Untitled Texas Attorney General Opinion ( 2004 )

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT
July 26,2004
The Honorable Allan B. Ritter Opinion No. GA-022 1
Chair, Committee on Pensions and Investments
Texas House of Representatives Re: Whether article XVI, section 67(a)(2) of
Post Office Box 29 10 the Texas Constitution would preclude retired
Austin, Texas 78768-2910 City of Houston employees Ii-om receiving
benefits from both the existing pension system
and a separate retirement system that the City
is contemplating establishing under section
8 10.001 of the Government Code
(RQ-0172-GA)
Dear Representative Ritter:
On behalf of the City of Houston (City), you ask whether article XVI, section 67(a)(2) of the
Texas Constitution, which prohibits a person from receiving benefits “from more than one
[retirement] system for the same service,” TEX. CONST. art. XVI, 0 67(a)(2), would preclude a retired
City employee from receiving benefits from both the existing municipal pension system, established
under article 6243h of the Revised Civil Statutes, and a separate retirement system that the City is
contemplating establishing under section 8 10.001 of the Government Code.’
The City is considering establishing, under section 810.001 of the Government Code, a
public retirement system that may qualify for favorable tax treatment under 26 U.S.C. 5 401. See
26 U.S.C. 5 401(a) (2000); TEx. GOV'T CODEANN. $ 810.001(b) (Vernon Supp. 2004); Request
Letter, supra note 1, at 1. Contributions to the plan would consist entirely of the lump sum to which
a departing employee is entitled for unused sick leave and vacation leave accumulated over the entire
course of his or her employment with the City (Lump Sum Payment). See Request Letter, supra note
1, at 1. “Both the employee and the City are liable for [federal unemployment tax under 26 U.S.C.
4 3 101 (FICA)] on the Lump Sum Payment,” and “[tlhe employee is also subject to federal income
tax on the Lump Sum Payment” in the tax year in which it is received. Id. The proposed City
retirement system, if established, would lessen the tax burden on both the City and the employee:
By contributing all or a portion of the Lump Sum Payment to the
Proposed Section 401 (a) Plan, the City and the terminating employee
would not be liable for FICA tax on the contributed amounts and the
‘See Letter from Honorable Allan B. Ritter, Chair, Committee on Pensions and Investments, Texas House of
Representatives, to Honorable Greg Abbott, Texas Attorney General (Jan. 2 1,2004) (on file with Opinion Committee,
also available at http://www.oag.state.tx.us) [hereinafter Request Letter].
The Honorable Allan B. Ritter - Page 2 (GA-022 1)
terminating employee would not be subject to federal income tax on
the contributed amount until . . . the amount is distributed to the
employee [presumably in smaller annual payments].
Id. at 2.
The employees who would be eligible to participate in the proposed plan are municipal
employees who currently are members of the Houston Municipal Employee Pension System
(HMEPS), an entity independent of the City. See id. See generally TEX. REV. CIV. STAT.ANN. art.
6243h (Vernon Supp. 2004). The HMEPS administers, manages, and operates the pension system
under article 624311.ofthe Revised Civil Statutes. See TEX. REV. CIV. STAT.ANN. art.6243h, $2(a)-
(b) (Vernon Supp. 2004) (continuing the pension board of the predecessor system and requiring the
pension board to operate for the benefit of the municipal employees); see also infra at 2-3
(summarizing article 6243h). According to a recent legislative report, the HMBPS provides
retirement, disability, and survivor benefits for approximately20,OOO eligible active and retired City
and HMEPS employees, not including police officers and firefighters. See HOUSE COMM. ON
PENSIONS & INVESTMENTS, BILLANALYSIS,Tex. H.B. 601,78th Leg., R.S. (2003).
We do not consider federal tax issues related to the proposed plan. You indicate that the City
has requested the Internal Revenue Service’s opinion concerning the proposed plan’s “qualified and
exempt status” under 26 U.S.C. $5 401(a) and 501(a). Request Letter, supra note 1, at 3. You ask
us to decide only certain state law issues related to the plan, and you are particularly concerned with
article XVI, section 67(a)(2) of the Texas Constitution. See id. at 2-3.
Article XVI, section 67 provides generally for retirement systems and specifically for the
creation of local retirement systems. See TEX. CONST.art. XVI, 5 67. In general, the legislature is
authorized to “enact general laws establishing systems and programs of retirement and related
disability and death benefits for public employees and officers.” Id. $ 67(a)(l). With regard to
municipal retirement systems in particular, the legislature is required to provide by law for “the
creation by any city . . . of a system of benefits for its officers and employees.” Id. 8 67(c)(l)(A).
Benefits under a municipal system must be “reasonably related to participant tenure and
contributions.” Id. 9 67(c)(2). Under section 67(a)(2), no person may receive benefits “from more
than one system for the same service,” although “the legislature may provide by law that a person
with service covered by more than one system or program is entitled to a fractional benefit from each
system or program based on service rendered under each system or program calculated as to amount
upon the benefit formula used in that system or program.” Id. 8 67(a)(2).
Article 6243h of the Revised Civil Statutes provides for the administration of a pension
system in a municipality of 1.5 million or more people, such as Houston. See TEX. REV. CIV. STAT.
ANN. art. 6243h, $9 l(4), (18), 2(a) (V emon Supp. 2004); see BUREAUOFTHECENSUS,U.S. DEP’T
OFCOMMERCE,2000 CENSUSOFPOPULATION, General Population Characteristics: Texas (City of
Houston population: 1,953,63 1).2 The term “pension system” includes “retirement . . . benefit plans
for municipal employees.” Id. 5 l(18). Although article 6243h does not expressly authorize the City
‘Available at http://factfmder.census.gov/.
The Honorable Allan B. Ritter - Page 3 (GA-022 1)
to create a pension system, it expressly requires the “pension board of the predecessor system,” in
existence since 1943, to “continue to administer, manage, and operate the pension system, including
directing investments and overseeing the fund’s assets.” Id. 0 2(a); see id. 0 1(19) (defining the term
“predecessor system” to mean “the retirement system authorized by Chapter 358, Acts of the 48th
Legislature, Regular Session, 1943”). With some exceptions, all municipal employees and executive
officials are eligible for membership in the system. See id. $5(a)-(d). Employees who are ineligible
for membership include “employees in positions covered by any other pension plan of the city to
which the city contributes . . . .” Id. 5 4(5).
Section 810.001 of the Government Code, under which the City proposes to create the
separate plan, generally authorizes “the governing body of a political entity,” which includes a
municipality, to create “a public retirement system for its appointive officers and employees and [to]
determine the benefits, funding source and amount, and administration of the system.” TEX. GOV’T
CODEANN. $810.001(a)(l), (b) (V emon Supp. 2004). The term “‘[plublic retirement system’ means
a continuing, organized program or plan (including a plan qualified under [26 U.S.C. $401(a)]) of
service retirement, disability retirement, or death benefits for” the political entity’s “officers or
employees,” excluding certain programs, accounts, or plans not at issue here. Id. 9 810.001(a)(2).
The authority to establish and maintain a public retirement system does not extend to
a political entity to the extent that the entity, by specific statute, is:
(1) required to establish or participate exclusively in a
particular public retirement system; or
(2) prohibited from establishing or participating in any
public retirement system or in a particular retirement system.
Id. 5 8 10.001 (d). The authority to establish and maintain a public retirement system under section
8 10.001 is cumulative of “other statutory authority to provide a public retirement system or programs
specifically excluded from the definition of a public retirement system.” Id. fj 810.001(e); see id.
$ 810.001(a)(2)(A)-(E).
A pension payment that a retired employee receives under article 6243h and a portion of the
Lump Sum Payment that the same retired employee would receive under the City’s proposed plan
are both benefits “for the same service” for the purposes of article XVI, section 67(a)(2). TEX.
CONST.art. XVI, $ 67(a)(2). The Lump Sum Payment accrues during the term of an employee’s
service to the City and is thus a benefit based on service. Consequently, the City’s proposed plan
is not strictly a defined contribution plan that is beyond the reach of article XVI, section 67 as a
briefer suggests.3 See Shanks v. Treadway, 110 S.W.3d 444,445 n. 1 (Tex. 2003) (describing defined
benefit plans and defined contribution plans).
‘See Brief from James R. Griffin & Edward C. Small, Jackson Walker L.L.P., representing AIG VALIC, to
Honorable Greg Abbott, Texas Attorney General, at 4-5 (June 11,2004) (on file with Opinion Committee).
The Honorable Allan B. Ritter - Page 4 (GA-022 1)
Resolving the issue you raise-whether article XVI, section 67(a)(2) of the Texas
Constitution effectively prohibits a retired municipal employee from receiving benefits from both
a pension system created under article 6243h of the Revised Civil Statutes and a municipal
retirement system created under section 8 10.001 of the Government Code-hinges on whether both
are systems of retirement benefits under article XVI, section 67(a). See Request Letter, supra note
1, at 1; see TEX. CONST.art. XVI, 3 67(a)-(b). If they both are, an employee clearly may not receive
benefits from both for the same service. See id. art. XVI, 9 67(a)(2).
Central to the issue is the meaning of the term “system” in section 67(a)(2), which prohibits
a person from receiving benefits “from more than one system for the same service.” TEX . CONST.
art. XVI, 5 67(a)(2) (emphasis added). The term appears to refer back to the preceding subsection,
(a)(l), which au th orizes the legislature to provide for “systems . . . of retirement . . . benefits for
public employees and officers.” Id. 9 67(a)(l). We accordingly construe the term “system” in
subsection (a)(2) to mean a “system[] of retirement benefits,” and it is this phrase that is key to
determining whether a retired City employee may receive benefits from both the HMEPS and a
separate City plan.
Article XVI, section 67 does not define the phrase “system . . . of retirement . . . benefits.”
See id. Consequently, we interpret the phrase by examining the provision’s plain language: “To
interpret our Constitution, we give effect to its plain language. We presume the language of the
Constitution was carefully selected, and we interpret words as they are generally understood.” City
of Beaumont v. Bouillion, 896 S.W.2d 143, 148 (Tex. 1995) (citations omitted). On its face, the
phrase encompasses any system or program under which a retired employee receives benefits
“reasonablyrelated to [the employee’s] tenure and contributions.” TEX. CONST.art.XVI, 9 67(c)(2).
We conclude that both a pension system established under article 6243h, Revised Civil
Statutes, and a public retirement system established under section 8 10.001 of the Government Code
are systems of retirement benefits for the purposes of article XVI, section 67 of the constitution.
Article 6243h’s definition of the term “pension system” and section 8 10.001 ‘s definition of the term
“public retirement system” are nearly identical, and both provide for retirement benefits. Under
article 6243h, a pension system includes a “retirement . . . benefit plan[]” for municipal employees.
TEX. REV. CIV. STAT. ANN. art. 6243h, 5 l(l8) (Vernon Supp. 2004) (emphasis added). Members
monthly contribute a percentage of salary. See id. 9 8(a). Benefits generally are paid out on a
monthly basis after the member’s retirement in an amount based upon the member’s years of credited
service. See id. $9 6(f), 10(d)-(e). Likewise, under section 810.001, a public retirement system
includes a “program or plan. . . of service retirement . . . benefits” for municipal employees. TEX.
GOV’T CODE ANN. 3 810.001(a)(2) (Vernon Supp. 2004) (emphasis added); see Tex. Att’y Gen.
LO-98-70, at 2-3 (summarizing section 810.001’s legislative history, showing that the legislature
intended to authorize certain political subdivisions to create local retirement plans). Each active
member of a retirement system established under section 810.001 must contribute an amount
determined by the political entity, and the political entity also must contribute for each active
member an amount determined by the political entity. See TEX. GOV’T CODE ANN. 9 810.001(b)
(Vernon Supp. 2004). The political entity’s governing body may determine the benefits. See id. By
their plain terms, article 6243h and section 810.001 provide for a program under which a retired
employee receives benefits “reasonably related to . . . tenure and contributions.” TEX. CONST.art.
XVI, 9 67(c)(2).
The Honorable Allan B. Ritter - Page 5 (GA-0221)
Consequently, under article XVI, section 67(a)(2) ofthe constitution, a retired City employee
may not receive benefits under both the HMEPS and the City’s proposed retirement system if the
benefits are for the same service. See TEX. CONST.art. XVI, @67(a)(2). Whether, in a particular
case, an employee is receiving benefits from multiple systems for the same service, and thereby
contravening article XVI, section 67(a)(2), is a question requiring the resolution of fact issues. Fact
questions are not amenable to the opinion process. See Tex. Att’y Gen. Op. No. GA-0003 (2002)
at 1 (stating that the opinion process does not determine facts).
You suggest that if we examine article XVI, section 67’s “language and intent,” we would
find that “the actual constitutional prohibition is against a person receiving benefits under two
different defined benefit plans that are based on formulas that utilize the employee’s same years of
service in computing benefits under each plan.” Request Letter, supra note 1, at 3. Article XVI,
section 67’s language expressly prohibits receiving benefits I?om multiple “systems and programs
of retirement . . . benefits for public employees.” TEX. CONST.art. XVI, 8 67(a)(l). Article XVI,
section 67 on its face does not limit its reach to “defined benefit plans,” such as the City’s proposed
plan. Moreover, both article 6243h of the Revised Civil Statutes and section 810.001 of the
Government Code define the plans they authorize as plans for retirement benefits. Compare TEX.
REV. CIV. STAT.ANN. art. 6243h, 0 1( 18) (Vernon Supp. 2004) (defining the term “pension system”)
with TEX. GOV’T CODE ANN. 9 810.001(a)(2) (Vernon Supp. 2004) (defining the term “public
retirement system”).
We do not answer your first question, regarding the City’s authority to create the proposed
defined-contribution plan under state law. Request Letter, supra note 1, at 2. Even if the City may
create such a plan under section 8 10.001 of the Government Code, retired City employees may not
receive benefits from both the proposed plan and the HMEPS. Cf: Tex. Att’y Gen. LO-98-070,
at 2 (stating that section 810.001 creates “an alternate” to a plan established under article 6243k).
Given our conclusion, you ask whether “the fact that an employee is not entitled to the
distribution until after he or she terminates service with the City cure[s] the State law issues.”
Request Letter, supra note 1, at 3. Article XVI, section 67 expressly prohibits an employee from
receiving “benefits from more than one system for the same service.” TEX. CONST. art. XVI,
0 67(a)(2). The fact that the employee would not be entitled to distribution of the Lump Sum
Payment until after termination does not alter the fact that the employee would be receiving benefits
from multiple systems for the same service. As you state, the Lump Sum Payment represents the
employee’s unused sick and vacation days “accumulated over the employee’s entire term of service
with the City.” Request Letter, supra note 1, at 1. It is this same term of service that is the basis for
benefits received under the article 6243h pension system. Accordingly, the Lump Sum Payment and
the pension received from the HMEPS are benefits for the same service, prohibited by article XVI,
section 67(a)(2).
You finally ask whether, given this conclusion, “the issues could be resolved under the ‘meet
and confer’ provisions” of article 6243h, section 3(n), which was adopted in 2003. Request Letter,
supra note 1, at 3; see Act of May 1,2003,78th Leg., R.S., ch. 40, 9 2,2003 Tex. Gen. Laws 76,
76-77. The new subsection (n) authorizes the HMEPS board to contract with the City regarding
pension issues and benefits:
The Honorable Allan B. Ritter - Page 6 (GA-022 1)
Notwithstanding any other law, the pension board may enter
into a written agreement with the city regarding pension issues and
benefits. The agreement must be approved by the pension board and
the [City’s] governing body and signed by the mayor and by the
pension board or the pension board’s designee. The agreement is
enforceable against and binding on the city and the pension system’s
members, retirees, deferred participants, beneficiaries, eligible
survivors, and alternate payees.
TEX. REV. CIV. STAT. ANN. art. 6243h, 9 3(n) (V emon Supp. 2004) (emphasis added). The statute
does not define the phrase “pension issues and benefits,” which limits the subjects on which the
pension board and City’s governing body may enter a written agreement. See id.
In our opinion, the Lump Sum Payment’s disposition is a pension issue or benefit about
which the HMEPS and the City may enter a written agreement under article 6243h, section 3(n).
The Honorable Allan B. Ritter - Page 7 (GA-022 1)
SUMMARY
A pension system established under article 6243h, Revised
Civil Statutes, and a public retirement system established under
section 810.001 of the Government Code are systems of retirement
benefits for the purposes of article XVI, section 67 of the Texas
Constitution. Accordingly, article XVI, section 67(a)(2), which
forbids a person from receiving benefits from more than one public
retirement system for the same service, forbids a person from
receiving benefits from both the Houston Municipal Employee
Pension System, established under article 6243h of the Revised Civil
Statutes, and a separate retirement system established by the City of
Houston under section 810.001 of the Government Code.
Verytq$y yaw
Attome@ral of Texas
BARRY R. MCBEE
First Assistant Attorney General
DON R. WILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
Kymberly K. Oltrogge
Assistant Attorney General, Opinion Committee