No. 92-499 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1993 

EDMUND F. SHEEHY, CATHERINE N. SHEEHY, 

JUNIUS CHADWICK, LILLIAN PAUL, and 

BEN JOHNS, on behalf of themselves, and 

all other similarly situated taxpayers, 

Plaintiffs and Appellants, 

PUBLIC EMPMYEES RETIREMENT DIVISION, 

TEACHERS RETIREMENT DIVISION, DEPmTMENT 

OF ADMINISTRATION: STATE - OF - MONTANA: 

and DEPARTMENT OF ' REVENUE, STATE OF MONTANA, 

Defendants and Respondents, 

ASSOCIATION OF MONTANA RETIRED PUBLIC EMPMYEES, et al., 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 7.- --A e-.- LL- ,.. -.... L.. 

ot~u LVL Lur LUUJILY uf Lewis and Clark, 

The Honorable Thomas C. Honzel, Judge presiding. 

COUNSEL OF RECORD: 

For Appellants: 

Edmund F. Sheehy, Jr. (argued); Cannon & Sheehy, 

Helena, Montana 

For Respondents: 

David W. Woodgerd, Dep't of Revenue, Helena, Montana 

R. Bruce McGinnis (argued), Tax Counsel, Helena, MT 

Brenda Nordlund (argued), Dep't of Administration, 

Helena, Montana 

Leo Berry; Browning, Kaleczyc, Berry & Hoven, Helena 

Montana (Association of Montana Retired Public 

Employees) 

Filed: 

Heard: April 28, 1993 

Submitted: July 27, 1993 

i #I A Decided: November 23, 1993 
Justice Karla M. Gray delivered the Opinion of the Court. 

This is an appeal from the grant of summary judgment to 

defendants by the First Judicial District Court, Lewis and Clark 

County. We affirm in part and reverse in part. 

We consider the following issues on appeal: 

1. Did the District Court err in concluding that no 

contractual right existed in certain state retirees to 

continued exemption from taxation of state retirement 

benefits, and that Ch. 823, 1991 Mont. Laws, does not 

violate Article 11, Sec. 31 of the Montana Constitution? 

2. Did the District Court err in concluding that the 

provision of Ch. 823, 1991 Mont. Laws, phasing out the 

$3,600 exemption does not violate 4 U.S.C. § Ill? 

3. Did the District Court err in concluding that the 

retirement adjustment payment contained in Ch. 823, 1991 

Mont. Laws, does not violate 4 U.S.C. 5 Ill? 

4. Are the retirement adjustment payment and related 

implementation provisions severable from Ch. 823, 1991 

Mont. Laws? 

For many years, the state of montana exempted from ir~tioute 

taxation all retirement benefits paid through its various 

retirement systems to teachers and state government retirees, while 

taxing retirement benefits paid by the United States to federal 

retirees. In 1989, the United States Supreme Court decided Davis 

v. Michigan Dep't of Treasury (1989), 489 U.S. 803, 109 S.Ct. 1500, 

103 L.Ed.2d 891. The Supreme Court determined that 4 U.S.C. 5 111 

waives the immunity retired federal employees otherwise would enjoy 

from state taxation of retirement benefits received as a result of 

their employment with the federal government, exce~t to the extent 

such state taxation discriminates on the basis of the source of the 

retirement benefits. Because the Michigan tax at issue favored 
retired state employees based on the source of their retirement 

benefits, the Supreme Court concluded that the tax violated 

principles of intergovernmental tax immunity. Davis, 489 U.S. at 

810, 815, 109 S.Ct. at 1505, 1509, 103 L.Ed.2d 901, 906. 

Although oavis was decided during Montana's 1989 legislative 

session, the legislature did not amend Montana's tax laws in 

response to Davis prior to adjourning. As a result, a group of 

federal retirees filed a declaratory judgment action to have the 

existing taxation scheme declared unconstitutional; they also 

souyht a retroactive application of Davis for purposes of 

entitlement to a refund of taxes illegally collected by the State. 

By the time that case reached this Court, the district court had 

adopted the parties1 stipulation that the tax was invalid for tax 

years beginning after December 31, 1988; only the issue of 

retroactive application of oavis was before us. See Sheehy v. 

State, Deprt of Revenue (1991), 250 Mont. 437, 820 P.2d 1257. 

The Montana legislature subsequently passed Chapter 823, 1991 

Montana Laws, which, according to its title, restructures the 

income tax on pension benefits by equalizing the taxation of all 

pension benefits. In lieu of extending the total exemption from 

taxation previously available to state retirement income to federal 

retirement income, the legislature opted in Chapter 823 to bring 

all retirement income--including both state and federal pensions-- 

within the Montana income tax. Chapter 823 does exempt from 

taxation the first $3,600 of all pension and annuity income 

received, except that the exemption is reduced or phased out by $2 
for every $1 of federal adjusted gross income in excess of $30,000. 

In addition, section 5 of Chapter 823 grants to state retirees who 

are Montana residents, and who now were to be taxed in response to 

m, an annual retirement adjustment paxpent. 

Appellants, who are primarily federal retirees but who include 

one or more state and teacher retirees (hereafter Taxpayers), filed 

the instant declaratory judgment action against two state 

retirement divisions of the Montana Department of Administration 

and the Montana Department of Revenue (hereafter the State), 

challenging Chapter 823 on a number of grounds. The Association of 

Montana Retired Public Employees was allowed to intervene. The 

parties entered into an agreed statement of facts and submitted the 

case to the District Court on cross motions for summary judgment. 

The District Court granted summary judgment to the State on 

all issues. Taxpayers appeal from portions of that judgment. 

I 

Did the District Court err in concluding that no contractual 

right existed in certain state retirees to continued exemption from 

taxation of state retirement benefits, and that Ch. 823, 1991 Mont. 

Laws, does not violate Article 11, Sec. 31 of the Montana 

Constitution? 

Taxpayers argue that as to state employees who retired on or 

before the effective date of Chapter 823 and began receiving 

retirement benefits at a time when those benefits were fully exempt 

from taxation, Chapter 823 violates Article 11, Section 31 of the 

1972 Montana Constitution, which prohibits the legislature from 
passing any law impairing the obligation of contracts. The thrust 

of the argument is that, by taxing these retirees' state pensions, 

Chapter 823 impairs private contractual rights codified at §§ 19-4- 

706 and 19-3-105, MCA (1989), that exempted their pensions from 

taxation. 

The State counters that the pre-Chapter 823 statutes did not 

create private contractual rights, and could not create a right in 

state retirees never to be taxed because it is prohibited from 

surrendering or contracting away its taxing power by Article VIII, 

Section 2 of the 1972 Constitution. Thus, the State contends, 

Article 11, Section 31 is inapplicable here. 

The District Court correctly relied on Wage Appeal v. Board of 

Personnel Appeals (1984) , 208 Mont. 33, 676 P. 2d 194, in concluding 

that §§ 19-4-706 and 19-3-105, MCA (1989), constituted current 

policy statements regarding public employment, rather than a 

contract providing that state retirement benefits would never be 

taxed. In Waqe Appeal, a statewide pay plan was challenged on the 

basis that it impaired employment contracts entered into before it 

took effect. We stated: 

[Wlhen the Legislature enacts a statute fixing certain 

terms and conditions of public employment, such as 

salaries and compensation, it is presumed that the 

statute does not create contractual rights, but is 

intended merely to declare a policy to be pursued until 

the Legislature declares otherwise. 

Wase Appeal, 676 P.2d at 199 (citations omitted). While 

recognizing the "presumptionw language in Waqe Appeal, Taxpayers 

rely on additional language therein: 
If contractual rights are to be created by statute, the 

language of the statute and the circumstances must 

manifest a legislative intent to create private rights of 

a contractual nature enforceable against the State. 

Waqe Awweal, 676 P.2d at 199 (citations omitted). Taxpayers assert 

that the provisions of § 19-4-706 and 19-3-105, MCA (1989), 

clearly manifest legislative intent to create private contractual 

rights enforceable against the State. We disagree. 

Notwithstanding their bald assertion of clearly manifested 

legislative intent, Taxpayers offer no analysis of the statutes to 

support the assertion. Thus, it is necessary only to point out 

that § 19-4-706, MCA (1989), provides that state retirement 

benefits are exempted from state tax. The use of the present tense 

"arew indicates that the statute is a statement of current policy 

regarding public employment. The statute contains no manifestation 

of legislative intent to create private and enforceable contractual 

rights as contempiated in Wase Aoweai; nor does it make or imply 

any promises regarding ongoing or future tax treatment of state 

retirement benefits. Taxpayers have not met their burden under 

Waae Awweal. 

Moreover, Taxpayers' reliance on Clarke v. Ireland (1948)' 122 

Mont. 191, 199 P.2d 965, and State ex rel. Sullivan v. State 

(1977), 174 Mont. 482, 571 P.2d 793, as support for their theory 

that §§ 19-4-706 and 19-3-105, MCA (1989), created a contract right 

to continued exemption from taxation of state retirement benefits 

is misplaced. Both cases involved an effort to deny the plaintiffs 

therein an actual retirement benefit provided by the Teachers* 

Retirement Act at the time the plaintiffs became members of the 

6 
teachers' retirement system; our conclusions in Clarke and Sullivan 

that contract rights existed were based on those facts. 

Here, we have no issue concerning efforts to deny or limit 

state retirees' actual retirement benefits. The question before us 

relates to a taxation provision entirely separate from state 

retirement programs and entitlements thereunder. Furthermore, the 

taxation characteristic which distinguishes this case from Clarke 

and Sullivan also brings into play Article VIII, Section 2 of the 

1972 Constitution, which prohibits the state from surrendering or 

contracting away the power to tax. Under that constitutional 

provision, the state cannot promise any group of taxpayers that it 

will never tax them. 

We hold that the District Court correctly concluded that state 

employees retiring prior to the effective date of Chapter 823 did 

not have a contractual right to continued exemption from taxation 

of their state retirement benefits. On that basis, the District 

Court also correctly determined that Chapter 823 does not violate 

Article 11, Section 31 of the Montana Constitution. 

I1 

Did the District Court err in concluding that the provision of 

Ch. 823, 1991 Mont. Laws, phasing out the $3,600 exemption does not 

violate 4 U.S.C. § Ill? 

Prior to adoption of the Public Salary Tax Act of 1939 (the 

Act), compensation of both state and federal employees generally 

was thought to be exempt from taxation by another sovereign under 
the doctrine of intergovernmental tax immunity. The purpose of the 

Act was to impose federal income tax on the salaries of all state 

and local government employees. In order to ensure that federal 

employees did not remain immune from state taxation while state 

employees were being required to pay federal income taxes, Congress 

enacted 5 4 of the Act--now 4 U.S.C. 5 Ill--waiving immunity which 

might otherwise have shielded federal employees from state 

taxation, but retaining immunity from discriminatory taxation based 

on the source of the income: 

The United States consents to the taxation of pay or 

compensation for personal service as an officer or 

employee of the United States, a territory or possession 

or political subdivision thereof, the government of the 

District of Columbia, or an agency or instrumentality of 

one or more of the foregoing, by a duly constituted 

taxing authority having jurisdiction, if the taxation 

does not discriminate aqainst the officer or emplovee 

because of the source of the oav or comwensation. 

4 U.S.C. 5 111 (emphasis added). 

In 1989, the United States Supreme Court decided Davis, which 

involved a Michigan income tax system discriminating in favor of 

state retirees and against federal retirees by exempting only state 

retirement benefits from taxation. The Supreme Court determined 

that the discriminatory tax was based on the source of the 

retirement benefits and was not justified by significant 

differences between the two classes of retirees. Davis, 489 U.S. 

When Davis was decided, it became clear that Montana's income 

tax statutes regarding state versus federal retirement benefits 

also violated federal law. In responding to Davis and 
restructuring the taxation of pension benefits in Chapter 823, the 

Montana legislature provided a $3,600 exemption from taxation to 

all retirees; the exemption is phased out beginning at the $30,000 

income level. Taxpayers contend that the phase-out violates 4 

U.S.C. 5 111 by discriminating against federal retirees based on 

the source of their income. This is so, they contend, because 

federal pensions are larger than state pensions and, as a result, 

federal retirees will lose all or part of the exemption. The State 

contends that the phase-out exemption treats state and federal 

retireesf pensions equally and that any difference is based on 

amount, not source, of income. 

As discussed above, the controlling federal statute does not 

prohibit all differences in state taxation of state and federal 

pensions. Rather, it precludes taxation which discriminates 

against federal retirees because of the source of the pension. 4 

U.S.C. 111. Here, the phase-out exemption is neutral on its 

face; it applies to all taxpayers equally. Any difference in 

impact on federal and state retirees is based entirely on the 

amount of income received by each individual taxpayer, without 

regard to the source of that income. 

Indeed, the Supreme Court in Davis tacitly approved 

differences in taxation such as the phase-out exemption before us: 

A taxation exemption truly intended to account for 

differences in retirement benefits would not discriminate 

on the basis of the source of those benefits . . . ; 

rather, it would discriminate on the basis of the amount 

of benefits received by individual retirees. 

Davis, 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d at 906 
(emphasis added!. The phase-out exemption contained ir? Chapter 823 

treats individual retirees differently based on differences in the 

amount of retirement income received. Taxpayers' strained 

interpretation that because federal pensions generally are larger 

than state pensions and, thus, that the phase-out discriminates as 

to source rather than amount, simply does not square with Davis. 

We conclude that the phase-out exemption does not discriminate 

as to source of income. Therefore, we hold that the District Court 

correctly concluded that the provision of Chapter 823 phasing out 

the $3,600 exemption does not violate 4 U.S.C. g 111. 

111 

Did the District Court err in concluding that the retirement 

adjustment payment contained in Ch. 823, 1991 Mont. Laws, does not 

violate 4 U.S.C. 5 111? 

Observing that Davis does not limit the State's ability to set 

the terms and conditions of public employment, the District Court 

concluded that the adjustment constitutes a legitimate increased 

retirement benefit to state retirees. It relied primarily on Clark 

v. United States (7th Cir. 1982), 691 F.2d 837. 

Taxpayers argue that the adjustment is part of the taxation 

scheme and that it impermissibly discriminates against them. They 

also argue that Clark is inapplicable. The State contends that the 

adjustment is unrelated to the tax and that, pursuant to Clark, it 

is a valid retirement benefit. 

Davis requires a two-pronged analysis of the legislation at 
issue here: 1) Does it constitute discriminatory taxation against 

federal retirees or in favor of state retirees on the basis of 

source of income? and 2) If so, is the different treatment 

"directly related to, and justified by, 'significant differences 

between the two classes'"? Davis, 489 U.S. at 816, 109 S.Ct. at 

1508, 103 L.Ed.2d at 905 (citation omitted). Application of 

to the case before us mandates our conclusion that the retirement 

adjustment payment (hereafter adjustment) contained in section 5 of 

Chapter 823 violates 4 U.S.C. 5 111. 

It is clear that the revenue, equalization and adjustment 

provisions of Chapter 823 are related parts of a comprehensive 

income tax program encompassing all pension income. The provisions 

were all included in and part of the same bill, originally 

introduced as Senate Bill 226 in the 1991 Montana legislature. The 

title of the bill, subsequently enacted as Chapter 823, reads in 

pertinent part: 

An Act to Restructure the Income Tax on Pension Benefits 

by Equalizing the Taxation of All Pension Benefits; To 

Provide an Exemption of $3,600 from Taxation of Benefits 

from Federal, State, and Private Retirement, Annuity, 

Pension, and Endowment Plans or Systems; To Provide That 

the Amount of the Exemption be Reduced by $2 for Every $1 

of Federal Adjusted Gross Income Received by the Taxpayer 

in Excess of $30,000; To Provide for an Adjustment 

Payment to Retirees of State, Local, and Teacher 

Retirement Systems Who are Montana Residents. . . . 

Reading the title makes it clear that the overall purpose of this 

bill was to tax state and federal pensions in a manner that does 

not violate 4 U.S.C. 5 111 as interpreted in Davis. Rather than 

comply with 4 U.S.C. § 111 by extending the total exemption from 

state income taxation previously granted to state retirement 
benefits to include federal retirement benefits, the legislature 

chose to equalize the burden by taxing all retirement benefits, 

subject to the phase-out exemption discussed above. Within the 

same legislative enactment, the legislature provided for an 

adjustment payment to state retirees who are Montana residents. 

The State's argument that the two portions of the bill are not 

related defies logic, 

Moreover, the relationship between the tax equalization 

provisions of the bill, with their negative impacts on state 

retirees, and the adjustment intended to make up, in part, for that 

equalization cannot be gainsaid. The adjustment--while purporting 

to be an adjustment to state retirement benefits--is, in fact, an 

adjustment to the equalization achieved via the first sections of 

Chapter 823. This conclusion is inescapable given the inclusion 

of the adjustment in, and as part of, the tax equalization program. 

No other interpretation of these two portions of Chapter 823 

comports with our duty to construe statutes in a reasonable manner. 

It is clear that the adjustment is not an actual and 

legitimate pension or retirement benefit. If it were a pension 

benefit, the State would have provided it to of its retirees in 

recognition of their years of public service rather than just those 

living in Montana. There was no need to do so because the sole 

purpose of the adjustment was to partially recompense state 

retirees living in Montana for the tax they now must pay under the 

equalizing provisions of Chapter 823. 

Further evidence that the adjustment is not an actual 
increased retirement benefit for retired state employees is the 

fact that the funding of the section 5 adjustment bears no 

resemblance to the funding of actual state retirement benefit 

adjustments previously enacted by the legislature. Such actual 

retirement adjustments as those contained in the Public Employees' 

Retirement System at 5 19-3-1603, MCA, and in the Teachersr 

Retirement System at 5 19-20-713, MCA, are funded by investment 

income produced by the retirement fund made up of employee and 

employer contributions. See § 19-3-1602 and 19-20-712, MCA. 

Here, the funding for the so-called retirement adjustment payment 

is statutorily appropriated from the general fund pursuant to 

section 4 of Chapter 823--that is, from the taxes collected from 

all Montana taxpayers. The money to pay the adjustment never goes 

into the state retirement funds, but is simply paid by the state 

treasurer to the retirement boards, to be distributed by the boards 

in accordance with the provisions of Chapter 823. While this 

evidence is not conclusive as to the nature of the adjustment at 

issue here, it undercuts any notion that the adjustment is a 

legitimate increase in retirement benefits for state retirees. 

We conclude that the adjustment is a partial tax rebate 

denominated otherwise in an attempt to evade the requirements of 

federal law. The discriminatory aspect of the adjustment is clear: 

the adjustment favors state retirees living in Montana based solely 

on the source of their retirement income; that is, those retirees 

living in Montana and receiving state retirement income receive the 

adjustment, while federal retirees living in Montana and receiving 
federal retirement income do not. Thus, the adjustment constitutes 

discriminatory taxation based solely on the source of the 

respective retiree's income, in violation of 4 U.S.C. 1 111. 

The State's reliance on Clark for the proposition that the 

adjustment is merely an allowable increased retirement benefit is 

misplaced. Clark involved a cost-of-living adjustment provided to 

all federal retirees as an actual and legitimate pension 

adjustment. Clark, 691 F.2d at 841. Here, the adjustment was 

provided not to all state retirees, but only to state retirees who 

are Montana residents. Further, the adjustment provided in Clark 

was entirely independent of, and unrelated to, any tax provisions. 

Here, it is part of a tax equalization scheme mandated by federal 

law. 

Because the adjustment contained in section 5 of Chapter 823 

violates 4 U.S.C. 1 111, the disparate tax treatment of state and 

federal retirement income is justified only if it is "directly 

related to, and justified by, 'significant differences between the 

two classes. 'Ii Davis, 489 U.S. at 816, 109 S.ct. at 1508, 103 

L.Ed.2d at 905. Application of this test mandates the conclusion 

that the adjustment contained in Chapter 823 cannot stand. 

The State makes no real argument that significant differences 

in fact exist between the two classes of retirees that justify the 

discriminatory adjustment. Perhaps this is to the State's credit, 

since it is clear that no such articulable differences exist which 

could withstand Davis scrutiny. The most obvious contention to be 

made regarding differences between the classes is the State's 
interest in inducing and retaining qualified state government 

workers. While this position is not asserted here, it is precisely 

the argument made by the state of Michigan in Davis to justify the 

preferential treatment of its retired employees, and is the 

argument squarely rejected by the Davis Court: 

This argument is wholly beside the point, however, for it 

does nothing to demonstrate that there are "significant 

differences between the two classesm themselves; rather, 

it merely demonstrates that the State has a rational 

reason for discriminating between two similar groups of 

employees. The State's interest in adopting the 

discriminatory tax, no matter how substantial, is simply 

irrelevant to an inquiry into the nature of the two 

classes receiving inconsistent treatment. 

Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905 

(emphasis added). 

Moreover, no reasonable argument can be made that the 

adjustment is necessary or intended (a) to retain retired residents 

in Montana in order to provide a critical mass of retired people to 

use those services and facilities that are important to retired 

people; or (b) to entice other retired people into the state. Such 

arguments would apply to all retired people and would support the 

similarities between state and federal retirees rather than 

establishing any significant differences between the two classes. 

Here, as noted, the State does not address or attempt to meet 

the Davis requirement that it justify disparate treatment on the 

basis of significant differences between the two classes of 

retirees. The reason is clear: the "adjustment" is not based on 

any difference in the nature of the two classes before us. The 

disparate treatment is based entirely on the State's desire to 
continue to provide an advantage to those of its own retirees 

losing a pre-l)avis advantage--namely, state retirees who reside in 

Montana and whose state pensions are now subject to income tax 

pursuant to Chapter 823. While the desire is understandable and 

perhaps even laudable, it is legally insufficient under l)avis as a 

justification for taxation which discriminates against federal 

retirees. 

We conclude that the adjustment contained in section 5 of 

Chapter 823 constitutes discriminatory taxation which is not 

related to, or justified by, significant differences between state 

and federal retirees. We hold that the District Court erred in 

determiningthat the retirement adjustment payment does not violate 

4 U.S.C. 5 111. 

IV 

Are the retirement adjustment payment and related 

implementation provisions severable from Chapter 823, 1991 Mont. 

Laws? 

Having concluded that the adjustment provision contained in 

section 5 of Chapter 823 violates 4 U.S.C. § 111, it is necessary 

to determine whether that provision and related implementing 

provisions can be severed from Chapter 823, or whether the entirety 

of Chapter 823 must be stricken. We conclude that the invalid 

provisions can be severed. 

Section 20 of Chapter 823 provides that if a part of the 

legislation is invalid, all valid parts that are severable from the 
invalid part remain in effect. We previously have concluded that 

the inclusion of a severability clause is an indication that the 

drafters desired judicial severability policy to apply. Montana 

Automobile Assoc. v. Greely (1981), 193 Mont. 378, 399, 632 P.2d 

300, 311. Thus, we begin our analysis with stated legislative 

intent favoring severability. We then apply severability 

principles in determining whether the invalid provisions can be 

severed or whether the entire legislative act must be stricken: 

If an invalid part of a statute is severable from the 

rest, the portion which is constitutional may stand while 

that which is unconstitutional is stricken out and 

rejected. . . . A statute "is not destroyed in toto 

because of an improper provision, unless such provision 

is necessary to the integrity of the statute or was the 

inducement to its enactment." . . . If, when an 

unconstitutional portion of an act is eliminated, the 

remainder is complete in itself and capable of being 

executed in accordance with the apparent legislative 

intent, it must be sustained. 

Greely, 632 P.2d at 311 (citations omitted). 

Here, the income tax provisions of Chapter 823 clearly are not 

destroyed in toto by striking the adjustment provisions contained 

in sections 4 and 5; indeed, they are not impacted in any way. The 

income tax still may be imposed and the exemption may be given 

effect without the adjustment for state retirees living in Montana. 

Nor was the adjustment the inducement for enacting the legislation; 

the "inducement*' for Chapter 823 was 4 U.S.C. § 111 and the Supreme 

Court's Davis decision. 

The income taxes and exemption contained in Chapter 823 remain 

complete in themselves and capable of being executed in accordance 

with the overall legislative intent, which was to equalize taxes. 
Granted, the legislature al-so intended to continue an advantage for 

certain state retirees through the adjustment. But where we have 

invalidated the adjustment portion of Chapter 823, it is clear that 

the legislature intended, through the severability clause it 

included in Chapter 823, to preserve all valid parts. 

Our earlier determination that the revenue, equalization and 

adjustment provisions of Chapter 823 are related parts of a 

comprehensive income tax program encompassing all pension income 

does not negate our conclusion here regarding severability. The 

fact that the provisions are related from the standpoint of whether 

they can withstand 4 U.S.C. g 111 and &y& scrutiny does not mean 

that they are not, and cannot be, separate and independent from a 

severability standpoint. From an administrative and operational 

perspective, it is clear that sections 4 and 5 are segregable from 

the income tax and exemption provisions. 

Finally, and returning again to the legislature's specific 

intent that invalid portions of Chapter 823 be severed, we note 

that, absent a severability clause: 

[Tlhe presumption is against the mutilation of a statute, 

and that the legislature would not have enacted it except 

in its entirety. The incorporation of a provision such 

as section 20 [severability clause] creates a presumption 

to the contrary; namely, that the legislature would have 

enacted the law without its invalid portions being 

incorporated therein. 

State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624, 636 

(citation omitted). See also Ingraham v. Champion Int'l (1990), 

243 Mont. 42, 49, 793 P.2d 769, 773. The presumption operates here 

in support of the legislature's intent that the remainder of 
Chapter 823 remains valid even where the adjustment provisions are 

determined to be invalid. Nothing in Chapter 823 indicates any 

intent that the tax and exemption provisions are dependent on the 

validity of the adjustment for state retirees living in Montana; 

thus, no inconsistency between such a provision and the contrary 

and clearly-stated severability clause exists in Chapter 823 which 

might require us to depart from the plain language used by the 

legislature and delve into the legislative history to resolve the 

issue before us. 

We conclude that sections 4 and 5 are severable from Chapter 

823, 1991 Montana Laws. We hold that those sections are severed 

and excised from Chapter 823 and, with those invalid and severed 

provisions excepted, Chapter 823, 1991 Montana Laws, remains valid 

and in full force and effect. 

Affirmed in part and reversed in part. 

We concur: 
ourt, sitting 

C Harrison 7 

wistrict Court, sittiAg inathe 

seat vacated by the retirement 

of Justice R.C. McDonough 
~istrict Judge Peter L. Rapkoch specially concurring in part and 

dissenting in part. 

I concur in the majority opinion on Issue I, that state 

employees retiring before the effective date of Chapter 823, 1991 

Laws of Montana, did not have a contractual right to continued 

exemption from taxation of their state retirement benefits. 

I also agree that the provision of Chapter 823 phasing out the 

$3600 exemption does not violate 4 U.S.C. 5 111 (1966). 

Nor do I disagree with the majority that the adjustment 

contained in section 5 of Chapter 823 constitutes discriminatory 

taxation and therefore violates 4 U.S.C. 5 111 (1966). 

It is, however, my opinion that the adjustment payment 

provision is not severable from the rest of Chapter 823, and 

therefore, I dissent from the majority's opinion on that point. 

Section 20 of Chapter 823 is the severability provision here. 

The incorporation of that provision raises a presumption that the 

Legislature would have enacted the law without its invalid 

portions. Williams v. Standard Oil Co. (1929), 278 U.S. 235, 

241-42; State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624, 

636; Ingraham v. Champion Intll. (1990), 243 Mont. 42, 49, 793 P.2d 

769, 773. 

That is a rebuttable presumption though, and a weak one at 

that; rebuttable by the nature of the statue being considered: its 

purpose manifested by its provisions before severance as compared 

to its apparent purpose, as manifested by the provisions remaining 
after amputation. Can it be said that the purpose is the same 

after surgery as it was before? 

The majority cites and quotes Montana Automobile Association 

v, Greely (19811, 193 Mont. 378, 399, 632 P.2d 300, 311 as follows: 

A statute Itis not destroyed in toto because of an 

improper provision, unless such provision is necessarvto 

the intearity of the statue or was the inducement to its 

enactment." If, when an unconstitutional portion of an 

act is eliminated, the remainder is complete in itself 

and capable of being executed in accordance with the 

awwarent leaislative intent, it must be sustained. 

[Citation omitted; emphasis added]. 

This cannot be done here. "Apparent legislative intentw must 

be that intent manifested by the language of the statute before 

severance. It is true that neither the income tax provisions nor 

the equalization parts are not themselves destroyed or affected by 

striking the adjustment provisions. But the former cannot in this 

case be considered separate and apart from the amputated adjnstment 

provision. And ltamputatedlt is the right word. What remains and 

will be enforced under the majority opinion will not be the same as 

what clearly appears to be the intent of the Legislature in the 

original enactment. The Legislature did not, in enacting Chapter 

823, set out to do no more than equalize the income tax on all 

retirees. It went on and set out, bv the adjustment wrovision, to 

remove or lessen that impact on resident Montana retirees. 

The general statement of the severability rule in Greely is an 

accurate statement. Portions of a statute are severable if: 

(1) the invalid part is not necessary to the integrity of the 

statute: or 
(2) the invalid part was not the inducement to its enactment; 

(3) the remainder of the statute is complete in itself; g& 

(conjunctive) 

(4) the remainder is capable of being executed in accordance 

with the avvarent_?,egislative intent. Greelv, 632 P.2d at 311. 

I submit that the surgery here performed on Chapter 823 fails 

to meet condition 1 above in that sections 4 and 5, the adjustment 

provisions, are necessary to the integrity of the entire Chapter 

823 as originally enacted. It is correct that the equalization 

provisions may be imposed and the exemption given effect without 

the adjustment to income for Montana resident retirees. But what 

would then be imposed and given effect would be a law completely 

different from what is clearly intended in the original act. It 

may even be a better law, but that is not our business; such would 

be judicial legislation. 

It also seems that the adjustment provision is part of an 

enactment that is a byzantine effort to avoid Davis v. Michigan 

Department of Treasury (1989), 489 U.S. 803. 1 stand in awe and 

admiration of such effort, but we are subject to 4 U.S.C. 5 111 

(1966) and Davis and must apply logic to the premises therein set 

forth. I, therefore, believe that the adjustment provision is an 

inseparable inducement to the enactment of Chapter 823, thereby 

failing the second condition above. 

The remainder of the statute, after eliminating the adjustment 

provision is complete in itself, but only in &self. It is not 
what the Legislature enacted or intended. There go conditions 3 

and 4 above. 

What remains after our decision is not, as stated ad nauseam 

above, capable of being executed in accordance with the apparent 

legislative intent. We cannot cut out a third of the legislation 

where that third completely changes the effect of the whole 

enactment and say that what is left is what the Legislature started 

with. 

Greelv is not on point. There the purpose of the Act was to 

regulate lobbying. The Legislature indulged in overkill by, for 

instance, defining the proscribed practice so a person of normal 

intelligence could not figure out what he could not do. Several 

sections were therefore held void; others, because the subject 

matter of some of the sections was not embraced in the title of the 

Initiative, contrary to Article V, Section 11, Clause 3, of the 

Montana Constitution. 

This Court stated: 

The Initiative, while being lengthy, is basically 

amendatory in nature. Its purpose was to expand 

Chapter 7, Title 5, of Montana's Lobbying Act, to provide 

for the disclosure of money spent to influence action of 

public officials and to require elected officials to 

disclose their business interests. This purpose is not 

frustrated by our limitations of the Initiative. Even 

after our excisions, Chapter 7, Title 5, as amended by 

the Initiative is complete in itself and capable of being 

executed in accordance with the intention of the people 

of Montana. [Emphasis added]. 

Greelv, 632 P.2d at 311-12. 

The legislation there considered is of a different nature than 

Chapter 823, where the parts are meaningful only in internal 
conjunction with each other. The whole of Chapter 823 was enacted 

as a unit. 

I must disagree with the view expressed that the legislative 

intent is clearly expressed in section 20, Chapter 823, which is 

the severability clause, and provides that if a part of the Act is 

invalid, all invalid parts of the Act are severable, and valid 

parts remain in effect. This is not the legislative intent that is 

relevant here. In fact, it is not the legislative intent at all 

that the act is severable; the intent is that if the act is 

severable. .. By use of the word "ifw the Legislature recognizes 

the fact that severance, or declaration of severability is a 

judicial act, not legislative. If the Legislature had intended the 

severed statue, it could and should and would have legislated 

accordingly. 

This may, as is stated and shown earlier, raise a presumption 

that the Legislature would have enacted the law without its invalid 

portions being incorporated. But that presumption is, I believe, 

a rebuttable presumption, here rebutted. Also, the inclusion of a 

severability provision is to a judicial act. Before it can be 

given effect, the judicial branch must do the severing. 

The relevant intent for the judiciary to look at in 

considering severability is not the legislative intent to provide 

for severability, but the legislative intent in enactincr the 

statute, the purpose of the statute, as indicated by its 

provisions. The intent to make portions severable is an interim 

intention, a procedural means, not the end. This Court has stated: 
The inclusion of a severability clause in the Initiative 

is an indication that its drafters and the voters desired 

this judicial policy [the severability rule] to be 

applied to the Initiative. [Emphasis added]. 

Greely, 632 P.2d at 311. 

Lastly, section 20, Chapter 823, reads as follows: 

Severability. If a part of [this act] is invalid, all 

valid parts that are severable from the invalid part 

remain in effect. If a part of [this act] is invalid in 

one or more of its applications, --- -- the part remains in 

effect in all valid applications that are sev.erable from 

the invalid applications. [Emphasis added]. 

That language, I think, is clear. That section speaks not of 

physical parts of provisions. It speaks of applications of those 

parts. To apply the equalization portions without the adjustment 

portion is to apply tie former portions at a divergence of 180 

degrees, more or less, from the application intended by the 

Legislature as the act is presently constituted. A severability 

clause is an appeal to the judiciary. 

It is, therefore, my opinion that the whole of Chapter 823 is 

invalid and the adjustment provisions are not severable. 

sitting for justice ~il'liak E. Hunt, Sr. 

Justice Terry N. Trieweiler joins in the foregoing concurrence 

and dissent. 
Justice Fred J. Weber specially concurs and dissents as follows: 

I concur with issues I and II of the majority, but dissent on 

issues I11 and IV. Issue I11 asks if the District Court erred in 

concluding that the retirement adjustment payment contained in 

Chapter 823, 1991 Montana Laws, violates 4 U.S.C. 5 111. I do not 

find such discrimination. 

The majority states: 

It is clear that the revenue, equalization and adjustment 

provisions of Chapter 823 are related parts of a 

comprehensive income tax program encompassing all pension 

income, 

I agree that Chapter 823 is a comprehensive income tax program; 

however, this does not preclude this statute from encompassing 

other issues. The majority quotes verbatim the vipertinenti' part of 

the bill's title. The first part of the title of the restructuring 

plan indicates that the legislature attempted to "equalizew the 

taxes on all pension benefits. Although, listed after this in 

sequence, the provision indicating the legislature's intent to 

provide the adjustment payment to State retirees living in Montana 

is an integral part of the Act as seen by the title's wording: 

. . . . To Provide for an Adjustment Payment to Retirees 

of State, Local, and Teacher Retirement Systems Who are 

Montana Residents . . . . It is not necessary to rely upon the title to determine the 

intent of the legislature. The chapter starts with the following 

list of seven WHEREAS'S, and with the exception of the taxation of 

benefits referred to in the first WHEREAS, all of the remaining 

WHEREAS'S set forth an intent directly relating to the adjustment 
payment and the reasons for the adjustment payment: 

WHEREAS, the State of Montana desires to tax federal, 

state, and private retirement benefits equally; and 

WHEREAS, the State of Montana has in the past provided 

its employees with a benefit of employment through its 

tax system: and 

WHEREAS, the Leaislature desires and encouraaes aualified 

emvlovees to enter and remain in wublic service; and 

WHEREAS, it is the policy of the State of Montana to 

encourage public employees who become superannuated or 

incapacitated to retire and, to that end, to provide 

sufficient benefits to provide for retirement; and 

WHEREAS, the Lesislature wishes to encouracle all retired 

persons to remain within Montana tc provide a critical 

mass of retired persons who use certain services and 

facilities that are important to retired persons and that 

may keep and perhaps entice other retired persons into 

the state: and 

WHEREAS, the Legislature has in the past granted 

increases in retirement benefits in a manner designed to 

provide relatively greater increases to those retirees 

who were employed during the years of low wages and whose 

benefits are relatively small; and 

WHEREAS, the Leaislature therefore srants an increase in 

benefits to its former public emwlovees who are residents 

of the state to provide compensation to encouraqe them to 

remain in Montana. 

(Emphasis added.) 

The above statement of intent was added because the legislature 

knew that the Davis decision mandated that all pension holders must 

be taxed equally. The Act does that. At the same time, the 

legislature knew that such an increase in taxes on State pensions 

could create a situation where many retirees would leave the State. 

Acting through its legislature and governor, Montana as a sovereign 

and as an employer expressed a desire to provide an incentive for 

Montana retirees to remain in the State. Without subterfuge of any 
type the legislature declared this intent. Unfortunately, that 

openness appears to have been a basis for the majority to conclude 

there was discrimination. 

If the same adjustment payment provided in the Act were 

provided in another act in some future year, and denominated a cost 

of living, no one would even raise the discrimination argument. I 

do not find a basis to condemn the adjustment merely because it is 

included with the tax. 

The adjustment payment is paid to State retirees who already 

are receiving retirement benefits. I find nothing in the record 

which demonstrates a corresponding obligation by the State of 

Montana to make some sort of payment to federal retirees whose 

retirement benefits are paid by the United States. I do not 

understand how the payment by the State to its retirees can lead to 

a *clear*' determination of discrimination, as compared to a federal 

increase to federal retirees which would not be such 

discrimination. 

The fact that federal retirees do not get this adjustment is 

not discrimination as to source. The same adjustment is not given 

to private retirees either. 

The basic intent of 4 U. S .C. § 111 has been lost. That intent 

is that the income taxation of Montana should tax federal and State 

retirement benefits at the same rates. The Act does that. An 

increase in pay to encourage State retirees to remain in the state 

is not discrimination as contemplated in 5 111. An incentive to 

stay is not discrimination as to source. There is a recognition on 
the part of the legislature that the new tax on Montana public 

employee pensions might cause them to leave the State. Such a 

recognition, stated up front and in the open, does not equal the 

discrimination that the majority characterizes as "clear." 

The fact that this adjustment payment comes from the general 

fund is also of no consequence. Any other cost of living increase 

for State public employees comes from the same source. This 

adjustment payment is no different than any other benefit which the 

State as an employer has a right to offer a group of its retirees. 

The majority refers to 5 l9-2O-?l3, MCA, which provides a cost 

of living increase for teachers in the Teachersi Retirement System. 

The title of Chapter 658 of Montana Laws 1985 shows that only 

rpcertainw teachers within the retirees from this system would be 

benefitted by the increase. I do not understand how the majority 

condemns the 1991 Act because it is made applicable to *IcertainSi 

retirees and yet refers to the Teachers1 Retirement Act as 

nondiscriminatory where it also benefits only "certain" teacher 

retirees. 

In addition, the Teachers' Retirement Act uses the "general 

fund" as the source of funds with which to pay teachers who retired 

from the various units of the University System and other schools, 

stating: 

If the employer is the superintendent of public 

instruction, a public institution of the state of 

Montana, a unit of the Montana university system, or the 

Montana state school for the deaf and blind, the 

lecrislature shall a~vrovriate to the emplover an adeauate 

amount to allow ~avment of the emploveris contribution. 

(Emphasis added.) 
Section 3, amended 5 19-20-605(3), MCA. With this annuity type 

system, the employers' part of the cost of living increase for 

"certainw retirees is paid by the State of Montana. How is that 

different from the present Act? 

I conclude there is no discrimination "as to source" within 

the 1991 Act. As a matter of policy, Montana provides its own 

retirees an "incentivem without an intention to discriminate in any 

manner. 

The Davis test of significant differences between the classes 

is not ev~n reached here. One only has to determine the 

significant difference between classes if discrimination has 

occurred. Here, there is no agreement as to even what the 

appropriate classes are. The only classes that are pertinent to 4 

UCS g 111 are "state retirees" and "federal retirees." Both of 

these classes are taxed equally under this Act. It is only the 

segment of State retirees that receive the benefit. 

While the majority merely mentions that the discrimination is 

"clearw it does not go on to explain how the vfincentivew or 

~vadjustmentvl is discriminatory. Nor does it explain how the Davis 

quote applies to what we have before us: 

Under our precedents, "[tlhe imposition of a heavier tax 

burden on [those who deal with one sovereign] than is 

imposed on [those who deal with the other] must be 

justified by significant differences between the two 

classes. (Emphasis added.) 

Davis, 489 U.S. at 815-816. The federal retirees have no heavier 

"tax burdenw than do State retirees. The tax burden on both State 

and federal retirees is identical. The exemption of $3,600 is 
identical as are the tax rates applicable to both State and federal 

retirees. The range at which the exemption begins is $30,000 for 

both State and federal retirees. The only difference is that State 

retirees who reside in Montana are given an "incentiv€?" to Stay 

within the State that has employed them and from whom their 

pensions are derived. I point out here that the wincentivew is 

still subject to tax at the same rates as any amounts received by 

the retirees. 

The District Court determined that the adjustment was part of 

a policy decision on the part of the State toward its employees. 

I would affirm the court on this analysis. The State acting as an 

employer has every right to act in concert with the sovereign and 

the legislature to provide an incentive to retired public employees 

to stay within the State that has been their home for years. This 

policy decision does not constitute discrimination against the 

retirees of any other sovereign or any other group of retirees. In 

this case, the other sovereign's retirees are taxed identically 

with those of the State sovereign. I conclude that instead of 

condemning the legislature and the governor for their openness in 

enacting the Act, they should be commended for the forthright way 

in which this was done. 

I also disagree with the conclusion that the adjustment is 

severable from the Act. Both the title and the statement of intent 

make it obvious that the adjustment or incentive to stay in Montana 

is an integral part of this Act. The incentive, based upon the 

fact that public retirees will now be receiving less money because 
of the mandatory taxation, should not be divorced from the tax plan 

itself. The tax plan explains why the employer State of Montana is 

granting this incentive. I do not believe the intention of 

granting some additional monies can be divorced from the taxation 

which applies to the retiree benefits and the adjustment. As 

demonstrated clearly in the WHEREAS clauses at the beginning of the 

Act, the taxation and the granting of the adjustment are not 

severable. The action of the majority is punitive in nature, 

taxing all benefits equally while eliminating the additional 

benefit awarded under the Act. 

I also concur in the portion of Judge Rapkoch's concurrence 

and dissent in which he concludes that the adjustment payment is 

not severable from the rest of Chapter 823. 
November 23, 1993 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the following 

named: 

Edmund F. Sheehy, Jr. 

Cannon & Sheehy 

P. 0. Box 5717 

Helena, MT 59604 

Hon. Joseph P. Mazurek, Attorney Genera! 

Clay R. Smith, Solicitor 

215 N. Sanders, Justice Building 

Helena, MT 59620 

David W. Woodgerd 

Department of Revenue 

Mitchell Building 

Helena, MT 59620 

R. Bruce McGinnis 

Tax Counsel 

Mitchell Building 

Helena, MT 59620 

Brenda Nordlund 

Attorney General's Office 

Justice Building 

Helena. MT 59620 

Leo Berry 

Browning, Kaleczyc, Berry & Hoven 

P. 0. Box 1697 

Helena, MT 59624 

ED SMITH 

CLERK OF THE SUPREME COURT