Stovall v. State By and Through Oregon Dept. of Transp.

• Decision Date: 01 January 1991
• Citation: 324 Or. 92,922 P.2d 646
• Parties: , 20 Employee Benefits Cas. 2237 Myron W. STOVALL, Dwayne Osburn, Theodore W. Kuenzi, Robert L. Maxey and Jeannette L. Bremer, on behalf of themselves and of a plaintiff class consisting of all persons or entities who received retirement, death, disability benefits or other payments through the Public Employee Retirement System on or after
• Court: Oregon Supreme Court

Page 646

922 P.2d 646

324 Or. 92, 20 Employee Benefits Cas. 2237

Myron W. STOVALL, Dwayne Osburn, Theodore W. Kuenzi, Robert

L. Maxey and Jeannette L. Bremer, on behalf of themselves

and of a plaintiff class consisting of all persons or

entities who received retirement, death, disability benefits

or other payments through the Public Employee Retirement

System on or after January 1, 1991, because of work

performed by public employees before September 29, 1991, and

whose PERS payments have been subjected to Oregon personal

income taxation, Appellants, and John B. Leahy, Plaintiff, v. STATE of Oregon, By and Through OREGON DEPARTMENT OF

TRANSPORTATION, Public Employee Retirement Board

and Department of Administrative

Services, Appellants,

and

Portland School District No. 1J, Marion County, City of

Salem and Multnomah County, on behalf of themselves and of a

defendant class consisting of all state and local public

employers who employed persons who, by reason of such

employment, received, on or after January 1, 1991, PERS

payments because of services performed before September 29,

1991, League of Oregon Cities, Special Districts Association

of Oregon and Oregon School Districts Association, Respondents,

and

City of Eugene and Eugene Water and Electric Board, on

behalf of themselves and of a defendant class consisting of

all state and local public employers who employed persons

who, by reason of such employment, received, on or after

January 1, 1991, PERS payments because of services performed

before September 29, 1991, Intervenors-Respondents.

Rose CHESS, Velma K. Mullaley, Edith S. Orner, Ben

Sickinger, Robert McCoy, Ed Lape, Jacob Weinstein, Richard

Fraser, Grace Shaw, Lyddie Bell Sedivy, for themselves and

on behalf of a class of retirees from public employment,

Oregon Public Employees Union, Oregon Education Association,

Oregon Association of Classified Employees, American

Federation of State, County and Municipal Employees and Portland Fire Fighters Association, Appellants, v. STATE of Oregon, Oregon Public Employes' Retirement Board,

State Department of Higher Education, State Department of

Health and Human Resources, State Department of

Transportation and Executive Department, Appellants,

and

Department of Administrative Services and Department of

Treasury, Defendants,

and

City of Portland, North Clackamas School District 12,

Corvallis School District 509J, Multnomah County, Yamhill

County, League of Oregon Cities, Special Districts

Association of Oregon, Oregon School Districts Association

and Josephine County, for themselves and on behalf of a

class of local government public employers in Oregon, Oregon

State Bar and Professional Liability Fund, Respondents,

and

City of Eugene and Eugene Water and Electric Board, for

themselves and on behalf of a class of local

government public employers in Oregon,

Intervenors-Respondents.

CC 93C11180; CC 94C10334; SC S43012.

Supreme Court of Oregon.

Argued and Submitted May 2, 1996.

Decided Aug. 29, 1996.

John R. Faust, Jr., of Schwabe, Williamson & Wyatt, Portland, argued the cause and filed the briefs for appellants Stovall, et al.

James S. Coon, of Swanson, Thomas & Coon, Portland, and Gregory A. Hartman, of Bennett Hartman Reynolds & Wiser, Portland, argued the cause and filed the briefs for appellants Chess, et al.

Elizabeth S. Harchenko, Special Counsel to the Attorney General, Salem, argued the cause for appellants State of Oregon, et al. With her on the briefs were Theodore R. Kulongoski, Attorney General, Virginia L. Linder, Solicitor General, and Michael D. Reynolds, Assistant Solicitor General.

John W. Osburn, of Miller, Nash, Wiener, Hager & Carlsen, Portland, argued the cause and filed the brief for respondents Portland School District No. 1J, Oregon School Districts Association, North Clackamas School District 12, and Corvallis.

Robert C. Cannon, Salem, argued the cause and filed the brief for respondents Marion County and Yamhill County.

Jacob Tanzer, Portland, argued the cause and filed the brief for respondents League of Oregon Cities and Special Districts Association of Oregon.

William F. Gary, of Harrang Long Gary Rudnick, P.C., Eugene, argued the cause for respondents City of Eugene and Eugene Water and Electric Board. With him on the brief was Judith Giers.

Gerald H. Itkin, Assistant County Counsel, Portland, on behalf of respondent Multnomah County, joined in the briefs of respondents League of Oregon Cities and Special Districts Association of Oregon; Portland School District No. 1J, Oregon School Districts Association, North Clackamas School District 12, and Corvallis School District 509J; Marion County and Yamhill County; and City of Eugene and Eugene Water and Electric Board.

Sylvia E. Stevens, Assistant General Counsel, waived appearance for respondent Oregon State Bar and Professional Liability Fund.

No appearance for respondents City of Salem, City of Portland, and Josephine County.

Before CARSON, C.J., and GILLETTE, VAN HOOMISSEN, FADELEY, GRABER, and DURHAM, JJ. ^*

GRABER, Judge.

In Hughes v. State of Oregon, 314 Or. 1, 36, 838 P.2d 1018 (1992), this court held, in part, that it was a breach of contract for the State of Oregon to subject to state income taxes employee pension benefits paid under the Public Employes' Retirement System (PERS), ORS 237.001 to 237.315 (1993), accrued or accruing for work performed before September 29, 1991. Plaintiffs in these two consolidated cases seek damages for that breach. The trial court ruled that the state was liable for those damages and that the damages should be paid out of the state's General Fund. The trial court enjoined the state from seeking contribution from other PERS employers and enjoined the implementation of legislative enactments intended to compensate plaintiffs for the damages suffered. We now reverse the judgment of the trial court.

I. FACTS AND PROCEDURAL BACKGROUND

In 1945, the legislature enacted the Public Employes' Retirement Act (PERA). OCLA §§ 90-701 to 90-723 (Supp.1947) (Or.Laws 1945, ch. 401). Benefits paid under that statutory system were exempt from all state taxes. OCLA § 90-723 (Supp.1947) (Or.Laws 1945, ch. 401, § 23). Although the legislature modified the laws concerning public employee benefits often over the following 45 years, that tax exemption remained a part of the statutes until 1991. See Hughes, 314 Or. at 7-8, 838 P.2d 1018 (discussing the evolution of PERS exemption).

In 1989, the United States Supreme Court decided Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). In Davis, the Court held that a state violates federal statutory and constitutional principles of intergovernmental tax immunity if it exempts pension benefits paid by the state government from state income taxes, but does not exempt pension benefits paid by the federal government. 489 U.S. at 817, 109 S.Ct. at 1509. The Court held that states must tax such benefits alike or exempt them alike. Id. at 817-18, 109 S.Ct. at 1509.

At the time that the Supreme Court issued its decision in Davis, Oregon taxed federal pension benefits as personal income, but exempted PERS retirement benefits from state taxation. Former ORS 237.201 (1989); former ORS 316.680(1)(d) (1989). In 1991, to comply with Davis, the legislature decided to subject PERS benefits to taxation, rather than to exempt federal benefits from taxation. Accordingly, the legislature passed Oregon Laws 1991, chapter 823. See Hughes, 314 Or. at 9, 838 P.2d 1018 (discussing the history leading to enactment of Oregon Laws 1991, chapter 823). Sections 1 and 3 eliminated that tax exemption for personal income benefits. See Or.Laws 1991, ch. 823, §§ 1 & 3 (eliminating the income tax exemption for PERS pension benefits).

A group of then-present and retired public employees challenged the 1991 law. In Hughes, this court held that Oregon Laws 1991, chapter 823, section 1, violated Article I, section 21, of the Oregon Constitution, ¹ and that section 3 "breache[d] petitioners' PERS contract insofar as it subjects to state * * * taxation PERS retirement benefits accrued or accruing for work performed before the effective date of that 1991 legislation." 314 Or. at 36, 838 P.2d 1018. The court declined to fashion a remedy for that breach of contract, however, choosing instead to defer to the legislature, "the most appropriate branch of government in the first instance to choose among the available remedies." Id. at 33 n. 36, 838 P.2d 1018. ²

In February 1993, plaintiff Stovall, a former employee of the Department of Transportation, filed a complaint in Multnomah County Circuit Court against the state. ³ The complaint was amended to include other plaintiffs who were employees of various political subdivisions of the state. Those plaintiffs seek a declaration that, pursuant to this court's decision in Hughes, each PERS participating employer is liable to its respective employees and their beneficiaries for the damages that resulted from the state's taxation of retirement benefits.

In January 1994, plaintiffs in the Chess case filed a class action in Marion County Circuit Court against a defendant class of PERS employers, alleging breach of a contract to provide PERS benefits free of state income tax. The requested plaintiff class consisted of "all retirees from state, local and school district service whose retirement, death, and disability benefits have been subjected to Oregon state and/or local income taxation." The requested defendant class consisted of the State of Oregon and numerous political subdivisions of the state. ⁴

The trial court consolidated the Stovall and Chess cases and certified a class of plaintiffs consisting of "all persons or entities who received retirement, death, disability benefits or other payments through the Public Employee Retirement System on or after January 1, 1991, because of work performed by public employees before September 29, 1991 and whose PERS...