Is the State of Texas on the hook if a city pension system can't pay its obligations?

Plain-English summary

State Representative Jim Murphy, chair of the House Committee on Corrections, asked whether the State of Texas must assume liability if a specific group of municipal retirement systems created under title 109 of the Texas Civil Statutes is unable to meet its financial obligations. He pointed to rising pension and health care costs, unpredictable revenues, aging infrastructure, and heavy debt loads that threaten cities' budgets, and asked whether the Legislature's oversight role over these systems causes the State to take on some or all of the liability.

The AG started with the constitutional and statutory framework. Article XVI, section 67 of the Texas Constitution lets the Legislature create retirement systems for public employees and requires it to provide by law for cities to create systems of benefits for their officers and employees. Acting under that authority, the Legislature enacted articles in title 109 of the Civil Statutes that establish the particular big-city systems, setting their governance, board composition, benefits, and contributions. The Legislature also made public retirement systems generally subject to chapter 802 of the Government Code, which requires the trustees to hold the system's assets in trust for the exclusive purpose of providing benefits to participants and beneficiaries and paying reasonable administrative expenses.

The AG described the oversight layer too. The State Pension Review Board, under chapter 801 of the Government Code, continuously reviews public retirement systems, studies threats to their actuarial soundness, and recommends policies and legislation. The Legislature also addressed financial health directly: it required the Board to study systems' ability to meet long-term obligations, and it required a system to notify the associated governmental entity when contributions are not sufficient to amortize unfunded liabilities within 40 years, and to formulate a funding soundness restoration plan when the amortization period stays too long. Some enabling statutes let local boards or city governing bodies reduce benefits, adjust contributions, or even dissolve a system in a fiscal emergency, while article XVI, section 66 generally protects vested benefits and places responsibility on the political subdivision and the retirement system that finance them.

The AG's conclusion was that in no instance does the constitution or the Legislature make the State liable for a title 109 system's shortfall. Going further, the AG explained that the Texas Constitution would actually prohibit the State from assuming that liability without express authorization. Article III, section 49(a) bars the creation of State debt except in narrow listed circumstances, and article III, section 50 bars the Legislature from giving or lending the State's credit to any city or other entity to pay its liabilities. So a court would likely conclude the State is not required to assume liability when a title 109 municipal retirement system cannot meet its obligations.

Currency note

This opinion was issued in 2016. 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.

What the opinion meant for those who asked

The House Corrections Committee chair (as the opinion described it): The opinion answered the question by concluding that a court would likely hold the State is not required to assume liability for a title 109 municipal retirement system that cannot meet its financial obligations, and that the constitution would bar the State from taking on that liability without express authorization.

Cities with title 109 pension systems (as the opinion described them): The opinion described a framework in which the responsibility for funding and for any shortfall sits with the local system and the city that finances it, supported by oversight from the State Pension Review Board, not with the State treasury. It noted that some enabling statutes give local boards and city governing bodies tools to respond to a fiscal emergency, including benefit reductions and, in one system, dissolution.

Public employees and retirees in these systems (as the opinion described them): The opinion noted that article XVI, section 66 generally protects the benefits of vested employees existing at the time of a change, placing the responsibility to keep those benefits from being reduced or impaired on the political subdivision and the retirement system, subject to exceptions and opt-outs for certain cities.

Common questions

Does Texas guarantee city pension funds?
As the opinion read the law, no. It found nothing in the constitution or the Legislature's enactments making the State liable for a title 109 system's shortfall, and it said the constitution would bar the State from taking on that liability without express authorization.

Why couldn't the State just step in and pay?
The opinion pointed to two constitutional limits. Article III, section 49(a) prohibits creating State debt except in narrow circumstances, and article III, section 50 prohibits the Legislature from lending the State's credit to pay the liabilities of a city or other entity.

If the State oversees these systems, doesn't that make it responsible?
The opinion said the Legislature's oversight, mainly through the State Pension Review Board's continuing review and reporting requirements, set up a framework for monitoring soundness. It did not make the State a financial backstop for a system that falls short.

What happens when a system can't fund its promises?
The opinion described statutory tools aimed at the local level: notice to the governmental entity when contributions fall short of a 40-year amortization, a funding soundness restoration plan, and, in some systems, local authority to reduce benefits or adjust contributions, with vested benefits generally protected under article XVI, section 66.

Is this AG opinion the final word?
No. AG opinions are persuasive authority, not binding law. The opinion predicted how a court would likely rule; only a court can finally decide the question.

Background and statutory framework

Article XVI, section 67 authorizes the Legislature to create retirement systems for public employees and requires it to provide by law for cities to create systems of benefits for their officers and employees, including a voluntary statewide system, the Texas Municipal Retirement System (Tex. Const. art. XVI, §§ 67(a), 67(c)(1)(A), 67(c)(1)(C); Tex. Gov't Code §§ 851.001-855.608). Under that authority the Legislature enacted title 109 of the Civil Statutes establishing the specific big-city systems and made public retirement systems generally subject to chapter 802 of the Government Code, under which trustees hold system assets in trust for the exclusive purpose of providing benefits and paying reasonable administrative expenses (Tex. Const. art. XVI, § 67(f)(2); Tex. Gov't Code §§ 802.201-.207, 802.201).

The State Pension Review Board conducts a continuing review of public retirement systems, studies threats to their actuarial soundness, and recommends policies and legislation (Tex. Gov't Code §§ 801.001-.211, 801.202(1)-(2)). The Legislature addressed financial health directly by requiring a study of systems' ability to meet long-term obligations and by requiring notice and a funding soundness restoration plan when amortization periods run too long (Act of May 13, 2013, 83d Leg., R.S., ch. 140, § 7(b), 2013 Tex. Gen. Laws 566, 568; Tex. Gov't Code § 802.2015(c)). Some enabling statutes authorize local action under financial stress, such as temporary benefit reductions or dissolution of a system whose reserves are exhausted (Tex. Rev. Civ. Stat. art. 6243h, § 21(a), (c); art. 6243e, § 28(h)). Article XVI, section 66 generally protects vested benefits, placing responsibility on the political subdivision and the retirement system that finance them, subject to exceptions and voter opt-outs for certain cities (Tex. Const. art. XVI, § 66(d)-(f); Tex. Att'y Gen. Op. No. GA-0615 (2008)).

The constitution bars the State from creating debt except in narrow listed circumstances and from lending its credit to any city or other entity to pay its liabilities, so the State could not assume a system's liability without express authorization (Tex. Const. art. III, §§ 49(a), 50).

Citations

Constitutional provisions:

• Tex. Const. art. XVI, §§ 67(a), 67(c)(1)(A), 67(c)(1)(C), 67(f)(2)
• Tex. Const. art. XVI, § 66(d)-(f)
• Tex. Const. art. III, §§ 49(a), 50

Statutory provisions:

• Tex. Gov't Code §§ 851.001-855.608
• Tex. Gov't Code §§ 802.201-.207, 802.201, 802.2015(c)
• Tex. Gov't Code §§ 801.001-.211, 801.202(1)-(2)
• Tex. Rev. Civ. Stat. art. 6243h, § 21(a), (c)
• Tex. Rev. Civ. Stat. art. 6243e, § 28(h)
• Act of May 13, 2013, 83d Leg., R.S., ch. 140, § 7(b), 2013 Tex. Gen. Laws 566

Texas Attorney General opinions:

• Tex. Att'y Gen. Op. No. GA-0615 (2008)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0112
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2016/kp0112.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

September 6, 2016

The Honorable Jim Murphy Opinion No. KP-0112
Chair, Committee on Corrections
Texas House of Representatives Re: Whether the State is required to assume
Post Office Box 2910 liability when a local retirement system
Austin, Texas 78768-2910 created pursuant to title 109 of the Texas Civil
Statutes is unable to meet its financial
obligations (RQ-0101-KP)

Dear Representative Murphy:

    You ask whether the State of Texas must assume liability in the event that a specific group of municipal retirement systems created pursuant to title 109 of the Texas Civil Statutes cannot meet its financial obligations. [1] You explain that "[r]ising pension and health care costs, unpredictable revenues, aging infrastructure, high debt load, and increasing costs for the delivery of city services threaten municipalities' ability to balance budgets and maintain strong credit ratings." Request Letter at 1. Citing the potential for municipal default, you ask whether "the oversight role played by the State Legislature in these specific municipal retirement systems cause[s] the State to assume some or all of the liability[.]" Id.

    Article XVI, section 67(a) of the Texas Constitution authorizes the Legislature to "enact general laws establishing systems and programs of retirement and related disability and death benefits for public employees and officers." TEX. CONST. art. XVI, § 67(a). With regard to municipalities, the constitution requires the Legislature to provide "by law for ... the creation by any city ... of a system of benefits for its officers and employees." [2] Id. art. XVI, § 67(c)(1)(A). Pursuant to this authority, the Legislature enacted multiple articles in title 109 of the Texas Civil Statutes to establish the specific municipal retirement systems you ask about. [3] Through each system's enabling statute, the Legislature provided the governance provisions applicable to each system, including board composition, plan structure, retirement eligibility requirements, benefits, and pension fund contributions. The Legislature also made public retirement systems generally subject to Chapter 802 of the Government Code, which sets forth administrative requirements in subchapter C regarding, among other things, the administration of assets. [4] See generally TEX. GOV'T CODE §§ 802.201-.207. In accordance with the constitution and chapter 802, the trustees of the municipal retirement systems at issue must "hold the assets of the system or program for the exclusive purposes of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the system or program." TEX. CONST. art. XVI, § 67(f)(2) (applicable to retirement systems not belonging to a statewide system); TEX. GOV'T CODE § 802.201 (similarly providing that a public retirement system's assets are held in trust "for the benefit of the members and retirees of the system and their beneficiaries").

    In addition, the Legislature provided general oversight of municipal retirement systems created pursuant to title 109 through the State Pension Review Board (the "Board"). See generally TEX. GOV'T CODE §§ 801.001-.211. The Board must "conduct a continuing review of public retirement systems, compiling and comparing information about benefits, creditable service, financing, and administration of systems," including "intensive studies of potential or existing problems that threaten the actuarial soundness of or inhibit an equitable distribution of benefits." Id. § 801.202(1)-(2). The Board recommends "policies, practices, and legislation" and, if requested by a public retirement system, provides "information and technical assistance on pension planning." Id. § 801.202(3)-(4). Thus, through title 109 of the Civil Statutes and chapters 801 and 802 of the Government Code, the Legislature provided an overall operating framework for each municipal retirement system about which you ask.

    Within this framework, the Legislature specifically addressed the financial health of the municipal retirement systems. For example, the Legislature required the Board to "conduct a study of the financial health of public retirement systems in this state, including each system's ability to meet its long-term obligations." Act of May 13, 2013, 83d Leg., R.S., ch. 140, § 7(b), 2013 Tex. Gen. Laws 566, 568. If at any time an actuarial valuation indicates "that the system's actual contributions are not sufficient to amortize the unfunded actuarial accrued liability within 40 years," a public retirement system must generally notify the associated governmental entity in writing. TEX. GOV'T CODE § 802.2015(c). If the valuation shows that the amortization period "has exceeded 40 years" for a certain number of consecutive valuations, the retirement system and the associated governmental entity must generally "formulate a funding soundness restoration plan" meeting certain requirements in accordance with the system's governing statute and report the progress toward improved actuarial soundness to the Board. Id. § 802.2015(c), (e), (f).

    With regard to specific enabling statutes of the municipal retirement systems at issue, the Legislature in some instances authorized or directed specific action by local entities under certain financial circumstances. See, e.g., TEX. REV. CIV. STAT. art. 6243h, § 21(a), (c) (Houston Municipal Employees Pension System) (authorizing the pension board to temporarily reduce benefits if it "determines that the pension fund is seriously depleted," and authorizing the governing body of the city by ordinance to dissolve and liquidate the pension system "[i]f the reserve and surplus in the pension fund become exhausted and the payouts of the pension fund exceed the income to the pension fund"). [5] In the event that a change by a municipal retirement system results in the reduction of benefits, article XVI, section 66(d)-(e) of the constitution generally protects the benefits of vested employees existing on the date of the change, putting the joint responsibility on "the political subdivision ... and the retirement system that finance benefits under the retirement system" to ensure that such benefits "are not reduced or otherwise impaired." [6] TEX. CONST. art. XVI, § 66(d)-(f); see also Tex. Att'y Gen. Op. No. GA-0615 (2008) at 7 (indicating that the legislative intent of section 66 was to give affected retirement systems the "flexibility ... to respond to changing economic times" while protecting the benefits of vested employees (quotation marks omitted)).

    In no instance does the constitution or the Legislature make the State liable for any shortfalls of a municipal retirement system regarding the system's financial obligations under title 109. The Texas Constitution would in fact prohibit the State from assuming such liability without express authorization. Article III, section 49(a) prohibits the creation of State debt except in limited circumstances not present here. [7] See TEX. CONST. art. III, § 49(a). A related provision, Article III, section 50, prohibits the State from lending its credit, stating that the Legislature has

            no power to give or to lend ... the credit of the State in aid of, or to any person, association or corporation, whether municipal or other, or to pledge the credit of the State in any manner whatsoever, for the payment of the liabilities, present or prospective, of any individual, association of individuals, municipal or other corporation whatsoever.

Id. art. III, § 50. Thus, a court would likely conclude that the State is not required to assume liability when a municipal retirement system created under title 109 is unable to meet its financial obligations.

                                 SUMMARY

                  A court would likely conclude that the State is not required to assume liability when a municipal retirement system created under title 109 of the Texas Civil Statutes is unable to meet its financial obligations.

                                        Very truly yours,

                                        KEN PAXTON
                                        Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

BECKY P. CASARES
Assistant Attorney General, Opinion Committee

[1] See Letter and Attachment from Honorable Jim Murphy, Chair, Comm. on Corrections, Tex. House of Representatives, to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Mar. 8, 2016), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter" & "Attachment" respectively) (Attachment on file with the Op. Comm.).

[2] Article XVI, section 67(c)(1)(C) also requires the Legislature to provide for a statewide system "in which cities may voluntarily participate." TEX. CONST. art. XVI § 67(c)(1)(C). Based on the information you provide, we assume that none of the cities at issue have elected to participate in the statewide system, the Texas Municipal Retirement System ("TMRS"). See generally TEX. GOV'T CODE §§ 851.001-855.608 (subtitle G, establishing TMRS).

[3] You identify the municipal retirement systems specifically enacted by title 109. See Attachment at 13-15, 17, 19-21, 23-26, 28-29 (pagination as indicated therein) (identifying Austin Employees' Retirement System, Austin Fire Fighters Relief & Retirement Fund, Austin Police Retirement System, Dallas Police & Fire Pension System, El Paso Firemen Pension Fund, El Paso Police Pension Fund, Fort Worth Employees' Retirement Fund, Galveston Employees' Retirement Plan for Police, Houston Firefighters' Relief & Retirement Fund, Houston Municipal Employees Pension System, Houston Police Officers Pension System, San Antonio Fire & Police Pension Fund, and Texas Local Fire Fighters Retirement Act); see also TEX. REV. CIV. STAT. arts. 6243a-1, 6243b, 6243e, 6243e.1, 6243e.2(1), 6243g-4, 6243h, 6243i, 6243n, 6243n-1, 6243o, 6243p.

[4] Subchapter C of chapter 802, Government Code, does not apply to the Texas Local Fire Fighters Retirement Act except for sections 802.202 (Investment of Surplus), 802.205 (Investment Custody Account), and 802.207 (Custody and Use of Funds). TEX. REV. CIV. STAT. art. 6243e, § 28(h).

[5] See also id. arts. 6243e.1, § 9.08 (Austin Fire Fighters Relief and Retirement Fund) (requiring a temporary pro rata reduction of benefits if the fund is insufficient to make regular payments); 6243n-1, § 6.01(d)(4) (Austin Police Retirement System) (giving the board "the authority and the duty" to decrease cost of living adjustments "as much as is necessary" to protect the continuity of the retirement system if "the ability of the system to continue" regular payments is compromised by an "economic situation"); 6243i, § 5.08(a) (Fort Worth Employees' Retirement Fund) (authorizing the city's governing body to amend its administrative rules governing municipal contributions under certain circumstances to address "a fiscal emergency"); 6243o, § 4.06 (making the City of San Antonio responsible for paying "the deficiency, if any" between the amount available to pay benefits and the amount owed by statute).

[6] By its terms, article XVI, section 66 does not apply "to a public retirement system that provides service and disability retirement benefits and death benefits to firefighters and police officers employed by the City of San Antonio" and to a public retirement system and its financing political subdivision if the voters so elect pursuant to section 66(h). TEX. CONST. art. XVI, § 66(b), (h). You inform us that voters of the following cities opted out of this provision: the City of Galveston (for the Galveston Employees' Retirement Plan for Police); the City of Houston (for the Houston Firefighters' Relief & Retirement Fund, the Houston Municipal Employees Pension System, and the Houston Police Officers Pension System); and the City of San Antonio (for the San Antonio Fire and Police Pension Fund). See Attachment at 22-26, 28 (pagination as indicated therein).

[7] See TEX. CONST. art. III, § 49(a) (prohibiting the creation of State debt "except (1) to supply casual deficiencies of revenue, not to exceed in the aggregate at any one time two hundred thousand dollars; (2) to repel invasion, suppress insurrection, or defend the State in war; (3) as otherwise authorized by this constitution; or (4)" as approved by the voters through an election).