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~uLVL 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: DavidW. Woodgerd,Dep'tof 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, 1993Justice 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 violateArticle 11, Sec. 31of theMontana Constitution? 2. Did the District Court err in concluding that the provision of Ch. 823, 1991 Mont. Laws, phasing out the $3,600exemption 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 systemsto teachers and stategovernment 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), 489U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. The Supreme Court determined that 4U.S.C. 5 111 waivesthe immunity retired federal employees otherwisewould 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 discriminateson thebasis of the sourceof the retirement benefits. Because the Michigan tax at issue favoredretired 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, Deprtof Revenue (1991), 250 Mont. 437, 820 P.2d 1257. TheMontana legislature subsequentlypassed 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 taxationpreviously availableto state retirement incometo federal retirement income, the legislature opted in Chapter 823 to bring all retirement income--including both state and federalpensions-- 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 $2for every $1 of federal adjusted gross income in excess of $30,000. In addition, section 5 of Chapter 823 grants to state retireeswho

areMontana residents,and who now were to be taxed in response to 

# m,an annual retirement adjustment paxpent. Appellants,who areprimarily federal retireesbut who include

oneormore stateand teacher retirees (hereafterTaxpayers), 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. TheAssociation of Montana Retired Public Employees was allowed to intervene. The parties entered into an agreed statementof facts and submitted the

case to the District Court on crossmotions 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 rightexisted in certain state retireesto continued exemption from taxation of stateretirement benefits, and thatCh. 823,1991Mont. 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 benefitswere fully exempt from taxation, Chapter 823 violates Article 11, Section 31 of the 1972 Montana Constitution, which prohibits the legislature frompassing any law impairing the obligation of contracts. The thrust of the argument is that,by taxing these retirees' statepensions, Chapter 823 impairs private contractual rights codifiedat §§ 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 correctlyrelied onWageAppeal v. Board of Personnel Appeals (1984)

### , 208 Mont. 33, 676P.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. InWaqe Appeal, a statewidepay 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 legislativeintent tocreate private rightsof a contractual nature enforceable against the State. Waqe Awweal, 676P.2d at 199 (citationsomitted). 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 thepresent tense "arew indicates that the statute is a statement of current policy regardingpublic employment. The statute contains nomanifestation of legislative intentto createprivate and enforceablecontractual 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' relianceon Clarkev. 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 §§ 19-4-706and 19-3-105,MCA (1989),created a contract right to continued exemption from taxation of state retirement benefits ismisplaced. 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 6teachers' retirementsystem;our conclusions in Clarkeand Sullivan that contract rights existed were based on those facts. Here, we have no issue concerning efforts to deny or limit stateretirees' actual retirementbenefits. Thequestionbefore us relates to a taxation provision entirely separate from state retirement programs and entitlementsthereunder. 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 cannotpromise any group of taxpayers that it will never tax them. We hold that theDistrictCourt correctlyconcluded 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 theDistrict Court err in concluding that theprovision of Ch. 823, 1991Mont. Laws,phasing out the $3,600 exemptiondoesnot 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 underthedoctrine of intergovernmentaltax immunity. Thepurpose 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 employeeswere being required topay federal incometaxes, Congress enacted 5 4 of theAct--now 4U.S.C. 

### 5 Ill--waiving immunity which might otherwise have shielded federal employees from state taxation,but retaining immunity fromdiscriminatory taxationbased

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 theUnited States,a territory orpossession or political subdivision thereof, the government of the District of Columbia, or an agency or instrumentalityof 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 (emphasisadded). In 1989, theUnited States Supreme Court decided

### Davis, which involved a Michigan income tax system discriminating in favor of stateretirees and against federal retireesby 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 differencesbetween 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 andrestructuring the taxationof 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 orpart 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 inretirement benefitswould notdiscriminate 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(emphasisadded!. Thephase-out exemption contained ir?Chapter 823 treats individual retirees differentlybased on differences in the amount of retirement income received. Taxpayers' strained interpretation that because federal pensions generally are larger than statepensions and, thus, that thephase-out discriminatesas to source rather than amount, simply does not square with 

### Davis. We conclude that thephase-out exemptiondoesnot 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 adjustmentpayment contained in Ch. 823, 1991Mont. Laws, does not violate 4 U.S.C. 5 111? Observing that

### Davis doesnot limitthe 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. Itrelied primarily on Clark

v. United States (7thCir. 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 Statecontends 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 atissue 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 (citationomitted). Application of to the case before us mandates our conclusion that the retirement adjustment payment (hereafteradjustment) 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 incometaxprogram encompassing all pension income. Theprovisions

were all included in and part of the same bill, originally introduced as Senate Bill 226 in the 1991Montana legislature. The title of the bill, subsequently enacted as Chapter 823, reads in pertinent part: An Act toRestructure the IncomeTax on Pension Benefits by Equalizing the Taxation of All Pension Benefits; To Provide an Exemption of $3,600 fromTaxation of Benefits from Federal, State, and Private Retirement, Annuity, Pension, and Endowment Plans or Systems;To ProvideThat theAmount of theExemptionbe Reduced by $2 forEvery $1 of FederalAdjusted Gross IncomeReceived by theTaxpayer in Excess of $30,000; To Provide for an Adjustment Payment to Retirees of State, Local, and Teacher Retirement SystemsWho 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 retirementbenefits 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 tomake up, inpart, for that equalization cannot be gainsaid. The adjustment--whilepurporting 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 aspart of, the tax equalizationprogram. No other interpretation of these two portions of Chapter 823 comports with ourduty to construestatutes ina reasonablemanner. It is clear that the adjustment is not an actual and legitimate pension or retirement benefit. If it were a pension benefit, the Statewould have provided it to of its retirees in recognitionof their years ofpublic servicerather 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 actualincreased 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 adjustmentsas 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. Themoney to pay the adjustment never goes into the state retirement funds, but is simply paid by the state treasurerto the retirement boards, tobe distributedby theboards 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. Thediscriminatoryaspect of theadjustment isclear: theadjustment favors state retireesliving inMontanabased solely

on the source of their retirement income; that is, those retirees living inMontana and receiving stateretirement income receive the adjustment, while federal retirees living in Montana and receivingfederal retirement incomedonot. Thus,theadjustment 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 retireeswho

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 schememandated by federal law. Because the adjustment contained in section 5 of Chapter 823 violates 4U.S.C. 

### 1 111, the disparate tax treatment of state and federal retirement income is justified only if it is "directly related to,and justifiedby, 'significantdifferencesbetween 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 Statemakes no real argument that significant differences in fact exist between the two classes of retirees that justify the discriminatoryadjustment. Perhaps this is to the State's credit, since it is clear that no such articulable differences existwhich could withstand 

### Davis scrutiny. Themost obvious contention to be made regarding differences between the classes is the State'sinterest in inducing and retaining qualified state government workers. While thisposition isnot assertedhere, it isprecisely 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: Thisargument iswholly beside thepoint,however, for it does nothing to demonstrate that there are "significant differencesbetween the two classesmthemselves; 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

(emphasisadded). Moreover, no reasonable argument can be made that the adjustment isnecessaryor intended (a)to retainretired residents inMontana in order toprovide a critical mass of retiredpeople 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 tocontinue to provide an advantage to those of its own retirees losing a pre-l)avis advantage--namely, state retireeswho 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 determiningthattheretirement adjustment paymentdoesnot 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 fromChapter 823, orwhether 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,allvalid parts thatare severable from theinvalid 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,theportionwhich isconstitutionalmay standwhile that which is unconstitutional is stricken out and rejected. 

# . . . A statute "is not destroyed in toto because of an improperprovision,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 (citationsomitted). Here,the incometaxprovisions of Chapter 823 clearly are not destroyed in toto by striking the adjustment provisions contained in sections 4 and 5; indeed, they arenot impacted in anyway. The income tax still may be imposed and the exemption may be given effectwithout the adjustment for stateretirees living inMontana. Nor was theadjustmentthe inducement for enacting the legislation; the "inducement*' for Chapter 823was 4U.S.C. § 111and the Supreme Court's 

### Davis decision. The incometaxesand 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 legislatureal-sointended to continuean advantage for certain state retirees through the adjustment. But where we have invalidated theadjustmentportion of Chapter 823, it is clearthat 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 provisionsare related from the standpointofwhether they can withstand 4 U.S.C. g 111and &y& scrutinydoes 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: [Tlhepresumption isagainstthemutilation of a statute, and that the legislaturewould nothave enacted it except in its entirety. The incorporation of a provision such as section20 [severabilityclause] createsapresumption to the contrary; namely,that the legislaturewould 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. Thepresumption operates here in support of the legislature's intent that the remainder ofChapter 823 remainsvalid 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 823which might require us to depart from the plain language used by the legislature and delve into the legislativehistory 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, 1991Montana Laws, remainsvalid and in full force and effect. Affirmed in part and reversed in part.

We concur:ourt, sitting C Harrison



# 7

wistrictCourt, sittiAg inathe seatvacated 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 theprovision of Chapter 823phasing 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 severabilityprovisionhere. 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;Ingrahamv. Champion Intll.(1990), 243 Mont. 42, 49, 793 P.2d 769, 773. That is a rebuttable presumption though, and a weak one at that; rebuttableby the nature of the statue being considered: its purpose manifested by its provisions before severance as compared to its apparent purpose, asmanifested 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 quotesMontana 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 isnecessarvto the intearityof the statue or was the inducementto 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. [Citationomitted; emphasis added]. This cannot be donehere. "Apparent legislative intentwmust 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 adjustmentprovisions. But the former cannot in this

casebe considered separateand apart fromtheamputated adjnstment provision. And ltamputatedlt is the right word. What remains and will be enforcedunder themajority opinion will notbe the sameas 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. Itwent on and set out, bv the adjustmentwrovision, to

remove or lessen that impact on resident Montana retirees. Thegeneral statement of the severabilityrule in Greely isan accurate statement. Portions of a statute are severable if: (1) 

### the invalid part isnot necessary to the integrityof the statute: or(2) the invalidpart wasnot the inducementto 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_?,egislativeintent. Greelv, 632 P.2d at 311. I submit that the surgery here performed on Chapter 823 fails tomeet condition 1above 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; suchwould 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. Theremainder of the statute, after eliminating theadjustment provision is complete in itself, but only in &self. It is notwhat 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 iswhat the Legislaturestarted 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 someof the sectionswas 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,ofMontana's Lobbying Act, toprovide 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. [Emphasisadded]. Greelv, 632 P.2d at 311-12. The legislationthere considered isof a different nature than Chapter 823, where the parts are meaningful only in internal

### conjunctionwith each other. Thewhole of Chapter 823

### was enacted

as a unit. 

### Imust 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 Legislaturehad intended the severed statue, it could and should and would have legislated accordingly. Thismay, as is stated and shown earlier, raise a presumption that theLegislaturewould have enacted the law without its invalid portions being incorporated. But that presumption is, I believe,

a rebuttablepresumption, here rebutted. Also, the inclusion of a severabilityprovision is to a judicial act. Before it canbe 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 proceduralmeans, not the end. This Courthas stated:The inclusion of a severabilityclause in the Initiative is an indicationthat its draftersand thevotersdesired 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. [Emphasisadded]. That language, Ithink, 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 thewhole of Chapter 823 is invalid and the adjustment provisions are not severable.

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

JusticeTerryN. Trieweiler joins in the foregoingconcurrence 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 clearthat the revenue, equalizationand adjustment provisions of Chapter 823 

### are related parts of a comprehensiveincometaxprogram encompassing allpension income, I agree that Chapter 823 

### is a comprehensive income tax program; however, this does not preclude this statute from encompassing other issues. Themajorityquotesverbatimthevipertinenti' part of thebill's title. The firstpart 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 inMontana is an integral part of the Act as seen by the title's wording:



# . . . .To Provide for anAdjustment 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 retirementbenefits 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, theLeaislature desiresandencouraaesaualified 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 Lesislaturewishes to encouracle all retired persons to remain within Montana tc provide a critical mass of retired persons who use certain services and facilitiesthatare important toretiredpersons and that may keep and perhaps entice other retired persons into the state: and WHEREAS, the Legislature has in the past granted increases in retirementbenefits in amanner designed to provide relatively greater increases to those retirees who were employed during the yearsof lowwages andwhose benefits are relatively small;and WHEREAS, the Leaislature therefore srants an increase in benefits to its former public emwlovees who are residents of the statetoprovide compensationto encouraqe them to remain in Montana.

(Emphasis added.) The above statement of intent was added because the legislature knew that the

### Davisdecisionmandated that all pension holdersmust 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 wheremany retireeswould leavethe State. Acting through its legislatureandgovernor,Montana as a sovereign and as an employer expressed a desire to provide an incentive for Montana retirees to remain inthe State. Without subterfugeof 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 inanother act in some futureyear,and denominateda cost of living, no onewould 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 thepayment by the Stateto its retirees can lead to

a *clear*' determinationof 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. Thebasic intent of 4

### U.S.C. § 111

### has been lost. That intent is that the income taxation ofMontana 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 discriminationas to source. There isa 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 isno different thanany otherbenefit which the State as an employerhas a right to offer a group of its retirees. Themajority refers to 5 

### l9-2O-?l3,MCA,whichprovides 

### a cost of living increase forteachers intheTeachersiRetirement 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 sourceof funds with which topay teacherswho retired from thevarious units of theUniversity Systemand other schools, stating: If the employer is the superintendent of public instruction, a public institution of the state of Montana, a unit of theMontana university system,or the Montana state school for the deaf and blind, the lecrislature shalla~vrovriate to the emploveran adeauate amount to allow ~avment of the emploveriscontribution. (Emphasisadded.)

### Section 3, 

### amended 5 19-20-605(3), 

### MCA. With this annuity type system, the employers' part of the cost of living increase for "certainwretirees 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 "incentivemwithout an intentiontodiscriminate in any

manner. The

### Davis test of significant differences between the classes is not ev~nreached 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 themajority merelymentions that the discrimination is "clearw it does not go on to explain how the vfincentivew or ~vadjustmentvl is discriminatory. Nor does it explainhow the

### Davis quote applies to what we have before us: Under ourprecedents, "[tlhe impositionof 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 "taxburdenw 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 applicabletoboth Stateand federal retirees. The range at which the exemption begins is $30,000 

### for both Stateand federal retirees. The onlydifference 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 legislatureto 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 theAct. Both the title and the statement of intent make it obvious that the adjustmentor incentive to stay inMontana is an integral part of this Act. The incentive, based upon the fact thatpublic retirees will now be receiving lessmoney because

### of themandatory taxation,should not be divorced from the taxplan itself. The taxplan explainswhy 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 intheWHEREAS clausesat 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.November23, 1993 CERTIFICATEOFSERVICE Ihereby certifythatthe followingorderwas sentby UnitedStates mail,prepaid, tothe following named:

EdmundF. Sheehy,Jr. Cannon&Sheehy P. 

### 0. Box5717 Helena,MT 59604 Hon. JosephP.Mazurek,AttorneyGenera! ClayR.Smith, Solicitor 215N. Sanders,JusticeBuilding Helena,MT 59620 David W.Woodgerd DepartmentofRevenue Mitchell Building Helena,MT 59620

R.BruceMcGinnis TaxCounsel MitchellBuilding Helena,MT 59620 Brenda Nordlund AttorneyGeneral's Office JusticeBuilding Helena.MT 59620 LeoBerry Browning,Kaleczyc,Berry&Hoven P.0.Box 1697 Helena,MT 59624

ED SMITH CLERKOFTHE SUPREME COURT