million.  In Simpson,
the Court of Appeals determined that plaintiffs’ contractual
rights had been impaired, “as plaintiffs stand to suffer
significant reductions in their retirement allowances as a result
of the legislative amendment under challenge.”  Simpson, 88 N.C.
App. at 225, 363 S.E.2d at 94.  Such is the case here.  Thus, it
is clear and we hold that the statutory amendment in question
substantially impairs the employees’ contractual right to a tax
exemption.
C.  Reasonableness and Necessity of Impairment
Having decided the first two questions in the
affirmative, we lastly consider the third prong of the U.S. Trust
test, whether the impairment was reasonable and necessary to
serve an important public purpose.  U.S. Trust, 431 U.S. at 25-
26, 52 L. Ed. 2d at 111-12.  Not every impairment of contractual
obligations by a state violates the Contract Clause.  Id. at 21,
52 L. Ed. 2d at 109.  Through the exercise of its police power, a
state may constitutionally impair its contractual obligations to
protect the general welfare of its citizens, so long as such
impairment is reasonable and necessary to serve an important
public purpose.  Id. at 25-26, 52 L. Ed. 2d at 111-12; Simpson,
88 N.C. App. at 224, 363 S.E.2d at 94.  In applying this test,
the courts are not bound by just any rationale put forward by the
-29-
legislature to justify its actions.  The Supreme Court noted in
U.S. Trust that:
In applying this standard, . . . complete
deference to a legislative assessment of
reasonableness and necessity is not
appropriate because the State’s self-interest
is at stake.  A governmental entity can
always find a use for extra money, especially
when taxes do not have to be raised.  If a
State could reduce its financial obligations
whenever it wanted to spend the money for
what it regarded as an important public
purpose, the Contract Clause would provide no
protection at all.
U.S. Trust, 431 U.S. at 25-26, 52 L. Ed. 2d at 112.  Defendants
assert that the exemption cap was a reasonable and necessary
approach to effectuating the important state interest of
complying with the Supreme Court’s Davis decision.  We find
defendants’ argument here unpersuasive.
While it is clear that the state interest in this case-
-complying with a Supreme Court ruling--was important, what is
equally clear is that the method chosen was not necessary to
achieve the state interest asserted.  In Davis, the Supreme Court
did not tell North Carolina that it was required to tax state and
local employees; nor did it set forth any mandatory scheme of
compliance.  Davis v. Michigan Dep’t of Treasury, 489 U.S. 803,
103 L. Ed. 2d 891.  The Court merely held that federal retirees
had to be treated the same as state and local retirees.  Id. 
There are numerous ways that the State could have achieved this
goal without impairing the contractual obligations of plaintiffs. 
Two of the most obvious ways would have been either to exempt
federal employees or to apply the exemption cap prospectively
-30-
only to those state and local employees whose retirement benefits
had not yet vested.  Thus, we hold the Act which placed a cap on
tax-exempt benefits was not necessary to a legitimate state or
public purpose, i.e., it was not “essential” because “a less
drastic modification” of the State’s exemption plan was
available.  U.S. Trust, 431 U.S. at 30, 52 L. Ed. 2d at 114.  As
the Supreme Court stated, “a State is not free to impose a
drastic impairment when an evident and more moderate course would
serve its purposes equally well.”  Id. at 31, 52 L. Ed. 2d at
115.
Furthermore, the method chosen was not reasonable under
the circumstances.  The legislature sought a “revenue neutral”
approach to complying with the Davis decision, meaning that
legislators would be faced with neither raising taxes nor cutting
other programs in order to comply.  However, this convenient
approach impaired vested rights of current and future state and
local retirees to whom the State had made promises of exemption
in consideration of their many years of public service. 
Legislative convenience is not synonymous with reasonableness. 
Because the impairment of contracts caused by the Act was neither
reasonable nor necessary for achieving an important state
interest, this legislative enactment was not an exercise of the
police power or other means under which the State may
legitimately skirt the mandate of the Contracts Clause.
D.  Conclusion
For the above-stated reasons, we hold that the
plaintiffs have met their burden under the U.S. Trust test of
-31-
establishing an unconstitutional impairment of contract.  The
plaintiffs had a contractual relationship with the Retirement
Systems, and that contract included the tax exemption of benefits
derived from their retirement plans.  The Act, which placed a cap
on the amount of benefits exempted from state taxation,
substantially impaired the contract.  Finally, the Act was
neither necessary nor reasonable for achieving an important state
interest.  As a result, the Act is unconstitutional as an
impermissible impairment of contract under the Contract Clause,
Article I, Section 10 of the United States Constitution, with
regard to employees whose benefits had vested when it was passed.
II.  TAKING WITHOUT JUST COMPENSATION
Defendants assign error to the trial court’s conclusion
that the Act’s removal of plaintiffs’ exemption from taxation on
their retirement benefits constitutes a taking of property
without just compensation under the “Law of the Land” Clause,
Article I, Section 19 of the North Carolina Constitution, and the
Fifth and Fourteenth Amendments to the United States
Constitution.  The trial court concluded as a matter of law that
“[r]epeal of the tax exemption was a taking under the federal and
state constitution.”  Defendants argue the Act cannot be
considered a taking of property because, under the Supreme
Court’s decision in City of Pittsburgh v. Alco Parking Corp., 417
U.S. 369, 41 L. Ed. 2d 132 (1974), the Act constitutes a
legitimate exercise of the State’s taxing power.  Defendants
additionally assert that because the exemption cannot be
considered contractual, it cannot be considered property
-32-
deserving of just compensation.  We find defendants’ arguments to
be without merit.
As established above, the relationship between the
State and the plaintiffs is contractual in nature, and the
plaintiffs’ exemption from taxation of benefits from their
retirement plans is a term of that contract to which plaintiffs
have a vested right.  The issue thus becomes whether the
subsequent taxation of those benefits via the Act constitutes an
unconstitutional taking of property without just compensation
under the state and federal Constitutions.  Article I, Section 19
of the North Carolina Constitution reads in pertinent part:  “No
person shall be taken, imprisoned, or disseized of his freehold,
liberties, or privileges, or outlawed, or exiled, or in any
manner deprived of his life, liberty, or property, but by the law
of the land.”  N.C. Const. art. I, § 19.  The Fifth Amendment to
the United States Constitution provides:  “No person shall . . .
be deprived of life, liberty, or property, without due process of
law; nor shall private property be taken for public use, without
just compensation.”  U.S. Const. amend. V.  
This Court recognized in Morris v. Holshouser, 220 N.C.
293, 17 S.E.2d 115 (1941), that “[t]he privilege of contracting
is both a liberty and a property right. . . .  ‘Included in the
right of personal liberty and the right of private property--
partaking of the nature of each--is the right to make contracts
for the acquisition of property.’”  Id. at 295-96, 17 S.E.2d at
117 (quoting Coppage v. Kansas, 236 U.S. 1, 14, 59 L. Ed. 441,
446 (1915)).  In Lynch v. United States, 292 U.S. 571, 78 L. Ed.
-33-
1434 (1934), Justice Brandeis, writing for a unanimous Supreme
Court, recognized that “[v]alid contracts are property, whether
the obligor be a private individual, a municipality, a State or
the United States.”  Id. at 579, 78 L. Ed. at 1440.  The Court
went on to note that impairment of a contract could constitute an
impermissible taking by stating, “Rights against the United
States arising out of a contract with it are protected by the
Fifth Amendment.”  Id.  Such is the case with rights arising out
of contracts between the State and individuals through
application of the Fourteenth Amendment.  See Department of
Transp. v. Harkey, 308 N.C. 148, 151 n.*, 301 S.E.2d 64, 67 n.*
(1983).  
Moreover, such contracts are protected by provisions in
the state Constitution.  Id.  In Foy, this Court was the first in
the nation to recognize that the purpose of a written
constitution is to place limits on the power of the legislature. 
This Court premised its analysis of the act considered in Foy on
the principle “that the people of North Carolina, when assembled
in convention, were desirous of having some rights secured to
them beyond the control of the Legislature, and these they have
expressed in the Bill of Rights and the Constitution.”  Foy, 5
N.C. at 83.  The Foy Court then recognized “that if the
Legislature had vested an individual with the property in
question, this section of the Bill of Rights [the Law of the Land
Clause] would restrain them from depriving him of such right.” 
Id. at 87.  In Long v. City of Charlotte, 306 N.C. 187, 293
S.E.2d 101 (1982), this Court further explained the application
-34-
of the state Constitution to takings of private property by
governmental action:
Every state constitution, except North
Carolina’s, contains similar provisions
prohibiting the taking of private property
for public use without just compensation. 
While North Carolina does not have an express
constitutional provision against the “taking”
or “damaging” of private property for public
use without payment of just compensation,
this Court has allowed recovery for a taking
on constitutional as well as common law
principles.  We recognize the fundamental
right to just compensation as so grounded in
natural law and justice that it is part of
the fundamental law of this State, and
imposes upon a governmental agency taking
private property for public use a correlative
duty to make just compensation to the owner
of the property taken.  This principle is
considered in North Carolina as an integral
part of “the law of the land” within the
meaning of Article I, Section 19 of our State
Constitution.
Id. at 195-96, 293 S.E.2d at 107-08 (citations omitted) (footnote
omitted) (emphasis added).  The Court went on to explain that
“[g]overnmental immunity is not a defense . . . .  ‘The test of
liability is whether, notwithstanding its acts are governmental
in nature and for a lawful purpose, the municipality’s acts
amount to a partial taking of private property.  If so, just
compensation must be paid.’”  Id. at 203, 293 S.E.2d at 111
(quoting Guilford Realty & Ins. Co. v. Blythe Bros. Co., 260 N.C.
69, 79, 131 S.E.2d 900, 907 (1963)).
In the present case, it is clear that the State has
taken plaintiffs’ private property by passage of the Act. 
Plaintiffs contracted, as consideration for their employment,
that their retirement benefits once vested would be exempt from
-35-
state taxation.  The Act now undertakes to place a cap on the
amount available for the exemption, thereby subjecting
substantial portions of the retirement benefits to taxation. 
This is in derogation of plaintiffs’ rights established through
the retirement benefits contracts and thus constitutes a taking
of their private property.  The State fails to compensate them
for such taking through the Act.  As such, the Act is
unconstitutional under the state and federal Constitutions.
Defendants’ attempt to analogize this case to the
Supreme Court’s decision in City of Pittsburgh is misplaced. 
There, the Supreme Court held that a city ordinance imposing an
unusually high tax on parking in the city did not constitute a
violation of due process so as to constitute an unconstitutional
taking of the property of parking lot owners.  City of
Pittsburgh, 417 U.S. at 375, 41 L. Ed. 2d at 136.  The Court held
that it would not judge the reasonableness of a tax that was
otherwise within the power of the legislative body to enact, so
long as it was not so arbitrary as to constitute a ruse for some
forbidden action by the legislative body.  Id.  The instant case
is distinguishable in that the Act is not otherwise within the
power of the legislature to enact because it violates the
constitutional prohibitions against impairing contracts and
taking property without just compensation.  Thus, the Act cannot
be construed as a legitimate exercise of the State’s taxing
power.
III.  DECLARATORY AND INJUNCTIVE RELIEF
-36-
Defendants next assign error to the trial court’s order
for declaratory and injunctive relief in favor of plaintiffs.  In
its 2 June 1995 order, the trial court held that the Act
constituted a material breach of contract and was
unconstitutional under numerous provisions of both the state and
federal Constitutions.  The court went on to conclude that the
Act was “void, a nullity and unenforceable.”  The trial court
further concluded in its 25 September 1995 amended order:
Injunctive relief would be statutorily
unavailable to plaintiffs without a final
ruling that the portion of the August 12,
1989 Act which repealed the tax exemption on
retirement benefits is unconstitutional.  And
ordinarily sovereign immunity and G.S. 105-
267 preclude any relief to plaintiffs in this
action other than refunds of additional state
income taxes, paid because of the repeal of
the tax exemption, for the years 1989, 1990
and/or 1991 for those plaintiffs, including
class members, who made appropriate timely
refund demands for those tax years.  However,
it is a useless act for plaintiff class
members and other state or local government
retirees who had completed five years of
creditable service on or before August 12,
1989 to continue to pay taxes on retirement
benefits, file protests pursuant to G.S. 105-
267, and continue to file lawsuits resulting
in multiple duplicative litigation. 
Sovereign immunity has been waived by the
passage of G.S. 105-267 permitting suits
against the State for tax refunds.  As the
statutory remedies are inadequate, equitable
relief including injunction of future
collection of taxes on retirement benefits
attributable to service rendered or
contributions made prior to August 12, 1989
is proper.
(Emphasis added.)  Based on these conclusions, inter alia, the
trial court then enjoined defendants from further collecting the
disputed tax, ordering that defendants “shall cease collecting
-37-
income taxes calculated upon state and local government
retirement benefits paid to all state and local government
retirees, for those portions of said retirement benefits
attributable to service rendered or contributions made prior to
August 12, 1989.”  However, this injunctive relief was stayed
pending appeal.  
Defendants assert that, despite the stay, the granting
of declaratory and injunctive relief by the trial court was
improper.  Defendants further contend that the trial court erred
and must be reversed in its conclusions of law that sovereign
immunity was waived by passage of N.C.G.S. § 105-267 and that
injunctive relief is proper since the statutory remedies are
inadequate.  According to defendants, relief should be limited
strictly to refunds of unconstitutionally collected taxes.  We
generally agree with defendants’ contentions but note that the
trial court’s holding has little if any practical impact on the
outcome of this case.
N.C.G.S. § 105-267 contains the procedure required for
contesting the taxation under the Act:
No court of this State shall entertain a
suit of any kind brought for the purpose of
preventing the collection of any tax imposed
in this Subchapter.  Whenever a person shall
have a valid defense to the enforcement of
the collection of a tax assessed or charged
against him or his property, such person
shall pay such tax to the proper officer, and
such payment shall be without prejudice to
any defense of rights he may have in the
premises.  At any time within 30 days after
payment, the taxpayer may demand a refund of
the tax paid in writing from the Secretary of
Revenue and if the same shall not be refunded
within 90 days thereafter, may sue the
-38-
Secretary of Revenue in the courts of the
State for the amount so demanded.  Such suit
may be brought in the Superior Court of Wake
County, or in the county in which the
taxpayer resides at any time within three
years after the expiration of the 90-day
period allowed for making the refund. If upon
the trial it shall be determined that such a
tax or any part thereof was levied or
assessed for an illegal or unauthorized
purpose, or was for any reason invalid or
excessive, judgment shall be rendered
therefor, with interest, and the same shall
be collected as in other cases.  The amount
of taxes for which judgment shall be rendered
in such action shall be refunded by the
State; provided, nothing in this section
shall be construed to conflict with or
supersede the provisions of G.S. 105-241.2.
N.C.G.S. § 105-267 (1989) (amended 1996).  In Bailey I, we held:
Section 105-267 . . . bars courts
absolutely from entertaining suits of any
kind brought for the purpose of preventing
the collection of any tax imposed in
Subchapter I.  Since the taxes challenged by
plaintiffs were Subchapter I taxes, we hold
that the trial court erred in enjoining
defendants from further collection of taxes
paid on plaintiffs’ retirement benefits. 
Under section 105-267 plaintiffs’ remedies
are restricted to a refund of any illegal,
invalid, or unauthorized tax . . . .
Bailey I, 330 N.C. at 242, 412 S.E.2d at 304.  This Court further
noted that N.C.G.S. § 105-267 was the exclusive basis for
challenging taxation under this subchapter, even on
constitutional grounds.  Id. at 235, 412 S.E.2d at 300.
N.C.G.S. § 105-267 is the relevant statute for
challenging the Act in the instant case.  The only relief granted
under this statute is a refund of improperly collected taxes. 
Nowhere does the statute allow a trial court to grant an
injunction from collection of a tax during the pendency of a
-39-
challenge to taxation under this subchapter.  Further, this Court
has ruled that the statutory procedures contained in section 105-
267 are adequately protective of individuals’ due process rights
and are the exclusive means by which a tax under this subchapter
may be challenged.  Swanson v. North Carolina, 335 N.C. 674, 687,
441 S.E.2d 537, 545, cert. denied, 513 U.S. 1056, 130 L. Ed. 2d
598 (1994).  As a result, the trial court technically erred in
its conclusion that sovereign immunity had been completely waived
by the passage of N.C.G.S. § 105-267 and in its order enjoining
defendants from further collection of the tax during the
resolution of this case.
However, an examination of the circumstances of this
case reveals that the practical effect of the trial court’s error
was inconsequential.  First, the trial court immediately stayed
the injunction pending appeal, preventing any undue prejudice to
defendants.  Second, the trial court determined that plaintiffs
would still be required to file refund suits, presumably in
accordance with section 105-267, for years not covered by the
present litigation, thereby allowing collection of the tax by
defendants during the future pendency of the case.  Finally, we
have by our present decision ruled that the Act is
unconstitutional under both the state and federal Constitutions
as applied to those employees whose benefits vested prior to its
passage.  The State, pursuant to this decision, will be prevented
from further attempts to collect taxes on retirement benefits. 
As such, no ruling in the form of an injunction is necessary to
-40-
forestall future harm to plaintiffs, thus making the issue of the
injunction moot as a practical matter.
Thus, we reaffirm that trial courts may not generally
grant injunctions barring future collection of taxes or fashion
other remedies not provided in section 105-267.  However, we hold
that such error here was not prejudicial and that in light of our
other determinations in this case, defendants should immediately
cease collection of taxes pursuant to the Act on the employees
affected by this decision and begin issuance of refunds
consistent with the trial court’s 25 September 1995 amended order
and this opinion.  This assignment of error is overruled.
IV.  COMMON-FUND DOCTRINE
Defendants next assign error to the trial court’s
creation of a “common fund” for the payment of attorney’s fees
and other costs incurred by the class representatives.  In its 25
September 1995 amended order, the trial court ordered defendants
to identify all individuals in the plaintiff class who had
complied with the statutory requirements for receiving a refund. 
Next, the trial court established a formula by which the amount
of each individual refund would be calculated, including
interest.  The result of this formulation is the “taxpayer credit
amount,” or the amount of money due to each plaintiff.  The trial
court then ordered eighty-five percent of the taxpayer credit
amount to be applied against future state income tax liability
incurred by plaintiffs or, in the case of plaintiffs who are
deceased, no longer residents of the state, or who have no tax
liability, to be paid in whole to such plaintiffs or their
-41-
estates.  The trial court ordered the remaining fifteen percent
to be “paid by defendants into a common fund administered by the
Court for the payment of plaintiffs’ attorney’s fees, costs of
litigation, costs of administration, fees and expenses incurred
by the special master and reimbursement of named plaintiffs for
travel and expenses.”
The “common-fund doctrine” is a long-standing exception
to the general rule in this country that every litigant is
responsible for his or her own attorney’s fees.  Boeing Co. v.
Van Gemert, 444 U.S. 472, 478, 62 L. Ed. 2d 676, 681-82 (1980);
Horner v. Chamber of Commerce, 236 N.C. 96, 97, 72 S.E.2d 21, 22
(1952); 20 Am. Jur. 2d Costs § 66, at 60 (1995).  Attorney’s fees
are ordinarily taxable as costs only when authorized by statute. 
Horner, 236 N.C. at 97, 72 S.E.2d at 22.  However, in Horner, the
leading North Carolina case regarding the common-fund doctrine,
this Court recognized:
[T]he rule is well established that a court
of equity, or a court in the exercise of
equitable jurisdiction, may in its
discretion, and without statutory
authorization, order an allowance for
attorney fees to a litigant who at his own
expense has maintained a successful suit for
the preservation, protection, or increase of
a common fund or of common property, or who
has created at his own expense or brought
into court a fund which others may share with
him.
Id. at 97-98, 72 S.E.2d at 22.  The United States Supreme Court
noted in the case of Boeing Co. v. Van Gemert, “Since the
decisions in Trustees of the Internal Improvement Fund v.
Greenough, [105 U.S. 527, 26 L. Ed. 1157 (1881)], and Central
-42-
R.R. & Banking Co. v. Pettus, [113 U.S. 116, 28 L. Ed. 915
(1885)], this Court has recognized consistently that a litigant
or a lawyer who recovers a common fund for the benefit of persons
other than himself or his client is entitled to a reasonable
attorney’s fee from the fund as a whole.”  Boeing, 444 U.S. at
478, 62 L. Ed. 2d at 681.  “This ‘rule rests upon the ground that
where one litigant has borne the burden and expense of the
litigation that has inured to the benefit of others as well as to
himself, those who have shared in its benefits should contribute
to the expense.’”  Horner, 236 N.C. at 98, 72 S.E.2d at 22
(quoting 14 Am. Jur. Costs § 74, at 47 (1938)).
Defendants do not contend that representative
plaintiffs in this case have not “borne the burden and expense of
litigation,” nor do they contest that if the representative
plaintiffs prevail (which they have), others will benefit from
their efforts.  Instead, defendants suggest a technical
interpretation of the doctrine based on a strict application of
factual precedents in the case law of this jurisdiction.  In the
majority of North Carolina cases dealing with the common-fund
doctrine, the litigation involved a preexisting fund of money or
piece of real estate.  See, e.g., Horner, 236 N.C. 96, 72 S.E.2d
21 (common-fund doctrine applicable to recovery of improper
donation of city funds challenged by representative plaintiff);
Raleigh-Durham Airport Auth. v. Howard, 88 N.C. App. 207, 363
S.E.2d 184 (1987), disc. rev. denied, 322 N.C. 113, 367 S.E.2d
916 (1988) (common-fund doctrine applicable to increase of
condemnation proceeds resulting from plaintiff’s suit).  As such,
-43-
defendants argue the relief plaintiffs seek does not qualify for
application of the common-fund doctrine because plaintiffs’ tax
credits or refunds constitute separate individual claims and not
a single “fund.”  We disagree.
The primary problem faced by courts in determining
whether a shifting of fees is appropriate under the common-fund
doctrine is deciding whether some finite benefit flows to a
determinable group of plaintiffs.  If the benefit reaped by the
representative plaintiffs merely “vindicate[s] a general social
grievance,” Boeing, 444 U.S. at 479, 62 L. Ed. 2d at 682, or
redounds to the benefit of the public at large, then the common-
fund doctrine will not operate to shift the burden of attorney’s
fees, id.  However, in Alyeska Pipeline Serv. Co. v. Wilderness
Soc’y, 421 U.S. 240, 44 L. Ed. 2d 141 (1975), the Supreme Court
noted that the common-fund doctrine has been appropriately
applied in cases (1) where the classes of persons benefitting
from the lawsuit were small and easily identifiable, (2) where
the benefits could be traced accurately, and (3) where the costs
could be shifted to those benefitting with some precision.  Id.
at 264 n.39, 44 L. Ed. 2d at 157-58 n.39.  In Boeing, the Supreme
Court used these principles to hold that the common-fund doctrine
was properly applied in a class-action suit by Boeing
bondholders.  In analyzing the application of the common-fund
doctrine, the Court stated:
the criteria [for appropriate fee-shifting
cases] are satisfied when each member of a
certified class has an undisputed and
mathematically ascertainable claim to part of
a lump-sum judgment recovered on his behalf. 
-44-
Once the class representatives have
established the defendant’s liability and the
total amount of damages, members of the class
can obtain their share of the recovery simply
by proving their individual claims against
the judgment fund. . . .  Although the full
value of the benefit to each absentee member
cannot be determined until he presents his
claim, a fee awarded against the entire
judgment fund will shift the costs of
litigation to each absentee in the exact
proportion that the value of his claim bears
to the total recovery.
Boeing, 444 U.S. at 479, 62 L. Ed. 2d at 682.  Although the
common-fund doctrine is particularly applicable to cases
involving preexisting funds, trusts or real estate parcels,
nothing precludes application of the doctrine to funds that arise
as a result of the litigation and otherwise meet the above
requirements.  In fact, this Court expressly authorized such
application in Horner when it stated that the common-fund
doctrine is appropriate in cases where a plaintiff “has created
at his own expense or brought into court a fund which others may
share with him.”  Horner, 236 N.C. at 98, 72 S.E.2d at 22
(emphasis added); see also Faulkenbury, 345 N.C. 683, 483 S.E.2d
422 (holding that the common-fund doctrine applied to a change in
calculation of benefits under the State’s retirement system
resulting in the creation of a recovery fund).
In the present case, the named plaintiffs have
recovered a determinate fund for the benefit of every member of
the class whom they represent.  The defendants’ liability has
been proven.  The qualifications for class membership have been
established, and the formula for computing individual refunds has
been set.  Thus, the judgment fund itself is a quantifiable sum
-45-
that has been created by the litigation undertaken by the
representative plaintiffs.  All the remaining class beneficiaries
need to do in order to recover their proper refund or credit is
to prove their individual claims against the judgment fund.  As
such, we are persuaded that the recovery at issue in this case
properly constitutes a common fund for purposes of shifting
attorney’s fees under the common-fund doctrine of Horner and its
progeny.  As the Supreme Court stated in Boeing:
Unless absentees contribute to the payment of
attorney’s fees incurred on their behalves,
they will pay nothing for the creation of the
fund and their representatives may bear
additional costs.  The judgment entered . . .
rectifies this inequity by requiring every
member of the class to share attorney’s fees
to the same extent that he can share the
recovery.  Since the benefits of the class
recovery have been “traced with some
accuracy” and the costs of recovery have been
“shifted with some exactitude to those
benefiting,” Alyeska Pipeline Service Co.,
[421 U.S.] at 265, n.39, 44 L. Ed. 2d [at
157, n.39] we conclude that the attorney’s
fee award in this case is a proper
application of the common-fund doctrine.
Boeing, 444 U.S. at 480-81, 62 L. Ed. 2d at 683 (footnote
omitted).
Moreover, N.C.G.S. § 6-20 provides, “In other actions,
costs may be allowed or not, in the discretion of the court,
unless otherwise provided by law.”  N.C.G.S. § 6-20 (1997).  If
an action is equitable in nature, the taxing of the costs is
within the discretion of the court, and the court may allow costs
in favor of one party or the other or require the parties to
share the costs.  Hoskins v. Hoskins, 259 N.C. 704, 707, 131
S.E.2d 326, 328 (1963).  The present case involves not only
-46-
plaintiffs’ request for refund of improper taxation, but also
their demand for performance of the State’s contractual
obligations and an injunction against future collection via a
ruling of unconstitutionality.  Thus, this case is equitable in
nature.  The trial court acted within its discretion in the
awarding of attorney’s fees to the representative plaintiffs
through the creation of a common fund.  This assignment of error
is overruled.  
V.  PLAINTIFF CLASS MEMBERSHIP
The final issue to be addressed is the proper
composition of the plaintiff class.  Plaintiffs contend the trial
court erred by ordering refunds only to those taxpayers who
complied with the protest requirements of N.C.G.S. § 105-267. 
Here, the basic question is whether a refund of taxes paid,
pursuant to an unlawful tax, is available only to those taxpayers
who complied precisely with the procedural steps of N.C.G.S. §
105-267 or to all taxpayers who wrongfully had their benefit
contracts impaired by the State.  Fundamental fairness would seem
to dictate an easy answer--the State should not profit from the
collection of a tax which it was prohibited by our state and
federal Constitutions from imposing in the first place.  However,
the resolution of this issue is complicated by our previous
holdings in Bailey I and Swanson.
In Bailey I, this Court held that the case brought by
the present plaintiffs should be dismissed because plaintiffs
failed to pay the disputed tax first and then seek a refund in
accordance with section 105-267 before bringing their
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constitutional challenge.  (Plaintiffs subsequently met the
requirements of section 105-267, resulting in the present case.) 
This Court stated:  “When a tax is challenged as unlawful rather
than excessive or incorrect, the appropriate remedy is to bring
suit under N.C.G.S. § 105-267.  ‘[A] constitutional defense to a
tax does not exempt a plaintiff from the mandatory procedure for
challenging the tax set out in N.C.G.S. § 105-267.’”  Bailey I,
330 N.C. at 235, 412 S.E.2d at 300 (quoting 47th Street Photo
Inc. v. Powers, 100 N.C. App. 746, 749, 398 S.E.2d 52, 54 (1990),
appeal dismissed and disc. rev. denied, 329 N.C. 268, 407 S.E.2d
835 (1991)).  In Swanson, this Court held that class plaintiffs
had not stated a claim because none of the demand letters sent to
the Department of Revenue included information regarding any
individual class member’s claim as required by section 105-267. 
This Court, in Swanson, also upheld the constitutionality of the
procedure in section 105-267 as measured by the requirements of
due process, holding, “Denial of refunds to taxpayers for the tax
years for which they failed to comply with this procedure does
not . . . deprive these taxpayers of constitutional due process.” 
Swanson, 335 N.C. at 687, 441 S.E.2d at 545.
In the case sub judice, defendants cite these
authorities for the contention that a refund should be limited
only to those taxpayers who complied with the protest procedures
of section 105-267.  However, close examination of the predicate
for these holdings in Bailey I and Swanson undermines defendants’
analysis.
-48-
First, the foundation upon which this Court’s rather
sweeping statement in Bailey I was premised has been undercut by
the United States Supreme Court.  Citing as authority the
decision in Coca-Cola Co. v. Coble, 293 N.C. 565, 238 S.E.2d 780
(1977), this Court stated, “Absent protest in the form of a
demand for refund, a tax is voluntarily paid, and ‘voluntary
payments of unconstitutional taxes are not refundable.’”  Bailey
I, 330 N.C. at 236, 412 S.E.2d at 301 (quoting Coca-Cola, 293
N.C. at 569, 238 S.E.2d at 783).  A close and realistic
examination of taxation procedure in this state reveals this
reasoning to be suspect, particularly in light of the
circumstances here.  North Carolina does not provide taxpayers
with any predeprivation procedures for determining the propriety
or legality of a tax.  Individuals who challenge tax liability
must first pay the disputed amount and then petition the
Department of Revenue for a refund of the amount in question. 
Individuals who do not pay taxes assessed, disputed or not, are
subject to a myriad of the State’s coercive powers, including
fines and forfeiture.  Under such circumstances, it would be
generous at best to characterize the payment of a disputed tax as
“voluntary.”  The United States Supreme Court, in the case of
McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496
U.S. 18, 110 L. Ed. 2d 17 (1990), a case decided after this
Court’s 1977 opinion in Coca-Cola, stated:
We have long held that, when a tax is
paid in order to avoid financial sanctions or
a seizure of real or personal property, the
tax is paid under “duress” in the sense that
the State has not provided a fair and
-49-
meaningful predeprivation procedure.  Justice
Holmes suggested in Atchison, T. & S.F. [Ry.]
Co. v. O’Connor, 223 U.S. 280, 56 L. Ed. 436
(1912), that a taxpayer pays “under duress”
when he proffers a timely payment merely to
avoid a “serious disadvantage in the
assertion of his legal . . . rights” should
he withhold payment and await a state
enforcement proceeding in which he could
challenge the tax scheme’s validity “by
[defense] in the suit.”  Id. at 286, 56 L.
Ed. [at 438].  
In contrast, if a State chooses not to
secure payments under duress and instead
offers a meaningful opportunity for taxpayers
to withhold contested tax assessments and to
challenge their validity in a predeprivation
hearing, payments tendered may be deemed
“voluntary.” 
McKesson Corp., 496 U.S. at 39 n.21, 110 L. Ed. 2d at 37 n.21
(citations omitted) (emphasis added).  This logic eviscerates the
conclusion of Bailey I that a tax is paid voluntarily “absent
protest” and, without such voluntary payment, is not refundable
even though the tax is unconstitutional.  Bailey I, 330 N.C. at
236, 412 S.E.2d at 301.  
Once this conclusion in Bailey I is removed, a thorough
reading of the cases suggests that the procedural requirements of
section 105-267 are intended only to establish the parameters
within which a contested tax case must arise, not to preclude
recovery for those determined via the resulting case to have been
unconstitutionally taxed.  Neither Bailey I nor Swanson reached
the substantive merits of the respective cases.  They addressed
only the procedural stances under which each arose.  In both
cases, the plaintiffs were barred from reaching the merits
because of this Court’s holding of procedural infirmities
-50-
resulting from failure to comply with section 105-267 and
regulations promulgated thereunder.  Neither decision addressed
the issue of what effect section 105-267 had on remedies for
taxpayers deemed to have been taxed unconstitutionally once a
suit was properly filed within the requirements of section 105-
267.  
To determine the appropriate application of Bailey I
and Swanson, we must examine the rationales underlying the
Court’s decisions.  In both cases, the Court stated that the
reason for the requirements of section 105-267 was the fiscal
stability of the State.  In Bailey I, the Court stated:
Reasons for requiring that refund
demands include the information identified by
the Secretary of Revenue evidently spring
from a concern for the stability of the fisc:
Where protest has been interposed,
the [taxing authority] is notified
that it may be obliged to refund
the taxes and is required to be
prepared to meet that contingency. 
If no protest has been lodged, it
is generally assumed that taxes
paid can be retained to meet
authorized public expenditures, and
financial provision is not made for
contingent refunds.
Bailey I, 330 N.C. at 238, 412 S.E.2d at 302 (quoting Conklin v.
Town of Southampton, 141 A.D.2d 596, 598, 529 N.Y.S.2d 517, 519
(1988)).  In Swanson, this Court quoted the above passage from
Bailey I, as well as the following statement from the United
States Supreme Court:  “‘The State’s ability in the future to
invoke such procedural protections suffices to secure the State’s
interest in stable fiscal planning . . . .’”  Swanson, 335 N.C.
-51-
at 687, 441 S.E.2d at 545 (quoting McKesson Corp., 496 U.S. at
45, 110 L. Ed. 2d at 41).
Thus, according to Bailey I and Swanson, the purpose
underlying the requirements of section 105-267 is to put the
State on notice that a tax, or a particular application thereof,
is being challenged as improper so that the State might properly
budget or plan for the potential that certain revenues derived
from such tax have to be refunded.  Such an understanding
affirms, and at the same time limits, the sweeping statement that
even claims of unconstitutional taxation are subject to the
procedural requirements of section 105-267.  While claims of
improper or illegal taxation, even on constitutional grounds as
held in Bailey I, are subject to the procedural requirements of
section 105-267, this is only to the extent necessary to provide
the State with the notice sufficient to protect fiscal stability.
Notice for fiscal planning purposes is the touchstone
of the section 105-267 requirements.  In this case, plaintiffs
met the requirements for filing suit under section 105-267.  As
of the first protest received in accordance with section 105-267,
not to mention the first lawsuit filed thereafter, the State has
been aware of a constitutional challenge to the validity of the
Act.  The State, through its agents, manages the various
Retirement Systems.  As a result, the State is or should be fully
aware of the number of retirees whose benefits vested prior to 12
August 1989, as well as the amount of benefits paid to those
retirees.  Therefore, the State had notice that the Act was
-52-
potentially unconstitutional and had the opportunity to budget
for such a contingency.  The purpose of the statute was realized.
We have determined in this case that the State acted
unconstitutionally by impairing the contracts and taking without
just compensation the property of state and local government
employees whose retirement benefits vested on or before 12 August
1989.  Such a determination does not discriminate between those
who protested and those who did not.  The State
unconstitutionally collected taxes from all of these individuals. 
It would be unjust to limit recovery only to those taxpayers with
the advantage of technical knowledge and foresight to have filed
a formal protest and demand for refund.  Such a result would
clearly elevate form over substance.  This is especially
untenable in a case such as this, where the matter is of
constitutional import and where, in practical consequence, the
purpose of the statute was realized.  Further, this more
expansive, inclusive determination would seem to comport with the
language and spirit of section 105-267, which provides:  “If upon
the trial it is determined that all or part of the tax was levied
or assessed for an illegal or unauthorized purpose, . . .
judgment shall be rendered therefor, with interest, and the
judgment shall be collected as in other cases.  The amount of
taxes for which judgment is rendered in such an action shall be
refunded by the State.”  N.C.G.S. § 105-267.
Thus, as to this issue, we hold that section 105-267
does not shield the State from refunding money collected to all
taxpayers unconstitutionally taxed by the Act and that the trial
-53-
court erred by limiting relief only to those taxpayers who
protested in accordance with section 105-267.  To the extent that
our rulings in Bailey I and Swanson imply otherwise, they are
hereby disavowed.
For the foregoing reasons, we affirm the trial court’s
holding that the Act is unconstitutional as an improper
impairment of contract and a taking of property without just
compensation.  We also affirm the trial court’s creation of a
common fund.  However, in light of our holding that the trial
court erred in limiting recovery only to those plaintiffs who
complied with section 105-267, we remand the case to the trial
court for entry of such further order or orders, consistent with
this opinion, as the trial court shall find appropriate with
respect to the determination and administration of plaintiffs’
class, refunds, and the common fund.  We have examined the
remaining issues raised by the parties, including the issue of
judicial salaries, and conclude we need not now address them in
light of the determinations hereinabove set forth.
AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
=============================
Justice FRYE concurring in part and dissenting in part.
This Court has decided, in two very recent cases, one
involving the same parties as in this case, that the protest
requirements of N.C.G.S. § 105-267 are valid.  I cannot join the
majority in overruling those cases today.  Accordingly, I dissent
from the portion of the majority opinion dealing with the protest
requirements of N.C.G.S. § 105-267.
-54-
============================
Justice WEBB concurring in part and dissenting in part.
I dissent from the portion of the majority opinion
dealing with the protest requirements of N.C.G.S. § 105-267,
which, when this action was filed, said:
No court of this State shall entertain a
suit of any kind brought for the purpose of
preventing the collection of any tax imposed
in this Subchapter.  Whenever a person shall
have a valid defense to the enforcement of
the collection of a tax assessed or charged
against him or his property, such person
shall pay such tax to the proper officer, and
such payment shall be without prejudice to
any defense of rights he may have in the
premises.  At any time within 30 days after
payment, the taxpayer may demand a refund of
the tax paid in writing from the Secretary of
Revenue and if the same shall not be refunded
within 90 days thereafter, may sue the
Secretary of Revenue in the courts of the
State for the amount so demanded.  Such suit
may be brought in the Superior Court of Wake
County, or in the county in which the
taxpayer resides at any time within three
years after the expiration of the 90-day
period allowed for making the refund.  If
upon the trial it shall be determined that
such a tax or any part thereof was levied or
assessed for an illegal or unauthorized
purpose, or was for any reason invalid or
excessive, judgment shall be rendered
therefor, with interest, and the same shall
be collected as in other cases.  The amount
of taxes for which judgment shall be rendered
in such action shall be refunded by the
State; provided, nothing in this section
shall be construed to conflict with or
supersede the provisions of G.S. 105-241.2.
N.C.G.S. § 105-267 (1989) (amended 1996).
I do not see how the language of this section could be
more clear that an action may not be brought to prevent the
collection of certain taxes, including the taxes involved in this
-55-
case.  The section further clearly says that the only way to test
the imposition of these taxes is to pay them to the proper
officer and file a protest within thirty days of payment.
In holding that a protest was not necessary in this
case, I believe the majority has violated the first rule of
statutory construction, which is that when the language of a
statute is unambiguous and clear, there is no room for judicial
construction, and a court must give the statute its plain and
definite meaning.  State ex rel. Utilities Comm’n v. Edmisten,
291 N.C. 451, 232 S.E.2d 184 (1977).
The majority says that reaching the result in this case
was complicated by Swanson v. North Carolina, 335 N.C. 674, 441
S.E.2d 537, cert. denied, 513 U.S. 1056, 130 L. Ed. 2d 598
(1994), and Bailey v. North Carolina, 330 N.C. 227, 412 S.E.2d
295 (1991), cert. denied, 504 U.S. 911, 118 L. Ed. 2d 547 (1992). 
This complication is understandable in light of the fact that
both the cases contain square holdings contrary to the result we
have reached today.  Bailey, of course, involves the very parties
and issues involved in this case.  The United States Supreme
Court has said that our protest payment scheme is not
unconstitutional.  McKesson Corp. v. Division of Alcoholic
Beverages & Tobacco, 496 U.S. 18, 110 L. Ed. 2d 17 (1990).
In order to avoid the plain meaning of the statute, the
majority goes to great lengths to prove (1) that payments under
protest are not voluntary, and (2) that the purpose of N.C.G.S. §
105-267 is to provide the State with information as to what
revenues it will have for its fiscal needs.  The majority says
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the State should have known what revenues might be available
without the protests, and this made it unnecessary to follow
section 105-267.
I do not believe the involuntariness of the payments or
the purpose behind the statute should be considered in this case. 
The meaning of the statute is clear.  We should not go beyond the
plain meaning.
The General Assembly has determined that in order to
contest the imposition of a tax, there must be a payment under
protest.  We should not repeal this action of the General
Assembly.