## IN THE SUPREME COURT OF TEXAS

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. 19-0234

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### D EGAN 

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### T ERRONES 

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### G UIRE 

### , R EED 

### H IGGINS 

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### G URLEY 

### , L ARRY 

### E DDINGTON 

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### S TEVEN 

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### B RIDE 

### , A PPELLANTS 

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### T HE 

### B OARD OF 

### T RUSTEES OF THE 

### D ALLAS 

### P OLICE AND 

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NITED S TATES C OURT OF A PPEALS FOR THE F IFTH C IRCUIT

4444444444444444444444444444444444444444444444444444 Argued September 17, 2019

J USTICE D EVINE delivered the opinion of the Court, in which C HIEF J USTICE H ECHT , J USTICE L EHRMANN , J USTICE B LACKLOCK , J USTICE B USBY , and J USTICE B LAND joined. J USTICE B OYD filed a dissenting opinion, in which J USTICE G REEN joined. J USTICE G UZMAN 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 authorize d by our Constitution and provided for in our appellate rules. T EX
. C ONST . art. V, § 3-c; T EX
. R. A PP
. P. 58. The questions concern whether changes made by the Texas Legislature in 2017 to Deferr ed Retirement Option Plans violate a state constitutional provision that prohibits the reduction o r impairment of certain accruedretirement benefits. See T EX
. C ONST . art. XVI, § 66. We consider the certified questions below an d conclude that the 2017 legislative reforms here do not violate the Constitution. I The Dallas Police and Fire Pension System is a public pension f und that provides comprehensive retirement, death, and disability benefits for ap proximately 9,300 active and retired City of Dallas police officers, firefighters, and their qualifi ed survivors. Like many states, the State of Texas has created a series of defined benefit plans for gove rnment employees. Pension systems for police and firefighters in cities like Dallas are largely c ontrolled by the Texas Legislature through Article 6243a-1. See T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1 (Supp. 2019). Under that statute, a local Board of Trustees, selected by the mayor in co nsultation with the city council and by the members and pensioners of the pension system, administer s 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 syste m 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 p lan enumerates four general categories of benefits: “retirem ent pension” options, “disabil ity 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 D ROP accounts in 1993 as an incentive to retain experienced police officers and firefighter s after they attained eligibility to retire. Before DROP’s existence, an ac tive police officer or firefighte r who became eligible to retire had two options under the pension system: The member could rem ain on the job and continue to

2grow his or her pension under the system’s pension formula, or the member could retire and begin drawing his or her accrued pension i n the form of a monthly annuity payment. DROP introduced a third option: A member could freeze his or her retirement ben efit 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 monthl y 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 inter est rate and provided the member several options for withdrawi ng these funds at the end of activ e service. Under these options, the member could elect a lump-sum distribution, an annuity based onthe 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 T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1, § 6.14(d)(1)–(3) (1993)). DROP accounts became very popular. Eventually, the amount of m oney drawn into these accounts, together with a member’s right to elect a lump-sum di stribution on leaving active service, threatened the liquidity and stability of the pension system. These concerns, in turn, motivated the Legislature to pass House B ill 3158 in 2017. This Bill amended the applicable pension statute to eliminate lump-sum payments and to permit only the annuitized o ption for DROP account withdrawals. T EX
. R EV
. C IV
. S TAT
. A NN . 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 T EX
. R EV
. C IV
. S TAT
. A NN
. art. 6243a-1).

3In 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 Retiree s contend that the funds in DROP are accrued service retirement be nefits 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 employme nt before the effective date of the change; and (2) would have been eligible for those benefits, without accumu lating additional service under the retirement system, on any date on or after the effective date of the change had the change not occurred. T EX
. C ONST . art. XVI, § 66. Concluding that Section 66’s application here was unsettled und er Texas law, the Fifth Circuit certified the following questions to this Court: 1. Whether the method of withdrawal of funds from Deferred Reti rement Option Plan is a service retirement benefit protected under article XV I, section 66 of the Texas Constitution. 2. If the answer to Question 1 is “yes,” then whether the Boardof the Dallas Police and Fire Pension’s System’s decision, pursuant to the Texas sta tute in question, to alter previous withdrawal elections and annuitize the DROP fund s over the respective life expectancy of the Plaintiffs violates Section 6 6 of the Texas Constitution.

4Degan 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 b enefit (and therefore prohibited by Section 66).” Id. at 18. II The Circuit’s first question recognizes that Section 66 protect s 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. T EX
. C ONST . 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 retire ment benefits.’” 766 Fed. Appx. at 18. The first certified ques tion nevertheless assumes that DROP is a service retirement benefit by inquiring whether the method of withdrawal of funds from DRO P is itself a benefit protected by the Constitution. As usual, the Circuit disclaims any intentio n 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 retiremen t benefit as the first question

assumes. The Retirees submit that a DROP account must be a service retir ement 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, contextu ally, Section 66 recognizes a pensioner’s annuity payments as a protected service retirement benefit. Id . at ___; 2019 WL

51090799, at *5. Because a DROP acc ount consists of a collectio n of these annuity payments and accrued interest in what we have previously described as a “for ced savings account,” it logically follows that the funds in that account are likewise a service r etirement benefit. Id . at ___; 2019 WL 1090799, at *1. That conclusion finds further support in the text of the consti tutional provision and underlying statute. Section 66 expressly excludes certain type s of benefits, but DROP is not among those excluded. See T EX
. C ONST . art. XVI, § 66(c). Moreover, all of the “Benefits” available under the system’s pension plan are listed in section 6 of the plan a nd underlying statute, and DROP is enumerated as a benefit in the same manner as the others. See T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1, § 6.14. We therefore agree that the funds deposited i n the DROP account (and accrued interest) are a service retirement benefit to which the protect ion afforded by Section 66 may apply. Although the parties have previously taken contrary positions o n DROP’s status as a service retirement benefit for purposes of Section 66, they agree in th is 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 firs t 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, an d 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 appropri ate issue and that it is generally captured

6in 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 6 6 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 thei r 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 proposit ion, we may consider contextual factors such as “the history of the legislation, the conditions and spi rit of the times, the prevailing sentiments of the people, the evils intended to be remedied, an d 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 Depr ession-era decision from this Court that subordinated the pension rights of public servants t o 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, h ad “a vested right to participate in the pension fund to the extent of the full amount of monthly in stallments granted to him at retirement.” Id . at 1011. At issue was whether that monthly amount could be r educed.

7Exemplifying Texas’s historical view of public pensions as a “g ratuity,” the Court held that a pensioner had no vested right to future pension installments an d, therefore, the Legislature could reduce accrued benefits or abolish the pension system altogethe r. Id . at 1013, 1017. Section 66 directly responds to that holding as a 2008 Texas At torney General opinion explains: The effect the Legislature—the makers—intended in adopting Hous e Joint Resolution 54 . . . proposing th e 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 legi slative action. Tex. Att’y Gen. Op. No. GA-0615 (2008). Legislative history th us 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 subsequen t changes to the system. T EX
. C ONST . 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 considere d 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, ben efits. 827 F.3d at 534. The employees who objected to the reforms argued that the formula u sed to calculate the benefit vested and became constitutionally prot ected, 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

8constitutional provision, “benefits” refers to payments but doe s 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 obs erved, “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 a ccrued 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 Sec tion 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-rat e 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 gra nted benefits.” 766 Fed. Appx. at 19. The Retirees similarly argue that the change here does not appl y prospectively to the accrued benefits in their DROP accounts, as was the case of the interes t-rate reduction in Eddington , but rather has a retrospective impact on those funds. Before the c hange, the Retirees ostensibly

9controlled the rate at which they could draw funds from their D ROP accounts. They could elect to withdraw the funds as a single-sum distribution, as a monthly a nnuity 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 34 32, 3465–66 (formerly T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1, § 6.14(d)(1)–(3) (1993)). The 2017 amendment t o the statute (H.B. 3158) eliminated all but the monthl y annuity option for distrib uting DROP funds. See T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1, § 6.14(e). The Retirees complain that this cha nge 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 DRO P 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 mo ney in the Retirees’ DROP accounts. The monthly annuity payments and earned interest col lected in those accounts are neither reduced nor impaired. Only the rate at which the Retiree is pe rmitted to withdraw these funds is affected. While an outright denial of access to these funds mi ght 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 proper ty right that attaches to DROP funds as they accumulate, and, as such, a right entitled to protectio n 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.”

10Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *4–*5. The legislative history, m oreover, 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 Sect ion 66 stating that “membership in such a plan is a contractual relationship”). Instead of a str ict contractual regime, Texas chose a more flexible approach allowing for prospective changes to bene fits 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 “a djust 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 rejecte d by the Fifth Circuit in Van Houten . There, the employees argued that Section 66 prohibited chang es 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 Attorne y General Opinion construing Secti on 66(d) to “prohibit[] a change in the method of determining the compensation base of vested em ployees if such action reduces or impairs retirement benefits that the employee would have been e ligible 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

11Houten , 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 publ ic 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, gran ting “those retir ement systems the flexibility the systems need to adjust retirement benefits if necessary to respond to c hanging economic times, while still protecting the benefits that local government employees have al ready 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 “‘r efer[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 un der Section 66, the Retirees’ claim here seeks to constitutionalize a lump-sum method of with drawing DROP funds. The Board maintains that such a method is simply a plan term that determi nes how DROP funds are distributed and, like other plan terms, is subject to change. The Board co ncludes that Section 66 protects only monthly pension annuity payments and not the methodology for DR OP 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 bec ause they did not reduce or impair an accrued benefit. Had the bene fit formula in Van Houten or the

12interest 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 in terest and thus did not implicate Section 66. The question of this reform’s retroactive effect is more nuance d, however. The underlying statute previously permitted a DR OP 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 T EX
. R EV
. C IV
. S TAT
. A NN . art. 6243a-1, § 6.14(d), (f) (1993)). Thus, the change is retrospective in the sense that previous el ections about how the DROP participant anticipated having the funds distributed are supers eded by the statutory amendment mandating monthly annuity payments. But does that change impli cate Section 66 by reducing or impairing the accrued benefit? The Retirees argue that it does because their election to take a lumpsum distribution has a greater net value to them than the annui ty 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 electi on or the flexibility it provided under former law. In Eddington , we observed once again that issues of constitutional construc tion 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 i ntended to be remedied, and the good to be accomplished.” Eddington , ___S.W.3d at ___; 2019 WL 1090799, at *5 (int ernal quotation

13marks omitted). Without question, Section 66’s purpose was to overrule our Depression-era decision in Trammell . As the Fifth Circ uit has observed, “Sec tion 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 fu nds previously credited to DROP. Eddington , ___S.W.3d at ___; 2019 WL 1090799, at *5. Moreover, the refo rm at issue does not retroactively reverse lump-sum distributions already paid out u nder 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 manage d according to sound actuarial principles for the benefit of its membership. T EX
. C ONST . 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.” T EX
. G OV
. C ODE § 802.201. Separate from the Board’s ministerial duty to hold these assets in trust is its obligation to manage the p ension system according to sound actuarial principles that do not reduce or otherwise impair con stitutionally protected benefits. T EX
. C ONST . art. XVI, §§ 66(f), 67(a). While Section 66 modifies Texas’s former “gratuity” approach to pension benefits for nonstatewide plans by protecting some benefits, Section 66 does no t prohibit prospective pension

14reforms. See Van Houten , 827 F.3d 538 (noting Texas’s “long-held flexible approach per mitting municipalities to revise their pe nsion plans in light of changi ng 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 annui ty payments. A pension reform that abandons a more flexible distribution scheme—a scheme that allo wed 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

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