[Editor's Note: The following articles will serve to alert the members of the Montana University System to an important problem dealing with retirement benefits. The Faculty Council at Montana State University has taken action on the problem by sending the information below to MSU retirees. Through the good offices of Arthur Coffin, the Faculty Council has made the material available to us for publication to all members of the MUS. Our thanks go to the Faculty Council, Dr. Coffin, and the two authors of the statement, Henry Parsons and Harold Rose. The latter two colleagues are, we understand, willing to discuss this matter with interested parties. The Montana Professor supports and endorses this effort to correct the situation.]
The 52nd Montana Legislature in 1991, through the passage of Senate Bill 226, eliminated the long standing Montana income tax exemption benefit for many state retirees. It is this matter of the taxation of retirement benefits which we wish to address today. We will use, as an example, retirement from the Montana Teachers' Retirement System of which we are members.
We view this change as it applies to benefits accrued prior to enactment of the new legislation in 1991 as a violation of the Montana Constitution which states in Article II, Section 31, that "No ex post facto law nor any law impairing the obligation of contracts,...shall be passed by the legislature." We believe that teachers in general, and those in some school districts or in some units of the Montana University System in particular, had legally binding contracts which stated either directly or indirectly that one of the benefits of their contract was a Montana Income Tax exempt status for retirement earnings providing they remained in Montana when they retired.
In support of this position, we hold that the 1977 ruling of the Supreme Court of Montana in Sullivan v. State Teachers' Retirement Board is applicable. That ruling stated that "Retirement benefits in the State Teachers-Retirement System are a matter of contract right, and applicable statutes in effect at the time a teacher becomes a member of the Retirement System become part of the teacher's contract." A retirement benefit cited in many biennial editions of the Montana Teachers' Retirement System "Handbook of Information" prior to the 1991 edition stated that "The retirement law provides that any benefits accrued or accruing under the provisions of the retirement system are exempt from any state, county or municipal tax of the State of Montana." Reference: 19-4-706 MCA. Article XIII, Section 5, of the Montana Constitution states that "The legislature shall enact liberal homestead and exemption laws." It is cross-referenced to statutes 19-3-105, 19-4-706, and others pertaining to exemption of funds and benefits of various retirement systems and appears to be a statement of the intention of the framers of the Constitution that Montana retirement benefits were to remain exempt from Montana taxation. We would not argue, however, that such "intention" overrides Article VIII, Section 2, which states that "The power to tax shall never be surrendered, suspended or contracted away." We argue only that tax change legislation cannot be ex post facto in nature which takes away previously contracted benefits. We believe that the 1991 legislature had only the right to pass legislation which would tax retirement benefits accrued or accruing after the close of the then current contract year or employee contract term.
In summary, we believe that: (1) the 52nd Legislature was in violation of the Montana Constitution when, through the passage of Senate Bill 226, it provided an immediate effective date and a retroactive applicability date to the taxation of Montana retirement benefits, and (2) that it ignored previously established legal determinations that retirement benefits are a matter of contract right which cannot be retroactively taken away. We respectfully request that this Joint Interim Subcommittee of the 52nd Montana Legislature support our request for positive, corrective action to be taken by the 53rd Montana Legislature.
Henry L. Parsons
1007 South Grand
Bozeman, MT 59715
Phone: 587-8417
Harold C. Rose
109-B Gallatin Drive
Bozeman, MT 59715
Phone: 587-3623
Dated: 5 February 1992
[Letter sent to Montana State University retirees follows.]
30 March 1992
Dear Montana State University Retiree:
On 4 March 1992, the MSU Faculty Council passed a resolution affirming that retirement benefits accrued or accruing prior to the passage of Senate Bill 226 by the 52nd Montana Legislature were matter of contract right and are, therefore, exempt from taxation by the State of Montana. This action followed the presentation of testimony in February to the Joint Interim Subcommittee on Public Employee Retirement Systems (see accompanying document).
In addition to retirees in the Montana Teachers' Retirement System and in the Public Employees Retirement System, Senate Bill 226 will also affect those in other Montana retirement systems. Moreover, the National Association of Retired Federal Employees has brought suit against the State of Montana with respect to several parts of this legislation. Part of their suit--the contractual right to exempt retirement income on earnings accrued prior to the passage of legislation--coincides with the Faculty Council resolution.
The MSU Faculty Council wishes to advise you of these developments and to inform you that it has, in the same resolution, requested the assistance of the MSU administration, of the Office of the Commissioner of Higher Education, of the Board of Regents, and of the members of the Joint Interim Subcommittee on Public Employee Retirement Systems to rectify this faulty legislation during the 53rd Montana Legislative session.
We have been advised that individuals affected by Senate Bill 226 as it pertains to their 1991 Montana Income Tax obligations may wish to file notice that the tax on their retirement earnings is or was (if they have already sent in their returns) paid under protest. Such a statement of protest may allow for a refund, if Senate Bill 226 is declared unconstitutional as a result of the current lawsuit by the Federal retirees, or, at least, make known to state government the level of retirees' dissatisfaction with the legislation and of the need for corrective action in the next session. The enclosed copy of the protest statement suggested by the Federal Employees' organization could serve as a model for your statement.
In addition to these actions by the MSU Faculty Council on this matter, it is imperative that individual retirees contact their local district legislators and/or legislative candidates and work with them to restore the original contractual tax exempt status of retirement benefits accrued or accruing prior to the passage of Senate Bill 226. Any other suggestions you have to demonstrate solidarity within the retirees group and between them and faculty governance will be most welcome.
Sincerely,
Arthur B. Coffin
Chair, MSU Faculty Council