BILL ANALYSIS H.B. 2943 By: Greenberg (Barrientos) Intergovernmental Relations 05-11-95 Senate Committee Report (Amended) BACKGROUND Chapter 451, Acts of the 72nd Legislature, Regular Session, 1991, Article 6243n, V.T.C.S., authorizes the establishment of a retirement system for employees of each municipality having a population of more than 460,000 and less than 500,000. The Act, originally enacted in 1991 and amended in 1993, contains ambiguous provisions that require amending in order for the retirement system to remain a qualified plan under federal law. PURPOSE As proposed, H.B. 2943 amends provisions under Article 6243n, V.T.C.S., to authorize a retirement board to adopt any amendment that modifies this Act to the extent necessary for the retirement system to remain a qualified plan; clarifies existing definitions and adds new definitions; sets forth the method of calculating a retirement benefit; amends the composition of the retirement board. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is granted to the retirement board of a retirement system for employees of each municipality having a population of more than 460,000 and less than 500,000 under SECTION 1 (Sec. 4(k), Article 6243n, V.T.C.S.) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 451, Article 6243n, V.T.C.S., as follows: Sec. 1. SCOPE. Establishes a retirement system for employees of each municipality having a population of more than 460,000 and less than 500,000; provided that once such pension system becomes operative in any city, any right or privilege accruing to any member thereunder shall be a vested right according to the terms of this Act and the same shall not be denied or abridged thereafter through any change in population of any such city taking such city out of the population bracket as herein prescribed, and said pension system shall continue to operate and function regardless of whether or not any future population exceeds or falls below said population bracket. Sec. 2. DEFINITIONS. Defines "agency of the municipality," "approved medical leave of absence," "authorized leave of absence," "board," "code," "compensation," "consumer price index," "current service annuity," "designated beneficiary," "employer," "governing body," "malfeasance," "membership service," "normal retirement date," "prior service," "qualified domestic relations order," "redeemed prior service," and "retirement." Redefines "accumulated deposits," "actuarial equivalent," "actuary," "average final compensation," "beneficiary," "Fund No. 2," "investment consultant," "investment manager," "life annuity (modified cash refund)," "member," "normal retirement age," "prior service pension," "regular full-time employee," "retirement board," and "year of creditable service." Sec. 3. ESTABLISHMENT AND APPLICABILITY. Requires members who retired prior to a certain date to continue to receive the same retirement allowances they were receiving prior to that date, except as provided by Subsection (b) of this section and subject to the authority granted the retirement board in Section 7(d) of this Act. Sec. 4. ADMINISTRATION. (a) Makes a conforming change. (b) Amends the composition of the retirement board to require that of the 11 members, one member be from the governing body for place one, three be qualified voters of the city for places three through five, and two retired members for places six through nine. (c) Makes conforming changes. Sets forth the length of terms for each member. (d) Requires members for places six through eleven to be elected in accordance with certain provisions, including that members for places 10 and 11 be elected to four-year staggered terms. Requires one such retirement board member to be elected at an election held in every other even-numbered year with the term of such retirement board member beginning on January 1 of the following odd-numbered year. Requires the first election for place 10 to be held in 1996 and the term of the retired member elected at that election to begin on January 1, 1997. Requires the retirement board to appoint a retired member, to place 10, to serve until January 1, 1997. Requires the term of the retired member serving in place 11 to expire on December 31, 1998. Requires the nominating and election committee to determine and certify that each nominee and each candidate announcing for election is an active-contributory member or a retired member, as applicable. Makes conforming changes. (e)-(i) Make conforming and nonsubstantive changes. (j) Authorizes the retirement board to retain legal counsel as necessary in the judgment of the board to advise, consult, assist and represent the retirement board the system in and with respect to any legal matter, issue, cause or claim that comes before the retirement board or that may affect the retirement system or the operation of the fund. (k) Authorizes the retirement board to adopt rules, establish regulations or procedures, correct any defect, supply any information, or reconcile any inconsistency as the retirement board considers necessary or advisable to carry out this Act, except as provided by Subsection (l) of this section. Provides that the retirement board is authorized to adopt any amendment that modifies this Act to the extent necessary for the retirement system to be a qualified plan. (l) Makes conforming changes. (m) Provides that the retirement board is authorized to administer oaths to any person providing testimony at any hearing or other proceeding of the retirement board. Sec. 5. MEMBERSHIP. (a) Requires each regular full-time employer to become an active-contributory member as a condition of employment and to make the required deposits commencing with the first pay period in which the employee is compensated following the effective date of this Act. Requires the employee to make the deposits as long as the employee remains a regular full-time employee or a beneficiary ceases to be entitled to any benefits, unless on approved medical leave of absence or on leave to service in the uniformed services. Requires the membership for all new regular full-time employees to commence on the date their employment commences and all current active contributory members to be deemed to have additional creditable service equal to the time elapsed between the date their regular full-time employment commenced and the date they became an active contributory member, but not in excess of six months. (b) Provides that membership in the retirement system consists of, in addition to other groups, the active-noncontributory members group, which consists of all employees on approved medical leave of absence and all employees of an employer who have been active-contributory members but who are no longer so because they are not regular full-time employees. Makes conforming changes. (c) No changes. (d) Sets forth certain information that the chief administrative officer of each employer, rather than the city manager, is required to submit to the retirement board in a statement. Makes conforming changes. Deletes references to the pension officer and hospital authority board. (e) Makes a conforming change. (f) Authorizes a member on authorized leave of absence to make deposits each pay period, rather than each biweekly pay period, to the system while on authorized leave of absence. Requires each deposit to be in an amount that is equal to the amount of the member's deposit for the last complete period that the member was paid by the employer. Requires the member's employer to make a single payment for a member who elects to make a single payment. Provides that a member will continue to earn membership service for the pay periods for which the member makes deposits during a leave of absence. Provides that membership service will be credited at the time of payment, if a member makes a lump sum payment. Deletes provisions requiring each hospital authority to make contributions to the retirement fund for a member on authorized leave of absence from the hospital authority. Make conforming changes. (g) Makes a conforming change. Sec. 6. CREDITABLE SERVICE. (a) and (b) Make conforming changes. (c) Authorizes a member to establish creditable service for military service performed that is creditable as provided under this subsection according to the following conditions, limitations, and restrictions apply: (1) Defines military service. (2) No changes. (3) Prohibits a member from establishing creditable service in the retirement system for military service for more than the greater of the creditable service required under the Uniformed Services Employment and Reemployment Act of 1994, as amended. (4) Provides that the retirement board will determine the required contribution based on a procedure recommended by the actuary and approved by the retirement board, provided that such contribution may not exceed the amount required under the Uniformed Services Employment and Reemployment Act of 1994, as amended, in the case of a member who makes such contributions within the time prescribed by such act. (5) No changes. Sec. 7. SERVICE RETIREMENT BENEFITS AND WITHDRAWAL BENEFITS. (a)-(c) Make conforming changes. (d) Requires the amount of the adjustment for each retired member or beneficiary to be a uniform percentage of the monthly payment being received by a member, or by a beneficiary by reason of a member, who was retired at least one year before the adjustment. Deletes a provision granting the board authority and duty to decrease the amount of adjustment payment at any and all times and without notice to anyone. Makes conforming and nonsubstantive changes. (e) No changes. (f) Makes a conforming change. (g) Requires the designation of a beneficiary to be made in writing on a form and in the manner prescribed by the retirement board. Provides that spousal consent shall not be required for a member to select Option I, II, III, IV, or VI. Makes conforming changes. (h)-(k) No changes. (l) Requires the sum of $10,000, rather than $2,000, to be payable in a lump sum to the member's beneficiary in the event of the death of a member receiving a retirement allowance. (m) Requires an additional sum of $10,000, rather than $2,000, to be payable as a death benefit to the member's designated beneficiary when monthly survivor benefits are deemed payable as a result of the death of a member before retirement. (n) Provides that a member's estate will receive the excess of the retired member's accumulated deposits over the retirement allowances paid in the event of the death of a retired member then receiving a retirement allowance under any retirement option and the death of the beneficiary designated by the retired member. (o) Makes conforming changes. (p) Prohibits forfeitures that may result from the termination of any right of a member from being used to increase benefits to remaining members. Prohibits this subsection from precluding an increase in benefits by amendment to this Act or action of the retirement board in accordance with Subsection (d) of this section that is made possible by forfeitures or for any other reason. Deletes a provision authorizing the board to adjust the terms of payment under any form of benefit payment. Sec. 8. DISABILITY RETIREMENT. (a) Provides that inactive-noncontributory members are not eligible for consideration for disability retirement and may not receive any benefits under this section. (b) Authorizes a member to apply for disability retirement if a member who is eligible for consideration for disability retirement has become mentally or physically incapacitated for the performance of all employment duties as a direct result of injuries sustained in the performance of the member's employment duties subsequent to the member's effective date of membership in the retirement system. Makes conforming changes. (c) Requires the retirement board to award a member who meets the requirements of Subsection (b) of this section a disability retirement allowance. Provides that the decision of the retirement board is final subject to reexamination, discontinuance and revocation rules at Subsections (h) and (i) of this section. Makes conforming changes. (d) Makes conforming changes. (e) and (f) Make no changes. (g) Requires a disabled member to file the annual report each calendar year as required by Subsection (f) of this section no later than a certain date. Authorizes the retirement board to verify all information submitted in the report. (h) Authorizes a retirement board to reinstate a member's disability retirement allowance on a prospective basis only on the member's full performance of and compliance with all requirements of this section, if a member's disability retirement allowance has been revoked. (i) Requires the retirement board to discontinue the disability retirement allowance if a member is no longer physically or mentally incapacitated as shown by the annual medical examination or is engaged in or is able to engage in substantial gainful occupation. Provides that a member is entitled to a life annuity if a member who had 10 or more years of creditable service does not withdraw the excess. Makes conforming changes. (j) Makes conforming changes. Sec. 9. LIMITATIONS ON BENEFITS. (a) Prohibits the annual benefit provided with respect to any member from exceeding the lesser of $90,000 or 100 percent of the member's compensation averaged over the three consecutive calendar years during which the member had the greatest aggregate compensation from the employer, notwithstanding any other provisions of this Act. (b) Requires benefits provided to a member under this Act and under any other qualified defined benefit plan or plans maintained by the employer to be aggregated for purposes of determining whether the limitations in Subsection (a) of this section are met. Requires the reductions to be made in the benefits provided under this Act, to the extent necessary to enable each plan or plans to satisfy those limitations, if the aggregate benefits otherwise payable to any member under this Act and any other defined benefit plan or plans maintained by the employer would otherwise exceed the limitations of Subsection (a) of this section. (c) Sets forth certain adjustments to which a maximum benefit otherwise permitted under Subsection (a) or (b) is subject. (d) Requires the $90,000 limitation on annual benefits, but not the $75,000 adjustment, to be adjusted annually as provided by Section 415(d) of the code and the regulations prescribed by the secretary of the treasury to reflect cost of living adjustments. Provides that the adjusted limitation is effective as of January 1 of each calendar year. (e) Requires the limitation provided by this section for a member who has separated from service with a vested right to a pension to be adjusted annually as provided by Section 415(d) of the code and the regulations prescribed by the secretary of the treasury. (f) Sets forth certain interest rate assumptions to be used in computing the limitations under this section. (g) Prohibits an adjustment under Section 415(d) of the code from being taken into account before the year for which the adjustment first takes effect, for purposes of this section. Provides that no adjustment is required for the value of qualified joint and survivor annuity benefits, preretirement death benefits, post-retirement medical benefits, or post-retirement cost-of-living increases made in accordance with Section 415(d) of the code and Section 1.415-3(c) of the Income Tax Regulations. (h) Authorizes this plan to still pay an annual benefit to any member in excess of the member's maximum annual benefit otherwise allowed under certain conditions. Provides that member contributions under this Act are not considered a separate defined contribution plan maintained by the employer. (i) Requires the $90,000 limitation, as adjusted, to be reduced by a certain method of computation if a member has less than 10 years of creditable service at the time the member begins to receive benefits under the Act, with a provision. Requires the 100 percent limitation and the $10,000 limitation of Subsection (h) to be reduced in the same manner as provided in the preceding sentence if the employee has less than 10 years of employment with the employer, with an exception. (j) Provides that the sum of a defined benefit plan fraction and the defined contribution plan fraction for any year may not exceed 1.0, if a member is or has been a member in one or more defined contributions plans maintained by the employer. (k) Sets forth the defined benefit plan fraction to any year for purposes of Subsection (j) of this section. (l) Sets forth the defined contribution plan fraction for any year for purposes of Subsection (a) of this section. Prohibits the annual additions from being recomputed for years beginning January 1, 1987, to treat all member contributions as annual additions. (m) Requires the retirement board to first request the person or persons responsible for the defined contribution plan or plans, to reduce, the annual additions to the member's account to the extent necessary for the year in which the sum of the defined plan fraction and the defined contribution plan fraction exceeds 1.0. Requires the board to adjust the benefits provided under this Act so that the sum of both fractions shall not exceed 1.0 in any year for the member, if, after limiting to the extent possible, the annual additions to the member's account for the year, the sum of the plan's fraction still exceeds 1.0. (n) Requires all qualified defined benefit plans and all qualified defined contribution plants, whether terminated or not, ever maintained by or contributed to by the employer, to be treated as one defined benefit plan and one defined contribution plan, respectively, for purposes of determining the limits provided by this section. (o) Requires limitations, adjustments, and other requirements prescribed by this Act to at all time comply with the requirements of Section 415 of the code and all regulations promulgated under the code, notwithstanding anything contained in this section to contrary. Prohibits a provision from reducing the benefits of any member after the effective date of the repeal of the provision or during the period in which the provision is not enforced, if any provision of Section 415 of the code is repealed or is not enforced by the Internal Revenue Service. Sec. 10. METHOD OF FINANCING. (a) Makes conforming changes. (b) No changes. (c) and (d) Makes conforming changes. (e) Requires each employer to pick up the contributions required to be made to the fund by its respective employees. Provides that active contributory member deposits will be picked up by each employer by a reduction in each such employee's monetary compensation. Requires all such employee contributions to be treated as employer contributions in accordance with Section 414(h)(2) of the code. Makes conforming changes. (f) Provides that under no circumstances and in no event may any of the contributions and income of the retirement system revert to the employer or otherwise be diverted to or used for any purpose other than the exclusive benefit of the member, retirees, and their beneficiaries. Provides that it shall be impossible for the diversion or use prohibited by the preceding section to occur, whether by operation or natural termination of the retirement system, by power of revocation or amendment, by the happening of a contingency, by collateral arrangement, or by any other means. Sec. 11. New heading: INVESTMENTS OF THE RETIREMENT BOARD. Makes conforming changes. Redesignates existing Section 10. Sec. 12. MISCELLANEOUS. (a) Requires a person who with intent to deceive falsifies records or knowingly permits any records to be falsified to forfeit any office or rights held by the person under the system. (b) No changes. (c) Makes conforming changes. (d) Provides that the benefit of any highly compensated employee or former employee is limited to a benefit that is nondiscriminatory under Section 404(a)(4) of the code, notwithstanding any other provision in this Act to the contrary, in the event of a termination of the retirement and pensioning system. Provides that benefits distributed to any of the 25 most highly compensated active and former highly compensated employees are restricted such that the annual payments are no greater than an amount equal to the payment that would be made on behalf of an employee under a single life annuity that is the sum of the employees' accrued benefit and the employee's other benefits under the plan. Provides that the preceding sentence does not apply under certain conditions. Sets forth what constitutes a benefit for purposes of this section. (e) Authorizes a distributee to elect, at the time and in the manner prescribed by the retirement board, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover, notwithstanding any provision of this Act to the contrary that would otherwise limit a distributee's election. Defines "eligible rollover," "eligible retirement plan," "distributee," and "direct rollover." (f) Requires the retirement system to add six months to the membership service of any member who was involuntarily terminated by an employer for nondisciplinary reasons during the period beginning April 1, 1995, and ending September 30, 1995. Provides that the current service annuity of a member who is described by this subsection and who is eligible for retirement will be equal to one-twelfth of the product of 2.3 percent of the member's average final compensation multiplied by the sum of the number of months of membership service. Sec. 13. CONFIDENTIALITY. (a) Provides that information contained in records that are in the custody of the retirement board or the system concerning an individual member, retiree, annuitant, beneficiary, or alternate payee is confidential under this Section 13 and may not be disclosed in a form identifiable with a specific individual unless the information is disclosed to certain authorized persons or pursuant to a subpoena and the pension officer determines that the individual will have a reasonable opportunity to contest the subpoena. (b) Provides that this section does not prevent the disclosure of the status or identity of an individual as a member, former member, retiree, deceased member or retiree, beneficiary, or alternate payee of the retirement system. (c) Authorizes the pension officer to designate other employees of the retirement system to make the necessary determinations under Subsection (a) of this section. (d) Authorizes a determination and disclosure under Subsection (a) of this section to be made without notice to the individual member, retiree, annuitant, beneficiary, or alternate payee. SECTION 2. (a) Provides that retirement allowances being paid by the retirement and pensioning system created by Chapter 451, Article 6243n, V.T.C.S., to members of the retirement system, or to the beneficiaries of those members, who retired before October 1, 1995, are increased beginning with the payments due at the end of October 1995. (b) Sets forth the percentage of the amount of the increase for a member, or the beneficiary of a member. SECTION 3. Effective date: October 1, 1995. SECTION 4. Emergency clause.