If a Texas teacher transfers retirement credit to the state employee system, who pays the early retirement incentive?

Plain-English summary

In 1993 the Texas Legislature let members of the Teacher Retirement System (TRS) transfer their service credit to the Employees Retirement System (ERS) and required TRS to send ERS money to cover its portion of those members' annuities. Around the same time, the legislature created a temporary early retirement incentive: state employees eligible to retire between August 31, 1993 and August 31, 1995 would get a slightly larger ERS annuity, computed at 2.25 percent per year of service instead of the standard 2 percent. The executive director of ERS asked the Attorney General who pays for the extra 0.25 percent on the years of service a transferring employee had earned in TRS. ERS said TRS should fund its proportional share; TRS said it should only have to fund the standard 2 percent and that ERS should cover the entire incentive.

The Attorney General sided with ERS. The office read the transfer statutes, section 805.008 of the Government Code (added by Senate Bill 1181) and section 43(e) of House Bill 2711, to require TRS to transfer to ERS a share of the annuity's total actuarial value that matches the proportion of the person's service credit earned in TRS. The legislature had already enacted the early retirement incentive when it wrote those transfer provisions, and it did not carve the incentive portion out of the "total actuarial value." Had the legislature meant to exclude the incentive, the office reasoned, it would have said so. The office also rejected TRS's argument that paying for the incentive with TRS funds would unconstitutionally divert pension money: article XVI, section 67 of the Texas Constitution expressly allows transferring service credit between TRS and ERS, and funding a former member's annuity through such a program is not an unconstitutional diversion. The office was sympathetic to TRS's fairness complaint but said the right fix would be legislation amending the statutes, not a different reading of them.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The early retirement incentive described here applied only to retirements between August 31, 1993 and August 31, 1995, and the Government Code provisions cited may have been amended since; confirm the current law before relying on anything described here.

What the opinion meant for those who asked

For the Employees Retirement System and the Teacher Retirement System: The opinion concluded that TRS was responsible for paying its proportional share of the early retirement incentive portion of a transferring member's annuity, alongside its share of the standard annuity. It read section 805.008(a) and section 43(e) of House Bill 2711 as requiring TRS to fund a share of the annuity's total actuarial value matching the member's TRS service credit.

For state employees who transferred TRS credit and retired under the incentive: The opinion concerned which retirement system pays, not the retiree's entitlement. A qualifying retiree received the larger annuity computed at 2.25 percent per year; the dispute the office resolved was how TRS and ERS split the cost.

For the legislature: The office acknowledged TRS's argument that the result was unfair to its remaining members and stated that the concern would be most appropriately addressed through legislation amending section 805.008 of the Government Code and section 43(e) of House Bill 2711.

Background and statutory framework

The standard service retirement annuity for both ERS and TRS under section 814.105(a) of the Government Code is the member's average monthly compensation for the 36 highest months of compensation, multiplied by 2 percent for each year of service credit. Senate Bill 81 (Acts 1993, 73d Leg., ch. 39) added section 814.1051, giving employees who retired under the early retirement incentive an annuity computed at 2.25 percent per year of service credit instead of 2 percent. In the office's worked example, a retiree with $3,000 average monthly compensation and 20 years of service would receive $1,200 a month under the standard formula and $1,350 a month with the incentive, a difference of $150.

Senate Bill 1181 (Acts 1993, 73d Leg., ch. 791) and House Bill 2711 (Acts 1993, 73d Leg., ch. 812) created the transfer mechanism. Section 805.007(b) of the Government Code provides that transferred service credit is treated as if it had been granted under the system to which it was transferred, and is used in satisfying minimum service requirements and in determining the amount of benefits based on service credit. Section 805.008(a) provides that the system from which credit is transferred shall transfer to the other system, at the time the annuity becomes payable, an amount equal to the portion of the actuarial value of the annuity representing the percentage of total service credited in both systems that was credited in the transferring system. Section 805.008(e), which ERS did not cite, provides that the system to which a transfer is made is responsible for paying the annuity, including the entire amount of any increase granted after the transfer. Section 43(e) of House Bill 2711 separately directs that, at retirement or death of a person transferred from TRS to ERS, TRS shall transfer the person's service credit and an amount equal to the portion of the actuarial value of any annuity payable under Chapter 814 that represents the percentage of total service credited to both systems that was credited in TRS.

The office concluded that the legislature intended TRS to fund a share of the annuity proportional to the person's TRS service credit, and that because the legislature did not expressly exclude the incentive portion from the "total actuarial value," the incentive was included. It read section 805.008(e) to mean the systems are proportionally responsible for the total actuarial value at the time funds are transferred; because a retiree is entitled to the incentive when he or she retires, and the transfer of funds occurs when the annuity becomes payable, the office found the incentive was not an "increase granted after the transfer." TRS had argued that the incentive is a benefit for retiring at a particular time rather than for past service, that the transfer legislation's actuarial cost analysis never included the incentive, and that using TRS funds for the incentive would violate the anti-diversion clause of article XVI, section 67(a)(1) of the Texas Constitution. The office found the plain language of section 805.008(a) and section 43(e) controlled, and that article XVI, section 67 expressly authorizes transferring service credit between the systems, so funding a former member's annuity (including the incentive) was not an unconstitutional diversion. It treated the fairness objection as a matter for the legislature.

Common questions

If a teacher transfers retirement credit to the state employee system and retires early, who pays the incentive?
The Attorney General concluded that TRS must pay its proportional share of the early retirement incentive, matching the years of service the member had earned in TRS. ERS pays the share matching the member's ERS service.

Why does TRS have to fund an incentive only the ERS offered?
Because the office read the 1993 transfer statutes to require TRS to fund a proportional share of the annuity's total actuarial value, and the legislature did not exclude the incentive portion from that value. The office reasoned that if the legislature had wanted to exclude it, it would have said so expressly.

Does shifting TRS funds to pay an ERS incentive unconstitutionally divert pension money?
No. The opinion found that article XVI, section 67 of the Texas Constitution expressly allows transferring service credit between TRS and ERS, and that funding a former member's annuity through such a program, including the incentive, is not an unconstitutional diversion of pension funds.

TRS argued the result was unfair to its other members. Did that change the answer?
No. The office said it was sympathetic but that the fairness concern would be most appropriately addressed by legislation amending section 805.008 of the Government Code and section 43(e) of House Bill 2711, not by reading the statutes differently.

Citations

Constitutional and statutory provisions discussed:

• Tex. Const. art. XVI, § 67 (retirement systems; anti-diversion clause; authorized transfer of service credit between ERS and TRS)
• Gov't Code § 814.105(a) (standard service retirement annuity formula)
• Gov't Code § 814.1051 (early retirement incentive annuity at 2.25 percent)
• Gov't Code § 805.007(b) (transferred service credit treated as granted under the receiving system)
• Gov't Code § 805.008(a), (e) (amount and responsibility for transferred annuities)
• Gov't Code § 311.025 (Code Construction Act; later-enacted statute)

No court cases were cited in this opinion.

Legislation referenced: Senate Bill 81 (Acts 1993, 73d Leg., ch. 39); Senate Bill 1181 (Acts 1993, 73d Leg., ch. 791); House Bill 2711 (Acts 1993, 73d Leg., ch. 812, including § 43(e)).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0275
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0275.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

December 14, 1993

Mr. Charles D. Travis
Executive Director
Employees Retirement System of Texas
P.O. Box 13207
Austin, Texas 78711-3207

Opinion No. DM-275

Re: 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 Employees Retirement System of Texas (RQ number not fully legible in scan)

Dear Mr. Travis:

On behalf of the Employees Retirement System of Texas ("ERS"), 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 ERS. You explain that the legislature recently enacted legislation which allows TRS members to transfer service credit to the ERS, and requires the TRS to transfer funds 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 ERS 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 percent 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 $1,200.00 ($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 § 814.1051). With the early retirement incentive, 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 $1,350.00 ($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 only for the portion of the annuity calculated at 2.00% and the ERS is responsible for funding 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 ERS service credit. She is eligible to retire on September 30, 1993, and to transfer her TRS service credit to the ERS, 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, $1,200.00. ERS 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. First, 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, § 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) provides 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 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 from 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 the percentage of the total amount of the person's service credited in both systems that was credited in the system from which the credit is being transferred. [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 Bill 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 [ERS] the person's service credit in the [TRS] and an amount of money equal to the portion of the actuarial value of any annuity that becomes payable under Chapter 814, Government Code, that represents the percentage of the total amount of the person's service credited to both systems that was credited in the [TRS]. [Emphasis added.]

In a brief submitted to this office, the TRS claims that it 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 "[a]lthough 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 during 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 furnished 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 unconstitutionally divert TRS funds in violation of article XVI, section 67(a)(1) of the Texas Constitution.

The TRS also takes the position that it would be unfair to require the TRS to transfer funds to the ERS to pay for the early retirement incentive portion of the TRS share of an annuity. The TRS brief points out that an early retirement incentive proposal for TRS members was considered and rejected as 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 funds 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 from the provisions quoted above that the legislature intended the TRS to transfer money to the ERS to fund an annuity in an amount that reflects the proportion of the person's TRS 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 ERS, the TRS is required to fund 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 from the total actuarial value of the annuity in describing the amount to be transferred. We believe if the legislature had intended to exclude the early retirement incentive from 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 funds is made is responsible for paying the entire amount of any increase in the annuity granted after the transfer of funds. It suggests that the systems are proportionally responsible for the total actuarial value of the annuity at the time of the transfer of funds. Because an annuitant 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 increase in the annuity 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 benefit for past service but is rather a benefit 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 fund 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 TRS actuary's omission of the cost of the ERS early retirement incentive from the actuarial cost of the transfer is indicative of legislative intent.

In addition, the transfer of TRS funds to the ERS to fund the early retirement incentive portion of TRS' 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 disability and death benefits for public employees and officers. Financing 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 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. Transfer of service credit between the [ERS] and the [TRS] also may be authorized by law.

This constitutional provision expressly authorizes the transfer of service credit between the ERS and the TRS. We do not believe that the transfer of funds from one system to another to pay for an annuity pursuant to such a transfer program, including the transfer of funds to pay for a portion of an early retirement incentive, for the benefit of a former member, would constitute an unconstitutional diversion of funds. Finally, although we are sympathetic to the TRS complaint that it is unfair for TRS to be required to transfer funds 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).

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 incentive 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
First Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Mary R. Crouter
Assistant Attorney General

Footnote 1: Senate Bill 81 was enacted by the legislature on April 1, 1993, and signed by the governor on April 22, 1993. Senate Bill 1181 and House Bill 2711 were enacted by the legislature on May 29, 1993, and May 30, 1993, respectively, and signed by the governor on June 18, 1993.

Footnote 2: We note that section 805.008 uses the terms "transferred" and "transfer" to describe two different events, i.e., the transfer of service credit and the transfer of funds at the time the annuity becomes payable. It is clear that the term "transfer" in subsection (e) refers to the transfer of funds at the time the annuity becomes payable: "The 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." Gov't Code § 805.008(e) (emphasis added).

Footnote 3: A brief we have received which supports the position of TRS relies on the language in section 805.008(a) of the Government Code which states that "[t]he system from 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 . . . ." (Emphasis added.) The brief argues that because the incentive portion of the annuity is not based on credit service, section 805.008(a) is not applicable to that portion of the annuity. We believe that the language relied upon merely describes the time at which the transfer of funds must be made and that it has no bearing on the amount of funds to be transferred. Furthermore, the incentive portion of an annuity is based upon service credit, i.e., years of service credit multiplied by .25%. Moreover, even if this language were legally significant, it is not contained in section 43(e) of House Bill 2711 which specifically addresses TRS' duty to transfer funds to ERS. We note that House Bill 2711 has a later enactment date than Senate Bill 1181, the bill which enacted section 805.008. See supra note 1; see also Gov't Code § 311.025 (Code Construction Act).