Court Opinion

ID: 9846556
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:43:41.159862+00
Date Added: 2024-06-11T09:19:38.066816
License: Public Domain

FADELEY, J.,
dissenting.
I join in the dissenting opinion of Gillette, J., and add the following, also in dissent. In my view, by constitutional law, PERS retirement benefits accruing before 1991 are exempt from state personal income taxation. And, under Davis v. Michigan Dept. of Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989), federal employees’ pre-1991 retirement benefits are similarly exempt. Equality of treatment is required by the doctrine of intergovernmental tax immunity. Therefore, a parallel exemption from state income tax must be accorded to federal retirees for parallel payments of parallel benefits, according to the Supreme Court of the United States.
In Harper v. Virginia Dept. of Taxation, 509 US__, 113 S Ct 2510, 125 L Ed 2d 74 (1993), that Court summarized:
“The Michigan tax scheme at issue in Davis £exempt[ed] from taxation all retirement benefits paid by the State or its political subdivisions, but levie[d] an income tax on retirement benefits paid by * * * the Federal Government.’ 489 U.S., at 805, 109 S.Ct., at 1502. We held that the United States had not consented under 4 U.S.C. § 111 1 to this discriminatory imposition of a heavier tax burden on federal benefits than on state and local benefits. Id., at 817,109 S.Ct. at 1508.
*236Relevant portions of the PERS trust fund capital and income cannot be taxed by the state when transferred to a retiree now or later without impairing the obligation of contract, in my view.1 Thus, the exemption for PERS benefits that accrued before enactment of the 1991 legislation applies by force of the state constitution. And under federal law, equality of tax treatment is required for federal retirees’ parallel benefits.
THE STATUTE AT ISSUE
The plaintiff here contends that a separate statute enacted in 1991 is a continuation in disguise of the former tax exemption for PERS participants and, therefore, that separate statute also violates Davis, because plaintiff, as a federal retiree, is not granted the same treatment in relation to state taxation. She points to Oregon Laws 1991, chapter 796, as the culprit. That act mandated that added payments be made out of the PERS fund to the beneficiaries of that fund, namely PERS retirees. Section 3 of that 1991 act amended ORS 237.209, a pre-existing statute section describing monthly *237benefit levels, by adding a new subsection (6) which increased the monthly retirement allowance payable to specified retirees. The increased payment is one percent for those with at least 10 years of service at retirement and ranges upward to four percent for those with over 25 years of service in the PERS system.
Subsection (6) of the 1991 act provides that these increases “shall be funded by employer contributions.” That is, they probably will be paid from a current and future increase in employer contributions, although whether the increase comes from past employer contributions held in trust or from current and future increased contributions is not clear in that statute.
TAXPAYER’S ARGUMENTS
Plaintiff claims that the doctrine of intergovernmental tax immunity requires that she receive an exemption from the state income tax equal to the disguised preferential tax treatment that is represented by those added benefit payment amounts. Other subsections of that act, not created or amended in 1991, have, on several occasions since 1980, mandated similar percentage increases. Those increases have had no relation to the Davis decision. However, the state cannot merely rely on its past practice to justify a discriminatory tax-treatment device enacted post -Davis and in response to problems presented by Davis.
In support of her argument, plaintiff also points to a decision of the Montana Supreme Court, Sheehy v. Public Employees Retirement Div., 262 Mont 129, 864 P2d 762 (1993). The underlying facts of that case are far afield from this case. That state did not owe its retirees any contractual obligation of tax exemption.
The partial tax rebate, enacted by the 1991 Oregon legislature, expressly conditions the added benefits payable to PERS retirees on the fact that no state tax exemption is available for the regular amount of PERS payments for any year in which the percentage increment is to be added. Or Laws 1991, ch 796, § 12.
The legislation thus signals that the sliding-scale, percentage increment is not granted out of legislative largess *238or a kindly concern about inflationary effects and increases in cost of living for those on fixed incomes. The legislature’s motivation in 1991 — its intent by enacting chapter 796 — is the same as that which originally created the tax exempt status for PERS retirement benefits as a term of the public employment contract in Oregon, namely, to save and maximize the use of taxpayer dollars. Originally, the tax exemption for PERS benefits permitted paying a lesser total dollar amount of retirement benefits which in turn required fewer governmental tax dollars to fund. Tax free treatment also saved the cost of churning the same governmental dollars through an additional state agency, or through the same agency a second time. The failure to grant tax free treatment to federal retirement benefits, and Davis, ended that economy. The 1991 legislation continues to indicate a preference for the cost-saving exemption and thus only adds the percentage increment to retirement benefits in years in which the tax exemption is not in force.2
But in years where there is no exemption for PERS payments accruing before 1991, the state and local governments are not living up to their statutory contracts and are obligated to repay to PERS retirees the value of the governmental promise which has been unconstitutionally removed from their pre-1991 employment contracts. The significance of conditioning the additional payment on absence of a state tax exemption is compounded by the relevant statements of the executive-branch revenue agency that is the defendant in this case. Defendant’s stated posture indicates its assumption or belief that the legislature was increasing retirement payments, in years where PERS payments are not exempt, to partially3 off-set the added taxes to be paid by PERS retirees.
No such off-set is provided federal retirees. The majority opinion justifies this disparity by pointing out that the obligation of the state and local government contract that promises to exempt pre-1991 PERS benefits from taxes is not *239an obligation owed to federal retirees. Although that is correct, the national law also requires equal or parallel tax immunity for retired federal employees. That also is a legal obligation of the state and its local governments.
The 1991 legislative repeal of the prior tax exemption, coupled with legislation mandating a government-paid partial offset as to state and local retirees, fails to fulfill the latter legal obligation, especially where a course of action that clearly fulfills that obligation is so readily available.4 The Supreme Court of the United States, whose jurisdiction includes enforcing the legal obligations owed by the states in the area of intergovernmental tax immunity, has not been impressed by state explanations of why those obligations do not apply in similar settings to federal employees. Davis v. Michigan Dept. of Treasury; Harper v. Virginia Dept. of Taxation. I would hold that the state legislation attacked today cannot, in the circumstances of this case, fulfill either obligation. Tax exemption per the original obligation of contract can do so, but not this half-a-loaf to half-the-people approach.

 In Hughes v. State of Oregon, 314 Or 1, 838 P2d 1018 (1992), I pointed out that the state must honor its obligation to preserve tax exemption for PERS retirement benefits accrued before 1991.1 explained:
“The promise was embodied in statute. The statute proclaimed: ‘The right of a [PERS member] to a pension* * * shall be exempt from* * * alístate, county and municipal taxes heretofore or hereafter imposed.’ ORS 237.201 (1989). The trust funds out of which the pension will be paid amounted to $12.5 billion in mid-1991. These trust funds are also covered by the promise of tax exemption by the language in ORS 237.201 extending the promise to cover ‘the money in the various funds created by ORS 237.271 and 237.281.’ ” (Fadeley, J., concurring in part and dissenting in part.) 314 Or at 37.
Restrictions on government acts that impair the obligations of contracts have existed as a constitutional guarantee — and a protection of those who contract with government — since the birth of our federal nation.
See also United States Trust Co. v. New Jersey, 431 US 1, 97 S Ct 1505, 52 L Ed 2d 92 (1977) (a seven member decision applying Article I, section 10, clause (1), of the United States Constitution, to invalidate state legislation that repealed a “covenant” previously enacted by statute promising that all of certain revenues would be pledged as security for bonds to be sold, the repeal coming after that promise was accepted by purchase of the bonds).

 The extra retirement benefit, funded by added governmental dollars is a “tax expenditure” in fiscal parlance, very similar to a direct tax credit or refund granted by law. The effect on the mathematical balance of the state budget, as to state retirees, is the same.

 See Hughes, 314 Or at 40-41.

 I refer to the option of exempting both state and federal retirement payments accrued before 1991.