HUGHES v. STATE OF OREGON

FADELEY, J., concurring in part and dissenting in part.

For decades, state government promised state and local government employees that their Public Employes' Retirement System (PERS) retirement pensions and annuities would forever be exempt from state income taxes. That tax exemption promise became a term of the employment contract between government and its workers.

The promise was embodied in statute. The statute proclaimed: "The right of a [PERS member] to a pension * * * shall be exempt from * * * all state, county and municipal taxes heretofore or hereafter imposed." ORS 237.201 (1989). The trust funds out of which the pension will be paid amounted to $12.5 billion in mid-1991. These trust funds are also covered by the promise of tax exemption by the language in ORS 237.201 extending the promise to cover "the money in the various funds created by ORS 237.271 and 237.281."

As a term of the employment contract, the promise of tax exemption for PERS retirement benefits carries with it constitutional protections. The Oregon Constitution provides:

"No * * * law impairing the obligation of contracts shall ever be passed * * *." Or Const, Art I, § 21.

The federal constitution commands:

"No State shall * * * pass any * * * Law impairing the Obligation of Contracts * * *." US Const, Art I, § 10.

Notwithstanding the promises, and the constitutional guarantees that no law impairing such promises shall ever be passed, the 1991 legislature chose to attempt to tax PERS retirement benefits by passing new statutes that removed the provisions of statute that reflected the promise of tax exemption. The effect of the 1991 legislation is to repeal the statutory promise, and do so retroactively, in order to exact state income taxes from PERS pension payments. I concur in the holding that the legislation, altering the promise with retroactive effect, violates the state constitution, Article I, section 21, and, as a consequence, that the PERS benefits accrued to retired members and those accruing to other members before the effective date of the 1991 Act "may not be taxed." I concur that, as to those members and such accrued and accruing benefits, the 1991 Act is a nullity. I concur both for the reasons set out in the lead opinion as to section 1 of Oregon Laws 1991, chapter 823, and for the reasons set out in this separate opinion.

However, I hold that section 3 of that chapter likewise violates the state contract impairment guarantee, as well as violating its federal counterpart, Article I, section 10, of the Constitution of the United States. I hold it also void, a nullity, and that any action to tax PERS pension benefits under it is impermissible. I cannot join in the majority's failure to do so. The majority agrees that the tax code exemption is "a mirror of the obligation" in the state's contract promise to never tax PERS benefits, but then it permits the legislature to use that mirror-image idea to impair the obligation. 314 Or at 32-33.

I dissent from that holding to the extent that the majority opinion upholds the constitutional validity of section 3. Retroactively repealing the tax exemption does indeed violate both the state and federal constitutions. It is not an action that may be justified or explained away by the use of mirror-based abstract analogies. I do not agree that altering the second exemption section — to accomplish the identical result that is held, as to the first exemption section, to be an unconstitutional result and a "nullity" — is constitutionally permissible. The effect — impairing the same obligation of the same contract — is the same. The state's promise to never tax PERS benefits, accepted and acted on by the public employees, is an obligation of the state's contract that is impaired identically by each section.

This case is a special proceeding created by Oregon Laws 1991, chapter 796, section 15, to test the constitutionality of imposing state taxation on retirement benefits paid to PERS retirees from a PERS trust fund, notwithstanding the state's promise to never tax such pensions. Section 15(1) describes the task as "to determine whether the taxation of retirement benefits received by retired members * * * is in violation of any constitutional provision." (Emphasis added.) Section 15(2) permits "any person interested in * * * a state income tax imposed upon amounts received from" PERS to petition this court for "review" of the legislative act, but section 15(6) limits requests for review to those filed within 60 days of the new law's effective date. Section 15(3) provides that "a person shall be considered interested * * * if the person is a retired member" of PERS. Retired persons have petitioned asserting that the 1991 legislation removing the tax exemption from their vested PERS pension payments and imposing a nine percent income tax on them is unconstitutional.

The constitutionally correct solution to the problem posed by the legislation retroactively reneging on state government's contracts follows. I begin by establishing the formation and the terms of that contract.

As of June 30, 1991, retired employees of state and local government numbering 56,160 had earned retirement benefits by long years of public service, relying on the promise of tax exemption, and they or their survivors were, by that date, receiving pensions in individually varying amounts.

The Offer. For 45 years Oregon state government promised its employees and prospective employees a permanent retirement system in which retirement benefits would always be exempt from state and local taxes. That promise was memorialized in state statute for all who chose a career of service with state or local government to see.

During those 45 years, ORS 237.201 or its predecessor statutes provided in part:

"The right of a person to a pension, an annuity or a retirement allowance, to the return of contribution, [to] the pension, annuity or retirement allowance itself, any optional benefit or death benefit, or any other right accrued or accruing * * * shall be exempt from * * * all state, county and municipal taxes."

For the last 22 of those 45 years, the state's tax exemption promise expressly referred to "all state, county and municipal taxes heretofore or hereafter imposed." ORS 237.201, as written from 1969 to 1991.

State government promised all persons who have given service as city, county, school, special district, and state employees, including police, fire fighters, teachers, and judges that their retirement income from PERS will never be subject to the state income tax.

Initially, the income tax code did not mirror the tax exemption promise. It contained no language designed to implement the promise of permanent tax exemption for PERS retirement payments. However, PERS payments were not taxed. Thereafter, Oregon Laws 1957, chapter 582, section 1, amending a relevant tax law, expressly noted the preexisting exemption in ORS 237.201 by enacting a statutory cross-reference in the income tax law to honor the exemption.

In 1969, just after Oregon voters agreed to use federal-law definitions of taxable income to establish the dollar amounts subject to state income taxation, a corollary to the promise that PERS retirement payments would always be tax exempt was placed in the Oregon income tax chapter. That 1969 provision required subtraction of PERS benefit payments from the amount of taxable income as defined by federal law, thus lowering the amount of income that was taxable under state law by the amount of the PERS payments. Or Laws 1969, ch 493, § 15. That is to say, the 1969 Legislative Assembly enacted both the "heretofore or hereafter imposed" language (Or Laws 1969, ch 640, § 13) and the language mandating subtraction "from federal taxable income" of amounts of "any payments received from [PERS] under ORS 237.001 to 237.315 which are exempt from state taxation under ORS 237.201." Compare ORS 237.201 (1969) with ORS 316.067 (1)(d) (1969). These simultaneously enacted statutes exempting PERS retirement payments from income taxation continued the state's promise of tax exemption. They dovetailed exactly with and confirmed each other in statute, for all to see, as evidence of the government's continuing contractual promises that PERS retirement benefits once earned would always be exempt from state taxation.

Other aspects of the promised retirement system are relevant to deciding the constitutional questions in this case. The amount of monthly benefits that are payable after retirement varies, depending on number of years of service in the employment of state and local government, ORS 237.147 (2), and on the final salary level attained, ORS 237.147 (1). A specific percentage multiplier for each year of service to state or local government is applied to the contributions deposited in the PERS trust fund.

The pension multiplier for most employees for each year of public service is 1.67 percent. The net effect of the 1991 tax laws is a reduction in PERS pension income after taxes of about 5 percent to 8 percent. Each general service employee is deprived, by taxation of retirement benefits, of at least the equivalent of benefits earned during three years of that person's public service. A deprivation of that magnitude is substantial and, because it results from a law passed to retroactively change a term of the state's contract with public employees, violates the obligation of the state's contract.

In light of the cases construing the protection against impairment of obligation, which will be reviewed shortly, one additional aspect of the state's contract with state and local public employees deserves mention. Retirement annuity and pension rights under the state's contract with public employees vest absolutely, as property rights of the individual employee, after five years of service. Under ORS 237.111, any employee who is a member of PERS and who has made contributions to the fund for each of five calendar years has a permanent individual account in the fund that:

"shall remain to the employee's credit in the fund * * * and there shall be paid * * * after attaining earliest retirement age, a service retirement allowance * * * which shall consist of:

"(a) An annuity * * * equivalent of the employee's

accumulated contributions and interest thereon credited to the employee;

"(b) A pension provided by the contributions of employers * * *; and

"(c) An additional life pension (nonrefund) for prior service * * *."

When those persons entered into employment with state or local government, each person accepted the state's offer. As Taylor v. Mult. Dep. Sher. Ret. Bd., 265 Or. 445, 450-51, 510 P.2d 339 (1973), states:

"Oregon has joined the ranks of those rejecting the gratuity theory of pensions and has held that contractual rights to a pension can be created between the employee and the employer. In Crawford v. Teachers' Ret Fund Ass'n, 164 Or. 77, 99 P.2d 729 (1940), we held that a teacher who had already completed the prerequisite duty entitling him to a pension had a vested contractual right thereto which could not thereafter be substantially impaired. In Adams v. Schrunk, 6 Or. App. 580, 488 P.2d 831 (1971), (rev. denied November 16, 1971), * * * [s]ubsequently, the plan was amended to deny the inclusion of such service. The Court of Appeals thus recognized, as Crawford had not, that a contractual right could be established before the completion of the service necessary to a pension. We agree with that opinion.

"* * * * *

"We conclude from the above authorities that Oregon has adopted not only the contractual concept of pensions, but, also, the concept that contractual rights can arise prior to the completion of the service necessary to a pension." (Emphasis in original.)

The state, in this proceeding, agrees that the retirement system and payment of retirement benefits are part of an existing contract. Moreover, 38 Op Att'y Gen 1356, 1365 (Or 1977) (cited by majority, 314 Or at 20-21, opines that the nature of the future payment right is a "vested property interest." As can be seen, under the contract formed by the offer and acceptance, service performed in the present earns retirement benefits to be paid only in the future, at and after retirement. The future benefit payments that one's current work and service earn are computed on the basis of the length of that service and the rate of pay for it, all by contract terms set forth in state law.

Function of the Change. Under the holding of Ragsdale v. Dept. of Rev., 312 Or. 529, 542, 823 P.2d 971 (1992); Barker v. Kansas, 503 US ___, 112 S Ct 1619, 118 L Ed 2d 243 (1992); and Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S Ct 1500, 103 L Ed 2d 891 (1989), all states are required by federal law to grant the same tax treatment to federal retirees as the state grants to its own and to local government retirees. Before those cases were decided, Oregon state government had exempted state and local public employees' pensions from the state income tax, as its contract with them required, but it had taxed federal retirees' pensions, except for a relatively small threshold amount.

The 1991 Act is an attempt to avoid loss of state revenue derived from the income tax on federal pensions by altering the apparent discrimination in taxation of federal system retirees, discrimination that formed the predicate for the holding of unconstitutionality in Davis v. Michigan Dept. of Treasury, supra. In order to continue to obtain tax revenue from retired federal employees' pensions, the 1991 Legislative Assembly enacted a statute that retroactively changed the terms of its contracts with both retired and current employees of state and local government.

The Retroactive Change. Or Laws 1991, chapter 823, section 1, amended ORS 237.201 by adding a new subsection 2 to the existing statutory tax exemption contract term. Before the 1991 law change, the exemption read:

"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." ORS 237.201 (emphasis added).

The 1991 change first numbered the pre-existing law, above, as subsection (1) and then added subsection (2), providing as follows:

"(2) Subsection (1) of this section does not apply to state personal income taxation of amounts paid under ORS 237.001 to 237.315."

Because the existing income tax code mirrored the exemption formerly provided, the tax code was also amended to make it consistent with the new subsection (2) of ORS 237.201. Oregon Laws 1991, chapter 823, section 3(d), provides for repeal from ORS 316.680 of the following language that, previously, had confirmed the tax exemption in ORS 237.201:

"The amount of any payments received from the Public Employes' Retirement Fund under ORS 237.001 to 237.315 which are exempt from state taxation under ORS 237.201."

The content of each of the two changes is identical in its effect. Before the change, PERS benefit payments were exempt from the state income tax. After each of the two changes, PERS payments would no longer be exempt; that is, under the new wording, retirement benefit payments for past services would become taxable by the state income tax.

The acts of the 1991 legislature violate at least two constitutional guarantees and may violate two or more others, not urged by the parties to this case. Failure to enforce the constitution would permit substantial harm to tens of thousands of older Oregonians.

Courts like this one can enforce constitutions. The need for that judicial function impelled the drafters of our constitution to grant courts independent and separate strength vis-a-vis other branches of government. When a court fails to enforce constitutional guarantees, the constitution becomes a dead letter and the court only a debating society.

The state constitutional prohibition against government action is plain: "No * * * law impairing the obligation of contracts shall ever be passed." Yet that was the very purpose of the 1991 Pension Taxation Act — to retroactively eliminate the tax-exemption term of the government's contract with public employees.

It is clear that the state's contract is impaired by the retroactive change in the statutory terms of the contract, in violation of the state constitutional provision as it was understood to mean when adopted.

That meaning is to be derived by looking at the meaning of the federal constitutional prohibition against state laws that impaired the obligation of contracts when the Oregon pioneers used that prohibition as the source of the similar one they placed in our state constitution. Eckles v. State of Oregon, 306 Or. 380, 390, 760 P.2d 846 (1988).

The Eckles court correctly stated the rule for interpreting Article I, section 21, of the Oregon Constitution as follows:

"[T]he framers of the Oregon Constitution intended to incorporate the substance of the federal provision, as it was then interpreted by the Supreme Court of the United States, into the Oregon Constitution * * *. Subsequent [i.e., after 1859 when Oregon adopted a contract impairment provision in our state constitution patterned on the federal provision] Supreme Court of the United States decisions, of course, do not control the interpretation of section 21, although those decisions may shed light on the early history of the federal provision, and thereby on the Oregon provision." 306 Or at 390.

Cases decided by the Supreme Court of the United States, before Oregon adopted its constitutional contract impairment prohibition, follow.

In New Jersey v. Wilson, 11 US (7 Cranch) 164, 3 L Ed 303 (1812), the New Jersey legislature transferred certain land to a "tribe of Delaware Indians" in full settlement of the tribe's claim to other land in the state. The legislative act provided that that land

"shall not hereafter be subject to any tax, any law, usage or custom to the contrary thereof, in any wise notwithstanding." 11 US (7 Cranch) at 165.

Years later, the legislature passed an act repealing that section of its former act, thereby removing from statute the tax exemption of that land. After a sale of the tribe's land to third parties, an act of the state legislature repealed the tax exemption. The Supreme Court, in an opinion by Chief Justice Marshall held that "[t]his contract is certainly impaired by a law that would annul this essential part of it." Id. at 167. The Court held that the act repealing the tax exemption "is repugnant to the constitution of the United States, inasmuch as it impairs the obligation of a contract, and is, on that account, void." Ibid.

The Supreme Court made it clear that the constitutional prohibition applied to contract terms entered into by a state itself. In an early case involving a state's contract, that court held: "When a law is in its nature a contract, when absolute rights have vested under that contract, a repeal of the law cannot divest those rights * * *." (Emphasis added.) Fletcher v. Peck, 10 US (6 Cranch) 87, 135, 3 L Ed 162, 177 (1810).

In Sturges v. Crowninshield, 17 US (4 Wheat) 122, 205-06, 4 L Ed 529, 551 (1819), Chief Justice Marshall explained the background for the federal provision protecting contracts from state laws designed to retroactively impair contract obligations:

"A general dissatisfaction with that lax system of legislation which followed the war of our revolution undoubtedly directed the mind of the convention to this subject. It is probable that laws such as those which have been stated in argument, produced the loudest complaints, were most immediately felt. The attention of the convention, therefore, was particularly directed to paper money, and to acts which enabled the debtor to discharge his debt otherwise than was stipulated in the contract. Had nothing more been intended, nothing more would have been expressed. But, in the opinion of the convention, much more remained to be done. The same mischief might be effected by other means. To restore public confidence completely, it was necessary not only to prohibit the use of particular means by which it might be effected [e.g., states printing their own paper money], but to prohibit the use of any means by which the same mischief might be produced [i.e., state laws impairing obligations of contract]. * * * The constitution therefore declares, that no state shall pass `any law impairing the obligation of contracts.'"

And in Trustees of Dartmouth College v. Woodward, 17 US (4 Wheat) 518, 643, 4 L Ed 629 (1819), Marshall's opinion for that court held that a charter granted by government, in response to which others had acted, was a "contract within the letter of the constitution, and within its spirit also."

The Supreme Court later decided Ogden v. Saunders, 25 US (12 Wheat) 213, 6 L Ed 606 (1827). In the initial opinion, filed before reargument, what constituted constitutionally protected obligations, in the context of a private contract and not that of the government, was discussed as follows:

"Again, it is insisted that if the law of the contract forms a part of it, the law itself cannot be repealed without impairing the obligation of the contract. This proposition I must be permitted to deny [in part]. It may be repealed at any time at the will of the legislature, and then it ceases to form any part of those contracts which may afterwards be entered into. The repeal is no more void than a new law would be which operates upon contracts to affect their validity, construction, or duration. Both are valid, (if the view which I take of this case be correct) as they may affect contracts afterwards formed; but neither are so, if they bear upon existing contracts; and, in the former case, in which the repeal contains no enactment, the constitution would forbid the application of the repealing law to past contracts and to those only.

"* * * [F]or it has not, and I think it cannot, for a moment, be maintained that a law which, in express terms, varies the construction of an existing contract, or which, in repealing a former law, is made to produce the same effect, does not impair the obligation of that contract." 25 US (12 Wheat) at 260-61 (emphasis added).

Chief Justice Marshall, in a separate opinion, discussed the nature of the contract obligation that could not be impaired constitutionally as follows:

"That there is an essential difference in principle between laws which act on past, and those which act on future contracts; that those of the first description can seldom be justified, while those of the last are proper subjects of ordinary legislative discretion, must be admitted." Id. at 334.

As Chief Justice Marshall said, "The thing forbidden is retroaction." Id. at 335-36 (emphasis added).

The initial holding in Ogden was that a New York state statute providing for bankruptcy, enacted before a contract of debt was entered into in that state, formed part of that contract's obligations and, thus, when the debtor took bankruptcy under the statute, that statute could not be an impairment of the "posterior" contract's obligation. The distinction on which the initial opinion in Ogden turns is between retrospective and prospective laws; either enactment of a new law or repeal of an old law that changed the validity or effect of an existing contract was a violation of the clause prohibiting impairment of contract because the enactment or repeal operated retrospectively, but not a violation when the enactment or repeal operated prospectively, on contracts formed after the law was passed only.

The final opinion held that state bankruptcy laws, although valid within the state of enactment, could not cross state lines to bind the citizens of other states without their consent. 25 US (12 Wheat) at 369. The Court continued the portion of the holding in its initial opinion that upheld state-adopted bankruptcy laws in the following words:

"That the fair and ordinary exercise of that power by the states does not necessarily involve a violation of the obligation of contracts, multo fortiori, of posterior contracts." 25 US (12 Wheat) at 369.

The majority here also appears to rely on dictum from Ogden v. Saunders, supra, that had no part to play in the actual decision initially, let alone in the different decision rendered after reargument a year later. That reliance is erroneous because the majority overlooks the unanimous view in Ogden that repeal of a law, in existence at the time a contract was formed, would unconstitutionally impair the obligation of a contract where the repeal had the effect of varying a term of the contract.

The operation of the federal impairment provision, demonstrated by the foregoing cases, was well known before Oregon adopted its constitution. During the time of territorial status preceding statehood, a decision in the supreme court of the provisional government of Oregon, June term, 1847, held an act of the territorial legislature void as in violation of the guarantee against impairing the obligation of contracts. That decision noted the understanding of the distinction of obligations that a state could not impair, as follows:

"[A] broad and well defined distinction was made between the contract and the remedy for the enforcement of that contract; and the court held that while the remedy to enforce the obligation of a contract might be modified as the wisdom of the legislature should direct, yet the constitution intended to restore and preserve public confidence completely, by establishing the great principle that the obligation of contracts should be inviolable." Knighton v. Burns, 10 Or. 549, 551 (Appendix, 1847).

In Knighton v. Burns, supra, 10 Or at 551, the Oregon Territorial Supreme Court recognized that "any deviation from the terms of a contract impaired it, and that the objection to a law, on the ground of its impairing the obligation of a contract, could never depend upon the extent of the change which the law affects in it." (Emphasis in original.) For this proposition, that court cited Green v. Biddle, 21 US (8 Wheat) 1, 5 L Ed 547 (1823) (invalidating, as an impairment of the obligation of contracts, a Kentucky statute that diminished the remedies of land owners against adverse possessors, where the diminishing statute was passed after formation of a "compact" between Virginia and Kentucky wherein those states agreed that rights in land ceded by Virginia to Kentucky should be determined by Virginia law in effect at the time of formation of the compact).

In Knighton, a debt was incurred evidenced by a note calling for payment in cash. Knighton held that a statute permitting payment in script, enacted after the debt was incurred, would violate the federal constitution by impairing the obligation of contract, if it were applied to the pre-existing note. The Knighton court commented, 10 Or at 551, that:

"the framers of the constitution acted wisely in incorporating this prohibitory clause in that instrument, and that its expounders merit the gratitude of the nation for having had the firmness to give to it such construction as affords an ample remedy for the consequences which must otherwise result from the temporary expedients of legislators."

Only one recent opinion of our court turns on interpretation of the contract clause. It holds that a statute that changes the terms of an existing contract impairs the obligations of the contract in violation of Article I, section 21. In Eckles v. State of Oregon, supra, 306 Or at 403, the court held:

"The state is not obliged by Article I, section 21, to return the funds to the IAF, but the circuit court erred in not awarding plaintiff a declaratory judgment that section four of the Transfer Act is unconstitutional insofar as it affects employers with SAIF insurance contracts that were in existence on or before the date of the enactment of the Transfer Act." (Emphasis added.)

The Eckles majority held that another section of the Transfer Act legislation in question in that case, section 2, merely directing the state treasurer to transfer funds from the IAF account to the state's general fund but not purporting to change any law, either retroactively or prospectively, did not offend the impairment clause.

The majority of the court in Eckles distinguished the section found unconstitutional from the section not so found, as follows:

"Unlike section four of the Act, however, section two does not alter retroactively the terms of that contract." 306 Or at 402 (emphasis added).

Adding to the significance of the distinction between laws acting retroactively on existing contracts and those acting prospectively on future contracts, the Eckles majority also explained that a new law that "alter[s] retroactively the terms of that contract," (i.e., terms of "contracts that were in existence before the effective date of the enactment") is "unconstitutional insofar as it affects" those terms. 306 Or at 402-03.

That description exactly fits each of the two 1991 changes in tax exemption law. Each affected the tax exemption of pensions that applied to each employee's vested retirement contract. Therefore, the ground of distinction employed in Eckles, to explain why one section of the 1982 Transfer Act violated the constitution while another section did not, is not available in the present case because sections 1 and 3 each have the identical retroactive effect of taxing benefit payments, when the right to receive the payments had vested and accrued, on account of services that were performed during a time when the statutory contract provided that the benefits were to be exempt from taxes. See United States Trust Co. v. New Jersey, 431 U.S. 1, 18-19, 97 S Ct 1505, 52 L Ed 2d 92 (1977) (holding unconstitutional, under the federal constitution's impairment clause, state legislative repeal in 1974 of a statutory covenant enacted in 1962 on the basis of which loans had been made to the state between 1962 and 1974); King v. Dedham Bank, 15 Mass. 447, 454 (1819) (holding that once a contract is formed, a court "cannot give it a different construction in consequence of the statute which was afterwards passed"). Once the employment contract was entered into containing the tax exempt retirement benefits term, the constitution of the state placed it beyond legislative control.

In this case, section 3 of the 1991 Act, repealing the tax exemption for PERS benefit and payment rights that accrued before that Act became effective, does alter retroactively the terms of the contract with public employees. The following chart illustrates that the Eckles distinction concerning the 1982 Transfer Act does not apply to the 1991 Pension Taxation Act.

1982 Transfer Act 1991 Pension Taxation Act — --------------- -------------------------

Section 4: Amended Section 1: repeals state retroactively a statute income tax exemption for controlling expenditure of PERS benefits. SAIF "surplus" funds.

Section 2: Directed Section 3: repeals state Treasurer to transfer income tax exemption (by dollars from SAIF account subtraction from taxable to state general fund income) of PERS benefits. account.

The present case is clearly distinguishable from the part of Eckles that held that one section of the 1982 Act there considered did not violate Article I, section 21. Differences include:

1. In Eckles, no term of contract provided that a dividend would ever be declared, let alone one providing a dividend in any certain amount or providing any method to ascertain an amount of any future dividend. In the present case, a retired member receives a fixed minimum monthly amount, an amount already determined at the time of retirement.

2. In Eckles, no statute and no other contract term in evidence required that dividends (refunds) must be paid. Whether to pay, when to pay, and the rate or amount to pay, were always optional with the Board of Directors of SAIF. Not so for retirement contracts in the present case. Here the monthly payment amount is fixed at the time of retirement, based on provisions of the pre-existing contract enacted in statute and on options selected by the retiree.

3. There was no set time in Eckles, at which the claimed contract right to a dividend payable out of surplus had become or would become certain and fixed in amount. Thus one could not say, in Eckles, that removing the $81 million worked any specific amount of retroactive change in any individual contract, as one can say in the present case as to each retiree.

These grounds of distinction are totally consistent with and supported by the several pronouncements of the Eckles court that:

(1) "Plaintiff does not point to any obligation of SAIF that SAIF has been excused from performing by virtue of the Act." 306 Or at 389 (emphasis added).

(2) "Unlike section four of the Act, however, section two does not alter retroactively the terms of that contract." Id. at 402 (emphasis added).

(3) "Insured employers may benefit from premium reductions and dividends drawn from surplus IAF funds. * * * These benefits are set in the `discretion' of SAIF. That `discretion' does not preclude a showing that insured employers were harmed by the transfer, but the existence of that harm cannot be presumed." Id. at 402 n 24.

(4) "[There is] no showing that the transfer of funds * * * caused some harm to [plaintiffs'] contractual interest." Id. at 403.

(5) "[T]he state cannot avoid a constitutional command by `balancing' it against another of the state's interests or obligations, such as protection of the `vital interests' of the people." Id. at 399.

Under the foregoing authorities, chapter 823, altering existing contract obligations, cannot stand. Or Const, Art I, § 21. Sections 1 and 3 of the 1991 Act are void as to previously accrued rights to future PERS retirement payments based on work performed before the effective date of the 1991 Act.

Federal Contracts Clause, Article 1, Section 10. In United States Trust Co. v. New Jersey, supra, a state agency borrowed money. A 1962 statutory covenant related to that borrowing transaction promised that certain reserves and revenues would not be used for any other purpose. Those reserves and revenues were pledged as security for bonds to be issued after the covenant was enacted. In 1974, the legislature repealed the statutory covenant. The Supreme Court of the United States explained that the 1974 act impaired the contract under which the money was loaned between 1962 and 1974. The state law was declared void.

The majority fails to give force to the facts or the holding in United States Trust Co. v. New Jersey, supra, that the state law diminishing security promised by the state for repayment of bond borrowing by repealing that promise violated the impairment of contracts clause. The majority relegates this case, adverse to its view, to a "see generally" cite supporting only the proposition that current federal court analysis of the federal clause differs from current Oregon analysis of the Oregon clause. 314 Or at 35 n 39. The law struck down in United States Trust Co. v. New Jersey let the state off the hook, partially, as does section 3 of the 1991 Oregon Act. Section 3 is unconstitutional under the federal constitution. I dissent from the majority's failure to so hold.

In Indiana Ex Rel. Anderson v. Brand, 303 U.S. 95, 104-05, 58 S Ct 443, 82 L Ed 685, 693 (1937), a statute of Indiana, granting a teacher tenured status after five years' employment, was referred to and made part of a teacher's contract. The statute included a term that limited the conditions under which the teacher's employment could be terminated. Thereafter, the statute was repealed and the district discharged a teacher who had served more than five years without recognizing her contract right to tenure. The Court held that repeal of the Indiana teacher tenure statute impaired the obligation of contract in violation of Article I, section 10, of the federal constitution.

The constitution's force — prohibiting a state from passing a law impairing the obligation of contract — does not depend on the question whether state government may choose to "breach the contract" by ignoring its statutorily manifested promises to public employees. When the state must, as it must here, pass a law in order to avoid the terms of its pre-existing contract, the impairment of obligations clauses of both the state and federal constitutions are violated. In such case, it is not just a breach, but an effort to eliminate or diminish the obligation, thereby violating each constitution. Where the government is one of the contracting parties, where there is no public policy or regulatory purpose, and where the government must pass a new law in order to avoid a substantial obligation of the government's contract, stated in the law existing at the time the contract was formed, the constitutions are violated. United States Trust Co. v. New Jersey, supra. As Chief Justice Marshall said in Sturges v. Crowninshield, supra, 17 US (4 Wheat) at 206, the contract impairment clause was drafted "to prohibit the use of any means [by state government] by which the same mischief [of impairing contract obligations] might be produced."

Oregon Laws 1991, chapter 796, section 15(1), provides in part:

"If the Supreme Court determines that such taxation violates constitutional provisions, the Supreme Court may, in its discretion, fashion an appropriate remedy."

I concur that the PERS pension benefits "may not be taxed." 314 Or at 31.

To defend the constitution, I declare sections 1 and 3 of Oregon Laws 1991, chapter 823, The Retirement Taxation Act, void, invalid, and impermissible. I dissent from the majority's failure to do so as to section 3. If necessary, I would enjoin any threatened taxation in contravention of the government's promise to never tax PERS retirement payments.

PETERSON, J., dissenting.

A state legislature's most basic power is the power to enact laws. A corollary to that power, but equally important, is the power to repeal laws that it has enacted. At the heart of the power to govern is a third power, the power to levy taxes. As a general rule, one legislature cannot bind a later legislature.

The majority states that, because the tax exemption was enacted "as part and parcel of the Public Employes' Retirement Act of 1953," it follows that "former ORS 237.201 is a term of the larger PERS contract." 314 Or at 25. I disagree for these reasons:

1. In order to find that the legislature intended to permanently bargain away its power to tax, that intention must be unmistakably clear. Inclusion of a tax exemption with other statutes that create a contract is not sufficient to establish the requisite legislative intent to create a permanent tax exemption.

2. The legislature, in 1945, 1953, and 1969, did not intend to contract with PERS employees to create a permanent tax exemption.

3. Legislative action in subsequent sessions, particularly in 1971, shows that the legislature did not believe that the power to tax had been contracted away.

Both this court and the Supreme Court of the United States have held that a state cannot contract away its eminent domain power or its police power. See West River Bridge Co. v. Dix, 47 US (6 How) 507, 12 L Ed 535 (1848) (a state may not contract away its eminent domain); Boyd v. Alabama, 94 US (4 Otto) 645, 650, 24 L Ed 302 (1876) (a state cannot contract away its police power); Eckles v. State of Oregon, 306 Or. 380, 397-98, 760 P.2d 846 (1988) (the state cannot contract away its eminent domain power or its police power), appeal dismissed 490 U.S. 1032 (1989). The Supreme Court of the United States has not stated a similar prohibition against a state's permanently impairing its power to tax. Unquestionably, the early decisions of the Court upheld the power of states to contract away the power to tax. However, the Court has applied a strict rule of construction against finding an irrepealable tax exemption. Wisconsin Michigan Ry. Co. v. Powers, 191 U.S. 379, 24 S Ct 107, 48 L Ed 229 (1903); Covington v. Kentucky, 173 U.S. 231, 19 S Ct 83, 43 L Ed 679 (1899). No decision of the Supreme Court of the United States in the last 100 years has upheld an irrepealable tax exemption.

Precedents of this court and the Supreme Court of the United States suggest this strict rule of construction concerning irrevocable tax exemptions: When a tax exemption is included with other legislation that does create a contract, the intention to create an irrevocable tax exemption must be so clearly and unambiguously shown that there can be no doubt about the legislature's intention.

In Eckles v. State of Oregon, supra, 306 Or at 390, this court concluded that Article I, section 21, of the Oregon Constitution, applied to contracts made by the state as well as to contracts between private parties. In reaching that conclusion, the court noted that Article I, section 21, had its origins in the federal Contract Clause, Article I, section 10, clause 1, of the United States Constitution, and that the federal Contract Clause had been interpreted to encompass state contracts prior to the adoption of the Oregon Constitution in 1859. Id. at 389-90. The significance of that conclusion is that the Oregon Contract Clause may prevent a later legislature from amending or repealing earlier legislation if that legislation is in the nature of a contract. See Fletcher v. Peck, 10 US (6 Cranch) 87, 135, 3 L Ed 162 (1810) ("When, then, a law is in its nature a contract, a repeal of the law cannot divest those rights").

Because a determination that the legislature intended to contract away the power of future legislatures and of the people to legislate concerning a particular issue results in a diminution of sovereign power, this court is unwilling to find an intent to create a contract absent an unambiguous expression of intent to do so from the legislature. Eckles v. State of Oregon, supra, 306 Or at 397. In Eckles, the plaintiffs claimed that a 1982 law authorizing the transfer of money from the Industrial Accident Fund (IAF) to the General Fund violated Article I, section 21, of the Oregon Constitution, because the law creating the IAF contractually obligated the state not to assert any proprietary interest in the IAF. In determining whether the legislative act creating the IAF was a contract, the court stated this rule of construction:

"[A] state contract will not be inferred from legislation that does not unambiguously express an intention to create a contract. [Citing cases.] Although the rule is concerned with the existence of a contractual agreement, rather than with the extent of the obligation created by an agreement, the effect of the rule is to eliminate the state's contractual obligation whenever there is doubt concerning the agreement." Id. at 397 (emphasis added).

Eckles stated the general rule — a state contract will not be inferred from legislation that does not unambiguously express an intention to create a contract — and then listed other special rules concerning state contracts inferred from legislation. Eckles v. State of Oregon, supra, 306 Or at 397-99. Those special rules include the rules that the state's power of eminent domain is not limited by the Contract Clause and that the state may not contract away its "police power." Id. at 397-98. Eckles also suggested that there may be other special rules within the language and history of Article I, section 21. Id. at 399. Another such special rule is that, because the power of a government to tax is at the core of governmental power, legislative intent to relinquish the power to tax must be so clearly and unambiguously expressed as to leave no room for doubt.

As early as 1893, this court, in dictum, stated that the better rule may be that "the legislature has no right to bargain away the taxing power of the state so as to place it beyond the control of succeeding legislatures." Hogg v. McKay, 23 Or. 339, 341, 31 P. 779 (1893) (emphasis added). Five years later, in Ladd v. City of Portland, 32 Or. 271, 275, 51 P. 654 (1898), which concerned the power of a city to tax for street improvements, the court stated that the power to tax "is `never presumed to be relinquished unless the intention to relinquish is declared in clear and unequivocal terms.'" (quoting from Philadelphia, Wilmington and Baltimore Railroad Co. v. Maryland, 51 US (10 How) 376, 393, 13 L Ed 461 (1850)). The Supreme Court of the United States has long applied a rule of strict construction against irrepealable tax exemptions; a legislature's intent to contract away its taxing power must be free from all doubt. In Providence Bank v. Billings, 29 US (4 Pet) 514, 561, 7 L Ed 939 (1830), Chief Justice Marshall stated:

"That the taxing power is of vital importance; that it is essential to the existence of government; are truths which it cannot be necessary to re-affirm. They are acknowledged and asserted by all. It would seem, that the relinquishment of such a power is never to be presumed. We will not say, that a state may not relinquish it; that a consideration sufficiently valuable to induce a partial release of it, may not exist: but as the whole community is interested in retaining it undiminished; that community has a right to insist, that its abandonment ought not to be presumed, in a case in which the deliberate purpose of the state to abandon it does not appear."

In the Court's December 1850 term, it reiterated that "the taxing power of a State is never presumed to be relinquished unless the intention to relinquish is declared in clear and unambiguous terms." Philadelphia, Wilmington and Baltimore Railroad Co. v. Maryland, supra, 51 US (10 How) at 393, quoted with approval in Ladd v. City of Portland, supra, 32 Or at 275; see also Vicksburg, Shreveport and Pacific Railroad Co. v. Dennis, 116 U.S. 665, 668, 6 S Ct 625, 29 L Ed 770 (1886) (noting that the quoted "rule has been strictly upheld and constantly reaffirmed in every variety of expression").

Concerning the type of showing that must be made to establish an irrepealable tax exemption, the Supreme Court of the United States in Covington v. Kentucky, supra, 173 US at 239, a case involving the federal Contract Clause, stated:

"Before a statute — particularly one relating to taxation — should be held to be irrepealable, or not subject to amendment, an intent not to repeal or amend must be so directly and unmistakably expressed as to leave no room for doubt; otherwise, the intent is not plainly expressed. It is not so expressed when the existence of the intent arises only from inference or conjecture."

Given the similarity of the Oregon and federal Contract Clauses, Covington is persuasive authority for the proposition that only the most explicit language will suffice to create an irrevocable statutory tax exemption. And Eckles v. State of Oregon, supra, 306 Or at 390-91, 397, which enunciates essentially the same standard, is binding authority.

I do not dispute that the state has the power to contract away its power to tax. The question is what is required for the state to create a permanent contractual tax exemption. The answer to that question is that the legislation must evidence more than a clear and unambiguous general intent to create a contract; a specific intent to create a permanent tax exemption as a term of the contract must be shown. The intent must be so clearly and unambiguously expressed as to leave no room for doubt that the legislature intended to contract away the taxing power, one of the core legislative powers reserved to the people and future legislatures by Article IV, section 1, of the Oregon Constitution. Consistent with Eckles, this strict rule against finding irrepealable tax exemptions is a special rule limiting the application of the Contract Clause in a manner consonant with the language and history of Article I, section 21.

In deciding whether Oregon Laws 1991, chapter 823, impairs the obligation of a contract, the court first must determine whether ORS 237.201, prior to the 1991 amendment, was a term of a contract between the state and PERS employees. The question is whether the legislature, in 1945, 1953, or 1969, intended to bind itself and future legislatures and the voters, by a statutory contract, to permanently exempt retirement income of all current and former state and local public employees from state income tax, effectively relinquishing its ability to exercise this core legislative authority.

In 1945, the legislature enacted the Public Employes' Retirement Act (1945 Act), Or Laws 1945, ch 401, the precursor to the present PERS laws. Section 23 of the 1945 Act 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 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." Or Laws 1945, ch 401, § 23.

Section 23 describes four attributes of the retirement benefits provided by the 1945 Act: (1) they "shall be exempt from all state, county, and municipal taxes"; (2) they "shall not be subject to execution, garnishment, attachment, or any other process"; (3) they "shall not be subject to * * * the operation of any bankruptcy or insolvency law"; and (4) they "shall be unassignable."

Although the use of the mandatory "shall" is indicative of the strength of the legislature's intent regarding those four attributes, the language of section 23, the exemption provision, does not clearly and unambiguously express an intention not to allow repeal or amendment. Certainly, it is plausible to infer that the tax exemption is like other financial benefits that petitioners derive from their state employment contracts. But the conclusion that the tax exemption is contractual must rest upon more than that. The legislature's intention must be so clear and unambiguous as to leave no room for doubt. The placement of the exemption in section 23 among other provisions that have little or nothing to do with monetary benefits that might be the subject of a contract suggests that the exemption was not intended to be contractual.

There is no legislative history available concerning the 1945 legislature's intention. At the time, the prevailing view of government employee pensions was that pensions were gratuities given through the beneficence of the sovereign and could be modified or eliminated at the will of the sovereign. See Crawford v. Teachers' Ret. Fund Ass'n, 164 Or. 77, 87, 88, 99 P.2d 729 (1940) ("There is a sound distinction between a `pension' and an `annuity'"; the former "is always subject to legislative control"); see also Annot, 52 ALR2d 437 (1957) (noting that, in 1957, the prevailing view was that both contributory and noncontributory public pensions were subject to legislative modification or elimination, but also noting that some states were beginning to recognize vested pension rights in contributory plans upon completion of the plan's requirements). Even though pension benefits now are considered to be contractual, it is certainly not clear or unambiguous from the language or context of the 1945 Act that the legislature intended to make the tax exemption a term of state employees' contracts.

In 1953, the legislature repealed the 1945 Act, Or Laws 1953, ch 180, §§ 2 and 18, and subsequently enacted the Public Employes' Retirement Act of 1953 (1953 Act). Or Laws 1953, ch 200. In creating the present PERS scheme, the legislature included in the 1953 Act a provision with language identical to section 23 of the 1945 Act. Or Laws 1953, ch 200, § 22. Section 22 of the 1953 Act retained the same four attributes for benefits provided in the 1945 Act. The next inquiry is whether the 1953 legislature, in creating the present PERS scheme, intended to contract away the state's power to repeal the tax exemption contained in section 22 of the 1953 Act.

Because the operative language of the exemption provision in the 1953 Act is identical to the language of the 1945 Act — which did not express a clear and unambiguous intention to create a contract for a tax exemption — the existence of such an intent must be found elsewhere, if at all. The majority relies on an opinion of the Attorney General issued prior to the repeal of the 1945 Act. The majority notes that the 1953 legislature enacted ORS 237.950 to 237.980, which preserved the accrued benefits of state employees, in the process of liquidating the pre-1953 retirement system. It concludes that the legislature believed that the pre-1953 system contained enforceable contract rights and thus protected those rights, including the right to a tax exemption. From that premise, the majority decides that the 1953 legislature intended the tax exemption to continue as a contract right when it re-enacted that system without substantial modification. 314 Or at 18-20.

There is no question but that the policy of the state in 1953, as it was in 1945, was that the retirement benefits of state employees should be exempt from state and local taxation. But that is largely irrelevant to the issue before us. The question is whether the 1953 legislature without doubt intended to contract away the power of future legislatures to declare a different taxation policy that might be more appropriate in different circumstances. Even assuming that the 1953 legislature was aware of the Attorney General's opinion and on that basis intended generally that PERS benefits would be contractual rather than gratuitous, there is no basis for concluding that the legislature clearly and unambiguously intended to include the income tax exemption for those benefits as part of that contract, not to be modified by any subsequent legislature. The Attorney General's opinion makes no reference to the tax-exempt status of the pre-1953 benefits. The legislative preservation of the tax exempt status of pre-1953 benefits and provision for a continued tax exemption for PERS benefits is understandable given the then-prevailing policy that state employees' retirement benefits should be free from state and local taxation. The "shall be exempt" language of section 22 of the 1953 Act, ORS 237.201, is nothing more than a shorthand way of saying "are exempt while this statute remains in effect."

There is much doubt concerning the legislature's intent to create, in 1945 or 1953, a permanent tax exemption. There is no doubt as to the legislature's intent in 1969 when it further amended ORS 237.201. Or Laws 1969, ch 640, § 13. After the 1969 amendment, the statute 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." ORS 237.201 (1969) (added language emphasized).

Although the additional language might be read as promising a permanent tax exemption, the events and legislative history of the 1969 amendment contradict such a conclusion and strongly support the conclusion that the legislature was merely trying to make it clear that the exemption was not to be amended sub silentio.

The 1969 legislative history shows that the language added to ORS 237.201 was intended to prevent courts from interpreting tax statutes enacted between 1953 and 1969 and thereafter as impliedly repealing the earlier enacted PERS tax exemption and thereby subjecting otherwise exempt benefits to their provisions. Rather than evidencing an intent to contract away the state's taxing power, the 1969 amendment is more appropriately interpreted as clarifying the scope of the statutory income tax exemption. There is nothing in the legislative history to suggest that the legislature intended to grant a virtually permanent tax exemption to all PERS employees and retirees.

The legislative history shows that the 1969 amendment at issue stemmed from a recent circuit court decision holding that PERS retirement benefits were subject to state inheritance tax because the state inheritance tax law had been enacted subsequent in time to the retirement law. Max Manchester, the executive secretary of the Public Employees' Retirement Board, sent legislative counsel a list of proposed changes. Number 5 on the list states:

"ORS 237.201 says retirement benefits not subject to state tax. Circuit court has said retirement benefits subject to state inheritance tax because inheritance tax is later than retirement law. Make clear that retirement benefits exempt from all state and local taxes, not dependent upon when statutes enacted."

In order to make clear that retirement benefits would be exempt from all state and local taxes, even though the tax law was enacted later, the legislature amended ORS 237.201.

Far from suggesting that the 1969 amendment was intended to create a contractual obligation that would bar any future imposition of income tax, the 1969 amendments were intended only to clarify that the ORS 237.201 exemption was not limited to taxes that existed at the time it was enacted. If anything, the 1969 legislation confirms continuing legislative power to control the taxability of PERS retirement benefits, not a legislative decision irrevocably to relinquish such power.

3. Legislative action in subsequent sessions, particularly in 1971, shows that the legislature did not believe that the power to tax had been contracted away.

Two years after the 1969 amendment, the legislature amended ORS 237.201 to make PERS retirement benefits subject to the inheritance tax. Or Laws 1971, ch 732, § 3. Eight years after that, the 1979 legislature amended ORS 237.201 to make PERS retirement benefits subject to "executions or other process arising out of a support obligation or an order entered pursuant to ORS 23.777 to 23.783." Or Laws 1979, ch 85, § 2. And, in 1985, the legislature amended ORS 237.201 to make PERS benefits subject to additional support obligations. Or Laws 1985, ch 671, § 9. Concededly, actions of the legislature in 1971, 1979, or 1985 do not determine what was the 1969 legislature's intent. Nonetheless, these changes — particularly the 1971 changes — are relevant, for they show that subsequent legislatures viewed ORS 237.201 as described above — subject to amendment to enlarge or restrict the tax liability or other attributes of PERS benefits as the legislature decided was appropriate.

In sum, after examining the 1945, 1953, and 1969 legislation concerning the tax exemption for PERS benefits, I conclude that none of that legislation evidences a clear and unambiguous intent to contract away the sovereign power of taxation of future legislatures and the voters. I do not deny that the language added in 1969 evidences a strong legislative intent regarding the exemption at that time. However, that is not the issue. Rather, the issue is whether the legislature ever has clearly and unambiguously expressed an intention to create a permanent tax exemption. With but one obvious substitution, the conclusion of the Supreme Court of the United States in Covington v. Kentucky, supra, — interpreting a statute that provided that certain property "shall be and remain, forever exempt from state, county, and city tax," 173 US at 233 — is equally apropos here:

"The utmost that can be said is that it may be inferred from the terms in which the exemption was declared, that the legislature had no purpose at the time the act of [1945, 1953, or 1969] was passed to withdraw the exemption from taxation; not that the power reserved would never be exerted, so far as taxation was concerned, if in the judgment of the legislature the public interests required that to be done." Id. at 239.

I am not persuaded by the majority's argument that, because PERS creates contractual rights and the tax exemption is within the PERS statutes, the exemption necessarily is a term of the state's contracts with its employees. Granted, there is some resonance to that argument, given that the tax exemption has economic value to state employees, like other provisions setting the amount and duration of PERS benefits. Nonetheless, given the heightened standard for finding a contractual tax exemption, the mere placement of the tax exemption in a law that creates other contractual rights is not sufficient evidence of the necessary intent. Taken to its logical conclusion, the majority's approach would require the legislature to disavow affirmatively any intent to create a contractual right to a tax exemption when it included the exemption within the PERS law. Today, the PERS law, ORS 237.001 to 237.315, fills more than 58 pages in the Oregon Revised Statutes. It has been amended at every regular legislative session since 1945. Given the majority opinion, what must future legislatures do to make it clear that any (or some) changes are not intended to be contractual?

The 19th century decisions of the Supreme Court of the United States involving tax exemptions granted in corporate charters are not to the contrary. In the early part of the 19th century, the Court held that the issuance of a charter by a state legislature created a contract between the state and the entity availing itself of the charter. Trustees of Dartmouth College v. Woodward, 17 US (4 Wheat) 518, 4 L Ed 629 (1819). The required clear and unambiguous intention was easily shown. In those days, a charter was a contract with the sovereign. The tax exemption was indisputably a part of the contract. In many cases it was the pith and core of the contract. Therefore, withdrawing the tax exemption impaired the contract. See The Piqua Branch of the State Bank of Ohio v. Knoop, 57 US (16 How) 369, 14 L Ed 977 (1853) (tax exemption granted in legislation providing for corporate charter for banks not repealable); Gordon v. The Appeal Tax Court, 44 US (3 How) 133, 11 L Ed 529 (1845) (same).

The legislation here is not sufficiently like a corporate charter to justify the same rule of construction. Perhaps the most significant distinction between charters and the PERS scheme is the formality of the contract at issue. A charter was an integrated contract between the state and the entities choosing to avail themselves of the benefits and to assume the obligations of the charter legislation. The formal assent required for incorporation under a charter established the four corners of the contract between the state and the corporation.

The contractual nature of the accrual of public retirement benefits was anything but clear when the legislature enacted the 1945 Act. That our precedents indicate that public pensions are now considered to be contractual does not eliminate the lack of clarity in the law concerning public pensions at the time of the 1945 and 1953 legislation. Given that lack of clarity and the lack of formality of the employment contract, there is no justification for treating either the 1945 or 1953 legislature's presumed general intent to contract with employees regarding the accrual of PERS benefits also as an intent to contract with employees for a permanent tax exemption merely because the exemption was enacted as part of the legislation creating the retirement system.

Finally, although I have found no Oregon precedent directly on point factually, a 1979 decision of the Supreme Court of Ohio, Herrick v. Lindley, 59 Ohio St.2d 22, 391 N.E.2d 729 (1979), is apposite. Ohio had adopted a PERS system similar to Oregon's and had also adopted, as part of the same scheme, a provision virtually identical to the pre-1991 version of ORS 237.201 that exempted PERS benefits from Ohio state income tax. The Ohio legislature withdrew the income tax exemption for PERS benefits. The Ohio Supreme Court rejected the retired employees' claim that the statute created "a vested right in [the tax] exemption" that could not later be changed. 391 N.E.2d at 731. The court held that, although the right to PERS benefits vested, the right to a tax exemption did not.

"When a legislative body grants a vested right to exemption from taxation, it partially relinquishes its ability to deal with changing fiscal conditions in the future. The power to tax being a fundamental governmental power, its impairment should not be based upon a debatable construction of statutory language. To the contrary, every reasonable doubt should be resolved against such an impairment.

"Applying this standard to R.C. 145.561 and 3307.711, we hold that it was not the intent of the General Assembly to grant appellees a vested right to receive their pensions exempt from state taxation. It is reasonable to assume that if such had been the desire of the legislative body, it could have provided for the vesting of the tax exemptions by appropriate language in these sections." Id. at 733 (citations omitted).

If the Oregon legislature had intended to create a contractual right to a tax exemption, it would have expressed its intent clearly and unambiguously so as to leave no room for doubt. The wording might well be similar to that used by the 1929 legislature in enacting ORS 656.634.

In sum, the dispositive question is whether the 1945, 1953, or 1969 legislature intended to prevent future legislatures and/or the voters from subjecting PERS benefits to taxation. As stated, the express language of the statute is crystal clear, insofar as the income tax exemption itself is concerned. But it is anything but clear that the legislature intended to bind the hands of future legislatures in such a substantial way. A conclusion that the state, by contract, has promised a timeless tax exemption for any class of citizens or property erodes in a serious way the principle that generally "[a] legislature cannot limit the power of amendment of a subsequent legislature, either as to the extent or manner of its exercise." 1A Sands, Sutherland Statutory Construction 107, § 22.07 (4th ed 1972). Further, such a conclusion would thwart, in part, the reserved right of the people to initiate legislation under Article IV, section 1(2), of the Oregon Constitution.

I would hold that the legislature did not clearly and unambiguously express an intention to contract away its power to subject PERS benefits to state income taxes. Because there was no contract for the tax exemption, the 1991 legislature's repeal of the tax exemption did not breach a state contract or impair an obligation of contract in violation of either the Oregon or federal Contract Clause. Further, because retired state employees had no contractual right to the tax exemption, the repeal of that exemption could not result in a taking that would require just compensation under either the state or federal constitution.

I therefore dissent.