Governor proposes settlement and statutory changes to resolve federal-retiree refund litigation

SALT LAKE CITY — Governor Michael O'Lovitt addressed the Utah Senate during the special session on Oct. 11, 1993, asking lawmakers to authorize a settlement offer to resolve long-running litigation by federal retirees over state tax treatment and to change the state's interest-on-refunds statute.

O'Lovitt said the litigation arose after two U.S. Supreme Court decisions altered longstanding state practice and compelled retroactive refunds. "I'm going to ask, today that we change our law dealing with the interest that we owe on refunds," he told senators, arguing that the court-imposed retroactivity created an unprecedented liability for the state.

Nut graf: The governor proposed a two-part approach: (1) give him authority to offer a cash settlement that would pay refund principals to claimants and allow more people to file protective claims, and (2) amend state law so the statutory requirement to pay interest on retroactive refunds would not apply when refunds are mandated retroactively by a final constitutional ruling. He framed the settlement as a way to resolve uncertainty and limit prolonged litigation.

In his presentation, O'Lovitt offered numeric estimates to illustrate potential exposure. He said as many as "34,000 people who fall into this category" could be in scope, while the core group included about 12,000 who had filed protective claims. He proposed that the state would "pay them their entire refund," and that, beyond legal obligations, the state would pay interest "in an amount equal to the amount of money that the state received during that period of time." The governor added, "We'll start writing checks by February" if the settlement were approved and accepted.

Senators pressed for financial detail and legal risk. The governor said the state's average return on those funds in the relevant period was roughly 6 percent and explained his view that paying the state's actual earnings would be "eminently fair" while protecting taxpayers and the state from open-ended statutory interest obligations. He told senators the administration intended to waive certain class-defenses in the settlement offer to let more claimants seek refunds, while reserving arguments it believes are legally available.

Supporters and skeptics surfaced in the chamber. "Let me compliment, governor, on I think a very difficult problem, and I think the solution you proposed is an excellent," said Senator Lyle Hilliard, who expressed hope the approach would be legally viable. Other senators asked about fiscal magnitude, legal fees and whether plaintiffs or their counsel would accept such an offer; the governor said he had not yet entered into settlement discussions with plaintiffs but expected many claimants would find the offer acceptable.

The governor also proposed a voluntary tax checkoff so federal retirees who received refunds could contribute to child-abuse programs, class-size reductions and anti-gang efforts, and described a plan to draw on surplus and the rainy day fund to cover the settlement if necessary.

What happens next: The governor asked the Senate to authorize him to make the settlement offer and to approve statutory changes to the state's refund-interest law; senators asked staff for fiscal analyses and legal briefings to follow. The record shows extended discussion but no final legislative vote on the authorization recorded during the morning session.

Sources: Remarks and Q&A by Governor Michael O'Lovitt to the Utah Senate during the 1993 second special session (transcript).