Hughes v. State
| Decision Date | 06 August 1992 |
| Citation | 314 Or. 1,838 P.2d 1018 |
| Parties | , 78 Ed. Law Rep. 553, 15 Employee Benefits Cas. 2473 William G. HUGHES and Charles L. Plummer, Petitioners, v. STATE of Oregon, Governor Barbara Roberts, and Oregon Department of Revenue, Respondents. OREGON PUBLIC EMPLOYEES UNION, Dawn Morgan, Velma K. Mullaley, Oregon School Employees' Association, Mary Slawosky, Retired Oregon School Employees and Pat Guest, Petitioners, v. STATE of Oregon and Oregon Department of Revenue, Respondents. George BRUNE, Jeffrey C. Davis, John E. Davis, Betty Drew, Bob Frazier, Ann Logan, Grant McElroy, Thomas P. Murphy, Judith Norton, Linda Pesanti, Marylu Philip, Keith Wolford, Oregon Education Association, Oregon Association of Classified Employees, American Federation of State, County & Municipal Employees, Council 75, Oregon State Fire Fighters, Oregon Nurses Association and Confederation of Oregon School Administrators, Petitioners, v. STATE of Oregon, Respondent. PORTLAND POLICE ASSOCIATION, Leo Painton, Oregon Council of Police Associations and Pieter Van Dyke, Petitioners, v. STATE of Oregon and Department of Revenue, Respondents. SCS38544 (Control); S38549; S38700; S38701. |
| Court | Oregon Supreme Court |
John R. Faust, Jr., Schwabe, Williamson & Wyatt, Portland, argued the cause and filed the briefs, for petitioners William G. Hughes et al.
James S. Coon, Sherwood & Coon, P.C., Portland, argued the cause and filed the briefs, for petitioners Oregon Public Employees Union et al.
Gregory A. Hartman, Bennett & Hartman, Portland, argued the cause and filed the briefs, for petitioners George Brune et al. With him on the reply brief was Monica A. Smith, Portland.
William B. Aitchison, Aitchison, Hoag, Vick & Tarantino, Portland, filed the brief, for petitioners Portland Police Ass'n et al.
Robert M. Atkinson, Asst. Atty. Gen., Salem, argued the cause, for respondents. With him on the brief were Dave Frohnmayer, Atty. Gen., Virginia L. Linder, Sol. Gen., and Rives Kistler, Asst. Atty. Gen., Salem.
The legislature has conferred special jurisdiction on this court, on the timely filing of a petition for review by an interested party, to evaluate the constitutionality of Oregon Laws 1991, chapter 823. Or. Laws 1991, ch. 796, § 15. 1 Chapter 823, in part, subjects benefits paid under the Public Employes' Retirement System (PERS), ORS 237.001 to 237.315, to state income taxation. 2
Petitioners, undeniably interested parties, 3 have timely filed petitions for review challenging, in various particulars, the constitutionality of Oregon Laws 1991, chapter 823, sections 1 and 3. 4 After considering those challenges, we hold that petitioners have a contract with the state 5 to receive PERS retirement benefits free from state and local taxation as provided by former ORS 237.201 (1989) 6 ( Or.Laws 1991, ch. 823, § 1); and that Oregon Laws 1991, chapter 823, section 1, impairs an obligation of that contract in violation of Article I, section 21, of the Oregon Constitution and, therefore, is a nullity as it relates to PERS retirement benefits accrued or accruing for work performed before the effective date of that 1991 legislation. We further hold that Oregon Laws 1991, chapter 823, section 3, breaches petitioners' PERS contract insofar as it subjects to state and local taxation PERS retirement benefits accrued or accruing for work performed before the effective date of that 1991 legislation, rather than impairing any of the obligations of that contract, and therefore section 3 does not violate the Contract Clauses of either the Oregon or the United States Constitutions; moreover, section 3 does not violate either the Oregon or United States Constitutions in any of the other respects argued by petitioners.
In 1945, the legislature enacted the Public Employes' Retirement Act (PERA). OCLA §§ 90-701 to 90-723 (Supp.1947) (Or.Laws 1945, ch. 401). From its inception, benefits paid under the PERA explicitly were exempt from all state and local taxation. The statute providing the tax exemption stated:
"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 act, and the money in the various funds created by the act, shall be exempt from all state, county, and municipal taxes and shall not be subject to execution, garnishment, attachment or any other process or the operation of any bankruptcy or insolvency law, and shall be unassignable." OCLA 90-723 (Or.Laws 1945, ch. 401, § 23) (emphasis added).
That statute, later reenacted as former ORS 237.201 (1953) (), 7 remained virtually unchanged for twenty-four years. Then, in 1969, the legislature amended the exemption statute to provide expressly that it applied to all state and local taxes "heretofore or hereafter imposed." Or.Laws 1969, ch. 640, § 13. After the 1969 amendment, former ORS 237.201 (1969) provided:
"The right of a person to a pension, an annuity, or a retirement allowance, or 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 ORS 237.001 to 237.315, and the money in the various funds created by ORS 237.271 and 237.281, shall be exempt from all state, county and municipal taxes heretofore or hereafter imposed, shall not be subject to execution, garnishment, attachment or any other process or the operation of any bankruptcy or insolvency law heretofore or hereafter existing or enacted, and shall be unassignable." (Emphasis added.)
Over the next several years, various amendments were made to the statute. By 1989, immediately before the amendments at issue here, former ORS 237.201 (1989) provided:
"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 ORS 237.001 to 237.315, and the money in the various funds created by ORS 237.271 and 237.281, shall be exempt from garnishment and all state, county and municipal taxes heretofore or hereafter imposed, except as provided under ORS chapter 118, 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 or notice entered pursuant to ORS 25.050, 25.060, 25.310, 25.350, 25.360, 25.450, 416.445 or 419.515, and shall be unassignable." (Emphasis added.)
One other statute, former ORS 316.680(1)(d) (1989) (repealed by Or.Laws 1991, ch. 823, § 3), a tax exemption in the state income tax law, also is significant to this case. It provided in part:
Thus, as of 1989, that statute made the PERS tax exemption, then provided for in former ORS 237.201 (1989), a part of the state income tax law.
In 1989, the Supreme Court of the United States decided Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). 9 In Davis, the Supreme Court held that if a state exempts pension benefits paid by state and local governments from state income taxes, without similarly exempting pension benefits paid by the federal government, then that state violates statutory and constitutional principles of intergovernmental tax immunity. 489 U.S. at 817, 109 S.Ct. at 1508; accord Barker v. Kansas, 503 U.S. 594, 112 S.Ct. 1619, 118 L.Ed.2d 243 (1992) (). Consequently, the Court held that states whose statutes provide for such disparate tax treatment are required either to tax state and federal pensions alike or to exempt them alike. 489 U.S. at 817-18, 109 S.Ct. at 1508-09.
When the Supreme Court issued its decision in Davis, Oregon taxed federal pension benefits as personal income, but, pursuant to former ORS 237.201 (1989) and former ORS 316.680(1)(d) (1989), exempted PERS retirement benefits from that same tax. Subsequently, this court held that Oregon's taxation scheme violated constitutional principles of intergovernmental tax immunity. Ragsdale v. Dept. of Rev., 312 Or. 529, 542, 823 P.2d 971 (1992). 10 To comply with Davis, the 1991 legislature decided to subject PERS retirement benefits to state personal income taxation, rather than to exempt federal pension benefits from such taxation. Oregon Laws 1991, chapter 823, is the result of those compliance efforts.
Sections 1 and 3 are the operative sections of Oregon Laws 1991, chapter 823. Those sections are the focus of the dispute in this case.
Section 1 amended former ORS 237.201 (1989) by making that statute subsection (1) of ORS 237.201 and by adding a second subsection to ORS 237.201 making the tax exemption in ORS 237.201(1) inapplicable to state personal income taxation. As amended, therefore, ORS 237.201 provides:
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