IN THE SUPREME COURT OF TEXAS 444444444444 NO. 19-0234 444444444444
LADONNA DEGAN, RIC TERRONES, JOHN MCGUIRE, REED HIGGINS, MIKE GURLEY, LARRY EDDINGTON, AND STEVEN MCBRIDE, APPELLANTS, v.
THE BOARD OF TRUSTEES OF THE DALLAS POLICE AND FIRE PENSION SYSTEM, APPELLEE 4444444444444444444444444444444444444444444444444444 ON CERTIFIED QUESTIONS FROM THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT 4444444444444444444444444444444444444444444444444444
Argued September 17, 2019
JUSTICE DEVINE delivered the opinion of the Court, in which CHIEF JUSTICE HECHT, JUSTICE LEHRMANN, JUSTICE BLACKLOCK, JUSTICE BUSBY, and JUSTICE BLAND joined.
JUSTICE BOYD filed a dissenting opinion, in which JUSTICE GREEN joined.
JUSTICE GUZMAN did not participate in the decision.
In this case, we consider two questions of Texas law certified from the United States Court
of Appeals for the Fifth Circuit. Such questions are authorized by our Constitution and provided
for in our appellate rules. TEX. CONST. art. V, § 3-c; TEX. R. APP. P. 58. The questions concern
whether changes made by the Texas Legislature in 2017 to Deferred Retirement Option Plans violate
a state constitutional provision that prohibits the reduction or impairment of certain accrued retirement benefits. See TEX. CONST. art. XVI, § 66. We consider the certified questions below and
conclude that the 2017 legislative reforms here do not violate the Constitution.
I
The Dallas Police and Fire Pension System is a public pension fund that provides
comprehensive retirement, death, and disability benefits for approximately 9,300 active and retired
City of Dallas police officers, firefighters, and their qualified survivors. Like many states, the State
of Texas has created a series of defined benefit plans for government employees. Pension systems
for police and firefighters in cities like Dallas are largely controlled by the Texas Legislature
through Article 6243a-1. See TEX. REV. CIV. STAT. ANN. art. 6243a-1 (Supp. 2019). Under that
statute, a local Board of Trustees, selected by the mayor in consultation with the city council and
by the members and pensioners of the pension system, administers the pension system under a
compliant plan document. Id. art. 6243a-1, § 3.01(a), (b).
Under the plan, individuals become members of the pension system once they commence
training at the police or firefighter academy. The member and the city contribute to the member’s
account during the member’s active service. Section 6 of the plan enumerates four general
categories of benefits: “retirement pension” options, “disability benefits,” “death benefits,” and a
“Deferred Retirement Option Plan” (commonly referred to by its initials DROP). See generally id.
art. 6243a-1, §§ 6.01–.14. The pension system began offering DROP accounts in 1993 as an
incentive to retain experienced police officers and firefighters after they attained eligibility to retire.
Before DROP’s existence, an active police officer or firefighter who became eligible to retire
had two options under the pension system: The member could remain on the job and continue to
2 grow his or her pension under the system’s pension formula, or the member could retire and begin
drawing his or her accrued pension in the form of a monthly annuity payment. DROP introduced
a third option: A member could freeze his or her retirement benefit and continue working, receiving
both a salary and an annuity payment from his or her retirement account.
While the member electing DROP continues on the job, the monthly annuity is paid into the
member’s DROP account. Once the member has left active service, future annuity payments are
redirected to the member, who is also now eligible to withdraw funds from his or her DROP
account. DROP accounts initially collected an attractive interest rate and provided the member
several options for withdrawing these funds at the end of active service. Under these options, the
member could elect a lump-sum distribution, an annuity based on the member’s life expectancy, or
disbursement based on monthly or annual payments designated by the member. See Act of June 18,
1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex. Gen. Laws 3432, 3465–66 (formerly TEX. REV. CIV.
STAT. ANN. art. 6243a-1, § 6.14(d)(1)–(3) (1993)).
DROP accounts became very popular. Eventually, the amount of money drawn into these
accounts, together with a member’s right to elect a lump-sum distribution on leaving active service,
threatened the liquidity and stability of the pension system. These concerns, in turn, motivated the
Legislature to pass House Bill 3158 in 2017. This Bill amended the applicable pension statute to
eliminate lump-sum payments and to permit only the annuitized option for DROP account
withdrawals. TEX. REV. CIV. STAT. ANN. art. 6243a-1, § 6.14(e); see Act of May 31, 2017, 85th
Leg., R.S., ch. 318, § 1.42, 2017 Tex. Gen. Laws 639, 696 (H.B. 3158) (amending TEX. REV. CIV.
STAT. ANN. art. 6243a-1).
3 In the underlying litigation, seven Dallas System retirees (the “Retirees”) challenge as
unconstitutional the 2017 statutory amendments, which eliminate their ability to request lump-sum
distributions from their respective DROP accounts. The Retirees contend that the funds in DROP
are accrued service retirement benefits and that the change to how these funds may be withdrawn
effectively reduces or impairs the accrued benefit in violation of the Texas Constitution, article XVI,
section 66(d). That provision prohibits changes that reduce or impair certain accrued benefits,
stating that:
(d) On or after the effective date of this section, a change in service or disability retirement benefits or death benefits of a retirement system may not reduce or otherwise impair benefits accrued by a person if the person:
(1) could have terminated employment or has terminated employment before the effective date of the change; and
(2) would have been eligible for those benefits, without accumulating additional service under the retirement system, on any date on or after the effective date of the change had the change not occurred.
TEX. CONST. art. XVI, § 66.
Concluding that Section 66’s application here was unsettled under Texas law, the Fifth
Circuit certified the following questions to this Court:
1. Whether the method of withdrawal of funds from Deferred Retirement Option Plan is a service retirement benefit protected under article XVI, section 66 of the Texas Constitution.
2. If the answer to Question 1 is “yes,” then whether the Board of the Dallas Police and Fire Pension’s System’s decision, pursuant to the Texas statute in question, to alter previous withdrawal elections and annuitize the DROP funds over the respective life expectancy of the Plaintiffs violates Section 66 of the Texas Constitution.
4 Degan v. Bd. of Trs. of Dall. Police & Fire Pension Sys., 766 Fed. Appx. 16, 20 (5th Cir. 2019) (per
curiam). The Circuit’s opinion further summarizes the parties’ constitutional disagreement to be
“whether DROP accounts are ‘service retirement benefits’ (and therefore protected by Section 66)
and whether the DROP withdrawal change reduces or impairs the benefit (and therefore prohibited
by Section 66).” Id. at 18.
II
The Circuit’s first question recognizes that Section 66 protects from reduction or impairment
only certain kinds of benefits. For example, it does not apply to health benefits, life insurance
benefits, or to some disability benefits. TEX. CONST. art. XVI, § 66(c). And while the constitutional
protection expressly applies to service retirement benefits, id. § 66(d), the Circuit’s opinion notes
a disagreement “about whether DROP accounts are ‘service retirement benefits.’” 766 Fed. Appx.
at 18. The first certified question nevertheless assumes that DROP is a service retirement benefit
by inquiring whether the method of withdrawal of funds from DROP is itself a benefit protected by
the Constitution. As usual, the Circuit disclaims any intention or desire that we confine our reply
to the precise form or scope of the questions certified. Id. at 20. Because of the acknowledged
disagreement, we begin with whether DROP is a service retirement benefit as the first question
assumes.
The Retirees submit that a DROP account must be a service retirement benefit under our
reasoning in Eddington v. Dallas Police & Fire Pension System, ___ S.W.3d ___ (Tex. 2019); 2019
WL 1090799 (Tex. Mar. 8, 2019). There, we noted that, contextually, Section 66 recognizes a
pensioner’s annuity payments as a protected service retirement benefit. Id. at ___; 2019 WL
5 1090799, at *5. Because a DROP account consists of a collection of these annuity payments and
accrued interest in what we have previously described as a “forced savings account,” it logically
follows that the funds in that account are likewise a service retirement benefit. Id. at ___; 2019 WL
1090799, at *1.
That conclusion finds further support in the text of the constitutional provision and
underlying statute. Section 66 expressly excludes certain types of benefits, but DROP is not among
those excluded. See TEX. CONST. art. XVI, § 66(c). Moreover, all of the “Benefits” available under
the system’s pension plan are listed in section 6 of the plan and underlying statute, and DROP is
enumerated as a benefit in the same manner as the others. See TEX. REV. CIV. STAT. ANN. art.
6243a-1, § 6.14. We therefore agree that the funds deposited in the DROP account (and accrued
interest) are a service retirement benefit to which the protection afforded by Section 66 may apply.
Although the parties have previously taken contrary positions on DROP’s status as a service
retirement benefit for purposes of Section 66, they agree in this Court that the method of
withdrawing funds from DROP is not itself a service retirement benefit. During argument, the
Retirees conceded as much, agreeing that our answer to the first question, as phrased, should be no.
The parties, however, have different views on the consequences that flow from that negative answer.
The Board contends that a negative answer to the first question ends the task certified to us
by the Circuit. The Retirees respond that it does not end our inquiry because the retirement service
benefits at issue here are the funds in their DROP accounts, and the constitutional question is
whether the changes restricting their access to these funds is a prohibited reduction or impairment
to that underlying benefit. We agree that this is the appropriate issue and that it is generally captured
6 in the second certified question, which asks whether the Board’s “decision, pursuant to the Texas
statute in question, to alter previous withdrawal elections and annuitize the DROP funds over the
respective life expectancy of the Plaintiffs violates Section 66 of the Texas Constitution.” 766 Fed.
Appx. at 20. We turn, then, to the Constitution’s application to that question.
III
Our guiding principle when interpreting the Texas Constitution is to give effect to the intent
of the voters who adopted it. Cox v. Robison, 150 S.W. 1149, 1151 (Tex. 1912). We presume that
the framers carefully chose the language, and we interpret their words accordingly. Leander Indep.
Sch. Dist. v. Cedar Park Water Supply Corp., 479 S.W.2d 908, 912 (Tex. 1972). In determining the
intent of the framers and adopters of a constitutional proposition, we may consider contextual factors
such as “the history of the legislation, the conditions and spirit of the times, the prevailing
sentiments of the people, the evils intended to be remedied, and the good to be accomplished.”
Harris Cty. Hosp. Dist. v. Tomball Reg’l Hosp., 283 S.W.3d 838, 842 (Tex. 2009) (internal citation
omitted).
The history of Section 66 indicates that its impetus was a Depression-era decision from this
Court that subordinated the pension rights of public servants to the authority of the state to diminish
or abolish future pension payments. See City of Dall. v. Trammell, 101 S.W.2d 1009, 1017 (Tex.
1937) (holding that a “pensioner has no vested right” to future pension payments). In Trammell, the
Court considered whether a public employee, after retirement, had “a vested right to participate in
the pension fund to the extent of the full amount of monthly installments granted to him at
retirement.” Id. at 1011. At issue was whether that monthly amount could be reduced.
7 Exemplifying Texas’s historical view of public pensions as a “gratuity,” the Court held that a
pensioner had no vested right to future pension installments and, therefore, the Legislature could
reduce accrued benefits or abolish the pension system altogether. Id. at 1013, 1017.
Section 66 directly responds to that holding as a 2008 Texas Attorney General opinion
explains:
The effect the Legislature—the makers—intended in adopting House Joint Resolution 54 . . . proposing the constitutional amendment was to insure that retirement benefits (the monthly pension payments) of vested municipal employees would not be reduced or impaired by subsequent, unilateral legislative action.
Tex. Att’y Gen. Op. No. GA-0615 (2008). Legislative history thus confirms that Section 66 was
added to the Constitution to overrule our decision in Trammell by protecting the amount of monthly
pension payments from reduction or impairment through subsequent changes to the system. TEX.
CONST. art. XVI, § 66; see also Van Houten v. City of Fort Worth, 827 F.3d 530, 537–38 (5th Cir.
2016) (“Section 66 reverses the core unfairness of the Trammell decision by ensuring that earned
benefits cannot be reduced.”).
Both the Fifth Circuit and this Court have previously considered the protection afforded by
Section 66. In Van Houten, the Fifth Circuit considered whether Section 66(d) prohibited pension
reforms designed to decrease expected, but as-yet unearned, benefits. 827 F.3d at 534. The
employees who objected to the reforms argued that the formula used to calculate the benefit vested
and became constitutionally protected, along with the benefit, when the employee reached retirement
age. Id. at 535. Thus, in the employees’ view, Section 66 foreclosed even wholly prospective
formula adjustments. Id. The Circuit disagreed. It concluded that, in the context of the
8 constitutional provision, “benefits” refers to payments but does not encompass the formula by which
those payments are calculated. See id. at 535–37 (discussing the “numerous indications that the term
‘benefits’ refers only to payments”). As the Fifth Circuit observed, “Section 66(d) prohibits the
impairment of accrued benefits for vested employees.” Id. at 534 (emphasis in original). Thus, the
pension reform that altered the rate at which future benefits accrued did not violate the constitutional
provision.
Later, our decision in Eddington agreed with Van Houten’s contextual understanding of the
term “benefit” as referring to the pension’s annuity payments and not the formula by which those
payments are calculated. Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *5. We further
agreed “that ‘accrued’ benefits under Section 66(d) are those that have been earned by service, not
those that may be earned by future service.” Id. at ___; 2019 WL 1090799, at *4 (citing Van
Houten, 827 F.3d at 535). Pensioners in that case contended that Section 66 prohibited the pension
system from reducing the interest rate paid on their DROP accounts. We did not agree that the
change invoked Section 66’s protection because the interest-rate reduction applied prospectively and
therefore did not affect accrued benefits. Id. at ___; 2019 WL 1090799, at *1.
The Circuit suggests the issue here is much closer because the statutory reform introduced
by House Bill 3158 “seems to retroactively nullify a retiree’s election about” payment from a DROP
account and “seems to relate to . . . previously accrued or granted benefits.” 766 Fed. Appx. at 19.
The Retirees similarly argue that the change here does not apply prospectively to the accrued
benefits in their DROP accounts, as was the case of the interest-rate reduction in Eddington, but
rather has a retrospective impact on those funds. Before the change, the Retirees ostensibly
9 controlled the rate at which they could draw funds from their DROP accounts. They could elect to
withdraw the funds as a single-sum distribution, as a monthly annuity based on the member’s life,
or in substantially equal monthly or annual payments designated by the member. See Act of June
18, 1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex. Gen. Laws 3432, 3465–66 (formerly TEX. REV.
CIV. STAT. ANN. art. 6243a-1, § 6.14(d)(1)–(3) (1993)). The 2017 amendment to the statute (H.B.
3158) eliminated all but the monthly annuity option for distributing DROP funds. See TEX. REV.
CIV. STAT. ANN. art. 6243a-1, § 6.14(e). The Retirees complain that this change violates Section
66 by retroactively voiding previous elections and effectively denying them access to their accrued
benefits. They essentially contend that the funds in their DROP accounts have been reduced or
impaired because the Retirees no longer have unfettered access to them.
But the reform here does not negatively affect the amount of money in the Retirees’ DROP
accounts. The monthly annuity payments and earned interest collected in those accounts are neither
reduced nor impaired. Only the rate at which the Retiree is permitted to withdraw these funds is
affected. While an outright denial of access to these funds might reasonably be considered an
impairment, the complaint here is that the pensioner’s choices about access have been impaired by
the statutory reform that eliminates two of the three previous methods of distribution. The Dissent
characterizes the statutory choice under former law as a property right that attaches to DROP funds
as they accumulate, and, as such, a right entitled to protection under Section 66. Post at ___. But
Eddington distinguishes between pension annuity payments and plan terms, observing that nothing
in Section 66’s text “suggests that all retirement plan terms are protected benefits” and rejecting the
general notion that DROP is “a contract between the System and a member that cannot be changed.”
10 Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *4–*5. The legislative history, moreover,
bears this out. See, e.g., House Comm. on Pensions & Invs., Bill Analysis, Tex. H.J. Res. 54, 78th
Leg., R.S. (2003) (deleting language in earlier version of Section 66 stating that “membership in
such a plan is a contractual relationship”). Instead of a strict contractual regime, Texas chose a
more flexible approach allowing for prospective changes to benefits not yet granted. See Tex. Leg.
Council, Analyses of Proposed Constitutional Amendments, Sept. 13, 2003 Election, at 101 (July
2003) (noting that Section 66 allows prospective changes to “adjust retirement benefits if necessary
to respond to changing economic times”) [hereafter “Legislative Analyses”], available at
https://tlc.texas.gov/docs/amendments/analyses03.pdf.
The constitutional complaint here is similar to the one rejected by the Fifth Circuit in Van
Houten. There, the employees argued that Section 66 prohibited changes to the benefit formula after
vesting in the plan—that is, after the employee became eligible to retire. The Circuit rejected the
notion that the formula also vested at that time, “meaning that even wholly prospective formula
adjustments are foreclosed by Section 66.” Van Houten, 827 F.3d at 535. The Circuit further
rejected a 2008 Texas Attorney General Opinion construing Section 66(d) to “prohibit[] a change
in the method of determining the compensation base of vested employees if such action reduces or
impairs retirement benefits that the employee would have been eligible to receive on or before the
effective date of the change.” Tex. Att’y Gen. Op. No. GA-0615, at 11. “The Circuit disagreed with
the opinion’s analysis, noting that, after finding Section 66’s text and legislative history unhelpful,
the opinion based its ultimate holding on ‘other state supreme courts, particularly those of New
York, Illinois, and Alaska.’” Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *4 (citing Van
11 Houten, 827 F.2d at 536). “It was problematic, the Circuit noted, to assume that Texas had suddenly
decided to copy these states, particularly with respect to public pension protection [an area in which
Texas was known to be an outlier].” Id. (citing Van Houten, 827 F.2d at 537). Indeed, Section 66
strikes a careful constitutional balance, granting “those retirement systems the flexibility the systems
need to adjust retirement benefits if necessary to respond to changing economic times, while still
protecting the benefits that local government employees have already earned.” Legislative Analyses
at 101.
Although not bound by the Van Houten decision, we nevertheless noted our agreement with
the Circuit’s analysis of the constitutional text. Eddington, ___ S.W.3d at ___; 2019 WL 1090799,
at *4. Thus, Eddington similarly construed the term “‘benefits’” in Section 66 as “‘refer[ring] to
payments[,]’” and the protected payments as “the pensioner’s annuity payments.” Id. at ___; 2019
WL 1090799, at *5 (quoting Van Houten, 827 F.3d at 535).
The Board argues that, in contrast to the payments protected under Section 66, the Retirees’
claim here seeks to constitutionalize a lump-sum method of withdrawing DROP funds. The Board
maintains that such a method is simply a plan term that determines how DROP funds are distributed
and, like other plan terms, is subject to change. The Board concludes that Section 66 protects only
monthly pension annuity payments and not the methodology for DROP withdrawals, and thus does
not apply to the change at issue here. But labeling the change as a mere methodology or plan term
does not directly address the constitutional question. The changes determined to be constitutional
in Van Houten and Eddington were so, not because they were terms or methodologies, but because
they did not reduce or impair an accrued benefit. Had the benefit formula in Van Houten or the
12 interest rate reduction in Eddington been applied retroactively to reduce an accrued benefit, the
constitutional protection would have plainly been invoked. But the pension reforms in those cases
did not negatively adjust prior accruals or take back earned interest and thus did not implicate
Section 66.
The question of this reform’s retroactive effect is more nuanced, however. The underlying
statute previously permitted a DROP participant to elect one of three alternative methods of
distribution from the fund—an election that, under the statute, could be changed at any time before
the participant left active service. See Act of June 18, 1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex.
Gen. Laws 3432, 3465–66 (formerly TEX. REV. CIV. STAT. ANN. art. 6243a-1, § 6.14(d), (f) (1993)).
Thus, the change is retrospective in the sense that previous elections about how the DROP
participant anticipated having the funds distributed are superseded by the statutory amendment
mandating monthly annuity payments. But does that change implicate Section 66 by reducing or
impairing the accrued benefit? The Retirees argue that it does because their election to take a lump-
sum distribution has a greater net value to them than the annuity that replaces it under the pension
reform. Even assuming that to be true, we fail to see how the benefits in their respective accounts
have been reduced or impaired by the elimination of this election or the flexibility it provided under
former law.
In Eddington, we observed once again that issues of constitutional construction may include
“a provision’s history, the conditions and spirit of the times in which it was adopted, the prevailing
sentiments of the people who framed and adopted it, the evils intended to be remedied, and the good
to be accomplished.” Eddington, ___S.W.3d at ___; 2019 WL 1090799, at *5 (internal quotation
13 marks omitted). Without question, Section 66’s purpose was to overrule our Depression-era
decision in Trammell. As the Fifth Circuit has observed, “Section 66 reverses the core unfairness
of the Trammell decision by ensuring that earned benefits cannot be reduced.” Van Houten, 827
F.3d at 537–38. But unlike Trammell, the change here does not take away an accrued or granted
annuity payment. And like Eddington, the reforms here do not affect the Retirees’ non-DROP
monthly pension annuity payments or the dollar amount of the funds previously credited to DROP.
Eddington, ___S.W.3d at ___; 2019 WL 1090799, at *5. Moreover, the reform at issue does not
retroactively reverse lump-sum distributions already paid out under former law; it merely changes
the method of withdrawal going forward by requiring the pension system to distribute all DROP
funds with interest in the form of an annuity.
***
Under the Texas Constitution, the pension system must be managed according to sound
actuarial principles for the benefit of its membership. TEX. CONST. art. XVI, § 67(a). The
Government Code further imposes a duty on the Board of Trustees to hold pension system assets
in trust for the benefit of all participants, which includes “the members and retirees of the system
and their beneficiaries.” TEX. GOV. CODE § 802.201. Separate from the Board’s ministerial duty
to hold these assets in trust is its obligation to manage the pension system according to sound
actuarial principles that do not reduce or otherwise impair constitutionally protected benefits. TEX.
CONST. art. XVI, §§ 66(f), 67(a).
While Section 66 modifies Texas’s former “gratuity” approach to pension benefits for non-
statewide plans by protecting some benefits, Section 66 does not prohibit prospective pension
14 reforms. See Van Houten, 827 F.3d 538 (noting Texas’s “long-held flexible approach permitting
municipalities to revise their pension plans in light of changing economic conditions”). It does,
however, prohibit the reduction or impairment of an accrued service retirement benefit, which we
have interpreted as protection for the pensioner’s vested annuity payments. A pension reform that
abandons a more flexible distribution scheme—a scheme that allowed the pensioner to elect how
the accrued benefits would be paid over time—in favor of a more predictable scheme—one that
preserves access through a vested annuity—does not violate the constitutional prohibition.
We therefore conclude that House Bill 3158, the 2017 amendment to Article 6243a-1, does
not violate Article XVI, Section 66 of the Texas Constitution. Our answer to both certified
questions is no.
_______________________________ John P. Devine Justice
Opinion Delivered: January 31, 2020