February 18, 1975
The Honorable A. G. McNeese, Jr. Chairman, Board ofRegents University of Texas System P. 0. Box 2629 Houston, Texas 77001 Opinion No. H- 532
Re: Construction of optional retirement program under Chapter 51, Education Code.
Dear Mr. McNeese:

You have requested our opinion concerning certain aspects ofthe Optional Retirement Program (ORP) established in subchapter G of chapter 51, Texas Education Code. Since its origin in 1967, the ORP has provided faculty members ofpublic institutions ofhigher education an alternative tothe Teacher Retirement System. Attorney General Opinion H-371 (1974); Educ. Code, sec. 3.02. See Educ. Code, sec. 51.356. Inlight ofthe 1973 amendments to subchapter G, you have asked several questions which may be stated as follows:

(1)Are ORP contracts prohibited from containing provisions for cash surrenders and contract loans while the faculty participant remains an employee ofa public institution ofhigher education? (2)Ifso, is the prohibition limited to state contributed monies and the values attributable thereto? (3)How would this prohibition affect the transfer ofaparticipant from one subject institution to another or from one ORP to another? (4)Is this prohibition consistent with the Federal Investment Company Act of 1940? (5)Is this prohibition violative ofthe federal or Texas Constitutions?

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In 1973, section 51.352(6) ofthe Education Code, which originally defined the ORP as ”

. . . the program under this subchapter toprovide fixed or variable retirement annuities, including retirement unit annuity certificates ofparticipation for faculty members:’ was amended toprovide:

‘Optional Retirement Program’ means the program under this Subchapter toprovide fixed or variable retirement annuities which meet the requirement of Section 403(b), and 401(g) ofthe Internal Revenue Code of 1954, as amended, and the benefits of such annuities are to be available only upon termination of employment inthe Texas public institutions of higher education, retirement, death or total disability ofthe participating faculty member. (Emphasis added)
Inaddition, section 51.358 was added, Acts 1973, 63rd Leg., ch. 521, p. 1368, which provides in pertinent part: Participation in the Optional Retirement Program shall terminate and the benefits of such annuities will beavailable only if the participant (1)Dies; (2) Terminates his employment due tototal disability: (3)Accepts retirement; (4) Terminates employment in the Texas public institutions ofhigher education.

. . .Transfers between such institutions mentioned in this section and changes in carriers shall not constitute termination of employment. An institution ofhigher education shall accept the transfer ofany participant’s Optional Retirement Program. Nothing herein shall be construed to preclude the election by a participant towithdraw from the retirement system his accumul,ated contributions under the provisions ofSection 51.356 ofthis code.

p. 2398The Honorable A. G. McNeese page 3 (H- 532)

This Act constitutes an express limitation on the availability of the benefits ofORP annuities; they are unavailable so long as the faculty participant remains an employee ina public institution ofhigher education. The last portion ofthe Act applies only to contributions in the “retirement system, ” which is defined in section 51.352(2) as the Teachers Retirement System of Texas. Itdoes not modify the prohibition applied to an ORP. The Act makes no exception for participant contributions, rather, it is applicable toall “benefits” under an ORP regardless of their source. Inaddition, theAct provides for “transfers between

. . . institutions, ” specifying that the benefits remain unavailable in the event of such a transfer, while requiring that the institution towhich he transfers “shall accept the transfer ofany participants’ Option Retirement Program. ” Inthe alternative, since benefits under an ORP.vest,in one year, [Educ. Code,sec. 51.353(a), Attorney General Opinion M-196(1968)], a participant may transfer programs and receive benefits from both when they become available under theAct, A,ccordingly, itis ouropinion that (1)section 51.358, as ofits effective date, June 14, 1973, prohibited cash surrenders and contract loans prior to termination ofemployment in the public institutions ofhigher education, (2),section 51.358 is applicable to benefits accruing from all contributions regardless oftheir source; and (3) afaculty participant may not receive the benefits of‘anORP upon his transfer to another subject institution.

Itis also our opinion that section 51.358 merely clarified through express provisions the existing law concerning the Optional Retirement System (ORS). Section 51.351 establishes the purpose ofthe ORS as providing:

. . . full and complete retirement benefits to

teachers and administrators who have given faithful service to state-supported institutions ofhigher education. (Emphasis added)
Benefits See also, Woods v. Reilly, 218S.W. 2d437 (Tex. Sup. 1949). under the Teacher Retirement System are not available until termination of service, [Educ. Code, sec. 3.31 et seq. ], and in creating the ORS the Legislature expressed no intention toprovide differently for an ORP. Indeed, contractual retirement system annuities are to be regarded as

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“pay withheld toinduce continued faithful service. ” Teacher Retirement System v. Duckworth, 260 S.W. 2d 632 (Tex. Civ. App. --Ft. Worth 1953), opinion adopted, 264 S.W. 2d 98 (Tex. Sup. 1954).

Inaddition, cash surrender or loan provisions adversely affect the purchase price ofannuities, have federal tax consequences incompatible with sound retirement programs, [Commissioner ofInternal Revenue v. Edwards, 135F. 2d 574 (7th Cir. 1943); I.R.S. Rev. Rul. 67-258 (1967)], and are inconsistent with the purpose underlying retirement systems, which is toprovide security upon retirement. Woods v. Reilly, sz.

Consequently, it is our opinion that the prohibitions of section 51.358 were impliedly in effect upon the establishment ofthe ORS. Notwithstanding any practice which may have developed or language which may be contained in existing contracts, a participant in the ORS has never had the right to surrender his annuity contract for cash or to receive a loan ofall or any part ofthe accumulated contributions during the time he remained an employee ofa public institution ofhigher education, for statutory provisions are a part of each contract executed in contemplation thereof, and the entire contract is tobe construed in reference thereto. 13Tex. Sur. Zd, Contracts, $165, p. 352. Nor has an institution of higher education ever been authorized toapprove or establish such aprogram, for public officers may make only such contracts for the government as are authorized by law. Fort Worth Cavalry Club v. Sheppard, 83 S.W. 2d 660 (Tex. sup. 1935). While participants’ rights under an ORP vest in one year, these rights are to receive future benefits upon termination of employment bya public institution ofhigher education. There is no right to those future benefits prior to termination. See 12Tex. Jur. 2d, Constitutional Law, $116, p. 463; 45 Tex. Jur.2d, Pensions, 55, p. 24.

Your fourth question concerns the interaction ofthe prohibition with the federal Investment Company Act of 1940, 15U.S. C. $80a-1, et seq., which requires that “periodic payment plan certificates” issued by investment companies registered thereunder be redeemable and provide the holders thereof a right to surrender them for account value within a certain time. +, 15U.S. C.A. sec. 80a-27(c)(d). Variable annuity contracts have been held subject to that provision. S.E. C. v. Variable Annuity Life Insurance Co., 359 U.S. 65 (1959). They are considered

p. 2400The Honorable A. G. McNeese page 5 (H-532)

by the Securities Exchange Commission to be periodic payment plan certificates. Adoption ofVariable Annuity Rules, [1969-1970 Transfer Binder] CCH Sec. L. Rep., para. 77, 727 (SEC 1969). See Annot., 18LEd. 2d 1557 (1968). There is no conflict between the Investment Company Act and the Texas ORS statutes. The Texas statutes do not purport to regulate variable annuity contracts, but merely limit the types of contracts which are eligible for use in an ORP. Ifregistered investment companies are unable to secure an exemption from the Securities Exchange Commission for contracts to be used in an ORP, 15U.S. C. 80a-6, then these companies’ variable annuity contracts are not eligible for use inan ORP.

Your finalquestion concerns the constitutionality of section 51;358 and its subject prohibition. In our opinion, the prohibition violates neither the federal nor the state constitutions. Rights under a retirement system are “subordinate to the right ofthe Legislature to entirely abolish a pension system or diminish or change the accrued benefits thereunder. ” Woods v. Reilly, supra. Inaddition, there is noviolation ofarticle 1, section 10ofthe United States Constitution or ofarticle 1, section 16of the Texas Constitution, which prohibit the impairment of contractual obligations, for there can be no impairment ofinvalid agreements. Sequestration Cases, 30 Tex. 689 (1868); Taylor v. Thomas, 22 L. Ed. 789 (U.S. 1875). The prohibited terms were never avalid part ofany contract under the ORS, and therefore there are no contractual obligations involved.
SUMMARY
Section 51.358 ofthe Education Code prohibits cash surrender, contract loans, or any other provisions ofan Optional Retirement Program contract which provide for the availability ofbenefits prior toa participant’s termination as an employee in the public institutions ofhigher learning of Texas. This prohibition applies toall accrued benefits regardless oftheir source. These benefits donot

p. 2401The Honorable A. G. McNeese page 6 (H-532)

become available upona participant’s transfer from one subject institution to another.
Section 51.358 merely made express that law which was previously implied within the Optional Retirement System statutes. Section 51.358 does not conflict with the federal Investment Company Act of 1940.
Section 51.358 and its prohibition are constitutional. Very truly yours,

OHN L.

u P f& H;LL Attorney General of Texas PPROVED:

DAVID M. KENDALL, First Assistant

C. ROBERT HEATH, Chairman Opinion Committee lg

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