Court Opinion

ID: 9557554
Source: CourtListenerOpinion
Date Created: 2023-08-21 16:52:15.776116+00
Date Added: 2024-06-11T09:05:58.752723
License: Public Domain

*384FADELEY, J.,
concurring.
I concur in the judgment and in the analysis by Justice Van Hoomissen. I write separately to detail the nature of the state’s long-standing retirement system contracts and to indicate that the state constitution prevents impairing the obligations thereof, not just the federal constitution.
Individuals and the Oregon State Police Officers’ Association obtained a Multnomah County Circuit Court judgment declaring that sections 10, 11, and 12 of an initiated measure violate the federal constitutional prohibition against laws that impair the obligation of contracts. US Const, Art I, § 10. Salem Police Employees and others obtained a Marion County Circuit Court judgment holding that sections 10, 11, and 12 of that measure violate the same federal constitutional prohibition. The Court of Appeals certified the state’s consolidated appeal of those four trial court judgments directly to this court for decision. I would hold that the measure violates the protection against laws that impair the obligation of contracts in Article I, section 21, of the Oregon Constitution, as well as the impairment clause of the federal constitution.
BACKGROUND
In 1989, the United States Supreme Court declared unconstitutional a Michigan tax law that taxed retirement income of federal retirees received from a federal government retirement plan but that did not tax state and local government retirees on payments they received from that state’s retirement plan. Davis v. Michigan Dept. of Treasury, 489 US 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989). That Court held that the constitutional doctrine of intergovernmental immunity requires equal treatment in taxation between retired former state or local government employees and retired former federal government employees. The Supreme Court held that a state’s tax treatment of federal and state retirement payments must be the same. If state plan payments are exempt from state taxes, federal payments also must be exempt.
Before Davis v. Michigan, Oregon statutes exempted from state taxation retirement benefit payments received *385from Oregon’s Public Employes’ Retirement System (PERS), an exemption also enacted in Oregon income tax statutes. But no similar exemption applied to federal retirement benefits. In reaction to the Supreme Court’s decision in Davis, however, the 1989 Oregon legislature enacted Oregon Laws 1989, chapter 906, a tax on all retirement income. A referendum petition sent that tax measure to the voters, where it was defeated in the 1990 general election. That left the situation as before. State and local retirement plan benefits were exempt from the state income tax, but federal retirement payments were taxed.
This court has held that retirement system and plan statutes formed a contract when public employees provided their labor and services while the statutes were in effect. Taylor v. Mult. Dep. Sher. Ret. Bd., 265 Or 445, 450, 510 P2d 339 (1973).
The 1991 legislature enacted a law repealing, among other things, the state’s statutory promise that rights under PERS never would be taxed.1 But that part of the 1991 act was declared void and a nullity because it impaired the obligation of contracts in contravention of Article I, section 21, of the Oregon Constitution. Hughes v. State of Oregon, 314 Or 1, 31, 838 P2d 1018 (1992).
*386In Hughes, 314 Or at 26-27, this court held that ORS 237.201 (1989) was and had been since 1953 a “term of the PERS contract and an obligation of the state under that contract * * * by "virtue of Article I, section 21, of the Oregon Constitution * * * not subject to legislative impairment without the consent of the PERS beneficiaries.” The Hughes court limited its holding to tax-exemption rights in retirement benefits that were based on services performed before the effective date of the legislative repeal of the specific promise of exemption found in the public employees’ retirement statutes. Id. at 29. "
As explained and supported in a separate opinion in that case, I would have held that all sections of the 1991 act that repealed existing exemptions from taxation of retirement rights were laws that impaired the obligation of contracts and were similarly unconstitutional. Id. at 38 (Fade-ley, J., concurring in part dissenting in part). That separate opinion made it clear that any repeal of the existing statutes granting a tax exemption would impair the obligation of contracts under the state and federal constitutions. The Hughes majority, however, went on to conclude that ORS 237.201 protected “benefits” that have accrued or are accruing for work performed before the unconstitutional attempt to repeal ORS 237.201. The Hughes majority concluded that the state’s obligation is no greater than to pay those accrued and accruing benefits but that, as to that obligation, the constitution required that the benefits “are exempt from state and local taxation forever! Id. at 29 (emphasis added). I continue to adhere to the view that, to the extent that Hughes approved the taxation of PERS pension benefits for work yet to be performed, Hughes was wrongly decided. Id. at 36. On that point, it is contrary to retirement case decisions countrywide.
The Hughes court did not expressly decide the meaning of the words “hereafter imposed” that described the taxes from which the statutory contract exempted PERS benefits. Those words are presently found in ORS 238.445. The Hughes court struck down the legislature’s effort to tax state and local pension benefits based on the 1945 and 1953 enactment of a tax exemption statute, without regard to the “heretofore or hereafter imposed” language. The Hughes court *387declared the legislation removing the tax-exemption promise from the retirement statutes void and a nullity under Article I, section 21, of the Oregon Constitution, prohibiting laws that impair the obligation of contracts. My concurring in part and dissenting in part opinion in Hughes would have also held that the repeal of a similar exemption within the income tax statutes was likewise void and a nullity based on the same constitutional provisions and on the parallel federal constitutional provision against impairing the obligation of contracts. I continue to believe that Hughes was wrongly decided and that no repeal of the contractual tax exemption was permissible.
In 1993, interested persons responded to the Hughes decision and its state constitutional basis by filing the initiative petition for Measure 8. Qualifying for the ballot, that initiative was approved at the general election in 1994. As we shall see, the provisions of that measure further modified the state’s retirement obligations. I first turn to the pertinent facts and promises of the state retirement plan as they existed before Measure 8 so that the impact of that measure may be made clear. Thereafter, a discussion of the effect of the separate provisions of Measure 8 on those facts and promises will be conducted.
THE STATE’S RETIREMENT PROMISES
A detailed understanding of various PERS statutes, and the timing of their enactment, is necessary to our consideration of the effect and constitutionality of Measure 8.
1. Retirement Benefits Exempt from Taxation
In 1945, the legislature established a public employees’ retirement system. In 1953, the legislature enacted a mature statutory system and plan for public employee retirement. Those statutes provided that the rights to a pension would become vested after a period of successfully working for the state or local government. They expressly provided that those rights should not be subject to taxation at any level from any government in the state or its political subdivisions.
In 1969, the legislature changed and strengthened the wording concerning the statutory promise that “rights” under the plan and system would never be subject to state or *388local taxes. The promise of tax exemption was not only applicable to taxes “heretofore” imposed, but was extended to cover all taxes “hereafter” imposed by state or local government. Or Laws 1969, ch 640, § 13. The 1953 tax exemption, as refined by the 1969 language, has thus continued to the present day, and is now found in ORS 238.445(1) (formerly numbered ORS 237.201), where it was placed by a reorganization and renumbering of the public employee retirement system statutes by the 1995 legislature.2
2. Employer Pays Annuity Purchase Amounts
As established in 1953, PERS provides benefits based on length of service and also on a separate annuity purchased during employment. The portion of the benefits based on length of service as a public employee applies a percentage factor for each year of creditable service. The employee’s highest salary level for the final years of public employment is then multiplied by that factor. This portion is referred to as the “service credit portion” of retirement benefits. The employer, a state or local government unit, has paid to the PERS retirement system a percentage of all its gross wages in order to finance the service credit portion of retirement benefits.
The other portion of retirement benefits is a type of refund annuity. Sometimes called a “money-purchase” contract, the annuity is purchased with money that is paid to the system as an employee works month by month. That money paid in is invested and earns interest. Principal and interest continue to be invested, and the amount available to pay the annuity in the future grows in relation to the rate of investment return and the length of time over which interest is received and contributions of principal continue.
Initially, public employees of state and local governments paid a percentage of their individual salaries to PERS. *389PERS uses those funds to establish and invest in the annuities of individual employees. For example, a person publicly employed during July of 1954 paid in six percent of his or her gross salary to PERS, which received the money in trust, and the money was then used by PERS to purchase an annuity for the employee in the form of a promise to pay money in the future. However, as to the employee just described, during the period of employment the source of the funds to pay for the employee’s purchase of the employee’s annuity was changed by an agreement between the governmental employer and the employee. That contractual agreement was statutorily authorized and was designed to save the taxpayers money.
In 1979, the legislature provided that any public employer, including the state, could contract to assume or pay the employee’s contributions to the funds to purchase an annuity, contributions that the statutes previously had required to be paid to PERS by its employee members.3 Thus, the annuity or money-purchase portion of the plan, as well as the service credit portion of the plan, could be paid for by the employer, whereas the annuity portion previously had been required to be paid for by the employee.
*390In 1979, double-digit annual inflation was present in the national economy. At that time, a very substantial increase in the number of base-pay dollars was necessaryjust to stay even in terms of purchasing power of every person’s salary or income. Public employees, thus, could and did make a very good case for increasing their base-pay rate. However, the state also was pressed for funds. In response to reasonable requests for base-pay increase, the governor and other government leaders agreed on a money-saving plan. To increase salaries to partially keep pace with the escalating consumer price index but to do so using fewer tax dollars, the state and local governments promised to pay to PERS the money needed to purchase annuities on behalf of state and local government employees.
Prior thereto, those employees purchased the same annuities by monthly contributions to PERS made from their salaries after taxes. Previously, therefore, it had cost the employees eight to nine percent of their gross salary to buy their annuity, because they were using after-tax dollars to make the purchase. Because the state’s purchase was with funds that had not been subjected to state or federal income taxes, the same amount of annuity could be purchased for six percent of wages that otherwise would have cost eight to nine percent had the state first paid the money to each employee and the employee had then paid state and local taxes on the money received and thereafter had purchased the annuity with the net. If the government bought the annuity instead of paying the base-wage increase, the government saved two to three percent of all its wage costs but the same level of annuity benefit was acquired. Under the annuity “pick-up” plan, public employees would continue to receive the lower number of base-wage dollars rather than a raise, but would receive the same value in annuity benefits as they would have received had the base rate been increased and the annuity purchase money paid by them out of net, after-tax, salary or wages.
Thereafter, in order to save taxpayer funds, a statutorily authorized contract between the government and its employees was entered. The contract required that the governmental employer pay for the individual annuity instead of the employee’s purchasing it with dollars that the employee *391could only use after paying taxes on them. Six percent of gross wages, paid by the employer, brought the same amount of annuity benefit as had required eight to nine percent when purchased with the after-tax net.
The government received an additional tax-saving benefit from the 1979 plan because many, if not all, payroll taxes are owed and payable by employers based on a percentage of the gross wages of their employees. By paying the annuity contribution rather than giving their employees a raise, the governmental employer saved payroll tax money because payroll taxes were paid on a lower total amount of wages. Examples of payroll percentage taxes are unemployment insurance, social security, and state workers’ compensation insurance. The mutually beneficial contract has benefited the state and other participating governments by hundreds of millions of dollars in payroll savings since 1979.
When the state adopted the statute authorizing bilateral agreements for a public employee to pay — or “pickup” — the six percent of salary that formerly was paid by the public employee to purchase a future annuity for the employee, it entered that contractual arrangement to obtain a substantial benefit for the state and, therefore, for its taxpayers, as just explained. Other public employers who entered that contractual arrangement authorized by statute also did so because of the substantial benefit that taxpayers of that level of government thereby obtained. Taxpayers were saved hundreds of millions of dollars since 1979, because the base salary of all employees remained lower because the state purchased the same amount of annuity with six percent of gross wages that would have cost eight to nine percent of gross wages of the individual employee after recognizing the reduction in spendable wages represented by taxes on such wages.
3. Sick Leave Savings Credited to Increase Final Average Salary.
In 1973, the legislature made provision for compensating for unused sick leave in the form of retirement benefits. The compensation took the form of adding one-half of the value of the government’s savings from unused sick leave to the gross amount of salary used to determine final average *392salary against which a percentage factor for the number of years of creditable service is to be multiplied. This provision is, with subsequent amendments, codified as ORS 238.350, and was formerly numbered ORS 237.153.
4. Minimum Rate of Return Guaranteed on Annuity Investments.
In 1975, the legislature enacted what was then numbered ORS 237.277, and has now been renumbered ORS 238.255 by the 1995 legislature as it includes an amendment by Oregon Laws 1993, chapter 177, section 31.
The 1975 legislation established that, as to the annuity purchased with the employees’ contributions, an assumed interest rate of return on the money paid in would be used to provide an annual minimum floor for the rate of investment return. That assumed rate of return was set by the Public Employes’ Retirement Board. If the actual earnings were less than the assumed earnings, then the law required that surplus moneys be transferred from other years where the actual earnings had been at a rate of return higher than the assumed earnings rate. The surplus thus would shore up the deficient return for the year and cause that year’s earnings to meet the assumed rate of interest earnings. The “surplus” was acquired by placing earnings from years where the rate of return on investment of the employees’ funds exceeded the assumed rate of return established by the Board. Under the statutory program, a rolling five-year average of investment return performance was used to establish the reserve or surplus account from which an annual deficiency was made up, thereby keeping the state’s statutory promise to provide the employee annuity portion a specific assumed rate of return. Any surpluses above the assumed rate not needed to shore up deficient annual earnings were available to PERS to meet its other obligations under the plan.
The foregoing state of contract, obligation, and operation continued until 1989. PERS plan rights, whether accrued or still accruing, were tax exempt. The employer paid the dollars necessary to purchase the individual annuity portion of the retirement plan. A minimum interest rate on the annuity investment was realized and assured for each year. *393Unused sick leave benefits could be saved and one-half applied to increase final years’ salary used to compute the service credit portion of retirement benefits. Measure 8 erased all of those contract obligations, as we shall see by a review of that measure.
MEASURE 8 PROVISIONS
Measure 8, the initiative measure declared invalid by the lower courts, adds three4 separate new sections to Article IX of the Oregon Constitution, an article dealing with taxation and government finance. One section of the measure itself contains three subsections. Although one may group the different amendments under a general heading of reducing public employees’ vested rights and thereby reducing government obligations arising from the state and local public employees’ retirement plan, the three constitutional amendments each accomplish a different and distinct purpose. Measure 8 expressly added them to the constitution with but a single vote on all amendments lumped together. Under Measure 8, three of the new sections added to Article IX of the Oregon Constitution are:
“Section 10. (1) Notwithstanding any existing State or Federal laws, an employee of the State of Oregon or any political subdivision of the state who is a member of a retirement system or plan established by law, charter or ordinance, or who will receive a retirement benefit from a system or plan offered by the state or a political subdivision of the state, must contribute to the system or plan an amount equal to six percent of their salary or gross wage.
“2. On and after January 1, 1995, the state and political subdivisions of the state shall not thereafter contract or otherwise agree to make any payment or contribution to a retirement system or plan that would have the effect of relieving an employee, regardless of when that employee was *394employed, of the obligation imposed by subsection (1) of this section.
“3. On and after January 1, 1995, the state and political subdivisions of the state shall not thereafter contract or otherwise agree to increase any salary, benefit or other compensation payable to an employee for the purpose of offsetting or compensating an employee for the obligation imposed by subsection (1) of this section.
“Section 11. (1) Neither the state nor any political subdivision of the state shall contract to guarantee any rate of interest or return on the funds in a retirement system or plan established by law, charter or ordinance for the benefit of an employee of the state or a political subdivision of the state.
“Section 12. (1) Notwithstanding any existing Federal or State law, the retirement benefits of an employee of the state or any political subdivision of the state retiring on or after January 1, 1995, shall not in any way be increased as a result of or due to unused sick leave.” (Emphasis added.)
1. Section 10
Subsection (1) of section 10, added to the constitution by Measure 8, enacts a special tax of six percent of salary or gross wages applicable only to public employees. Because public employees are required by law to belong to PERS, ORS 238.015 (former ORS 237.011), the initiated law mandates that public employees be taxed six percent of their salary. Under our statutes, all employees must belong to PERS,5 all members of PERS must pay, and the government specifically directs the use to which the new revenue must be put. That use is one from which the government benefits, because it replaces government payments previously made from other tax funds to accomplish the identical purposes to be accomplished by the levy on all public employees’ wages. Under our precedents, that is a tax.
*395In Automobile Club v. State of Oregon, 314 Or 479, 485, 840 P2d 674 (1992), this court defined a tax as:
“In the most general sense, a tax is ‘any contribution imposed by government upon individuals, for the use and service of the state * * *.’ Black’s Law Dictionary 1457 (6th ed 1991).”
In State Ind. Acc. Com. v. Aebi, 177 Or 361, 369, 162 P2d 513 (1945), the court determined that the employer’s contributions under the Workmen’s Compensation Act are “taxes” and therefore are not discharged in the employer’s bankruptcy:
“[I]t does not destroy the character of a tax on exaction imposed by statute merely because it applied only to a certain class.”
And, as this court stated 90 years ago in Reser v. Umatilla County, 48 Or 326, 329, 86 P 595 (1906):
“Generally speaking, a tax is a charge or burden imposed on persons or property for the support of the government or for some specific purpose authorized by it. Its object is to raise revenue: Bouvier, Law Die.”
Under the doctrine of Roseburg School Dist. v. City of Roseburg, 316 Or 374, 379, 851 P2d 595 (1993), a tax is imposed on a person “if payment of the charge is a legal obligation” of that person. Further provisions of Measure 8 expressly so impose on public employee members the obligation to pay. If Measure 8 is legal, the payment is a legal obligation of each individual employee. Under Measure 8, each employee “must contribute * * * six percent of their salary or gross wage.” The six percent payroll tax imposed by subsection (1) may not be repealed by the legislature, because imposition of the tax is stated in the form of constitutional amendments that affect both the employees and the state and other governmental employers. Clearly, under the foregoing authorities, the six percent payment requirement is a tax.6
*396Subsection (2) of section 10 likewise affects both governmental employers and their individual employees. It prohibits state and local government from relieving any employee from that tax by means of any contract. That restricts the freedom of contract of the state and local government and the freedom of contract of the employees. The result is that the tax may never be repealed by government or otherwise avoided by the employee. One clear effect of subsection (2) is to prevent the state from buying an annuity for the employees as a part of the employees’ compensation notwithstanding the government’s paid-for, statutorily based contract to the contrary.
Subsection (3) of section 10 provides that state and local government, and their employees, are prohibited from making any contract or agreement to increase compensation in order to offset the six percent tax. Likewise prohibited is any law or agreement that compensates employees in some way for the tax that they must pay. For example, reimbursing them for that tax is forbidden. While subsection (2) prevents the state from buying an annuity for the employee, subsection (3) prohibits a current raise in salary or wages under the conditions stated therein. Thus, subsection (3) performs a different function and restricts a different kind of contract both as to government and as to its employees. That is, subsection (3) also constitutionally restricts contracts but does so differently than does subsection (2). Those different provisions of section 10 restrict individuals as well as government.
2. Section 11
Section 11 restricts the ability of the state to enter a wholly different type of contract, one that guarantees a rate of interest or return on invested retirement trust funds where public employees are involved as the beneficiaries of the trust. This section, differing from section 10, is directed not at any compensatory relief from Measure 8’s payroll tax, but at prohibiting the state from guaranteeing a specific rate of return on the annuity investments made by PERS on behalf of employees.
3. Section 12
Section 12 relates to unused sick leave and the service credit portion of PERS benefits. It prohibits compensating public employees for extra days of work that those employees *397perform when that payment takes the form of increased investments in their retirement trust funds. Neither the service credit portion of PERS benefits nor unused sick leave compensation is the subject of either section 10 or 11, but it is the only subject of section 12. Without section 12, present law for some, but not all,7 public employers permits the employee who has worked the extra days, rather than taking time off from work for sick leave, to receive a contribution in lieu of one-half of the pay for the extra days, as previously discussed.
Section 12 also restricts government. It prohibits the government from contracting for the additional work unless it pays for it directly at the time rather than later paying one-half of its value to the system to fund an additional service credit benefit amount for the employee who did not use allotted sick leave.
That provision relates to those who retire on or after January 1,1995. Thus, those persons who may have worked additional days and have not used sick leave from 10, 15, or 20 years ago, relying on a contract binding at the time, are deprived of the benefit already earned by working pursuant to the obligation stated by a contract authorized by statute. Section 12 retroactively takes away all of their accrued rights under the untaken sick leave statute and agreement.8 In addition, section 12 prevents future accrual of enhancements to that right. Their contract right to that benefit is impaired by Measure 8, which takes the valuable right from them.
Two of the separate sections, section 10(1) and section 12, expressly purport to nullify any federal law, as well as any state law, that has in the past contravened or that presently contravenes the provisions of those sections.
The foregoing provisions would cancel most, if not all, of those tax-saving provisions discussed above in “The *398State’s Retirement Promises” section of this opinion. Furthermore, those money-saving plans carried out and delivered on a statutory contract obligation of the state that pension benefits should never be taxed. The statutory contract that no state, county, or local tax shall be hereafter imposed on PERS benefits is a contract expressly in relation to:
“The right of a person to a pension, an annuity or a retirement allowance, to the return of contribution, the pension, annuity or retirement allowance itself, any optional benefit or death benefit, or any other right accrued or accruing to any person under the provisions of [the retirement statutes], and the money in the various funds created by ORS 238.660 and 238.670 * * ORS 238.445(1) (former ORS 237.201) (emphasis added).9
That contractual statute has mandated and, under Hughes, presently mandates tax exemption not only for money benefits when paid but also for the presently accrued “right” to later payment of such money benefits, an accrued right that may have add-ons “accruing” to it now and in the future. The “right” to such benefits from the mandatory plan are not to be taxed by any tax “heretofore or hereafter imposed.” Measure 8 does not merely erase the statutory contracts under which the governmental employer agreed to pay for the annuity benefit, agreed to guarantee a rate of investment return, and agreed to increase final average salary by one-half of the savings achieved through untaken sick leave. The measure also prohibits any increase in base wages and also prohibits any other compensation for the purpose of, or as a means of, offsetting that mandatory reduction in pay rate accomplished by section 10.
I next analyze the impact of Measure 8 against the foregoing statutory contracts to see whether Measure 8 unconstitutionally impairs the obligation of the government contracts. Although the lower courts ruled on the basis of the federal impairment clause and their rulings are a correct *399application of that clause, see note 11 below, I start with state constitutional guarantees.
The methodology followed by this court decides a case on the basis of state law, if possible, before reaching federal law. Moreover, in this case, achieving finality now requires a state law basis for decision. Otherwise, the government can prolong the case by efforts to appeal to the United States Supreme Court.
In operation, the provisions of Measure 8 mandate that the state retain the benefit of the very contractual bargains that Measure 8 also requires the state to impair. The measure retains the lower base-wage rate that was the quid pro quo for the payment pick-up, the savings from untaken sick leave, and the surplus investment return on the annuity.
Measure 8 would keep for the government all benefits on its side of the bargain — lower base wages, lower payroll tax costs, and no payment in lieu of sick leave. The measure guarantees those benefits to government in the future by its placement in the constitution. But public employees lose all of the benefits they contracted to receive for which they have performed. They lose, not only all future benefit from the long-standing bargain, but also what otherwise would have been increases in base-wage rate, increases they gave up as a part of that bargain. Thus, the fundamental provisions of Measure 8 not only deprive public employees of the benefit of obligations formerly due to them on their side of the annuity and bargain but also further reduce their real wages by six percent even though, as pointed out previously, those wages were already lower because of the prior bargain on which Measure 8 would renege. The feature of canceling a contract benefit after the employees have paid for it by performance of their part of the contract is also present, in individually varying degrees, as to the unused sick leave, final years’ salary, and service credit portion of retirement.
By constitutional prohibition in Measure 8, the employees are stuck with the lower base-wage rate that was based on the agreement authorized by statute in 1979 that the government would pick up, or buy for them, the annuities. Their base wages are frozen by the measure, at an *400amount that is eight or nine percent lower than the base-wage rate would have been in all probability without the 1979 statute and without the bilateral contract entered into pursuant to that statute.10 The government retains the hundreds of millions of dollars of savings already gained, and other scores of millions that it will gain in the future because of the frozen base-wage rate.
This aspect of Measure 8 expressly applies, according to the terms of that measure, “regardless of when” an employee entered public service in relation to the measure’s effective date. That language indicates the intent to impair the obligation of contract on a retroactive basis. Inability of the employees to recoup for the lower base wage under the terms of Measure 8, a lower wage to which they had agreed as their part of the pay-for-annuity bargain, makes clear that Measure 8 is a retroactive law that impairs the obligation of an existing contract and, given the dollar amounts, that the impairment is substantial.11
Because former ORS 237.201 promised an exemption from past and future taxation on the right of a person to an annuity, not just on the final payout of that annuity, and because the state has received the consideration for its promise in the form of money-saving or tax-savings for many *401years, section 10(1) of Measure 8 violates the Oregon Constitution and the federal constitution by impairing the obligation of contract. It matters not that the violation is itself accomplished by a separate, later-adopted amendment to the constitution in the form of Measure 8, section 10(1). The constitution is not so easily circumvented. Obligations may not be avoided simply by changing the constitution after they have been created and relied upon. It is the “retroaction” of effect that causes the violation. Hughes, 314 Or at 49 (Fade-ley, J., concurring in part and dissenting in part (quoting Chief Justice John Marshall in Ogden v. Saunders, 25 US (12 Wheat) 212, 335-36, 6 L Ed 606 (1827), that: “The thing forbidden is retroaction.”)).
On the facts stated and for the reasons stated, the provision of Measure 8 exacting a six percent levy against the wages of state and local government employees who had already been promised that an annuity would be purchased with governmental funds, and who by their work paid for that promise, may not be deprived of the obligation that the government undertook to provide that annuity. That obligation may not be impaired by a law later passed without violating the state constitution that, in Article I, section 21, provides in part:
“No * * * law impairing the obligation of contracts shall ever be passed* * *.”
Section 10(1) is void and a nullity. Subsections (2) and (3) of section 10 compound the impairment of contract accomplished by subsection (1) and serve no other purpose. They are void.
The same result — substantial impairment of contract under either constitution — applies to the two other separate action sections added by Measure 8 to the constitution, sections 11 and 12. As to the guaranteed rate of investment return prohibition, it must first be noted that the state also gains substantially from the operation of ORS 238.255.12 The *402state first uses part of future surpluses to fund the rate guarantee. If there is unused surplus, as has been the case in recent periods, these funds are no longer segregated to or encumbered by fulfilling the obligation imposed by the rate guarantee promise. Instead, the state may use the surplus investment earnings for purposes of fulfilling other of the state’s interests or obligations within PERS. See, eg., ORS 238.610 (system administrative expenses are to be paid from investment earnings or, if earnings are insufficient, from employer contributions).
Section 11 of Measure 8 impairs the obligation of the statutory contract by prohibiting the rate guarantee promise and plan. All of the burden of that change in the contract by the section 11 prohibition falls on the employees who, by law, must remain members of the system. The state is relieved of the obligation and receives an even greater degree of control over the trust fund investment process. Public employees experience no balancing relief from any obligation or detriment or any other quid pro quo to pay for the loss of the guaranteed assumed interest rate as a result of Measure 8. Besides, the literal words of the measure state that all public employees are covered by the new mandates, no matter when they commenced their service to government. That statement implies that the measure was intended retroactively to remove or erase the assumed interest rate guarantee. By that implication, section 11 thus eradicates accrued statutory contract rights, thereby unconstitutionally impairing the obligation of contract under each constitution.
*403Application of one-half of the value of unused sick leave to increase final salary and thus increase the portion of benefits predicated on service years is impacted differently than the annuity portion benefits. As to the increase of final years’ salary to compensate for one-half of unused sick leave, the effect of the provisions of Measure 8 prohibiting the sick leave contract from being carried out is to cancel part of all employees’ retirement benefits, even though already earned by the employee who has already performed her or his side of the contract by not using sick leave.13 The cancellation is retroactive because it is after the fact and after the employee has performed the employee’s part of the agreement. Thus, after the employee has given the required consideration to the state to pay for the state’s return promise, Measure 8 irrevocably would cancel and void that return promise. The measure impairs the obligation of that contract by canceling the obligation to perform the already paid-for return promise. Hughes, 314 Or at 43 (Fadeley, J., concurring in part and dissenting in part); Taylor, 265 Or at 450-51; Crawford v. Teachers’ Ret. Fund Ass’n, 164 Or 77, 99 P2d 729 (1940) (teacher who had completed the prerequisite duty entitling her to a pension had a vested contract right thereto which could not thereafter be substantially impaired).
Measure 8 thus impairs both major parts of the statutory system for calculating retirement benefit amounts, the annuity and the service credit portion. The impairment is imposed after those benefit-calculation provisions became vested rights as to almost all state and local government employees, including school district employees.
Sections 11 and 12 are void under the state constitution, because they impair the obligation of contract in the form of the state’s promises mandated or authorized by statute and from which the state has realized and retains benefits conferred by its employees, who in turn have conferred those benefits in reliance on the contract provisions that Measure 8 impairs.
*404Measure 8 is void and a nullity. The state and local governments remain bound by their contracts and must now disgorge funds taken from employees unconstitutionally under Measure 8.

 ORS 238.445 (former ORS 237.201) presently provides:
“(1) The right of a person to a pension, an annuity or a retirement allowance, to the return of contribution, the pension, annuity or retirement allowance itself, any optional benefit or death benefit, or any other right accrued or accruing to any person under the provisions of this chapter, and the money in the various funds created by ORS 238.660 and 238.670, shall be exempt from garnishment and all state, county and municipal taxes heretofore or hereafter imposed, except as provided under ORS chapter 118 [inheritance taxes], shall not be subject to execution, garnishment, attachment or any other process or to the operation of any bankruptcy or insolvency law heretofore or hereafter existing or enacted except for execution or other process upon a support obligation or an order of notice entered pursuant to ORS 25.060, 25.311, 25.314, 110.300 to 110.441,419B.408 or 419C.600, and shall be unassignable.
“(2) Subsection (1) of this section does not apply to state personal income taxation of amounts paid under this chapter.” (Emphasis added.)
Subsection (2) was added by the 1991 legislature in an attempt to avoid the ruling of the United States Supreme Court in Davis. The cross-reference to inheritance taxes in subsection (1) is interesting for two reasons: It implies that at least some benefit right is an individual property right that may pass by inheritance; Oregon has had no inheritance tax for the cross-reference to apply to for over a decade.

 The 1995 legislature also established a new class of membership within PERS. Persons who first establish membership in the system after January 1, 1996, are a separate class from those who established membership before that date. Or Laws 1995, ch 654, § 2. No person who was a member of the system before that date is included in the new class. This opinion does not consider the effect of that classification or its members’ rights.

 ORS 238.205 (former ORS 237.075) provides:
“Notwithstanding any other provision of this chapter, and subject to the provisions of this section, a public employer participating in the system may agree, by a written employment policy or agreement in effect on or after July 1, 1979, to ‘pick-up,’ assume or pay the full amount of contributions to the fund required of all'or less than all active members of the system employed by the employer. If a public employer so agrees:
“(1) The rate of contribution of each active member of the system employed by the employer who is covered by such policy or agreement shall uniformly be six percent of salary regardless of the amount of monthly salary.
“(2) The full amount of required employee contributions ‘picked-up,’ assumed or paid by the employer on behalf of its employees shall be considered ‘salary’ within the meaning of ORS 238.005(11) only for the purpose of computing a member’s ‘final average salary’ within the meaning of ORS 238.005(15), and shall not constitute additional ‘salary’ or ‘other advantages’ within the meaning of ORS 238.005(11) for any other purpose.
“(3) The full amount of required employee contributions ‘picked-up,’ assumed or paid by the employer on behalf of its employees shall be added to the individual account balances of the employees for their annuities and shall be considered employee contributions for all other purposes of this chapter.”

 Measure 8 added four sections to Article IX. Sections 10, 11, and 12 are the substantive sections discussed herein. Section 13 is a severability provision that has no separate meaning unless one of the substantive sections is found constitutionally wanting.
“If any part of section 10, 11 or 12 of this Article is held to be unconstitutional under the Federal or State Constitution, the remaining parts shall not be affected and shall remain in full force and effect.”

 A public employee may escape the reach of the PERS statutes only if the employee is a member of one of the very few historically distinct public retirement systems. Even there, the recent trend has been to integrate distinct systems into PERS.

 The 1994 General Election Voters’ Pamphlet included several arguments in favor of Measure 8 that acknowledged that the measure would operate like a tax. That was presented by proponents as a factor favoring adoption of the measure.

 For example, because sick leave credit statutes do not apply to elected judges, they are not affected by section 12.

 It is that provision that precipitated early retirement before January 1, 1995, of a number of administrators and law enforcement officials.

 As can be seen from the wording of the statute, as well as the law on impairment of contracts, Hughes was wrongly decided, and that error someday must be corrected to conform to the protections stated in our constitutions against impairment of the obligations of governmental contracts by later-enacted laws.

 ORS 238.205 (former ORS 237.075) was adopted as Oregon Laws 1979, chapter 538, section 3.

 The Supreme Court of the United States in General Motors Corp. v. Romein, 503 US 181, 186, 112 S Ct 1105, 117 L Ed 2d 328 (1992), uses a three-question test to determine whether the constitutional prohibition against laws impairing the obligation of contracts has been violated: Whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether that impairment is substantial. Where a violation is thus established, a state may rehabilitate the constitutionality of its offending law by demonstrating a legitimate and general public purpose served by the law, such as remedying broad social or economic problems. No such showing is present in the record of the present cases, and it is conceded that no such showing can be made. See Energy Reserves Group v. Kansas Power & Light, 459 US 400, 411-13, 103 S Ct 697, 74 L Ed 2d 569 (1983) (under a legitimate state public purpose, some adjustment of contract rights is permissible). Although I would as a complete and adequate ground hold Measure 8 unconstitutional based on the state constitution, the trial courts relied on the federal provision. There is no question but that it is violated as well. United States Trust Co. v. New Jersey, 431 US 1, 97 S Ct 1505, 52 L Ed 2d 92, reh den 431 US 975 (1977). The state’s self-interest is at stake.

 ORS 238.255 (former ORS 237.277) provides:
“(1) As used in this section, ‘individual account’ means the individual account for each active and inactive member of the system in the Public Employes’ Retirement Fund provided for under ORS 238.250, but not the individual account of the employee in the Variable Annuity Account established by ORS 238.260.
*402“(2) The individual account for an active or inactive member of the system shall be examined each year. If the individual account is credited with earnings for the previous year in an amount less than the earnings that would have been credited pursuant to the assumed interest rate for that year determined by the board, the amount of the difference shall be credited to the individual account and charged to a reserve account in the fund established for the purpose. A reserve account so established may not be maintained on a deficiency basis for a period of more than five years. Earnings in excess of the assumed interest rate for years following the year for which a charge is made to the reserve account shall first be applied to reduce or eliminate the amount of a deficiency.”
The section remains as originally enacted by Oregon Laws 1975, chapter 333, section 2, except that Oregon Laws 1993, chapter 177, section 31, clarified that an individual account is to be maintained for all members, including inactive members.

 That is, all except for employees who were able to and did retire before January 1, 1995, before cancellation of the earned right to sick leave credit, and except for the judiciary who have not been accorded sick leave benefits and, thus, have accumulated none to apply to increase final years’ salary.