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
Untitled Texas Attorney General Opinion
Combined Opinion