Sheehy v. Public Employees Retirement Division

No. 92-499

IN THE SUPREME COURT OF THE STATE OF MONTANA

1993

EDMUND F. SHEEHY, CATHERINE N. SHEEHY,

JUNIUS CHADWICK, LILLIAN PAUL, and

BEN JOHNS, on behalf of themselves, and

all other similarly situated taxpayers,

Plaintiffs and Appellants,

PUBLIC EMPMYEES RETIREMENT DIVISION,

TEACHERS RETIREMENT DIVISION, DEPmTMENT

OF ADMINISTRATION: STATE OF MONTANA:

- -

and DEPARTMENT OF REVENUE, STATE OF MONTANA,

'

Defendants and Respondents,

ASSOCIATION OF MONTANA RETIRED PUBLIC EMPMYEES, et al.,

Defendants and Respondents.

APPEAL FROM:

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District Court of the First Judicial District,

ot~u L V L L u r LUUJILY uf Lewis and Clark,

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The Honorable Thomas C. Honzel, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

Edmund F. Sheehy, Jr. (argued); Cannon & Sheehy,

Helena, Montana

For Respondents:

David W. Woodgerd, Dep't of Revenue, Helena, Montana

R. Bruce McGinnis (argued), Tax Counsel, Helena, MT

Brenda Nordlund (argued), Dep't of Administration,

Helena, Montana

Leo Berry; Browning, Kaleczyc, Berry & Hoven, Helena

Montana (Association of Montana Retired Public

Employees)

Heard: April 28, 1 9 9 3

Submitted: July 2 7 , 1 9 9 3

i A

#I Decided: November 23, 1993

Filed:

Justice Karla M. Gray delivered the Opinion of the Court.

This is an appeal from the grant of summary judgment to

defendants by the First Judicial District Court, Lewis and Clark

County. We affirm in part and reverse in part.

We consider the following issues on appeal:

1. Did the District Court err in concluding that no

contractual right existed in certain state retirees to

continued exemption from taxation of state retirement

benefits, and that Ch. 823, 1991 Mont. Laws, does not

violate Article 11, Sec. 31 of the Montana Constitution?

2. Did the District Court err in concluding that the

provision of Ch. 823, 1991 Mont. Laws, phasing out the

$3,600 exemption does not violate 4 U.S.C. § Ill?

3. Did the District Court err in concluding that the

retirement adjustment payment contained in Ch. 823, 1991

Mont. Laws, does not violate 4 U.S.C. 5 Ill?

4. Are the retirement adjustment payment and related

implementation provisions severable from Ch. 823, 1991

Mont. Laws?

For many years, the state of montana exempted from ir~tioute

taxation all retirement benefits paid through its various

retirement systems to teachers and state government retirees, while

taxing retirement benefits paid by the United States to federal

retirees. In 1989, the United States Supreme Court decided Davis

v. Michigan Dep't of Treasury (1989), 489 U.S. 803, 109 S.Ct. 1500,

103 L.Ed.2d 891. The Supreme Court determined that 4 U.S.C. 5 111

waives the immunity retired federal employees otherwise would enjoy

from state taxation of retirement benefits received as a result of

their employment with the federal government, exce~t the extent

to

such state taxation discriminates on the basis of the source of the

retirement benefits. Because the Michigan tax at issue favored

retired state employees based on the source of their retirement

benefits, the Supreme Court concluded that the tax violated

principles of intergovernmental tax immunity. Davis, 489 U.S. at

810, 815, 109 S.Ct. at 1505, 1509, 103 L.Ed.2d 901, 906.

Although oavis was decided during Montana's 1989 legislative

session, the legislature did not amend Montana's tax laws in

response to Davis prior to adjourning. As a result, a group of

federal retirees filed a declaratory judgment action to have the

existing taxation scheme declared unconstitutional; they also

souyht a retroactive application of Davis for purposes of

entitlement to a refund of taxes illegally collected by the State.

By the time that case reached this Court, the district court had

adopted the parties1 stipulation that the tax was invalid for tax

years beginning after December 31, 1988; only the issue of

retroactive application of oavis was before us. See Sheehy v.

State, Deprt of Revenue (1991), 250 Mont. 437, 820 P.2d 1257.

The Montana legislature subsequently passed Chapter 823, 1991

Montana Laws, which, according to its title, restructures the

income tax on pension benefits by equalizing the taxation o f all

pension benefits. In lieu of extending the total exemption from

taxation previously available to state retirement income to federal

retirement income, the legislature opted in Chapter 823 to bring

all retirement income--including both state and federal pensions--

within the Montana income tax. Chapter 823 does exempt from

taxation the first $3,600 of all pension and annuity income

received, except that the exemption is reduced or phased out by $2

for every $1 of federal adjusted gross income in excess of $30,000.

In addition, section 5 of Chapter 823 grants to state retirees who

are Montana residents, and who now were to be taxed in response to

m, an annual retirement adjustment paxpent.

Appellants, who are primarily federal retirees but who include

one or more state and teacher retirees (hereafter Taxpayers), filed

the instant declaratory judgment action against two state

retirement divisions of the Montana Department of Administration

and the Montana Department of Revenue (hereafter the State),

challenging Chapter 823 on a number of grounds. The Association of

Montana Retired Public Employees was allowed to intervene. The

parties entered into an agreed statement of facts and submitted the

case to the District Court on cross motions for summary judgment.

The District Court granted summary judgment to the State on

all issues. Taxpayers appeal from portions of that judgment.

I

Did the District Court err in concluding that no contractual

right existed in certain state retirees to continued exemption from

taxation of state retirement benefits, and that Ch. 823, 1991 Mont.

Laws, does not violate Article 11, Sec. 31 of the Montana

Constitution?

Taxpayers argue that as to state employees who retired on or

before the effective date of Chapter 823 and began receiving

retirement benefits at a time when those benefits were fully exempt

from taxation, Chapter 823 violates Article 11, Section 31 of the

1972 Montana Constitution, which prohibits the legislature from

passing any law impairing the obligation of contracts. The thrust

of the argument is that, by taxing these retirees' state pensions,

Chapter 823 impairs private contractual rights codified at §§ 19-4-

706 and 19-3-105, MCA (1989), that exempted their pensions from

taxation.

The State counters that the pre-Chapter 823 statutes did not

create private contractual rights, and could not create a right in

state retirees never to be taxed because it is prohibited from

surrendering or contracting away its taxing power by Article VIII,

Section 2 of the 1972 Constitution. Thus, the State contends,

Article 11, Section 31 is inapplicable here.

The District Court correctly relied on Wage Appeal v. Board of

Personnel Appeals (1984), 208 Mont. 33, 676 P.2d 194, in concluding

that §§ 19-4-706 and 19-3-105, MCA (1989), constituted current

policy statements regarding public employment, rather than a

contract providing that state retirement benefits would never be

taxed. In Waqe Appeal, a statewide pay plan was challenged on the

basis that it impaired employment contracts entered into before it

took effect. We stated:

[Wlhen the Legislature enacts a statute fixing certain

terms and conditions of public employment, such as

salaries and compensation, it is presumed that the

statute does not create contractual rights, but is

intended merely to declare a policy to be pursued until

the Legislature declares otherwise.

Wase Appeal, 676 P.2d at 199 (citations omitted). While

recognizing the "presumptionw language in Waqe Appeal, Taxpayers

rely on additional language therein:

If contractual rights are to be created by statute, the

language of the statute and the circumstances must

manifest a legislative intent to create private rights of

a contractual nature enforceable against the State.

Waqe Awweal, 676 P.2d at 199 (citations omitted). Taxpayers assert

that the provisions of § 19-4-706 and 19-3-105, MCA (1989),

clearly manifest legislative intent to create private contractual

rights enforceable against the State. We disagree.

Notwithstanding their bald assertion of clearly manifested

legislative intent, Taxpayers offer no analysis of the statutes to

support the assertion. Thus, it is necessary only to point out

that § 19-4-706, MCA (1989), provides that state retirement

benefits are exempted from state tax. The use of the present tense

"arew indicates that the statute is a statement of current policy

regarding public employment. The statute contains no manifestation

of legislative intent to create private and enforceable contractual

rights as contempiated in Wase Aoweai; nor does it make or imply

any promises regarding ongoing or future tax treatment of state

retirement benefits. Taxpayers have not met their burden under

Waae Awweal.

Moreover, Taxpayers' reliance on Clarke v. Ireland (1948)' 122

Mont. 191, 199 P.2d 965, and State ex rel. Sullivan v. State

(1977), 174 Mont. 482, 571 P.2d 793, as support for their theory

that §§ 19-4-706 and 19-3-105, MCA (1989), created a contract right

to continued exemption from taxation of state retirement benefits

is misplaced. Both cases involved an effort to deny the plaintiffs

therein an actual retirement benefit provided by the Teachers*

Retirement Act at the time the plaintiffs became members of the

6

teachers' retirement system; our conclusions in Clarke and Sullivan

that contract rights existed were based on those facts.

Here, we have no issue concerning efforts to deny or limit

state retirees' actual retirement benefits. The question before us

relates to a taxation provision entirely separate from state

retirement programs and entitlements thereunder. Furthermore, the

taxation characteristic which distinguishes this case from Clarke

and Sullivan also brings into play Article VIII, Section 2 of the

1972 Constitution, which prohibits the state from surrendering or

contracting away the power to tax. Under that constitutional

provision, the state cannot promise any group of taxpayers that it

will never tax them.

We hold that the District Court correctly concluded that state

employees retiring prior to the effective date of Chapter 823 did

not have a contractual right to continued exemption from taxation

of their state retirement benefits. On that basis, the District

Court also correctly determined that Chapter 823 does not violate

Article 11, Section 31 of the Montana Constitution.

I1

Did the District Court err in concluding that the provision of

Ch. 823, 1991 Mont. Laws, phasing out the $3,600 exemption does not

violate 4 U.S.C. § Ill?

Prior to adoption of the Public Salary Tax Act of 1939 (the

Act), compensation of both state and federal employees generally

was thought to be exempt from taxation by another sovereign under

the doctrine of intergovernmental tax immunity. The purpose of the

Act was to impose federal income tax on the salaries of all state

and local government employees. In order to ensure that federal

employees did not remain immune from state taxation while state

employees were being required to pay federal income taxes, Congress

enacted 5 4 of the Act--now 4 U.S.C. 5 Ill--waiving immunity which

might otherwise have shielded federal employees from state

taxation, but retaining immunity from discriminatory taxation based

on the source of the income:

The United States consents to the taxation of pay or

compensation for personal service as an officer or

employee of the United States, a territory or possession

or political subdivision thereof, the government of the

District of Columbia, or an agency or instrumentality of

one or more of the foregoing, by a duly constituted

taxing authority having jurisdiction, if the taxation

does not discriminate aqainst the officer or emplovee

because of the source of the oav or comwensation.

4 U.S.C. 5 111 (emphasis added).

In 1989, the United States Supreme Court decided Davis, which

involved a Michigan income tax system discriminating in favor of

state retirees and against federal retirees by exempting only state

retirement benefits from taxation. The Supreme Court determined

that the discriminatory tax was based on the source of the

retirement benefits and was not justified by significant

differences between the two classes of retirees. Davis, 489 U.S.

When Davis was decided, it became clear that Montana's income

tax statutes regarding state versus federal retirement benefits

also violated federal law. In responding to Davis and

restructuring the taxation of pension benefits in Chapter 823, the

Montana legislature provided a $3,600 exemption from taxation to

all retirees; the exemption is phased out beginning at the $30,000

income level. Taxpayers contend that the phase-out violates 4

U.S.C. 5 111 by discriminating against federal retirees based on

the source of their income. This is so, they contend, because

federal pensions are larger than state pensions and, as a result,

federal retirees will lose all or part of the exemption. The State

contends that the phase-out exemption treats state and federal

retireesf pensions equally and that any difference is based on

amount, not source, of income.

As discussed above, the controlling federal statute does not

prohibit all differences in state taxation of state and federal

pensions. Rather, it precludes taxation which discriminates

against federal retirees because of the source of the pension. 4

U.S.C. 111. Here, the phase-out exemption is neutral on its

face; it applies to all taxpayers equally. Any difference in

impact on federal and state retirees is based entirely on the

amount of income received by each individual taxpayer, without

regard to the source of that income.

Indeed, the Supreme Court in Davis tacitly approved

differences in taxation such as the phase-out exemption before us:

A taxation exemption truly intended to account for

differences in retirement benefits would not discriminate

on the basis of the source of those benefits .

. . ;

rather, it would discriminate on the basis of the amount

of benefits received by individual retirees.

Davis, 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d at 906

(emphasis added!. The phase-out exemption contained ir? Chapter 823

treats individual retirees differently based on differences in the

amount of retirement income received. Taxpayers' strained

interpretation that because federal pensions generally are larger

than state pensions and, thus, that the phase-out discriminates as

to source rather than amount, simply does not square with Davis.

We conclude that the phase-out exemption does not discriminate

as to source of income. Therefore, we hold that the District Court

correctly concluded that the provision of Chapter 823 phasing out

the $3,600 exemption does not violate 4 U.S.C. g 111.

111

Did the District Court err in concluding that the retirement

adjustment payment contained in Ch. 823, 1991 Mont. Laws, does not

violate 4 U.S.C. 5 111?

Observing that Davis does not limit the State's ability to set

the terms and conditions of public employment, the District Court

concluded that the adjustment constitutes a legitimate increased

retirement benefit to state retirees. It relied primarily on Clark

v. United States (7th Cir. 1982), 691 F.2d 837.

Taxpayers argue that the adjustment is part of the taxation

scheme and that it impermissibly discriminates against them. They

also argue that Clark is inapplicable. The State contends that the

adjustment is unrelated to the tax and that, pursuant to Clark, it

is a valid retirement benefit.

Davis requires a two-pronged analysis of the legislation at

issue here: 1) Does it constitute discriminatory taxation against

federal retirees or in favor of state retirees on the basis of

source of income? and 2) If so, is the different treatment

"directly related to, and justified by, 'significant differences

between the two classes'"? Davis, 489 U.S. at 816, 109 S.Ct. at

1508, 103 L.Ed.2d at 905 (citation omitted). Application of

to the case before us mandates our conclusion that the retirement

adjustment payment (hereafter adjustment) contained in section 5 of

Chapter 823 violates 4 U.S.C. 5 111.

It is clear that the revenue, equalization and adjustment

provisions of Chapter 823 are related parts of a comprehensive

income tax program encompassing all pension income. The provisions

were all included in and part of the same bill, originally

introduced as Senate Bill 226 in the 1991 Montana legislature. The

title of the bill, subsequently enacted as Chapter 823, reads in

pertinent part:

An Act to Restructure the Income Tax on Pension Benefits

by Equalizing the Taxation of All Pension Benefits; To

Provide an Exemption of $3,600 from Taxation of Benefits

from Federal, State, and Private Retirement, Annuity,

Pension, and Endowment Plans or Systems; To Provide That

the Amount of the Exemption be Reduced by $2 for Every $1

of Federal Adjusted Gross Income Received by the Taxpayer

in Excess of $30,000; To Provide for an Adjustment

Payment to Retirees of State, Local, and Teacher

Retirement Systems Who are Montana Residents. ..

.

Reading the title makes it clear that the overall purpose of this

bill was to tax state and federal pensions in a manner that does

not violate 4 U.S.C. 5 111 as interpreted in Davis. Rather than

comply with 4 U.S.C. § 111 by extending the total exemption from

state income taxation previously granted to state retirement

benefits to include federal retirement benefits, the legislature

chose to equalize the burden by taxing all retirement benefits,

subject to the phase-out exemption discussed above. Within the

same legislative enactment, the legislature provided for an

adjustment payment to state retirees who are Montana residents.

The State's argument that the two portions of the bill are not

related defies logic,

Moreover, the relationship between the tax equalization

provisions of the bill, with their negative impacts on state

retirees, and the adjustment intended to make up, in part, for that

equalization cannot be gainsaid. The adjustment--while purporting

to be an adjustment to state retirement benefits--is, in fact, an

adjustment to the equalization achieved via the first sections of

Chapter 8 2 3 . This conclusion is inescapable given the inclusion

of the adjustment in, and as part of, the tax equalization program.

No other interpretation of these two portions of Chapter 8 2 3

comports with our duty to construe statutes in a reasonable manner.

It is clear that the adjustment is not an actual and

legitimate pension or retirement benefit. If it were a pension

benefit, the State would have provided it to of its retirees in

recognition of their years of public service rather than just those

living in Montana. There was no need to do so because the sole

purpose of the adjustment was to partially recompense state

retirees living in Montana for the tax they now must pay under the

equalizing provisions of Chapter 8 2 3 .

Further evidence that the adjustment is not an actual

increased retirement benefit for retired state employees is the

fact that the funding of the section 5 adjustment bears no

resemblance to the funding of actual state retirement benefit

adjustments previously enacted by the legislature. Such actual

retirement adjustments as those contained in the Public Employees'

Retirement System at 5 19-3-1603, MCA, and in the Teachersr

Retirement System at 5 19-20-713, MCA, are funded by investment

income produced by the retirement fund made up of employee and

employer contributions. See § 19-3-1602 and 19-20-712, MCA.

Here, the funding for the so-called retirement adjustment payment

is statutorily appropriated from the general fund pursuant to

section 4 of Chapter 823--that is, from the taxes collected from

all Montana taxpayers. The money to pay the adjustment never goes

into the state retirement funds, but is simply paid by the state

treasurer to the retirement boards, to be distributed by the boards

in accordance with the provisions of Chapter 823. While this

evidence is not conclusive as to the nature of the adjustment at

issue here, it undercuts any notion that the adjustment is a

legitimate increase in retirement benefits for state retirees.

We conclude that the adjustment is a partial tax rebate

denominated otherwise in an attempt to evade the requirements of

federal law. The discriminatory aspect of the adjustment is clear:

the adjustment favors state retirees living in Montana based solely

on the source of their retirement income; that is, those retirees

living in Montana and receiving state retirement income receive the

adjustment, while federal retirees living in Montana and receiving

federal retirement income do not. Thus, the adjustment constitutes

discriminatory taxation based solely on the source of the

respective retiree's income, in violation of 4 U.S.C. 1 111.

The State's reliance on Clark for the proposition that the

adjustment is merely an allowable increased retirement benefit is

misplaced. Clark involved a cost-of-living adjustment provided to

all federal retirees as an actual and legitimate pension

adjustment. Clark, 691 F.2d at 841. Here, the adjustment was

provided not to all state retirees, but only to state retirees who

are Montana residents. Further, the adjustment provided in Clark

was entirely independent of, and unrelated to, any tax provisions.

Here, it is part of a tax equalization scheme mandated by federal

law.

Because the adjustment contained in section 5 of Chapter 823

violates 4 U.S.C. 1 111, the disparate tax treatment of state and

federal retirement income is justified only if it is "directly

related to, and justified by, 'significant differences between the

two classes. ' I i Davis, 489 U.S. at 816, 109 S.ct. at 1508, 103

L.Ed.2d at 905. Application of this test mandates the conclusion

that the adjustment contained in Chapter 823 cannot stand.

The State makes no real argument that significant differences

in fact exist between the two classes of retirees that justify the

discriminatory adjustment. Perhaps this is to the State's credit,

since it is clear that no such articulable differences exist which

could withstand Davis scrutiny. The most obvious contention to be

made regarding differences between the classes is the State's

interest in inducing and retaining qualified state government

workers. While this position is not asserted here, it is precisely

the argument made by the state of Michigan in Davis to justify the

preferential treatment of its retired employees, and is the

argument squarely rejected by the Davis Court:

This argument is wholly beside the point, however, for it

does nothing to demonstrate that there are "significant

differences between the two classesm themselves; rather,

it merely demonstrates that the State has a rational

reason for discriminating between two similar groups of

employees. The State's interest in adopting the

discriminatory tax, no matter how substantial, is simply

irrelevant to an inquiry into the nature of the two

classes receiving inconsistent treatment.

Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905

(emphasis added).

Moreover, no reasonable argument can be made that the

adjustment is necessary or intended (a) to retain retired residents

in Montana in order to provide a critical mass of retired people to

use those services and facilities that are important to retired

people; or (b) to entice other retired people into the state. Such

arguments would apply to all retired people and would support the

similarities between state and federal retirees rather than

establishing any significant differences between the two classes.

Here, as noted, the State does not address or attempt to meet

the Davis requirement that it justify disparate treatment on the

basis of significant differences between the two classes of

retirees. The reason is clear: the "adjustment" is not based on

any difference in the nature of the two classes before us. The

disparate treatment is based entirely on the State's desire to

continue to provide an advantage to those of its own retirees

losing a pre-l)avis advantage--namely, state retirees who reside in

Montana and whose state pensions are now subject to income tax

pursuant to Chapter 823. While the desire is understandable and

perhaps even laudable, it is legally insufficient under l a i as a

)vs

justification for taxation which discriminates against federal

retirees.

We conclude that the adjustment contained in section 5 of

Chapter 823 constitutes discriminatory taxation which is not

related to, or justified by, significant differences between state

and federal retirees. We hold that the District Court erred in

determiningthat the retirement adjustment payment does not violate

4 U.S.C. 5 111.

IV

Are the retirement adjustment payment and related

implementation provisions severable from Chapter 823, 1991 Mont.

Laws?

Having concluded that the adjustment provision contained in

section 5 of Chapter 823 violates 4 U.S.C. § 111, it is necessary

to determine whether that provision and related implementing

provisions can be severed from Chapter 823, or whether the entirety

of Chapter 823 must be stricken. We conclude that the invalid

provisions can be severed.

Section 20 of Chapter 823 provides that if a part of the

legislation is invalid, all valid parts that are severable from the

invalid part remain in effect. We previously have concluded that

the inclusion of a severability clause is an indication that the

drafters desired judicial severability policy to apply. Montana

Automobile Assoc. v. Greely (1981), 193 Mont. 378, 399, 632 P.2d

300, 311. Thus, we begin our analysis with stated legislative

intent favoring severability. We then apply severability

principles in determining whether the invalid provisions can be

severed or whether the entire legislative act must be stricken:

If an invalid part of a statute is severable from the

rest, the portion which is constitutional may stand while

that which is unconstitutional is stricken out and

rejected. . . . A statute "is not destroyed in toto

because of an improper provision, unless such provision

is necessary to the integrity of the statute or was the

inducement to its enactment." . . .If, when an

unconstitutional portion of an act is eliminated, the

remainder is complete in itself and capable of being

executed in accordance with the apparent legislative

intent, it must be sustained.

Greely, 632 P.2d at 311 (citations omitted).

Here, the income tax provisions of Chapter 823 clearly are not

destroyed in toto by striking the adjustment provisions contained

in sections 4 and 5; indeed, they are not impacted in any way. The

income tax still may be imposed and the exemption may be given

effect without the adjustment for state retirees living in Montana.

Nor was the adjustment the inducement for enacting the legislation;

the "inducement*'for Chapter 823 was 4 U.S.C. § 111 and the Supreme

Court's Davis decision.

The income taxes and exemption contained in Chapter 823 remain

complete in themselves and capable of being executed in accordance

with the overall legislative intent, which was to equalize taxes.

Granted, the legislature al-so intended to continue an advantage for

certain state retirees through the adjustment. But where we have

invalidated the adjustment portion of Chapter 823, it is clear that

the legislature intended, through the severability clause it

included in Chapter 823, to preserve all valid parts.

Our earlier determination that the revenue, equalization and

adjustment provisions of Chapter 823 are related parts of a

comprehensive income tax program encompassing all pension income

does not negate our conclusion here regarding severability. The

fact that the provisions are related from the standpoint of whether

they can withstand 4 U.S.C. g 111 and &&

y scrutiny does not mean

that they are not, and cannot be, separate and independent from a

severability standpoint. From an administrative and operational

perspective, it is clear that sections 4 and 5 are segregable from

the income tax and exemption provisions.

Finally, and returning again to the legislature's specific

intent that invalid portions of Chapter 823 be severed, we note

that, absent a severability clause:

[Tlhe presumption is against the mutilation of a statute,

and that the legislature would not have enacted it except

in its entirety. The incorporation of a provision such

as section 20 [severability clause] creates a presumption

to the contrary; namely, that the legislature would have

enacted the law without its invalid portions being

incorporated therein.

State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624, 636

(citation omitted). See also Ingraham v. Champion Int'l (1990),

243 Mont. 42, 49, 793 P.2d 769, 773. The presumption operates here

in support of the legislature's intent that the remainder of

Chapter 823 remains valid even where the adjustment provisions are

determined to be invalid. Nothing in Chapter 823 indicates any

intent that the tax and exemption provisions are dependent on the

validity of the adjustment for state retirees living in Montana;

thus, no inconsistency between such a provision and the contrary

and clearly-stated severability clause exists in Chapter 823 which

might require us to depart from the plain language used by the

legislature and delve into the legislative history to resolve the

issue before us.

We conclude that sections 4 and 5 are severable from Chapter

823, 1991 Montana Laws. We hold that those sections are severed

and excised from Chapter 823 and, with those invalid and severed

provisions excepted, Chapter 823, 1991 Montana Laws, remains valid

and in full force and effect.

Affirmed in part and reversed in part.

We concur:

ourt, s i t t i n g

C Harrison

7

w i s t r i c t C o u r t , sittiAg i n a t h e

s e a t v a c a t e d by t h e r e t i r e m e n t

o f J u s t i c e R.C. McDonough

~istrictJudge Peter L. Rapkoch specially concurring in part and

dissenting in part.

I concur in the majority opinion on Issue I, that state

employees retiring before the effective date of Chapter 823, 1991

Laws of Montana, did not have a contractual right to continued

exemption from taxation of their state retirement benefits.

I also agree that the provision of Chapter 823 phasing out the

$3600 exemption does not violate 4 U.S.C. 5 111 (1966).

Nor do I disagree with the majority that the adjustment

contained in section 5 of Chapter 823 constitutes discriminatory

taxation and therefore violates 4 U.S.C. 5 111 (1966).

It is, however, my opinion that the adjustment payment

provision is not severable from the rest of Chapter 823, and

therefore, I dissent from the majority's opinion on that point.

Section 20 of Chapter 823 is the severability provision here.

The incorporation of that provision raises a presumption that the

Legislature would have enacted the law without its invalid

portions. Williams v. Standard Oil Co. (1929), 278 U.S. 235,

241-42; State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d 624,

636; Ingraham v. Champion Intll. (1990), 243 Mont. 42, 49, 793 P.2d

769, 773.

That is a rebuttable presumption though, and a weak one at

that; rebuttable by the nature of the statue being considered: its

purpose manifested by its provisions before severance as compared

to its apparent purpose, as manifested by the provisions remaining

after amputation. Can it be said that the purpose is the same

after surgery as it was before?

The majority cites and quotes Montana Automobile Association

v, Greely (19811, 193 Mont. 378, 399, 632 P.2d 300, 311 as follows:

A statute Itis not destroyed in toto because of an

improper provision, unless such provision is necessarvto

the intearity of the statue or was the inducement to its

enactment." If, when an unconstitutional portion of an

act is eliminated, the remainder is complete in itself

and capable of being executed in accordance with the

awwarent leaislative intent, it must be sustained.

[Citation omitted; emphasis added].

This cannot be done here. "Apparent legislative intentw must

be that intent manifested by the language of the statute before

severance. It is true that neither the income tax provisions nor

the equalization parts are not themselves destroyed or affected by

striking the adjustment provisions. But the former cannot in this

case be considered separate and apart from the amputated adjnstment

provision. And ltamputatedlt the right word.

is What remains and

will be enforced under the majority opinion will not be the same as

what clearly appears to be the intent of the Legislature in the

original enactment. The Legislature did not, in enacting Chapter

823, set out to do no more than equalize the income tax on all

retirees. It went on and set out, bv the adjustment wrovision, to

remove or lessen that impact on resident Montana retirees.

The general statement of the severability rule in Greely is an

accurate statement. Portions of a statute are severable if:

(1) the invalid part is not necessary to the integrity of the

statute: or

(2) the invalid part was not the inducement to its enactment;

(3) the remainder of the statute is complete in itself; g&

(conjunctive)

(4) the remainder is capable of being executed in accordance

with the avvarent_?,egislativeintent. Greelv, 632 P.2d at 311.

I submit that the surgery here performed on Chapter 823 fails

to meet condition 1 above in that sections 4 and 5, the adjustment

provisions, are necessary to the integrity of the entire Chapter

823 as originally enacted. It is correct that the equalization

provisions may be imposed and the exemption given effect without

the adjustment to income for Montana resident retirees. But what

would then be imposed and given effect would be a law completely

different from what is clearly intended in the original act. It

may even be a better law, but that is not our business; such would

be judicial legislation.

It also seems that the adjustment provision is part of an

enactment that is a byzantine effort to avoid Davis v. Michigan

Department of Treasury (1989), 489 U.S. 803. 1 stand in awe and

admiration of such effort, but we are subject to 4 U.S.C. 5 111

(1966) and Davis and must apply logic to the premises therein set

forth. I, therefore, believe that the adjustment provision is an

inseparable inducement to the enactment of Chapter 823, thereby

failing the second condition above.

The remainder of the statute, after eliminating the adjustment

provision is complete in itself, but only in &self. It is not

what the Legislature enacted or intended. There go conditions 3

and 4 above.

What remains after our decision is not, as stated ad nauseam

above, capable of being executed in accordance with the apparent

legislative intent. We cannot cut out a third of the legislation

where that third completely changes the effect of the whole

enactment and say that what is left is what the Legislature started

with.

Greelv is not on point. There the purpose of the Act was to

regulate lobbying. The Legislature indulged in overkill by, for

instance, defining the proscribed practice so a person of normal

intelligence could not figure out what he could not do. Several

sections were therefore held void; others, because the subject

matter of some of the sections was not embraced in the title of the

Initiative, contrary to Article V, Section 11, Clause 3, of the

Montana Constitution.

This Court stated:

The Initiative, while being lengthy, is basically

amendatory in nature. Its purpose was to expand

Chapter 7, Title 5, of Montana's Lobbying Act, to provide

for the disclosure of money spent to influence action of

public officials and to require elected officials to

disclose their business interests. This purpose is not

frustrated by our limitations of the Initiative. Even

after our excisions, Chapter 7, Title 5, as amended by

the Initiative is complete in itself and capable of being

executed in accordance with the intention of the people

of Montana. [Emphasis added].

Greelv, 632 P.2d at 311-12.

The legislation there considered is of a different nature than

Chapter 823, where the parts are meaningful only in internal

conjunction with each other. The whole of Chapter 823 was enacted

as a unit.

I must disagree with the view expressed that the legislative

intent is clearly expressed in section 20, Chapter 823, which is

the severability clause, and provides that if a part of the Act is

invalid, all invalid parts of the Act are severable, and valid

parts remain in effect. This is not the legislative intent that is

relevant here. In fact, it is not the legislative intent at all

that the act is severable; the intent is that if the act is

severable. .. By use of the word "ifw the Legislature recognizes

the fact that severance, or declaration of severability is a

judicial act, not legislative. If the Legislature had intended the

severed statue, it could and should and would have legislated

accordingly.

This may, as is stated and shown earlier, raise a presumption

that the Legislature would have enacted the law without its invalid

portions being incorporated. But that presumption is, I believe,

a rebuttable presumption, here rebutted. Also, the inclusion of a

severability provision is to a judicial act. Before it can be

given effect, the judicial branch must do the severing.

The relevant intent for the judiciary to look at in

considering severability is not the legislative intent to provide

for severability, but the legislative intent in enactincr the

statute, the purpose of the statute, as indicated by its

provisions. The intent to make portions severable is an interim

intention, a procedural means, not the end. This Court has stated:

The inclusion of a severability clause in the Initiative

is an indication that its drafters and the voters desired

this judicial policy [the severability rule] to be

applied to the Initiative. [Emphasis added].

Greely, 632 P.2d at 311.

Lastly, section 20, Chapter 823, reads as follows:

Severability. If a part of [this act] is invalid, all

valid parts that are severable from the invalid part

remain in effect. If a part of [this act] is invalid in

one or more of its - - -

applications, the part remains in

--

effect in all valid applications that are sev.erable from

the invalid applications. [Emphasis added].

That language, I think, is clear. That section speaks not of

physical parts of provisions. It speaks of applications of those

parts. To apply the equalization portions without the adjustment

portion is to apply t i e former portions at a divergence of 180

degrees, more or less, from the application intended by the

Legislature as the act is presently constituted. A severability

clause is an appeal to the judiciary.

It is, therefore, my opinion that the whole of Chapter 823 is

invalid and the adjustment provisions are not severable.

sitting for justice ~il'liak E. Hunt, Sr.

Justice Terry N. Trieweiler joins in the foregoing concurrence

and dissent.

Justice Fred J. Weber specially concurs and dissents as follows:

I concur with issues I and II of the majority, but dissent on

issues I11 and IV. Issue I11 asks if the District Court erred in

concluding that the retirement adjustment payment contained in

Chapter 823, 1991 Montana Laws, violates 4 U.S.C. 5 111. I do not

find such discrimination.

The majority states:

It is clear that the revenue, equalization and adjustment

provisions of Chapter 823 are related parts of a

comprehensive income tax program encompassing all pension

income,

I agree that Chapter 823 is a comprehensive income tax program;

however, this does not preclude this statute from encompassing

other issues. The majority quotes verbatim the vipertinenti'

part of

the bill's title. The first part of the title of the restructuring

plan indicates that the legislature attempted to "equalizew the

taxes on all pension benefits. Although, listed after this in

sequence, the provision indicating the legislature's intent to

provide the adjustment payment to State retirees living in Montana

is an integral part of the Act as seen by the title's wording:

.... To Provide for an Adjustment Payment to Retirees

of State, Local, and Teacher Retirement Systems Who are

Montana Residents ....

It is not necessary to rely upon the title to determine the

intent of the legislature. The chapter starts with the following

list of seven WHEREAS'S, and with the exception of the taxation of

benefits referred to in the first WHEREAS, all of the remaining

WHEREAS'S set forth an intent directly relating to the adjustment

payment and the reasons for the adjustment payment:

WHEREAS, the State of Montana desires to tax federal,

state, and private retirement benefits equally; and

WHEREAS, the State of Montana has in the past provided

its employees with a benefit of employment through its

tax system: and

WHEREAS, the Leaislature desires and encouraaes aualified

emvlovees to enter and remain in wublic service; and

WHEREAS, it is the policy of the State of Montana to

encourage public employees who become superannuated or

incapacitated to retire and, to that end, to provide

sufficient benefits to provide for retirement; and

WHEREAS, the Lesislature wishes to encouracle all retired

persons to remain within Montana tc provide a critical

mass of retired persons who use certain services and

facilities that are important to retired persons and that

may keep and perhaps entice other retired persons into

the state: and

WHEREAS, the Legislature has in the past granted

increases in retirement benefits in a manner designed to

provide relatively greater increases to those retirees

who were employed during the years of low wages and whose

benefits are relatively small; and

WHEREAS, the Leaislature therefore srants an increase in

benefits to its former public emwlovees who are residents

of the state to provide compensation to encouraqe them to

remain in Montana.

(Emphasis added.)

The above statement of intent was added because the legislature

knew that the Davis decision mandated that all pension holders must

be taxed equally. The Act does that. At the same time, the

legislature knew that such an increase in taxes on State pensions

could create a situation where many retirees would leave the State.

Acting through its legislature and governor, Montana as a sovereign

and as an employer expressed a desire to provide an incentive for

Montana retirees to remain in the State. Without subterfuge of any

type the legislature declared this intent. Unfortunately, that

openness appears to have been a basis for the majority to conclude

there was discrimination.

If the same adjustment payment provided in the Act were

provided in another act in some future year, and denominated a cost

of living, no one would even raise the discrimination argument. I

do not find a basis to condemn the adjustment merely because it is

included with the tax.

The adjustment payment is paid to State retirees who already

are receiving retirement benefits. I find nothing in the record

which demonstrates a corresponding obligation by the State of

Montana to make some sort of payment to federal retirees whose

retirement benefits are paid by the United States. I do not

understand how the payment by the State to its retirees can lead to

a *clear*'determination of discrimination, as compared to a federal

increase to federal retirees which would not be such

discrimination.

The fact that federal retirees do not get this adjustment is

not discrimination as to source. The same adjustment is not given

to private retirees either.

The basic intent of 4 U.S .C. § 111 has been lost. That intent

is that the income taxation of Montana should tax federal and State

retirement benefits at the same rates. The Act does that. An

increase in pay to encourage State retirees to remain in the state

is not discrimination as contemplated in 5 111. An incentive to

stay is not discrimination as to source. There is a recognition on

the part of the legislature that the new tax on Montana public

employee pensions might cause them to leave the State. Such a

recognition, stated up front and in the open, does not equal the

discrimination that the majority characterizes as "clear."

The fact that this adjustment payment comes from the general

fund is also of no consequence. Any other cost of living increase

for State public employees comes from the same source. This

adjustment payment is no different than any other benefit which the

State as an employer has a right to offer a group of its retirees.

The majority refers to 5 l9-2O-?l3, MCA, which provides a cost

of living increase for teachers in the Teachersi Retirement System.

The title of Chapter 658 of Montana Laws 1985 shows that only

rpcertainw

teachers within the retirees from this system would be

benefitted by the increase. I do not understand how the majority

condemns the 1991 Act because it is made applicable to *IcertainSi

retirees and yet refers to the Teachers1 Retirement Act as

nondiscriminatory where it also benefits only "certain" teacher

retirees.

In addition, the Teachers' Retirement Act uses the "general

fund" as the source of funds with which to pay teachers who retired

from the various units of the University System and other schools,

stating:

If the employer is the superintendent of public

instruction, a public institution of the state of

Montana, a unit of the Montana university system, or the

Montana state school for the deaf and blind, the

lecrislature shall a~vrovriate the emplover an adeauate

to

amount to allow ~avment the emploveris contribution.

of

(Emphasis added.)

Section 3, amended 5 19-20-605(3), MCA. With this annuity type

system, the employers' part of the cost of living increase for

"certainw retirees is paid by the State of Montana. How is that

different from the present Act?

I conclude there is no discrimination "as to source" within

the 1991 Act. As a matter of policy, Montana provides its own

retirees an "incentivem without an intention to discriminate in any

manner.

The Davis test of significant differences between the classes

is not e v ~ n reached here. One only has to determine the

significant difference between classes if discrimination has

occurred. Here, there is no agreement as to even what the

appropriate classes are. The only classes that are pertinent to 4

UCS g 111 are "state retirees" and "federal retirees." Both of

these classes are taxed equally under this Act. It is only the

segment of State retirees that receive the benefit.

While the majority merely mentions that the discrimination is

"clearw it does not go on to explain how the vfincentivewor

~vadjustmentvl discriminatory. Nor does it explain how the Davis

is

quote applies to what we have before us:

Under our precedents, "[tlhe imposition of a heavier tax

burden on [those who deal with one sovereign] than is

imposed on [those who deal with the other] must be

justified by significant differences between the two

classes. (Emphasis added.)

Davis, 489 U.S. at 815-816. The federal retirees have no heavier

"tax burdenw than do State retirees. The tax burden on both State

and federal retirees is identical. The exemption of $3,600 is

identical as are the tax rates applicable to both State and federal

retirees. The range at which the exemption begins is $30,000 for

both State and federal retirees. The only difference is that State

retirees who reside in Montana are given an "incentiv€?"to Stay

within the State that has employed them and from whom their

pensions are derived. I point out here that the wincentivew is

still subject to tax at the same rates as any amounts received by

the retirees.

The District Court determined that the adjustment was part of

a policy decision on the part of the State toward its employees.

I would affirm the court on this analysis. The State acting as an

employer has every right to act in concert with the sovereign and

the legislature to provide an incentive to retired public employees

to stay within the State that has been their home for years. This

policy decision does not constitute discrimination against the

retirees of any other sovereign or any other group of retirees. In

this case, the other sovereign's retirees are taxed identically

with those of the State sovereign. I conclude that instead of

condemning the legislature and the governor for their openness in

enacting the Act, they should be commended for the forthright way

in which this was done.

I also disagree with the conclusion that the adjustment is

severable from the Act. Both the title and the statement of intent

make it obvious that the adjustment or incentive to stay in Montana

is an integral part of this Act. The incentive, based upon the

fact that public retirees will now be receiving less money because

of the mandatory taxation, should not be divorced from the tax plan

itself. The tax plan explains why the employer State of Montana is

granting this incentive. I do not believe the intention of

granting some additional monies can be divorced from the taxation

which applies to the retiree benefits and the adjustment. As

demonstrated clearly in the WHEREAS clauses at the beginning of the

Act, the taxation and the granting of the adjustment are not

severable. The action of the majority is punitive in nature,

taxing all benefits equally while eliminating the additional

benefit awarded under the Act.

I also concur in the portion of Judge Rapkoch's concurrence

and dissent in which he concludes that the adjustment payment is

not severable from the rest of Chapter 823.

November 23, 1993

CERTIFICATE OF SERVICE

I hereby certify that the following order was sent by United States mail, prepaid, to the following

named:

Edmund F. Sheehy, Jr.

Cannon & Sheehy

P. 0.Box 5717

Helena, MT 59604

Hon. Joseph P. Mazurek, Attorney Genera!

Clay R. Smith, Solicitor

215 N. Sanders, Justice Building

Helena, MT 59620

David W. Woodgerd

Department of Revenue

Mitchell Building

Helena, MT 59620

R. Bruce McGinnis

Tax Counsel

Mitchell Building

Helena, MT 59620

Brenda Nordlund

Attorney General's Office

Justice Building

Helena. MT 59620

Leo Berry

Browning, Kaleczyc, Berry & Hoven

P. 0. Box 1697

Helena, MT 59624

ED SMITH

CLERK OF THE SUPREME COURT