ORDERS:
S.C. Code Ann. § 9-1-1680 (pre-1989 amendment). In this provision, there is absolutely no
language, much less a “clear indication,” suggesting an intent by the General Assembly to
contractually tie its own hands forever on the issue of tax exemption. It merely states that an
exemption has been granted to the taxpayer on retirement payments. Petitioner cannot and does not
overcome the presumption that the “law is not intended to create private contractual or vested rights
but merely declares a policy to be pursued until the legislature shall ordain otherwise.” See Alston,
322 S.C. at 46, 471 S.E.2d at 178 (internal citations omitted).
3. Petitioner’s claim that a contract exists fails under Lloyd, which held
that the legislature could eliminate § 9-1-1680's retirement exemptions.
Petitioner is unable to establish the existence of a contractual right to the tax exemption
contained in former § 9-1-1680. Support for this position is contained in Lloyd v. Lloyd, 295 S.C.
55, 367 S.E.2d 153 (1988), where our Supreme Court found that the statutory rights under § 9-1-1680 were not irrevocable. Section 9-1-1680, in its pre-amended form, provided that the “right of
a person to...a retirement allowance” is “exempted from any State or municipal tax and exempted
from levy and sale, garnishment, attachment or any other process whatsoever....” S.C. Code Ann. §
9-1-1680 (pre-1989 amendment). Therefore, under the explicit terms of the statute, retirement
allowances were exempt from state taxes and from garnishment and attachment.
In 1985, the General Assembly enacted S.C. Code Ann. §20-7-1315 (1986), which allowed
for garnishment and attachment of “retirement benefits” to secure payment of support obligations.
See Lloyd, 295 S.C. at 57-58, 367 S.E.2d at 155. Obviously, this created a conflict between § 9-1-1680, which provided that retirement allowances were not subject to garnishment and attachment,
and § 20-7-1315, which provided that retirement benefits were subject to garnishment and
attachment. Our Supreme Court resolved the conflict by holding that §20-7-1315 superseded § 9-1-1680 insofar as the latter exempted state retirement benefits from garnishment and attachment to
satisfy court-ordered family support obligations. See Lloyd, 295 S.C. at 58, 367 S.E.2d at 155. This
decision clearly reveals that our Supreme Court holds the view that § 9-1-1680 is in the nature of a
non-contractual statutory provision that can be amended. If, as Petitioner contends, § 9-1-1680
created contractual rights that could not be altered, impaired, or amended, then the court would not
have held in Lloyd that the General Assembly was empowered to take away the exemption from
garnishment and attachment of retirement benefits. Analytically, the exemption from taxation of
retirement benefits and the exemption from garnishment and attachment of retirement benefits are
indistinguishable. Therefore, § 9-1-1680 could be and was amended by our General Assembly to
eliminate the tax exemption.
4. Petitioner’s claim that a contract exists fails under McKinney, which
holds that retirement benefits are statutory, not contractual, in nature.
Petitioner is also unable to demonstrate the existence of a contractual entitlement to a
retirement benefit under § 9-1-1680 because Supreme Court precedent holds that retirement benefits
are statutory, not contractual, in nature. See McKinney, 311 S.C. 372, 429 S.E.2d 797. In
McKinney, the plaintiff claimed that he had a contract with the Retirement System. The Supreme
Court explicitly rejected this argument, stating that “McKinney misconstrues the nature of his right
to retirement benefits: the source of his right is the statutes, not a contract.” Id. at 375, 429 S.E.2d
at 798. The Court further clarified that neither McKinney, nor the Retirement System, has “the
authority to convert this statutory right into a contractual one.” Id. The rule that retirement benefits
are statutory, not contractual, could not have been stated more clearly. Other South Carolina cases
confirm the same rule: “The right to retirement benefits is purely statutory....” Anderson v. South
Carolina Retirement System, 278 S.C. 161, 164, 293 S.E.2d 312, 314 (1982); Smith v. South
Carolina Retirement System, 336 S.C. 505, 521, 520 S.E.2d 339, 348 (Ct. App. 1999) (“Entitlement
to State retirement benefits is purely statutory.”). As such, under binding precedents of our state
Supreme Court, retirement benefits are statutory; therefore, Petitioner’s contention that he had
contractual rights to a retirement benefit is without merit.
In sum, under Supreme Court precedent, there exist four major reasons why Petitioner has
not established a contractual right to the statutory tax exemption previously contained in § 9-1-1680:
(1) under Rivers, tax laws are subject to revision, and there is no contractual right to tax laws
remaining unchanged; (2) under Alston, there exists a presumption that statutes regulating the
benefits of public employees do not create contractual rights, and there is no clear indication that the
legislature intended to bind itself contractually to a tax exemption; (3) under Lloyd, the legislature
could eliminate § 9-1-1680's retirement exemptions; and (4) under McKinney, retirement benefits
are statutory, not contractual. Because Petitioner has failed to establish the existence of a contractual
entitlement to the pre-Act 189 tax exemption, his impairment of contract claim cannot succeed.
B. No substantial impairment
Petitioner cannot establish that any purported contract has been
impaired substantially.
Assuming arguendo a contract exists, Petitioner must also, if he is to establish an impairment
of contract claim, prove that such a contract was impaired substantially. See U.S. Trust Co. v. New
Jersey, 431 U.S. 1 (1977) (in considering a contract clause claim, the court must ascertain whether
the State law has in fact operated as a substantial impairment of a contractual relationship) (cited in
Evans, 344 S.C. at 68, 543 S.E.2d at 551). A statute can be said to substantially impair a contract
when it alters the reasonable expectations of the contracting parties. Hodges v. Rainey, 341 S.C. 79,
533 S.E.2d 578 (2000). Petitioner cannot demonstrate that any alleged contractual obligation was
substantially impaired.
When the current case was on appeal earlier, our Supreme Court gave guidance on the issue
of substantial impairment. It declared that “[a]ssuming State Retirees have either a contract right
or a property interest in the full tax exemption of their retirement benefits, had the action proceeded
to trial, the circuit court could have considered whether State Retirees’ contract had been
substantially impaired or their property taken without just compensation ....” Evans, 344 S.C. at 68,
543 S.E.2d at 551 (emphasis in original). The Court further explained that “[t]estimony may have
revealed Act 189's 7% increase in retirement benefits fairly offset any financial loss to State Retirees
resulting from Act 189's deletion of the full tax exemption for state retirement benefits.” Id.
(emphasis added). Thus, as the Supreme Court indicated, a pivotal question in determining whether
Act 189 substantially impaired any alleged contract is: Has Act 189's increase of 7% in retirement
benefits “fairly offset” any financial loss to Petitioner, as a result of the elimination of the full tax
exemption for retirement benefits? See Id. Petitioner may argue that the test for substantial
impairment, as enunciated in U. S. Trust Company, is whether there was an interference with the
“legitimate expectations” of the contracting parties.
The preponderance of the evidence in this case establishes that Act 189's 7% increase in
retirement benefits has “fairly offset” any financial loss to Petitioner. R. Kent Porth, an expert in
retirement benefits and taxation,
and the only remaining expert witness in this case,
offered
deposition testimony confirming that the 7% increase in retirement benefits Petitioner received fairly
offset any financial loss to Petitioner. Taking into account the change in state law, Mr. Porth
determined that, as a result of the 7% increase in retirement benefits, Petitioner is “better off
financially” (i.e., the increase in benefits has more than offset the loss of the tax exemption). (Porth
depo., p. 11). More specifically, Mr. Porth testified that he examined Petitioner’s tax returns and
determined the amount of tax that was being applied to payments from the South
Carolina Retirement System, both federal and state. [Mr. Porth] then compared that
with what would have theoretically happened had the exemption, the total exemption
from the South Carolina income tax, stayed into account and the seven percent
benefit increase had not been granted...[I]n all years the net after tax amount of the
seven percent increase more than made up for the amount of South Carolina income
tax that was now being imposed on [Petitioner’s] retirement system payment.
(Porth depo., p. 51). Mr. Porth considered the impact of Act 189 by examining the tax effects just
on the income Petitioner received from the South Carolina Retirement System. (Id., pp. 55-56). Mr.
Porth testified that isolating the tax on the actual benefit is the appropriate way to determine how the
benefit increase compared with the change in taxation. (Id., p. 56). This analysis shows that the net
after tax amount of the 7% increase in retirement benefits more than makes up for the amount of
additional tax incurred by Petitioner, including the additional federal tax that Petitioner incurs as a
result of the 7% increase in his retirement allowance. (Id., pp. 8, 51, 55-58; Petitioner’s Ex. 2). Mr.
Porth further opined that even if all of Petitioner’s income from sources other than the South
Carolina Retirement System were considered, Petitioner’s increase in benefits would still offset the
loss of the tax exemption. (Id., pp. 52-54).
Mr. Porth’s testimony – which is the only expert testimony in the record – establishes that
the increase in retirement benefits more than offsets the additional taxes Petitioner paid. See Evans,
344 S.C. at 68, 543 S.E.2d at 551. Further, if there is an increase in the amount of monies received
by Petitioner, there can not be any interference with any legitimate expectation by Petitioner.
Accordingly, Petitioner’s impairment of contract claim fails for lack of proof of a substantial
impairment of any alleged contractual obligation with Respondent. Although Petitioner may have
formed an “expectation” that he was entitled to more benefits than those provided to him pursuant
to Act 189, the simple truth is that he suffered no loss and thus there is no impairment.
C. Act 189 – Reasonable and Necessary
Act 189 was reasonable and necessary, as confirmed by Ward.
In addition to proving that § 9-1-1680 gave rise to a contract and that the contract has been
substantially impaired, Petitioner must also show that the law that allegedly impaired the contract
was not “reasonable and necessary to carry out a legitimate governmental purpose.” See Alston, 322
S.C. at 44, 471 S.E.2d at 177 (quoting Citizens for Lee County v. Lee County, 308 S.C. 23, 30, 416
S.E.2d 641, 646 (1992)). When a legislative enactment is reasonable, the Court must defer to the
legislature and reject any impairment of contract claim. See Ken Moorhead Oil Co. v. Federated
Mut. Ins. Co., 323 S.C. 532, 547, 476 S.E.2d 481, 489 (1996) (finding, in an impairment of contract
case, the legislative judgment to be “entirely reasonable” and requiring the Court’s “deference”).
Petitioner cannot make a showing that Act 189 was not reasonable and necessary because the South
Carolina Supreme Court has recently held that Act 189 was enacted by the General Assembly in
order to comply with the “dictate” of the United States Supreme Court. See Ward, 356 S.C. 449, 590
S.E.2d at 32.
As the state Supreme Court recognized in Ward, “[T]he South Carolina General Assembly
enacted Act 189 to comply with the United States Supreme Court decision in Davisv. Michigan
Dept’t of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989).” Ward, 356 S.C. 449,
590 S.E.2d at 31. In Davis, the United States Supreme Court declared that states like South
Carolina, which exempted state but not federal retirement income from taxation, must provide “equal
treatment” in the taxation of state and federal retirees by either extending tax exemptions to federal
retirees or by eliminating the tax exemption for state retirees. Ward, 356 S.C. 449, 590 S.E.2d at 32.
The South Carolina Supreme Court explained that:
in enacting Act 189, the General Assembly specifically followed the dictate of Davis
by eliminating the tax exemption for both state and federal employees. In doing so,
the General Assembly was guided by the remedies suggested by the [United States]
Supreme Court. In direct response to Davis, the General Assembly amended South
Carolina’s tax statute to remove the tax exemption for state retirees. Act 189
conformed South Carolina to the requirements of the Davis decision.
Id.
Petitioner first argues that the impairment of a contractual right to a tax exemption is, as a
matter of law, neither reasonable nor necessary. South Carolina Public Service Authority v.
Summers, 282 S. C. 148, 318 S. E. 2d 113 (1984). However, this argument fails because Petitioner
has not shown any impairment to a contract. Second, Petitioner argues that our Supreme Court has
held that the standard of reasonableness and necessity of a statute passed by our General Assembly,
which impairs a contract in which the State is a party, must receive “heightened scrutiny.” Ken
Moorhead Oil Co., Inc. v. Federated Mut. Ins., 323 S.C. 532, 476 S.E.2d 481 (1996). Moorhead
provides that there must be some emergency condition or basic societal interest existing which
required the repeal of the exemption. Petitioner posits that the sole reason the General Assembly
passed the statute as written was for pecuniary reasons, which is an insufficient justification to
survive the heightened scrutiny test. U. S. Trust Co., supra at p. 26.
However, given that the General Assembly enacted Act 189 to conform South Carolina to
the mandate of the highest Court in the land, it is clear that the General Assembly’s action was
reasonable and necessary. It is clear that the Davis decision provided an option to all states. It did
not provide just one available option for our states to follow. For policy reasons, our General
Assembly decided not to offer the full tax exemption to federal and non-governmental retirees; it
instead decided to reduce the exemption to its retirees. Our state had the opportunity to comply with
the mandate in Davis by choosing one or the other option presented by the United States Supreme
Court. The choice it made was reasonable. It would be difficult to conceive of a situation where a
legislature could have a more compelling reason to enact a statute. Hence, South Carolina’s action
in passing Act 189 was “reasonable and necessary to carry out a legitimate governmental purpose.”
See Citizens for Lee County, 308 S.C. at 30, 416 S.E.2d at 646.
For the above reasons, Petitioner’s claim fails because he is unable to establish any of the
elements essential to establish a contract clause violation.
III. Takings and Due Process Claims
Petitioner cannot establish that Act 189's elimination of the full tax exemption
constituted a taking of private property without just compensation or was a
deprivation of property without due process of law.
Petitioner maintains that even if he had no contractual entitlement to the indefinite
continuation of the exemption of state retirement benefits from taxation, he nevertheless had a
property right to the retirement benefits, which could not be taken from him without just
compensation and without due process of law. The court agrees with Petitioner; he does have a
property right to retirement benefits and he receives them. However, Petitioner has no property right
to receive those retirement benefits tax exempt.
To maintain either a takings or a due process claim under the Fifth and Fourteenth
Amendments of the United States Constitution and ArticleI, §13 of the South Carolina Constitution,
Petitioner must first establish that he had a property right – a legitimate claim of entitlement under
state law. See Board of Regents v. Roth, 408 U.S. 564 (1972); Mibbs, Inc.v. South Carolina Dep’t
of Revenue, 337 S.C. 601, 524 S.E.2d 626 (1999). Petitioner maintains that he had such a property
right in the full exemption that § 9-1-1680 provided prior to its amendment by Act 189. He is
mistaken.
A property right exists when a person has a “legitimate claim of entitlement” to the right
arising from such sources as state statutes, local ordinances, and employment contracts. Board of
Regents v. Roth, 408 U.S. 564, 577 (1972) (establishing the test for determining what constitutes
a property interest protected by the Due Process Clause); Bunting v. City of Columbia, 639 F. 2d
1090 (4th Cir. 1981) (citing Roth). The person must have more than an abstract need or desire for
it; there must be more than a unilateral expectation of it. Roth, 408 U.S. at 577; Hamilton v. Board
of Trustees of Oconee County School Dist., 282 S.C. 519, 319 S.E.2d 717 (Ct. App. 1984).
Property interests are created and their dimensions are defined by existing rules or
understandings that stem from an independent source such as state law–rules or understandings that
secure certain benefits and that support claims of entitlement to those benefits. Roth, 408 U. S. at
577. Here, Petitioner’s right is created by a state statute.
As to the pre-Davis years, Petitioner had no property right in the tax exemption in those years
if the exemption is a “tax law” because both the South Carolina Supreme Court and the United
States Supreme Court have held that tax legislation does not give rise to any vested right that the
legislation will remain unchanged. Rivers, 327 S.C. at 275, 490 S.E.2d at 263 (“[T]axpayers have
no vested interest in tax laws remaining unchanged ....”); United States v. Carlton, 512 U.S. 26, 33
(1994) (“Tax legislation is not a promise ....”). Carlton further declared: “An entirely prospective
change in the law may disturb the relied-upon expectations of individuals, but such a change would
not be deemed therefore to be violative of due process.” Carlton, 512 U.S. at 33-34. Petitioner
opines that his “property right” emanates from Retirement System provisions. He argues that the
system provides that state employees will receive a retirement allowance or monthly benefits after
working a certain number years and after they have vested in the system. He states that they have
the expectation that they will receive certain specific benefits when they retire.
In this instance, the General Assembly amended § 9-1-1680 so that, effective for the tax year
1989 and thereafter, state retirees’ retirement benefits would no longer be fully exempt from
taxation, but would be subject to the same limited exemption available to other retirees, including
federal retirees. This prospective change in the exemption, available for state retirement benefits,
did not deprive Petitioner of a “property” right within the meaning of the Fifth and Fourteenth
Amendments of the United States Constitution because he had no legitimate claim of entitlement
to a continuation of the exemption. Carlton, 512 U.S. at 33-34; Rivers, 327 S.C. at 275, 490 S.E.2d
at 263. As the court explained in Keating v. State of Rhode Island, 785 F. Supp. 1094 (D.R.I. 1992):
Tax exemptions are a matter of legislative grace, subject to repeal at any time. A tax
exemption “vests” only one year at a time, when the taxpayer takes advantage of it.
The following year it may be gone. Pension rights vest more permanently, but the
pension income’s tax exempt status can change from year to year.
Keating, 785 F. Supp. at 1100; accord Spradling v. Colorado Dep't of Revenue, 870 P.2d 521 (Colo.
App. 1993); Herrick v. Lindley, 391 N.E.2d 729 (Ohio 1979); Pierce v. State, 910 P.2d 288 (N.M.
1995) (all holding that public employees have no vested right to statutory tax exemption applicable
to retirement benefits); see also Wright v. Town Board of Ticonderoga, 800 F. Supp. 1072
(N.D.N.Y. 1992) (since taxpayer had no right to the continuation of a favorable tax exemption, he
could not maintain a constitutional due process claim based on the withdrawal of that exemption).
Under the retirement system, once a state employee is vested, at retirement he has the expectation
and the right to receive a retirement benefit; however, he does not have a right to nor any
expectation of a tax exemption. Exemptions are subject to change at the will of the legislature and
a state employee, including Petitioner, has no property interest in such.
Petitioner believes that the elimination of this exemption equates to the taking of a vested
property right without just compensation and in violation of due process. U. S. Const. amend. XIV,
§ 1; S.C. Const. art. I, § 13, art. I, § 3. A determination of a takings clause violation requires a
factual inquiry with three factors. They are: (1) the economic impact of the legislation; (2) its
interference with reasonable investment-backed expectations; and (3) the character of the
governmental action. See Mibbs v. South Carolina Dep’t of Revenue, 337 S.C. 601, 606, 524 S.E.2d
626, 628 (1999) (citing Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)). In this case there is no
evidence in the record of any economic impact to the State of South Carolina resulting from the
legislation, nor is there any evidence that there is any interference with any reasonable investment-backed expectations of Petitioner. There is no record of any taking of anything from Petitioner
simply because he did not have any property interest in the exemption.
Further, Petitioner has not shown any deprivation of property without due process of law
resulting from the state’s repeal of the exemption. In fact, the testimony by the expert witness is that
the 7% increase in retirement benefits that Petitioner received as part and parcel of the arrangement
by the State of South Carolina in 1989 fairly offsets any financial loss he might have as a result of
the loss of the exemption. Petitioner begs the issue by asserting that there is a difference in net
income over four years in the amount of $ 190.00 per year (roughly $16.00 monthly). Even if such
is true, which is doubtful, such a figure is unrealistic to sustain a claim for deprivation of property
or an impairment to property. There is simply no violation of any due process rights of Petitioner
or of any substantial impairment or taking of property arising from the repeal of the tax exemption.
Our South Carolina Supreme Court has recognized that “even though taxes ... indisputably
‘take’ money from individuals or businesses, assessments of that kind are not treated as per se
takings under the Fifth Amendment.” Rivers, 327 S.C. at 275, 490 S.E.2d at 263 (quoting Branch
v. United States, 69 F.3d 1571, 1576 (Fed. Cir. 1995)). Rivers also cited the United States Supreme
Court decision A. Magnano v. Hamilton, 292 U.S. 40 (1934) for the proposition that the taxing
power of state or federal governments is not considered a taking under the Fifth or Fourteenth
Amendment. Rivers, 327 S.C. at 276, 490 S.E.2d at 263. Therefore, on this basis, Petitioner’s
takings claim fails as a matter of law.
Another defect in Petitioner’s takings and due process claims is that they are simply another
version (portrayed in other clothing) of his impairment of contract claim. Where, as here, a public
employee or retiree has no contractual right to a tax exemption, his takings and due process claims
based on the withdrawal of that same tax exemption necessarily fail. Nat’l Educ’n Ass’n - Rhode
Island v. Retirement Bd. of the Rhode Island Employees’ Ret. Sys., 172 F.3d 22, 30 (1st Cir. 1999).
As the First Circuit explained:
This position is virtually compelled by Supreme Court cases that, after finding that
an expected statutory benefit did not constitute a contract right, rejected the claim to
payment. It would make nonsense of such rulings – and the clear intent requirement
[for finding statutory contracts] – to conclude that an expectancy insufficient to
constitute an enforceable contract against the state could simply be renamed
“property” and enforced as a promise through the back door under the Takings
Clause.
Nat'l Educ’n Ass’n, 172 F.3d at 30 (internal citations omitted).
Finally, to the extent that Petitioner is asserting a procedural, as opposed to a substantive, due
process claim, even if he could establish a property interest, his claim would still fail because South
Carolina’s political process has provided due process to Petitioner. “When a legislature passes a law
which affects a general class of persons, the political process provides all the process that is due.”
Barefoot v. City of Wilmington, 306 F.3d 113, 124 (4th Cir. 2002) (discussing Bi-Metallic
Investment Co. v. State Board of Equalization, 239 U.S. 441 (1915)). In Bi-Metallic Investment
Company, the United States Supreme Court rejected a due process challenge to Denver’s increase
of the valuation of all taxable property by 40 percent, despite the fact that petitioners had no
opportunity to be heard on the issue. Writing for the Court, Justice Holmes declared:
The Constitution does not require all public acts to be done in town meeting or an
assembly of the whole. General statutes within the state power are passed that affect
the person or property of individuals, sometimes to the point of ruin, without giving
them a chance to be heard. Their rights are protected in the only way that they can
be in a complex society, by their power, immediate or remote, over those who make
the rule.
Bi-Metallic Investment Co., 239 U.S. at 445. In this case, Petitioner, even if he had a property
interest, was entitled to no more due process than that provided by South Carolina’s political process.
In sum, Petitioner’s takings and due process claims fail as a matter of law.
CONCLUSION
Based upon the findings, conclusions and discussion above, it is hereby ORDERED:
(1) that all claims by Petitioner are dismissed;
(2) that all claims by Petitioner are barred by the applicable statute of limitations;
(2) that Petitioner’s causes of action fail on the merits;
(3) that Petitioner’s claim for impairment of contract fails for lack of proof that a contract
exists;
(4) that Petitioner’s claim for substantial impairment to a property interest fails for lack of
proof;
(5) that Petitioner’s claim that Act 189 was not reasonable and necessary to carry out a
legitimate governmental purpose fails for lack of proof;
(6) that Petitioner’s takings and due process claims are without merit inasmuch as Petitioner
lacks a property interest in the exemption;
(7) that this action is dismissed and all relief sought by Petitioner is denied.
AND IT IS SO ORDERED.
________________________________
Marvin F. Kittrell
Chief Administrative Law Judge
April 29, 2004
Columbia, South Carolina S.C. Code Ann. § 9-1-1680 (pre-1989 amendment). In this provision, there is absolutely no
language, much less a “clear indication,” suggesting an intent by the General Assembly to
contractually tie its own hands forever on the issue of tax exemption. It merely states that an
exemption has been granted to the taxpayer on retirement payments. Petitioner cannot and does not
overcome the presumption that the “law is not intended to create private contractual or vested rights
but merely declares a policy to be pursued until the legislature shall ordain otherwise.” See Alston,
322 S.C. at 46, 471 S.E.2d at 178 (internal citations omitted).
3. Petitioner’s claim that a contract exists fails under Lloyd, which held
that the legislature could eliminate § 9-1-1680's retirement exemptions.
Petitioner is unable to establish the existence of a contractual right to the tax exemption
contained in former § 9-1-1680. Support for this position is contained in Lloyd v. Lloyd, 295 S.C.
55, 367 S.E.2d 153 (1988), where our Supreme Court found that the statutory rights under § 9-1-1680 were not irrevocable. Section 9-1-1680, in its pre-amended form, provided that the “right of
a person to...a retirement allowance” is “exempted from any State or municipal tax and exempted
from levy and sale, garnishment, attachment or any other process whatsoever....” S.C. Code Ann. §
9-1-1680 (pre-1989 amendment). Therefore, under the explicit terms of the statute, retirement
allowances were exempt from state taxes and from garnishment and attachment.
In 1985, the General Assembly enacted S.C. Code Ann. § 20-7-1315 (1986), which allowed
for garnishment and attachment of “retirement benefits” to secure payment of support obligations.
See Lloyd, 295 S.C. at 57-58, 367 S.E.2d at 155. Obviously, this created a conflict between § 9-1-1680, which provided that retirement allowances were not subject to garnishment and attachment,
and § 20-7-1315, which provided that retirement benefits were subject to garnishment and
attachment. Our Supreme Court resolved the conflict by holding that § 20-7-1315 superseded § 9-1-1680 insofar as the latter exempted state retirement benefits from garnishment and attachment to
satisfy court-ordered family support obligations. See Lloyd, 295 S.C. at 58, 367 S.E.2d at 155. This
decision clearly reveals that our Supreme Court holds the view that § 9-1-1680 is in the nature of a
non-contractual statutory provision that can be amended. If, as Petitioner contends, § 9-1-1680
created contractual rights that could not be altered, impaired, or amended, then the court would not
have held in Lloyd that the General Assembly was empowered to take away the exemption from
garnishment and attachment of retirement benefits. Analytically, the exemption from taxation of
retirement benefits and the exemption from garnishment and attachment of retirement benefits are
indistinguishable. Therefore, § 9-1-1680 could be and was amended by our General Assembly to
eliminate the tax exemption.
4. Petitioner’s claim that a contract exists fails under McKinney, which
holds that retirement benefits are statutory, not contractual, in nature.
Petitioner is also unable to demonstrate the existence of a contractual entitlement to a
retirement benefit under § 9-1-1680 because Supreme Court precedent holds that retirement benefits
are statutory, not contractual, in nature. See McKinney, 311 S.C. 372, 429 S.E.2d 797. In
McKinney, the plaintiff claimed that he had a contract with the Retirement System. The Supreme
Court explicitly rejected this argument, stating that “McKinney misconstrues the nature of his right
to retirement benefits: the source of his right is the statutes, not a contract.” Id. at 375, 429 S.E.2d
at 798. The Court further clarified that neither McKinney, nor the Retirement System, has “the
authority to convert this statutory right into a contractual one.” Id. The rule that retirement benefits
are statutory, not contractual, could not have been stated more clearly. Other South Carolina cases
confirm the same rule: “The right to retirement benefits is purely statutory....” Anderson v. South
Carolina Retirement System, 278 S.C. 161, 164, 293 S.E.2d 312, 314 (1982); Smith v. South
Carolina Retirement System, 336 S.C. 505, 521, 520 S.E.2d 339, 348 (Ct. App. 1999) (“Entitlement
to State retirement benefits is purely statutory.”). As such, under binding precedents of our state
Supreme Court, retirement benefits are statutory; therefore, Petitioner’s contention that he had
contractual rights to a retirement benefit is without merit.
In sum, under Supreme Court precedent, there exist four major reasons why Petitioner has
not established a contractual right to the statutory tax exemption previously contained in § 9-1-1680:
(1) under Rivers, tax laws are subject to revision, and there is no contractual right to tax laws
remaining unchanged; (2) under Alston, there exists a presumption that statutes regulating the
benefits of public employees do not create contractual rights, and there is no clear indication that the
legislature intended to bind itself contractually to a tax exemption; (3) under Lloyd, the legislature
could eliminate § 9-1-1680's retirement exemptions; and (4) under McKinney, retirement benefits
are statutory, not contractual. Because Petitioner has failed to establish the existence of a contractual
entitlement to the pre-Act 189 tax exemption, his impairment of contract claim cannot succeed.
B. No substantial impairment
Petitioner cannot establish that any purported contract has been
impaired substantially.
Assuming arguendo a contract exists, Petitioner must also, if he is to establish an impairment
of contract claim, prove that such a contract was impaired substantially. See U.S. Trust Co. v. New
Jersey, 431 U.S. 1 (1977) (in considering a contract clause claim, the court must ascertain whether
the State law has in fact operated as a substantial impairment of a contractual relationship) (cited in
Evans, 344 S.C. at 68, 543 S.E.2d at 551). A statute can be said to substantially impair a contract
when it alters the reasonable expectations of the contracting parties. Hodges v. Rainey, 341 S.C. 79,
533 S.E.2d 578 (2000). Petitioner cannot demonstrate that any alleged contractual obligation was
substantially impaired.
When the current case was on appeal earlier, our Supreme Court gave guidance on the issue
of substantial impairment. It declared that “[a]ssuming State Retirees have either a contract right
or a property interest in the full tax exemption of their retirement benefits, had the action proceeded
to trial, the circuit court could have considered whether State Retirees’ contract had been
substantially impaired or their property taken without just compensation ....” Evans, 344 S.C. at 68,
543 S.E.2d at 551 (emphasis in original). The Court further explained that “[t]estimony may have
revealed Act 189's 7% increase in retirement benefits fairly offset any financial loss to State Retirees
resulting from Act 189's deletion of the full tax exemption for state retirement benefits.” Id.
(emphasis added). Thus, as the Supreme Court indicated, a pivotal question in determining whether
Act 189 substantially impaired any alleged contract is: Has Act 189's increase of 7% in retirement
benefits “fairly offset” any financial loss to Petitioner, as a result of the elimination of the full tax
exemption for retirement benefits? See Id. Petitioner may argue that the test for substantial
impairment, as enunciated in U. S. Trust Company, is whether there was an interference with the
“legitimate expectations” of the contracting parties.
The preponderance of the evidence in this case establishes that Act 189's 7% increase in
retirement benefits has “fairly offset” any financial loss to Petitioner. R. Kent Porth, an expert in
retirement benefits and taxation,
and the only remaining expert witness in this case,
offered
deposition testimony confirming that the 7% increase in retirement benefits Petitioner received fairly
offset any financial loss to Petitioner. Taking into account the change in state law, Mr. Porth
determined that, as a result of the 7% increase in retirement benefits, Petitioner is “better off
financially” (i.e., the increase in benefits has more than offset the loss of the tax exemption). (Porth
depo., p. 11). More specifically, Mr. Porth testified that he examined Petitioner’s tax returns and
determined the amount of tax that was being applied to payments from the South
Carolina Retirement System, both federal and state. [Mr. Porth] then compared that
with what would have theoretically happened had the exemption, the total exemption
from the South Carolina income tax, stayed into account and the seven percent
benefit increase had not been granted...[I]n all years the net after tax amount of the
seven percent increase more than made up for the amount of South Carolina income
tax that was now being imposed on [Petitioner’s] retirement system payment.
(Porth depo., p. 51). Mr. Porth considered the impact of Act 189 by examining the tax effects just
on the income Petitioner received from the South Carolina Retirement System. (Id., pp. 55-56). Mr.
Porth testified that isolating the tax on the actual benefit is the appropriate way to determine how the
benefit increase compared with the change in taxation. (Id., p. 56). This analysis shows that the net
after tax amount of the 7% increase in retirement benefits more than makes up for the amount of
additional tax incurred by Petitioner, including the additional federal tax that Petitioner incurs as a
result of the 7% increase in his retirement allowance. (Id., pp. 8, 51, 55-58; Petitioner’s Ex. 2). Mr.
Porth further opined that even if all of Petitioner’s income from sources other than the South
Carolina Retirement System were considered, Petitioner’s increase in benefits would still offset the
loss of the tax exemption. (Id., pp. 52-54).
Mr. Porth’s testimony – which is the only expert testimony in the record – establishes that
the increase in retirement benefits more than offsets the additional taxes Petitioner paid. See Evans,
344 S.C. at 68, 543 S.E.2d at 551. Further, if there is an increase in the amount of monies received
by Petitioner, there can not be any interference with any legitimate expectation by Petitioner.
Accordingly, Petitioner’s impairment of contract claim fails for lack of proof of a substantial
impairment of any alleged contractual obligation with Respondent. Although Petitioner may have
formed an “expectation” that he was entitled to more benefits than those provided to him pursuant
to Act 189, the simple truth is that he suffered no loss and thus there is no impairment.
C. Act 189 – Reasonable and Necessary
Act 189 was reasonable and necessary, as confirmed by Ward.
In addition to proving that § 9-1-1680 gave rise to a contract and that the contract has been
substantially impaired, Petitioner must also show that the law that allegedly impaired the contract
was not “reasonable and necessary to carry out a legitimate governmental purpose.” See Alston, 322
S.C. at 44, 471 S.E.2d at 177 (quoting Citizens for Lee County v. Lee County, 308 S.C. 23, 30, 416
S.E.2d 641, 646 (1992)). When a legislative enactment is reasonable, the Court must defer to the
legislature and reject any impairment of contract claim. See Ken Moorhead Oil Co. v. Federated
Mut. Ins. Co., 323 S.C. 532, 547, 476 S.E.2d 481, 489 (1996) (finding, in an impairment of contract
case, the legislative judgment to be “entirely reasonable” and requiring the Court’s “deference”).
Petitioner cannot make a showing that Act 189 was not reasonable and necessary because the South
Carolina Supreme Court has recently held that Act 189 was enacted by the General Assembly in
order to comply with the “dictate” of the United States Supreme Court. See Ward, 356 S.C. 449, 590
S.E.2d at 32.
As the state Supreme Court recognized in Ward, “[T]he South Carolina General Assembly
enacted Act 189 to comply with the United States Supreme Court decision in Davis v. Michigan
Dept’t of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989).” Ward, 356 S.C. 449,
590 S.E.2d at 31. In Davis, the United States Supreme Court declared that states like South
Carolina, which exempted state but not federal retirement income from taxation, must provide “equal
treatment” in the taxation of state and federal retirees by either extending tax exemptions to federal
retirees or by eliminating the tax exemption for state retirees. Ward, 356 S.C. 449, 590 S.E.2d at 32.
The South Carolina Supreme Court explained that:
in enacting Act 189, the General Assembly specifically followed the dictate of Davis
by eliminating the tax exemption for both state and federal employees. In doing so,
the General Assembly was guided by the remedies suggested by the [United States]
Supreme Court. In direct response to Davis, the General Assembly amended South
Carolina’s tax statute to remove the tax exemption for state retirees. Act 189
conformed South Carolina to the requirements of the Davis decision.
Id.
Petitioner first argues that the impairment of a contractual right to a tax exemption is, as a
matter of law, neither reasonable nor necessary. South Carolina Public Service Authority v.
Summers, 282 S. C. 148, 318 S. E. 2d 113 (1984). However, this argument fails because Petitioner
has not shown any impairment to a contract. Second, Petitioner argues that our Supreme Court has
held that the standard of reasonableness and necessity of a statute passed by our General Assembly,
which impairs a contract in which the State is a party, must receive “heightened scrutiny.” Ken
Moorhead Oil Co., Inc. v. Federated Mut. Ins., 323 S.C. 532, 476 S.E.2d 481 (1996). Moorhead
provides that there must be some emergency condition or basic societal interest existing which
required the repeal of the exemption. Petitioner posits that the sole reason the General Assembly
passed the statute as written was for pecuniary reasons, which is an insufficient justification to
survive the heightened scrutiny test. U. S. Trust Co., supra at p. 26.
However, given that the General Assembly enacted Act 189 to conform South Carolina to
the mandate of the highest Court in the land, it is clear that the General Assembly’s action was
reasonable and necessary. It is clear that the Davis decision provided an option to all states. It did
not provide just one available option for our states to follow. For policy reasons, our General
Assembly decided not to offer the full tax exemption to federal and non-governmental retirees; it
instead decided to reduce the exemption to its retirees. Our state had the opportunity to comply with
the mandate in Davis by choosing one or the other option presented by the United States Supreme
Court. The choice it made was reasonable. It would be difficult to conceive of a situation where a
legislature could have a more compelling reason to enact a statute. Hence, South Carolina’s action
in passing Act 189 was “reasonable and necessary to carry out a legitimate governmental purpose.”
See Citizens for Lee County, 308 S.C. at 30, 416 S.E.2d at 646.
For the above reasons, Petitioner’s claim fails because he is unable to establish any of the
elements essential to establish a contract clause violation.
III. Takings and Due Process Claims
Petitioner cannot establish that Act 189's elimination of the full tax exemption
constituted a taking of private property without just compensation or was a
deprivation of property without due process of law.
Petitioner maintains that even if he had no contractual entitlement to the indefinite
continuation of the exemption of state retirement benefits from taxation, he nevertheless had a
property right to the retirement benefits, which could not be taken from him without just
compensation and without due process of law. The court agrees with Petitioner; he does have a
property right to retirement benefits and he receives them. However, Petitioner has no property right
to receive those retirement benefits tax exempt.
To maintain either a takings or a due process claim under the Fifth and Fourteenth
Amendments of the United States Constitution and Article I, § 13 of the South Carolina Constitution,
Petitioner must first establish that he had a property right – a legitimate claim of entitlement under
state law. See Board of Regents v. Roth, 408 U.S. 564 (1972); Mibbs, Inc. v. South Carolina Dep’t
of Revenue, 337 S.C. 601, 524 S.E.2d 626 (1999). Petitioner maintains that he had such a property
right in the full exemption that § 9-1-1680 provided prior to its amendment by Act 189. He is
mistaken.
A property right exists when a person has a “legitimate claim of entitlement” to the right
arising from such sources as state statutes, local ordinances, and employment contracts. Board of
Regents v. Roth, 408 U.S. 564, 577 (1972) (establishing the test for determining what constitutes
a property interest protected by the Due Process Clause); Bunting v. City of Columbia, 639 F. 2d
1090 (4th Cir. 1981) (citing Roth). The person must have more than an abstract need or desire for
it; there must be more than a unilateral expectation of it. Roth, 408 U.S. at 577; Hamilton v. Board
of Trustees of Oconee County School Dist., 282 S.C. 519, 319 S.E.2d 717 (Ct. App. 1984).
Property interests are created and their dimensions are defined by existing rules or
understandings that stem from an independent source such as state law–rules or understandings that
secure certain benefits and that support claims of entitlement to those benefits. Roth, 408 U. S. at
577. Here, Petitioner’s right is created by a state statute.
As to the pre-Davis years, Petitioner had no property right in the tax exemption in those years
if the exemption is a “tax law” because both the South Carolina Supreme Court and the United
States Supreme Court have held that tax legislation does not give rise to any vested right that the
legislation will remain unchanged. Rivers, 327 S.C. at 275, 490 S.E.2d at 263 (“[T]axpayers have
no vested interest in tax laws remaining unchanged ....”); United States v. Carlton, 512 U.S. 26, 33
(1994) (“Tax legislation is not a promise ....”). Carlton further declared: “An entirely prospective
change in the law may disturb the relied-upon expectations of individuals, but such a change would
not be deemed therefore to be violative of due process.” Carlton, 512 U.S. at 33-34. Petitioner
opines that his “property right” emanates from Retirement System provisions. He argues that the
system provides that state employees will receive a retirement allowance or monthly benefits after
working a certain number years and after they have vested in the system. He states that they have
the expectation that they will receive certain specific benefits when they retire.
In this instance, the General Assembly amended § 9-1-1680 so that, effective for the tax year
1989 and thereafter, state retirees’ retirement benefits would no longer be fully exempt from
taxation, but would be subject to the same limited exemption available to other retirees, including
federal retirees. This prospective change in the exemption, available for state retirement benefits,
did not deprive Petitioner of a “property” right within the meaning of the Fifth and Fourteenth
Amendments of the United States Constitution because he had no legitimate claim of entitlement
to a continuation of the exemption. Carlton, 512 U.S. at 33-34; Rivers, 327 S.C. at 275, 490 S.E.2d
at 263. As the court explained in Keating v. State of Rhode Island, 785 F. Supp. 1094 (D.R.I. 1992):
Tax exemptions are a matter of legislative grace, subject to repeal at any time. A tax
exemption “vests” only one year at a time, when the taxpayer takes advantage of it.
The following year it may be gone. Pension rights vest more permanently, but the
pension income’s tax exempt status can change from year to year.
Keating, 785 F. Supp. at 1100; accord Spradling v. Colorado Dep't of Revenue, 870 P.2d 521 (Colo.
App. 1993); Herrick v. Lindley, 391 N.E.2d 729 (Ohio 1979); Pierce v. State, 910 P.2d 288 (N.M.
1995) (all holding that public employees have no vested right to statutory tax exemption applicable
to retirement benefits); see also Wright v. Town Board of Ticonderoga, 800 F. Supp. 1072
(N.D.N.Y. 1992) (since taxpayer had no right to the continuation of a favorable tax exemption, he
could not maintain a constitutional due process claim based on the withdrawal of that exemption).
Under the retirement system, once a state employee is vested, at retirement he has the expectation
and the right to receive a retirement benefit; however, he does not have a right to nor any
expectation of a tax exemption. Exemptions are subject to change at the will of the legislature and
a state employee, including Petitioner, has no property interest in such.
Petitioner believes that the elimination of this exemption equates to the taking of a vested
property right without just compensation and in violation of due process. U. S. Const. amend. XIV,
§ 1; S.C. Const. art. I, § 13, art. I, § 3. A determination of a takings clause violation requires a
factual inquiry with three factors. They are: (1) the economic impact of the legislation; (2) its
interference with reasonable investment-backed expectations; and (3) the character of the
governmental action. See Mibbs v. South Carolina Dep’t of Revenue, 337 S.C. 601, 606, 524 S.E.2d
626, 628 (1999) (citing Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)). In this case there is no
evidence in the record of any economic impact to the State of South Carolina resulting from the
legislation, nor is there any evidence that there is any interference with any reasonable investment-backed expectations of Petitioner. There is no record of any taking of anything from Petitioner
simply because he did not have any property interest in the exemption.
Further, Petitioner has not shown any deprivation of property without due process of law
resulting from the state’s repeal of the exemption. In fact, the testimony by the expert witness is that
the 7% increase in retirement benefits that Petitioner received as part and parcel of the arrangement
by the State of South Carolina in 1989 fairly offsets any financial loss he might have as a result of
the loss of the exemption. Petitioner begs the issue by asserting that there is a difference in net
income over four years in the amount of $ 190.00 per year (roughly $16.00 monthly). Even if such
is true, which is doubtful, such a figure is unrealistic to sustain a claim for deprivation of property
or an impairment to property. There is simply no violation of any due process rights of Petitioner
or of any substantial impairment or taking of property arising from the repeal of the tax exemption.
Our South Carolina Supreme Court has recognized that “even though taxes ... indisputably
‘take’ money from individuals or businesses, assessments of that kind are not treated as per se
takings under the Fifth Amendment.” Rivers, 327 S.C. at 275, 490 S.E.2d at 263 (quoting Branch
v. United States, 69 F.3d 1571, 1576 (Fed. Cir. 1995)). Rivers also cited the United States Supreme
Court decision A. Magnano v. Hamilton, 292 U.S. 40 (1934) for the proposition that the taxing
power of state or federal governments is not considered a taking under the Fifth or Fourteenth
Amendment. Rivers, 327 S.C. at 276, 490 S.E.2d at 263. Therefore, on this basis, Petitioner’s
takings claim fails as a matter of law.
Another defect in Petitioner’s takings and due process claims is that they are simply another
version (portrayed in other clothing) of his impairment of contract claim. Where, as here, a public
employee or retiree has no contractual right to a tax exemption, his takings and due process claims
based on the withdrawal of that same tax exemption necessarily fail. Nat’l Educ’n Ass’n - Rhode
Island v. Retirement Bd. of the Rhode Island Employees’ Ret. Sys., 172 F.3d 22, 30 (1st Cir. 1999).
As the First Circuit explained:
This position is virtually compelled by Supreme Court cases that, after finding that
an expected statutory benefit did not constitute a contract right, rejected the claim to
payment. It would make nonsense of such rulings – and the clear intent requirement
[for finding statutory contracts] – to conclude that an expectancy insufficient to
constitute an enforceable contract against the state could simply be renamed
“property” and enforced as a promise through the back door under the Takings
Clause.
Nat'l Educ’n Ass’n, 172 F.3d at 30 (internal citations omitted).
Finally, to the extent that Petitioner is asserting a procedural, as opposed to a substantive, due
process claim, even if he could establish a property interest, his claim would still fail because South
Carolina’s political process has provided due process to Petitioner. “When a legislature passes a law
which affects a general class of persons, the political process provides all the process that is due.”
Barefoot v. City of Wilmington, 306 F.3d 113, 124 (4th Cir. 2002) (discussing Bi-Metallic
Investment Co. v. State Board of Equalization, 239 U.S. 441 (1915)). In Bi-Metallic Investment
Company, the United States Supreme Court rejected a due process challenge to Denver’s increase
of the valuation of all taxable property by 40 percent, despite the fact that petitioners had no
opportunity to be heard on the issue. Writing for the Court, Justice Holmes declared:
The Constitution does not require all public acts to be done in town meeting or an
assembly of the whole. General statutes within the state power are passed that affect
the person or property of individuals, sometimes to the point of ruin, without giving
them a chance to be heard. Their rights are protected in the only way that they can
be in a complex society, by their power, immediate or remote, over those who make
the rule.
Bi-Metallic Investment Co., 239 U.S. at 445. In this case, Petitioner, even if he had a property
interest, was entitled to no more due process than that provided by South Carolina’s political process.
In sum, Petitioner’s takings and due process claims fail as a matter of law.
CONCLUSION
Based upon the findings, conclusions and discussion above, it is hereby ORDERED:
(1) that all claims by Petitioner are dismissed;
(2) that all claims by Petitioner are barred by the applicable statute of limitations;
(2) that Petitioner’s causes of action fail on the merits;
(3) that Petitioner’s claim for impairment of contract fails for lack of proof that a contract
exists;
(4) that Petitioner’s claim for substantial impairment to a property interest fails for lack of
proof;
(5) that Petitioner’s claim that Act 189 was not reasonable and necessary to carry out a
legitimate governmental purpose fails for lack of proof;
(6) that Petitioner’s takings and due process claims are without merit inasmuch as Petitioner
lacks a property interest in the exemption;
(7) that this action is dismissed and all relief sought by Petitioner is denied.
AND IT IS SO ORDERED.
________________________________
Marvin F. Kittrell
Chief Administrative Law Judge
April 29, 2004
Columbia, South Carolina |
