                           QBffice   of tfy EWmwp             Qknecal
                                       &date of ZEexaS
DAN MORALES
 ATTORNEY
       GENERAL                          December 14,1993


     Mr. Charles D. Travis                        Opinion No. DM-275
     Executive Director
     Employees Retirement System of Texas         Re: Whether the Teacher Retirement
     P.O. Box 13207                               System of Texas (“TRS”) is responsible for
     Austin, Texas 7871 l-3207                    paying the early retirement incentive portion
                                                  of its share of an annuity of a member who
                                                  has transfmed service credit from the TRS
                                                  to the ~Employees Retirement System of
                                                  Texas (RQ-01

     Dear Mr. Travis

              On behalf of the Employees Retirement System of Texas (“BRS”), you ask
     whether the Teacher Retirement System of Texas (“TRS”) is responsible for paying the
     early retirement incentive portion of its share of an annuity of a member who has
     transferred service credit from the TRS to the BRS. You explain that the legislature
     recently enacted legislation which allows TRS members to transfer service credit to the
     BRS, and requires the TRS to transfer timds to the ERS to pay for its portion of those
     members’annuities. See S.B. 1181, Acts 1993,73d Leg., ch. 791; H.B. 2711, Acts 1993,
     73d Leg., ch. 812. In addition, the legislature also passed a provision which gives current
     state employees who are eligible for retirement during the period between August 31,
     1993 and August 31.1995 an early retirement incentive, in the form of an increased BRS
     annuity. See S.B. 81, Acts 1993,73d Leg., ch. 39.

             The standard retirement annuity for both ERS and TRS under section 814.105(a)
     of the Government Code is “an amount computed as the member’s average monthly
     compensation for service. . for the 36 highest months of compensation multiplied by 2
     percenr for each year of service credit . .” Gov’t Code $814.105(a) (emphasis added).
     Under section 814.105(a), an ERS annuitant whose average monthly compensation for
     service for the 36 highest months of compensation is $3.000.00, with 20 years of service
     credit, would receive a monthly annuity of Sl,200.00 ($3,000.00 x 20 x .02). An
     employee retiring under the early retirement incentive provision would receive an annuity
     computed by multiplying the average monthly salary figure by 2.25 percent for each year
     of service credit. See S.B. 81, Acts 1993, 73d Leg., ch. 39 (enacting Gov’t Code
     8 814.1051). %th the early retirement incentive, an ERS annuitant whose average
     monthly compensation for service for the 36 highest months of compensation is
     $3,OOO,OO,wIth20 years of service credit, would receive a monthly annuity of $1,350.00




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Mr. Charles D. Travis - Page 2             (DM-275)




($3,000.00 x 20 x .0225)-$150.00        more than under the standard section 814.105(a)
computation.

        You state that this .25 percent early retirement incentive “raises a question
concerning the amount of money to be transferred from the TRS to the ERS when the
person whose service is transferred elects to retire and receives the additional .25 percent
per year of service credit. No such incentive is available to persons retiring under the
TRS.” You state that “TRS has indicated their belief that they are responsible for only for
the portion of the annuity calculated at 2.00% and the ERS is responsible for tknding all of
the annuity increase resulting from the .25% incentive.” .

        The following scenario illustrates the systems’ disagreement in more concrete
terms. The hypothetical employee described above has 10 years of TRS service credit and
10 years of BBS service credit. She is eligible to retire on September 30, 1993, and to
transfer her TRS service credit to the BBS, both of which she does. As of September 30,
1993, she retires under the ERS with a total of 20 years’service credit. Her annuity would
be an amount computed as her average monthly compensation for service for the 36
highest months of compensation multiplied by 2.25% for each year of service credit, or, in
the example we have been using, $1,350.00. Apparently, the systems agree that each
would be. responsible for paying one half of the standard annuity calculated at 2% per
year, Sl,200.00. BBS also apparently agrees that it would be responsible for paying the
early retirement incentive portion of the annuity calculated at .25% per year for the 10
years of ERS service credit ($75.00), but neither system believes it is responsible for
paying the early retirement portion of the incentive annuity calculated at .25% per year for
the 10 years of TRS service credit ($75.00).

        You make the following arguments in support of ERS’ position. Pii, you note
that Senate Bill 81, the early retirement incentive provision, was enacted by the legislature
and signed by the governor almost two months before Senate Bill 1181 and House Bill
2711.’ Senate Bill 81 also had an effective date of April 22, 1993, whereas the relevant
sections of Senate Bill 1181 and House Bill 2711 became effective June 18, 1993, or
September 1, 1993. See Acts 1993, 73d Leg., ch. 791, § 59; id., ch. 812, 9 46. You rely
upon three provisions in the later enacted legislation. Section 2 of Senate Bill 1181 added
sections 805.007(b) and 805.008(a) to the Government Code. Section 805.007(b)
orovides as follows:

               Service credit transferred under this chapter is considered as if it
           had been granted for service performed under the system to which it
           has been transferred and is used in satisfying minimum service


         %enateBill 81 was enactedby the legislatureon April 1.1991, and signed by the g~~.r~~oron
April 22, 1992. Senate Bill 1181 and HouseBill 2711 were enactedby the legislatm on May 29, 1993,
and May 30.1993, reqectively, and signed by the &wemoron June 18.1993.




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Mr. Charles D. Travis - Page 3            (DM-275)




          requirements for retirement and in determining the amount of
          benefits that are based on the amount of a person’s service credit.

Section 805.008(a) provides as follows:

               The system frbm which a person’s service credit is transferred
          under this chapter shall transfer to the other system, at the time the
          annuity based on the service credit becomes payable, an amount
          equal to the portion of the actuarial value of the annuity that
          represents ihe percentage of the total amount of the person’s service
          credited in both gstems that was credited in the system from which
          rhe credir is being tran.@red. [Emphasis added.]

Subsection (e) of section 805.008, which you do not cite, provides that “[t]he system to
which a transfer is made under this section is responsible for paying the annuity for which
the transfer was made, including the entire amount of any increase in the annuity granted
after the transfer.” In addition, you rely upon section 43(e) of House Bi 2711 which
provides:

               At the time of the retirement or death of a person whose
          membership is transferred from the [TRS] to the [ERS] pursuant to
          legislation enacted by the 73rd Legislature, Regular Session, 1993,
          the [TRS] shall transfer to the PS] the person’s service credit in the
          [TRS] and an amount of money equal to the portion of the actuarial
          value of any ammity that becomes payable under Chapter 814,
          Government Code, that represents the percentage of the total
          amount of the person’s service crea?ted to both systems that was
          credited in the [ntr;l. [Emphasis added.]
        In a brief submitted to this office, the TRS claims that is not responsible for paying
a proportional share of the early retirement incentive portion of the annuity. The TRS
does not parse the relevant legislative provisions. Rather, it argues that “[allthough
technically the incentive is computed by multiplying the additional incentive factor (25%)
by the retiring member’s service credit and average salary, it is not in reality a retirement
benefit for past service but is rather a benefit for retiring at a particular time.” The brief
also states that “[t]he early retirement incentive was not an anticipated ERS benefit feature
dmkg the conceptual development of the ERS-TRS transfer legislation immediately prior
to the 73rd Legislature. The TRS actuary’s determination of the actuarial cost of ERS-
TRS credit transfer proposals krnished in the course of the legislative process never
included the cost of the ERS early retirement incentive.” The brief also suggests that the
transfer of TRS funds to pay for the ERS early retirement incentive may unconstitutionaIIy
divert TRS fknds in violation of article XVI, section 67(a)(I) of the Texas Constitution.

        The TRS also takes the position that it would be unfair to require the TRS to
transfer Iknds to the ERS to pay for the early retirement incentive portion of the TRS



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Mr. Charles D. Travis - Page 4                (DM-275)




share of an annuity. The TRS brief points out that an early retirement incentive proposal
for TRS members was considered and rejected aa too expensive during the most recent
legislative session, and states “[i]t is neither reasonable nor fair to other TRS members that
a relatively few transferring TRS members have their ERS retirement incentive funded by
TRS funds.” The brief also states that it would be unfair for TRS fimds to be used to pay
for the early retirement incentive of a member who retires with many years of TRS service
credit and just a few months of ERS service credit.

         We believe that it is apparent Tom the provisions quoted above that the legislature
intended the TRS to transfer money to the ERS to fimd an annuity in an amount that
reflects the proportion of the person’s TR!J service credit to the person’s combined service
credit for both TRS and ERS. In other words, in the case of the hypothetical employee
who has 10 years service credit in both the TRS and the BBS, the TRS is required to timd
half of the total actuarial value of the annuity. Although the legislature had already
enacted the early retirement incentive provision almost two months before, it did not
exclude the early retirement incentive portion of the annuity fiorn the total actuarial value
of the am&y in describing the amount to be transferred. We believe if the legislature had
intended to exclude the early retirement incentive t?om the total actuarial value of an
annuity, it would have done so expressly. It is significant that subsection (e) of section
805.008 provides that the system to which the transfer of fimds is made is responsible for
paying the entire amount of any increase in the ammity granted after the transfer of funds.2
It suggests that the systems are proportionally responsible for the total actuarial value of
the am&y at the time of the transfer of funds. Because. an annuitsnt is entitled to the
early retirement incentive at the time he or she retires, and the transfer of funds is made at
the time the annuity becomes payable, we do not believe that the incentive can be
characterized as an increasein the am&y granted after the transfer of funds is made.

        With respect to the arguments submitted by the TRS, we understand that the early
retirement incentive is not a retirement be&it for past se-rvice but is rather a be&it for
retiring at a particular time. As discussed above, however, we believe that the plain
language of section 805.008(a) and section 43(e) requires the TRS to fbnd the early
retirement incentive portion of its share of the total actuarial value of an annuity. We are
not aware of any express legislative intent to the contrary. Nor do we believe that the



        zWe note that section 805.008 oscs the terms “traosferrod”and “transfer”to describe two
different evea&, Le., the tmsfer of service credit and the transferof funds at the time the annuity
becomespaysble. It is clear that the term Vransfer”in subseaion (e) refersto the traufer of fimds at the
time the aonoity become-spayable: “The system to which a traqfer is made under this section is
mpnosiile for paying the annuity for which the Ironfer was made, including the entire amountof any
in-     in the amity grantedafterthe transfer.”G&t Code 8 805008(e) (emphasisadded).




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Mr. CharlesD. Travis - Page 5               (DM-275)




TRS actuary% omission of the cost of the ERS early retirement incentive gem the
actuarial cost of the transfer is indicative of legislative intent3

        In addition, the transfer of TRS funds to the ERS to iimd the early retirement
incentive portion of TR!? share of the total actuarial value of an annuity does not run afoul
of the constitution.    Article XVI, section 67 of the Texas Constitution provides in
pertinent part:
                (a) General Provisions. (1) The legislature may enact general
           laws establishing systems and programs of retirement and related
           disabiity and death benefits for public employees and officers.
           Fiiing    of benefits must be based on sound actuarial principles.
           The assets of a system are held in trust for the benefit of members
           and may not be diverted.

                (2) A person may not receive benefits from more than one
           system for the same service, but the legislature may provide by law
           that a person with service covered by more than one system or
           program is entitled to a tktional     be&it 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. Transfer of service credit between the [EPS] and the
           [TRS] also may be authorized by law.

This constitutional provision expressly authorizes the transfer of service credit between the
ERS and the TPS. We do not believe that the transfer of funds from one system to
another to pay for an annuity pursuant to such a transfkr program, including the transfer of
Ibis to pay for a portion of an early retirement incentive, for the benefit of a former
member, would constitute an unconstitutional diversion of fimds. Finally, although we are
sympathetic to the TRS complaint that it is unfair for TRS to be required to transfer tknds
to ERS to pay for the early retirement incentive, we believe that this concern would be
most appropriately addressed through legislation amending section 805.008 of the
Government Code and section 43(e).

         3A brief we have receivedwhich supportsthe positionof TRS relies on the language in section
805.008(a) of the GovernmentCedewhich statesthat “[tlhesystemfrom which a person’sservicecreditis
tramferrodunder this chaptershall tmnsfer to the other system, at the time the amwily based on the
service credit becomespayable,ao amount . . .I (Emphasisadded.) The brief argues that because the
incentiveportionof the ammityis not basedon creditservice,section 805.008(a) is not applicableto that
portionof the annuity. We believe that the language reliedupon merelydescrii the time at which the
vansferoffundsmustkmadeandthatithasRokaringontheamwntoffundstok~emd.
Fmihermore,the incentiveportionof an ammityis based upon servicecredit,i.e., ycars of service credit
multipliedby .25%. Moreover.even if this laoguagcwerelegally ~gnitkant, it is not containedin section
43(e) of House Bill 2711 which specifjcallyaddrrsstsTRS’duty to transferfunds to ERS. We note that
HouseBill 2711 has a laterenaclmenldate than SeaaleBill 1181, the bill which eucted section 805.008.
Seesupranotel;seerrlsoGov’tCode~311.025(~ConstruaionAa).




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Mr. CharlesD. Travis - Page 6            (DM-275)




                                   SUMMARY

               Under section 43(e) of House Bill 2711, Acts 1993, 73d Leg.,
          ch. 812. and newly enacted section 805.008 of the Government
          Code, the Teacher Retirement System of Texas (“TRS”) is
          responsible for paying the early retirement ‘mcentive portion of its
          share of the total actuarial value of an annuity of a member who has
          transferred service credit from the TRS to the Employees Retirement
          System of Texas.




                                                     DAN      MORALES
                                                     Attorney General of Texas

WILL. PRYOR
Fiist Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELBINE B. JOHNSON
Chair, Opinion Committee

Prepared by Mary R. Grouter
Assistant Attorney General




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