Sundermier v. State, 12C13753

• Decision Date: 11 March 2015
• Docket Number: 12C13753,A154412.
• Citation: 269 Or.App. 586,344 P.3d 1142
• Parties: Paul J. SUNDERMIER, Plaintiff–Appellant, v. STATE of Oregon, acting by and through its PUBLIC EMPLOYEES RETIREMENT SYSTEM and Public Employee Retirement Board, Trustee and fiduciary, Defendant–Respondent, and Paul R. Cleary, et al., Defendants.
• Court: Oregon Court of Appeals

269 Or.App. 586
344 P.3d 1142

Paul J. SUNDERMIER, Plaintiff–Appellant
v.
STATE of Oregon, acting by and through its PUBLIC EMPLOYEES RETIREMENT SYSTEM and Public Employee Retirement Board, Trustee and fiduciary, Defendant–Respondent
and
Paul R. Cleary, et al., Defendants.

12C13753
A154412.

Court of Appeals of Oregon.

Argued and Submitted July 1, 2014.
Decided March 11, 2015.

344 P.3d 1143

Paul J. Sundermier, Salem, argued the cause and filed the briefs for appellant pro se.

Peenesh H. Shah, Assistant Attorney General, argued the cause for respondent. With him on the brief were Ellen F. Rosenblum, Attorney General, and Anna M. Joyce, Solicitor General.

Before GARRETT, Presiding Judge, and EGAN, Judge, and DeVORE, Judge.

Opinion

GARRETT, P.J.

269 Or.App. 588

This appeal involves two competing interpretations of a statute. The legislature enacted ORS 238.364, which provides some retired public employees with an additional retirement benefit to offset their state income tax liability. There is no dispute that that was the purpose of the law. Petitioner contends, however, that what the legislature actually enacted is a formula that entitles him to far more—thousands of dollars per month more—than is needed to offset the state income tax on his pension benefit. As explained below, we reject petitioner's interpretation and affirm the judgment of the trial court.

Petitioner retired in 2011 after 30 years of service as a state employee. He obtained a determination of his monthly retirement allowance from the Public Employees Retirement System (PERS). Believing PERS's calculation to be incorrect, petitioner requested an audit. PERS upheld its benefit calculation in a written order. Petitioner sought judicial review pursuant to ORS 238.450(4), alleging several defects in the order. The trial court granted summary judgment to PERS. On appeal, petitioner challenges only one aspect of the trial court's decision: its ruling that PERS correctly calculated the portion of petitioner's retirement benefit attributable to ORS 238.364. Specifically, petitioner argues that PERS, in applying that statute, wrongly increased petitioner's benefit by only four percent instead of 36 percent.

The Supreme Court discussed the history of ORS 238.364 in Vogl v. Dept. of Rev., 327 Or. 193, 197–200, 960 P.2d 373 (1998). We summarize that history to provide context for our analysis.

For many years, Oregon exempted state pension income from income tax but did not similarly exempt federal retirement benefits. In 1991, the legislature repealed the state pension exemption in light of the United States Supreme Court's decision in Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), which

344 P.3d 1144

had invalidated a similar state/federal pension distinction in Michigan. Oregon public retirees challenged the 1991 law as a breach of contract. The Oregon

269 Or.App. 589

Supreme Court held that the 1991 repeal of the tax exemption for state pension benefits was, indeed, a breach of the state's contractual obligation to its public employees. Hughes v. State of Oregon, 314 Or. 1, 838 P.2d 1018 (1992).

Following Hughes, the 1995 legislature enacted House Bill (HB) 3349, now codified at ORS 238.364, the statute at issue in this case. HB 3349 stated that its purpose was to provide a benefit increase “in compensation for damages suffered by those members and beneficiaries by reason of subjecting benefits * * * to Oregon personal income taxation.” Or. Laws 1995, ch. 569, § 2. In other words, HB 3349 established a mechanism by which the affected public employees would receive an additional benefit to remedy the breach of contract described in Hughes. As the Supreme Court later noted in Vogl, HB 3349 “expressly state[d], in a variety of ways, that the increased benefits are provided as full and final payment of damages for any claim arising out of the repeal of the previously existing exemption” for state pension benefits. 327 Or. at 200, 960 P.2d 373.

The relevant parts of ORS 238.364 are as follows:

“(1)(a) Upon retirement of an employee who is a member of the Public Employees Retirement System and computation of that member's service retirement allowance * * * the Public Employees Retirement Board shall add to the amount of the allowance, * * * the greater of the percentage increase calculated under ORS 238.366 or a percentage increase calculated under subsection (4) of this section.

“ * * * * *

“(4)(a) The Public Employees Retirement Board shall calculate a multiplier for the purposes of this section equal to the percentage produced by the following formula:

1
	.91 [ 1 ]

269 Or.App. 590

“(b) Upon the retirement or death of a member of the system, the board shall determine the fraction of the member's retirement allowance or death benefit, including any refund or lump sum payment, that is attributable to service rendered by the member before October 1, 1991. The board shall then calculate a percentage that is equal to that fraction multiplied by the multiplier determined by the board under paragraph (a) of this subsection. The percentage so calculated shall be used to determine the amount of the increase in benefits provided to a member, if any, under this section.”

In plainer terms, subsection (4)(b) directs the board to determine what portion of a member's overall retirement benefit is attributable to service prior to October 1, 1991. The reason for that is that October 1, 1991, was the effective date of the tax law change that repealed the exemption; the statute entitled members to the state tax exemption through October 1, 1991, but not after that date. Vogl, 327 Or. at 200, 960 P.2d 373. Accordingly, the period of contract breach, for which members are entitled to the remedy under Hughes, ended October 1, 1991. To determine the amount of the member's additional benefit under HB 3349 (that is, the tax remedy), it is necessary to determine what portion of a member's overall service was affected by the breach. That determination is reflected in the ratio of a member's pre-October 1991 years of service to the member's total years of service. That much is undisputed.

The parties focus their arguments on how PERS calculated petitioner's “multiplier” described in subsection (4)(a). The multiplier is the number that, according to subsection 4(b), must be multiplied by the fraction of a member's overall service that occurred prior to October 1, 1991. The result of that calculation is then used to

344 P.3d 1145

determine the member's overall benefit increase in dollar terms. PERS used a multiplier of .0989 (or 9.89 percent), and, on appeal, argues that multiplier aligns with the undisputed purpose of ORS 238.364 : to provide the remedy required in Hughes by reimbursing PERS members for income tax that they paid.

The figure of .0989 (or 9.89 percent) is derived in the following manner: Oregon's highest marginal income

269 Or.App. 591

tax rate in 1991 was 9 percent; thus, to be made whole as required by Hughes, members must receive a net HB 3349 benefit that offsets the 9 percent tax that they paid. That cannot be achieved, however, simply by multiplying the pre-October 1991 benefit by 9 percent, because the additional benefit under HB 3349 is itself subject to a 9 percent tax. Thus, to achieve a net benefit increase of 9 percent (that is, after imposition of a 9 percent income tax), the benefit increase must be 9.89 percent. This is illustrated by the following example, which, for the sake of simplicity, assumes that a member's benefit amount attributable to pre-October 1991 service is $100:

1. Base benefit amount (pre–1991 service):	$100
	2. Oregon tax:	$9 ($100 x 9% rate)
	3. Base benefit after tax:	$91
	4. HB 3349 benefit:	$9.89 ($100 x 9.89%)
	5. Oregon tax on HB 3349 benefit:	$.89 ($9.89 x 9% rate)
	6. HB 3349 benefit after tax:	$9

...