Court Opinion

ID: 4132847
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:31:06.500052+00
Date Added: 2024-06-11T14:36:14.448152
License: Public Domain

February      18, 1975

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

Dear Mr.   McNeese:

         You have requested our opinion concerning       certain aspects of the
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      of public institutions   of higher education
an alternative   to the Teacher Retirement    System.    Attorney General
Opinion H-371 (1974); Educ. Code, sec. 3.02.         See   Educ. Code, sec.
51.356.   In light of the 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
                of a public institution of higher education?

                (2) If so, is the prohibition limited to state con-
                tributed monies and the values attributable    thereto?

                (3) How would this prohibition affect the transfer
                of a participant 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    of the federal    or
                Texas   Constitutions?

                                      p.   2397
The Honorable     A. G. McNeese      page 2        (H-532)

          In 1973, section 51. 352(6) of the   Education Code, which originally
defined the ORP as ” . . . the program          under this subchapter to provide
fixed or variable retirement      annuities,   including retirement  unit annuity
certificates    of participation for faculty   members:’ was amended to provide:

                  ‘Optional Retirement     Program’ means the program
                  under this Subchapter to provide fixed or variable
                  retirement   annuities which meet the requirement      of
                  Section 403(b), and 401(g) of the Internal Revenue
                  Code of 1954, as amended,       and the benefits of such
                  annuities are to be available only upon termination
                  of employment    in the Texas public institutions   of
                  higher education,    retirement,   death or total dis-
                  ability of the participating  faculty member.
                  (Emphasis added)

           In addition, 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
                  be available only if the participant

                       (1) Dies;
                       (2) Terminates      his employment  due to total
                  disability:
                       (3) Accepts    retirement;
                       (4) Terminates      employment in the Texas public
                  institutions   of higher education.   . . . Transfers between
                  such institutions     mentioned in this section and changes
                  in carriers    shall not constitute termination    of employ-
                  ment. An institution of higher education shall accept
                  the transfer of any participant’s     Optional Retirement
                  Program.

                       Nothing herein shall be construed to preclude the
                  election by a participant to withdraw from the retire-
                  ment system his accumul,ated contributions    under the
                  provisions   of Section 51. 356 of this code.

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

 This Act constitutes     an express limitation on the availability      of the benefits
of ORP annuities; they are unavailable         so long as the faculty participant
remains an employee in a public institution of higher education.              The last
portion of the Act applies only to contributions        in the “retirement     system, ”
which is defined in section 51. 352(2) as the Teachers          Retirement    System of
 Texas.    It does not modify the prohibition applied to an ORP.           The Act
makes no exception for participant contributions,           rather, it is applicable
to all “benefits” under an ORP regardless          of their source.     In addition,
the Act provides for “transfers       between . . . institutions,     ” specifying
that the benefits remain unavailable in the event of such a transfer,             while
requiring that the institution to which he transfers         “shall accept the trans-
fer of any participants’ Option Retirement         Program.    ” In the 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 the Act,
A,ccordingly,     it is our opinion that (1) section 51. 358, as of its effective
date, June 14, 1973, prohibited cash surrenders           and contract loans prior
to termination      of employment   in the public institutions    of higher education,
(2) ,section 51.358 is applicable to benefits accruing from all contributions
regardless     of their source; and (3) a faculty participant may not receive
the benefits of ‘an ORP upon his transfer to another subject institution.

        It is 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 of the ORS as
providing:

                 . . . full and complete retirement    benefits to
                 teachers and administrators     who have given
                 faithful service to state-supported  institutions
                 of higher education.   (Emphasis added)

See also,   Woods v. Reilly,     218 S. W. 2d 437 (Tex. Sup. 1949).  Benefits
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 to provide differently for an ORP.
Indeed, contractual    retirement    system annuities are to be regarded as

                                        p.   2399
The Honorable    A. G. McNeese       page 4     (H-532)

“pay withheld to induce 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).

        In addition, cash surrender   or loan provisions   adversely   affect
the purchase price of annuities,  have federal tax consequences      incompatible
with sound retirement   programs,   [Commissioner     of Internal Revenue v.
Edwards, 135 F. 2d 574 (7th Cir. 1943); I. R. S. Rev. Rul. 67-258      (1967)],
and are inconsistent  with the purpose underlying retirement      systems,
which is to provide 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         of the ORS.     Not-
withstanding 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
of all or any part of the accumulated      contributions  during the time he
remained an employee of a public institution of higher education,           for
statutory provisions   are a part of each contract executed in contempla-
tion thereof, and the entire contract is to be construed in reference           thereto.
13 Tex. Sur. Zd, Contracts,       $165, p. 352.    Nor has an institution of higher
education ever been authorized to approve or establish such a program,
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     by a public institution of higher education.      There is no right
to those future benefits prior to termination.        See 12 Tex. Jur. 2d,
Constitutional   Law, $116, p. 463; 45 Tex. Jur.2d,        Pensions,   5 5, p. 24.

         Your fourth question concerns the interaction    of the prohibition
with the federal Investment Company Act of 1940, 15 U.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.   +,   15 U.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. 2400
The Honorable    A. G. McNeese      page 5       (H-532)

by the Securities  Exchange Commission     to be periodic payment plan
certificates.   Adoption of Variable Annuity Rules,   [1969-1970 Transfer  Binder]
CCH Sec. L. Rep.,      para. 77, 727 (SEC 1969).   See Annot., 18 LEd. 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.    If registered investment   companies are
unable to secure an exemption from the Securities      Exchange Commission
for contracts to be used in an ORP, 15 U.S. C. 80a-6,      then these companies’
variable annuity contracts are not eligible for use in an 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 of the Legislature    to entirely abolish a
pension system or diminish or change the accrued benefits thereunder. ”
Woods v. Reilly,    supra.    In addition,  there is no violation of article 1,
section 10 of the United States Constitution or of article 1, section 16 of
the Texas Constitution,     which prohibit the impairment      of contractual
obligations,  for there can be no impairment       of invalid agreements.
Sequestration   Cases,    30 Tex. 689 (1868); Taylor v. Thomas,        22 L. Ed.
789 (U.S. 1875). The prohibited terms were never a valid part of any
contract under the ORS, and therefore there are no contractual            obliga-
tions involved.

                                   SUMMARY

                      Section 51.358 of the Education Code prohibits
                 cash surrender,     contract loans,    or any other pro-
                 visions of an Optional Retirement       Program    con-
                 tract which provide for the availability      of benefits
                 prior to a participant’s    termination   as an employee
                 in the public institutions    of higher learning of Texas.
                 This prohibition applies to all accrued benefits
                 regardless   of their source.      These benefits do not

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

                    become available        upon a 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 constitu-
                    tional.

                                                           Very   truly yours,

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

    DAVID   M.   KENDALL,    First   Assistant

    C. ROBERT HEATH,        Chairman
    Opinion Committee

    lg

                                           p.   2402