SBW C.S.S.B. 1102 75(R)BILL ANALYSIS PENSIONS & INVESTMENTS C.S.S.B. 1102 By: Armbrister (Telford) 5-12-97 Committee Report (Substituted) BACKGROUND The Employees Retirement System of Texas (ERS) is a public retirement system established by Section 67, Article XVI, Texas Constitution. Pursuant to the constitutional mandate, ERS provides retirement benefits for state employees, elected state officials and members of the judiciary. Additionally, ERS administers the Texas Employees Uniform Group Insurance Program (UGIP) which provides group health coverage and optional disability, life, dental, and accident insurance coverage to employees and retirees of state agencies and certain institutions of higher education and their dependents. ERS also administers a cafeteria plan pursuant to Section 125 of the Internal Revenue Code and a deferred compensation plan pursuant to Sections 457 and 401(k) of the Internal Revenue Code. The ERS Board and staff, as well as state employees, retirees, judges, and elected state officials continually review the programs administered by ERS as well as its enabling legislation and make recommendations resulting from this process. PURPOSE As proposed, CSSB 1102 revises the powers and duties of the systems and programs under the ERS, including regulations for purchase or repurchase of service credit on an installment basis; provides benefits for certain state employees who are subject to privatization; establishes a permanent multiplier of 2.25% for the computation of employee class service retirement benefits; clarification that the portfolio concept is authorized in making investment decisions; establishment of the "Rule of 80" for service retirement; creation of an excess benefits arrangement to comply with provisions of the Internal Revenue Code; provide a supplemental payment (13th check) to annuitants in the first year of the biennium; increase in annuities for persons retiring in the second year of the current biennium for purposes of equity; use of partial months for military service credit and for unused sick leave credit; ability to disclaim benefits pursuant to the Probate Code; clarification that the Board holds deferred compensation funds in trust for the participants and their beneficiaries pursuant to requirements of the Internal Revenue Code; provide for broader authority for trustee to pay accelerated life insurance benefits; provide for additional optional term insurance for retirees; and make technical changes in the Uniform Group Insurance Program. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is granted to the Board of Trustees of ERS in Section 3 [Section 813.104, Gov't Code], Section 21 [Section 815.5072(f), Gov't Code], Section 27 [Section 833.105(a), Gov't Code], Section 32 [Section 838.105(a), Gov't Code], and Section 49 [Section 11 (d) and (e) of Article 3.50-2, Insurance Code] and to the managed health care unit of UTMB and the Texas Tech Health Science Center in Section 9[Section 813.506(a), Gov't Code]. SECTION BY SECTION ANALYSIS SECTION 1: Amends Section 805.002, Government Code, by adding language to Subsection (g) which removes the requirement that a person be the designated beneficiary in both ERS and Teacher Retirement System in order to transfer service credit from one system to another following the death of a member so long as the service credit to be transferred is reinstated service and no beneficiary designation was made at or after the time of reinstatement. The beneficiary in the receiving system would be able to make the election to transfer. SECTION 2: Amends Sections 811.001(8) and (9), Government Code, by clarifying in Section 811.001(8) that the definition of a custodial officer including certain members who transferred from the Texas Department of Criminal Justice to the managed care unit of the University of Texas Medical Branch and Texas Tech. It also amends Section 811.001(9) by deleting language which currently includes law enforcement officers commissioned by the General Services Commission and the Capitol Area Security Force within the definition of "law enforcement officers". SECTION 3: Amends Section 813.104, Government Code, by rewording Subsection (a) to permit the Board to adopt rules allowing installment payments to establish or reestablish credit for periods less than one year as an alternative to lump sum payments and allowing payroll deductions to do so. These changes are necessary to replace the authority currently found in Section 813.105 which this bill would repeal. Also deletes Subsections (b) and (c) in their entirety for consistency purposes. Also changes Subsection (e) to Subsection (c) and addresses the Board's new rule making authority expressed in Subsection (a) for consistency purposes. Also deletes Subsection (g) in its entirety for consistency purposes. SECTION 4: Amends Section 813.106, Government Code, by deleting reference to Section 813.105 for use in purchasing membership or military time and by adding a reference to the new Section 813.202(c) for purposes of calculating benefits. This bill would repeal Section 813.105. SECTION 5: Amends Section 813.202, Government Code, by deleting the prohibition against a noncontributing member's purchase of the pre-1958 waiting period in Subsections (a) and (b). It also combines Subsections (b) and (c), deletes Subsection (d) for consistency purposes and redesignates Subsection (e) as Subsection (c) in which the fund from which the state contribution is to be paid. SECTION 6: Amends Section 813.301, Government Code, by deleting and adding language in Subsection (b) to permit purchase of a month of military service for any fraction of a month served. SECTION 7: Amends Section 813.402, Government Code, by deleting language from Subsections (a) and (b) which currently limits the establishment of service in the elected class for a year in which a person was eligible for office to contributing members. SECTION 8: Amends Section 813.504, Government Code, by deleting the requirement that a member must have held a position for at least six (6) months in order to reestablish previously canceled service and by adding language which would allow reestablishment of service by a member after six (6) months have elapsed following cancellation. Adds provision for a disabled former member to purchase refunded service without returning to work. SECTION 9: Amends Section 813.506(a) and (c), Government Code, by adding the managed care unit of the University of Texas Medical Branch and Texas Tech as an employer which will adopt standards and determine eligibility for service credit as a custodial officer. SECTION 10: Amends Section 813.509, Government Code, by adding and deleting language in Subsection (a) in order to permit a retiring member to receive credit for one month of service for any amount of unused sick leave in excess of 160 hours. This would be in addition to the months currently available for 160 hours or multiples thereof. SECTION 11: Amends Section 814.005(a), Government Code, to provide that the retirement system will give effect to a properly executed disclaimer prepared in accordance with Section 37A, Texas Probate Code. SECTION 12: Amends Section 814.104, Government Code, to include the "Rule of 80" as a method for calculating retirement eligibility by making a member whose combined age and years of service credit total 80 eligible to retire. SECTION 13: Adds a new section 814.1041 to provide service retirement option for employees of the Texas Workforce Commission, Department of Human Services and Texas Department of Mental Health and Mental Retardation whose positions are eliminated as a result of privatization. Two options are provided. One allows members whose positions are eliminated to retire upon separation if adding 3 years of age and 3 years of service credit makes them eligible for retirement with the additional service credit counting for purposes of computing an annuity. The second option would allow a member to retire upon the date the member would have been eligible to retire had not the termination taken place if the addition of 5 years to age and 5 years to service credit would have qualified the member for retirement. The annuity of a person under this option is based on actual service credit. SECTION 14: Amend Section 814.105(a) to increase the multiplier used in computing a standard service retirement annuity from 2% to 2.25% for employee class retirees. SECTION 15: Amends Section 814.1081(a), Government Code, by adding language that allows an optional annuity to be changed to a standard annuity if the beneficiary executes a court approved transfer and release pursuant to a divorce decree. SECTION 16: Amends Section 815.003, Government Code, by changing the date by which a trustee is to be elected from August 1 to August 31 of each odd-numbered year. The date is found in Subsection (d). SECTION 17: Amends Subchapter B, Chapter 815, Government Code, by adding a new Section 815.106 with language that prohibits the use of ERS dollars to influence an election or legislation but clarifies that the prohibition does not apply to recommendations to the Legislature relating to ERS' fiduciary duties nor to providing information to the Legislature when requested. SECTION 18: Amends Section 815.303(b), Government Code, by providing that an indemnification agreement obtained in connection with the securities lending program will indemnify the retirement system against borrower default. SECTION 19: Amends Section 815.307, Government Code, by providing that the retirement system shall invest its assets in accordance with Section 67, Article XVI, Texas Constitution, and clarifies that investment decisions shall be evaluated in the context of the investment portfolio as a whole consistent with the Texas Trust Act. SECTION 20: Amends Section 815.403(a), Government Code, by correcting a reference made necessary by an amendment in Section 5. SECTION 21: Amends Subchapter F, Chapter 815, Government Code, by adding a new Section 815.5072 to authorize the ERS to administer a benefit plan to enable the ERS to pay benefits promised by state law pursuant to the Internal Revenue Code. SECTION 22: Amends Section 815.510(a) to require the ERS year-end fiscal report to the Governor, other state officials, and Legislative Budget Board, regarding the status of the retirement trust fund, to include the current fair value of the trust fund rather than the book value, in accordance with Governmental Accounting Standards Board accounting practices. SECTION 23: Amends Section 815.512 to provide a statutory basis for the ERS to file interpleader suits in Travis County District Court to protect the retirement system from double or multiple liability on a claim. SECTION 24: Requires the ERS to increase annuities by 12.5% that are described by Sections 814.107, 814.207, 814.305 or 814.601(a), Government Code, and that are based on service retirements, disability retirements, or deaths that occurred or occur after August 31, 1996, but before September 1, 1997. The increase in annuities is payable beginning with the first monthly payments that become due after the effective date of this Act. SECTION 25: Requires the Board of Trustees of the ERS to authorize a supplemental payment (13th check), as set forth in Section 814.603(d), to annuitants in the fiscal year beginning September 1, 1997, if the conditions of Section 811.006 concerning amortization for unfunded actuarial liabilities of the retirement system are met. SECTION 26: Amends Section 833.103, Government Code, by deleting and adding language in Subsection (d) to permit purchase of a month of military service for any part of a month served by JRS I members. SECTION 27: Amends Section 833.105, Government Code, by rewording Subsections (a) and (b) to permit the Board to adopt rules allowing installment payments to establish or reestablish credit for periods less than one year as an alternative to lump sum payments and allowing payroll deduction to do so for JRS I members. These changes are necessary to replace the authority currently found in Section 833.106 which this bill would repeal. Also amends the Section by creating new Subsections (c) and (d) to give the designated beneficiary or personal representative of a deceased JRS I member the ability to establish or reestablish service for which the member was eligible at the time of his death if it would result in the payment of a death benefit annuity. SECTION 28: Amends Subchapter A, Chapter 834, Government Code, by adding Section 834.005 to provide that the retirement system shall give effect to a properly executed disclaimer prepared in accordance with Section 37A, Texas Probate Code. SECTION 29: Amends Section 834.101(a), Government Code, by removing certain eligibility requirements of JRS I members based on continuous service. SECTION 30: Amends Section 834.302, Government Code, by allowing a member's designated beneficiary to select a death benefit plan if none was filed by the member. SECTION 31: Amends Section 838.103, Government Code, by deleting and adding language to Subsection (d) to permit purchase of a month of military service for any part of a month served by JRS II members. SECTION 32: Amends Section 838.105, Government Code, by rewording Subsections (a) and (b) to permit the Board to adopt rules allowing installment payments to establish or reestablish for less than the existing one year minimum as an alternative to lump sum payments and allowing payroll deduction to do so for JRS II members. These changes are necessary to replace the authority currently found in Section 838.106 which this bill would repeal. Also amends the Section by creating new Subsections (c) and (d) to give the designated beneficiary or personal representative of a deceased JRS II member the ability to establish or reestablish service for which the member was eligible at the time of his death if it would result in the payment of a death benefit annuity. SECTION 33: Amends Subchapter A, Chapter 839, Government Code, by adding Section 839.004 to provide that the retirement system shall give effect to a properly executed disclaimer prepared in accordance with Section 37A, Texas Probate Code. SECTION 34: Amends Section 839.101(a), Government Code, by removing certain eligibility requirements of JRS II members based on continuous service. SECTION 35: Amends Section 839.302, Government Code, by allowing a member's designated beneficiary to select a death benefit plan if none was filed by the member. SECTION 36: Amends Section 840.3012(b), Government Code, by providing that an indemnification agreement obtained in connection with the securities lending program will indemnify the retirement system against borrower default. SECTION 37: Amends Section 840.303, Government Code, by providing that the retirement system shall invest its assets in accordance with Section 67, Article XVI, Texas Constitution, and clarifies that investment decisions shall be evaluated in the context of the investment portfolio as a whole consistent with the Texas Trust Act. SECTION 38: Amends Section 609.009, Government Code, by requiring Section 457 funds to be held in trust for the exclusive benefit of the participants and their beneficiaries. The trust may be established by January 1, 1999, if the plan was in existence on August 20, 1996. Changes in federal law requires these changes. SECTION 39: Amends Sections 609.502(a) and (b), Government Code, by making changes consistent with the changes in Section 34 of this Act. SECTION 40: Amends Section 609.509(b), Government Code, by making changes consistent with the changes in Section 34 of this Act. SECTION 41: Amends Section 609.512(b), Government Code, to make a technical correction to a citation. SECTION 42: Amends Section 3(a)(2)(8) and (9), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act) to provide that annuitant must have at least 3 years of service as employee with a department authorized to participate in the Texas Employee Uniform Group Insurance Program, provide for continuation of health insurance coverages of certain dependent children, and to make technical corrections due to the change of the name of the State Board of Insurance to the Texas Department of Insurance. SECTION 43: Amends Section 4B(e), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act) to delete the provision authorizing the trustee to delegate the duties of the executive director to another employee of the ERS. SECTION 44: Amends Section 4C(a), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act) to make a technical correction to remove a reference to school district employees not now covered under the Act. SECTION 45: Amends Sections 5(b), (h), (i), and (j), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act) to make technical corrections to refer to the commissioner of insurance rather than the abolished State Board of Insurance, and to permit the selection of more than one administering firms to administer self-funded plans of coverages when appropriate. SECTION 46: Amends Section 5A(a) Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to change the definition of basic coverage to remove reference to benefits mandates in state and federal law. SECTION 47: Amends Section 9, Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to make a technical change in terms from "insurer" to "carrier". SECTION 48: Amends Section 10(b), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act) to clarify that no coverage under the UGIP will be subject to any state tax or regulatory fee, including premium and maintenance taxes. SECTION 49: Amends Section 11, Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to give the trustee additional authority, including rulemaking authority, to increase accelerated life benefit payments for terminally ill, injured, or permanently disabled participants in the program and to expand benefit payments to a larger number of individuals. Also provides for retirees to continue to carry optional term life after retirement not to exceed two times the salary at the time of retirement. SECTION 50: Amends Section 12, Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to permit the trustee to give effect to a full or partial disclaimer of insurance benefits in accordance with Section 37A, Texas Probate Code. SECTION 51: Amends Section 13(b) and (c), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to make a technical correction, deleting the incorrect reference in Section 3(a)(5)(A)(viii) and replacing it with the correct reference to Section 3(a)(5)(A)(x). This previously adopted section provides that a graduate student employed on a part time basis by an institution of higher education will not be covered automatically, but must make application for coverage under the UGIP. SECTION 52: Amends Section 13A(f), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), in regard to expulsion from the program for fraud, to clarify that expulsion bars participation in any plan of coverage. SECTION 53: Amends Sections 15(b), (c), and (d), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to clarify that state departments and institutions of higher education who provide contributions for their employees' benefits from operating budgets provided from sources other than the General Appropriations Act, must provide a contribution for their employees' individual and dependent coverages equal to the contributions in the General Appropriations Act for each state employee's individual and dependent group coverages, and make timely payments of such amounts to the trustee. SECTION 54: Amends Sections 18(a) and (b), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefit Acts) to change the number of voting members of the Group Benefits Advisory Committee (GBAC) from 27 to 26 and to provide that the governing body of an agency or institution, rather than the trustee, will appoint an employee to fill the balance of a vacated term. Deletes reference to state treasurer. SECTION 55: Amends Sections 19(a), Article 3.50-2, Insurance Code, (Texas Employees Uniform Group Insurance Benefits Act), to provide that a foster child is eligible for health coverage only if the child is not covered by another governmental health program. Provides for continuation of health insurance coverages for certain dependent children. SECTION 56: Amends Section 659.102, Gov't Code, Subsection (b) by adding institutions of higher education as specifically defined or institutions as specifically defined are allowed to approve employee-funded dental plans as an optional benefits program for specified employees. SECTION 57: Amends Sections 803.403, 813.105, 833.106, 838.103(i) and 838.106, Government Code, to eliminate the requirement that the ERS file an annual report on the long-range effect of the proportionate retirement system (Section 803.403), repeal sections regarding payroll deductions to establish or reestablish service credit (Section 813.105, 813.106, and 838.106) and replace by Section 3 of this bill, and to permit judges participating in Judicial Retirement Plan II to use military service to become eligible for retirement (Section 838.103(i)). SECTION 58: Clarifies that commissioning and administration of the Capitol area security force by the Department of Public Safety does not affect the service credit previously established by individuals as commissioned law enforcement officers. SECTION 59: Provides that this Act takes effect September 1, 1997. SECTION 60: Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 2: (8) The substitute adds the Texas Tech University Health Sciences Center. SECTION 8: (a) The substitute strikes language referring to a member holding a position for six months that is included in the employee class. (b) the substitute adds language stating for the purpose of retiring with a service retirement annuity. SECTION 9: (a) The substitute adds the Texas Tech Health Sciences Center. SECTION 11 of the original bill is deleted. SECTION 12: (a)(2) The substitute creates a "true rule of 80" as defined. SECTION 13: The substitute adds this section regarding the implementation of a Temporary Service Retirement Option For Members Affected By Privatization or Other Reduction In Workforce. SECTION 14: The substitute changes the multiplier to 2.25 permanently. SECTION 19: The substitute adds language referencing the Trust Code regarding investment standards. SECTIONS 26, 27, 28 and 29 of the original bill are deleted in the substitute. SECTION 37: The substitute adds language referencing the Trust Code regarding investment standards. SECTION 42: (2) The substitute adds to the definition of annuitant. (2)(B) adds back in reference to Chapter 803 of the Government Code. (2)(C) Strikes language regarding participation in the employees uniform group insurance program. (2)(E) of the original bill is stricken. (8) is added defining dependent. SECTION 45: The substitute changes reference made to the State Board of Insurance to the "commissioner of insurance." SECTION 48: The substitute adds subsection (e) regarding the continuation of optional term life insurance coverage after retirement. SECTION 55: The substitute adds subsection (d) regarding unmarried dependent children who reach age 25. SECTION 56: The substitute adds this section regarding a Deduction for Supplemental Optional Benefits Program. SECTION 58: The substitute adds a new subsection (b) regarding employees of TEA who transferred membership from TRS to ERS.