BILL ANALYSIS H.B. 1782 By: Yarbrough April 7, 1995 Committee Report (Unamended) BACKGROUND Texas Revised Civil Statutes Annotated ("Revised Statutes") Art. 6243e.2 provides for the establishment of a Firemen's Relief and Retirement fund in cities of not less than 1,200,000 population. Article 6243e.2 was originally adopted in 1975 by the 64th Legislature, and was derived in part from predecessor Article 6243e. At this time the only pension fund operated under this Article is the Firemen's Relief and Retirement Fund for the City of Houston, Texas. PURPOSE This bill would establish within the retirement fund a Deferred Retirement Option Plan, (DROP). The purpose of the DROP program is provide members who meet eligibility requirements for retirement benefits, but who desire to continue working, with an alternative pension benefit option. Members who are eligible for retirement may elect to participate in DROP for up to 5 years. During this period of continued active service, monthly contributions to the Fund from the member's salary, together with an amount equal to the member's monthly retirement benefit, are segregated into a separate account which is paid to the member upon retirement either in a lump sum or in 3 equal installments. The quid pro quo for DROP participation is that years of service occurring after the member elects to participate in DROP are not counted in determining the amount of the member's monthly retirement benefit. Thus, while the member receives an additional retirement payment at the time of retirement, his/her monthly pension benefit thereafter may be less than otherwise would have been received in the absence of DROP participation. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1: Amends Art. 6243e.2 by adding Section 4A, Subsections (a) - (n). (a) defines "DROP", "DROP account", and "DROP account balance." (b) allows members who are eligible to receive a regular retirement pension and who remain in active service to participate in DROP. Members who participate in DROP will have their DROP election date treated as their date of retirement for purposes of determining the amount of their monthly retirement pension. Members may apply for a monthly retirement pension, together with the balance in their DROP account, upon leaving active service. (c) authorizes the Fund's Board of Trustees to establish a procedure for members to elect to participate in DROP. Elections become effective the first month after the Board approves a member's DROP participation request. After a member's DROP election becomes effective, amounts deducted from the member's salary for the Fund are maintained in a separate DROP account established for the member. These credits to the member's DROP account continue for 5 years or until the member leaves active service, whichever occurs first. (d) requires the Fund to make monthly contributions to the member's DROP account which equal the retirement benefit the member would have received had the member retired rather that remaining in active service and participating in DROP. Again, these contributions continue for 5 years or until the member leaves active service, whichever occurs first. (e) requires crediting a member's DROP account with earnings and losses which occur during the period of DROP participation, and provides a method for determining earnings and losses to be credited to the DROP account. (f) allows a member to receive the amount in the member's DROP account upon leaving active service. The member may elect to receive this amount in a lump sum or in 3 equal, annual installments. (g) prohibits crediting a member's DROP account with earnings or losses which occur after the member retires. A member who elects to receive his/her DROP balance in installments receives no interest on the balance in his/her DROP account after payment of the first installment. (h) prohibits paying a DROP account balance in installments if such method fails to satisfy the requirements of Section 401(a)(9) of the Internal Revenue Code. (i) provides that a member's DROP election date will be treated as his/her retirement date for purposes of calculating regular retirement benefits under Section 4 of the Act, and for purposes of calculating survivor benefits under Sections 7 and 11 of the Act. (j) establishes that a member's survivors are entitled to receive the balance in a member's DROP account when the member dies prior to complete distribution of the account. (k) governs the timing of distribution of a member's DROP account to survivors if the member dies prior to complete distribution of the account. (l) makes members who participate in DROP ineligible for disability benefits under Section 6 of the Act, and makes the member's survivors ineligible for enhanced death benefits provided in Section 7(b) of the Act. However, in cases where disability or death occurs after the member has begun DROP participation, a procedure is provided for revocation of the member's DROP election. Such revocation must occur before the member has received any distributions from the member's DROP account and/or retirement benefits. (m) requires members who participated in the DROP program and who return to active service after retiring to continue participation in DROP. (n) makes the DROP program effective on September 1, 1995, and requires that the program remain in effect for 5 years. Thereafter, the Board is allowed to establish a cut-off date for further participation in DROP. SECTION 2: Effective date: September 1, 1995 SECTION 3: Emergency clause SUMMARY OF COMMITTEE ACTION HB. 1782 was considered by the committee in a public hearing on April 3, 1995. Rep. Ken Yarbrough testified as the bill's author. The following persons testified for the bill: Rick Mumey representing the Houston Professional Fire Fighters Assoc. Jennifer C. Morales representing herself and the Board of Trustees, Houston Firemen's Pension Fund The bill was reported favorably without amendment with the recommednation that it do pass and be printed and be sent to the Committee on Local and Consent Calendars, by a record vote of 5 ayes, 0 nays, 0 pnv & 4 absent.