Ladonna Degan, Ric Terrones, John McGuire, Reed Higgins, Mike Gurley, Larry Eddington, and Steven McBride v. the Board of Trustees of the Dallas Police and Fire Pension System

IN THE SUPREME COURT OF TEXAS
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NO. 19-0234
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LADONNA DEGAN, RIC TERRONES, JOHN MCGUIRE, REED HIGGINS, MIKE
GURLEY, LARRY EDDINGTON, AND STEVEN MCBRIDE, APPELLANTS,
v.

THE BOARD OF TRUSTEES OF THE DALLAS POLICE AND FIRE PENSION SYSTEM,
APPELLEE
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ON CERTIFIED QUESTIONS FROM THE
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
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Argued September 17, 2019

JUSTICE DEVINE delivered the opinion of the Court, in which CHIEF JUSTICE HECHT, JUSTICE
LEHRMANN, JUSTICE BLACKLOCK, JUSTICE BUSBY, and JUSTICE BLAND joined.

JUSTICE BOYD filed a dissenting opinion, in which JUSTICE GREEN joined.

JUSTICE GUZMAN did not participate in the decision.

In this case, we consider two questions of Texas law certified from the United States Court

of Appeals for the Fifth Circuit. Such questions are authorized by our Constitution and provided

for in our appellate rules. TEX. CONST. art. V, § 3-c; TEX. R. APP. P. 58. The questions concern

whether changes made by the Texas Legislature in 2017 to Deferred Retirement Option Plans violate

a state constitutional provision that prohibits the reduction or impairment of certain accrued
retirement benefits. See TEX. CONST. art. XVI, § 66. We consider the certified questions below and

conclude that the 2017 legislative reforms here do not violate the Constitution.

I

The Dallas Police and Fire Pension System is a public pension fund that provides

comprehensive retirement, death, and disability benefits for approximately 9,300 active and retired

City of Dallas police officers, firefighters, and their qualified survivors. Like many states, the State

of Texas has created a series of defined benefit plans for government employees. Pension systems

for police and firefighters in cities like Dallas are largely controlled by the Texas Legislature

through Article 6243a-1. See TEX. REV. CIV. STAT. ANN. art. 6243a-1 (Supp. 2019). Under that

statute, a local Board of Trustees, selected by the mayor in consultation with the city council and

by the members and pensioners of the pension system, administers the pension system under a

compliant plan document. Id. art. 6243a-1, § 3.01(a), (b).

Under the plan, individuals become members of the pension system once they commence

training at the police or firefighter academy. The member and the city contribute to the member’s

account during the member’s active service. Section 6 of the plan enumerates four general

categories of benefits: “retirement pension” options, “disability benefits,” “death benefits,” and a

“Deferred Retirement Option Plan” (commonly referred to by its initials DROP). See generally id.

art. 6243a-1, §§ 6.01–.14. The pension system began offering DROP accounts in 1993 as an

incentive to retain experienced police officers and firefighters after they attained eligibility to retire.

Before DROP’s existence, an active police officer or firefighter who became eligible to retire

had two options under the pension system: The member could remain on the job and continue to

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grow his or her pension under the system’s pension formula, or the member could retire and begin

drawing his or her accrued pension in the form of a monthly annuity payment. DROP introduced

a third option: A member could freeze his or her retirement benefit and continue working, receiving

both a salary and an annuity payment from his or her retirement account.

While the member electing DROP continues on the job, the monthly annuity is paid into the

member’s DROP account. Once the member has left active service, future annuity payments are

redirected to the member, who is also now eligible to withdraw funds from his or her DROP

account. DROP accounts initially collected an attractive interest rate and provided the member

several options for withdrawing these funds at the end of active service. Under these options, the

member could elect a lump-sum distribution, an annuity based on the member’s life expectancy, or

disbursement based on monthly or annual payments designated by the member. See Act of June 18,

1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex. Gen. Laws 3432, 3465–66 (formerly TEX. REV. CIV.

STAT. ANN. art. 6243a-1, § 6.14(d)(1)–(3) (1993)).

DROP accounts became very popular. Eventually, the amount of money drawn into these

accounts, together with a member’s right to elect a lump-sum distribution on leaving active service,

threatened the liquidity and stability of the pension system. These concerns, in turn, motivated the

Legislature to pass House Bill 3158 in 2017. This Bill amended the applicable pension statute to

eliminate lump-sum payments and to permit only the annuitized option for DROP account

withdrawals. TEX. REV. CIV. STAT. ANN. art. 6243a-1, § 6.14(e); see Act of May 31, 2017, 85th

Leg., R.S., ch. 318, § 1.42, 2017 Tex. Gen. Laws 639, 696 (H.B. 3158) (amending TEX. REV. CIV.

STAT. ANN. art. 6243a-1).

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In the underlying litigation, seven Dallas System retirees (the “Retirees”) challenge as

unconstitutional the 2017 statutory amendments, which eliminate their ability to request lump-sum

distributions from their respective DROP accounts. The Retirees contend that the funds in DROP

are accrued service retirement benefits and that the change to how these funds may be withdrawn

effectively reduces or impairs the accrued benefit in violation of the Texas Constitution, article XVI,

section 66(d). That provision prohibits changes that reduce or impair certain accrued benefits,

stating that:

(d) On or after the effective date of this section, a change in service or disability
retirement benefits or death benefits of a retirement system may not reduce or
otherwise impair benefits accrued by a person if the person:

(1) could have terminated employment or has terminated employment
before the effective date of the change; and

(2) would have been eligible for those benefits, without accumulating
additional service under the retirement system, on any date on or after
the effective date of the change had the change not occurred.

TEX. CONST. art. XVI, § 66.

Concluding that Section 66’s application here was unsettled under Texas law, the Fifth

Circuit certified the following questions to this Court:

1. Whether the method of withdrawal of funds from Deferred Retirement Option
Plan is a service retirement benefit protected under article XVI, section 66 of the
Texas Constitution.

2. If the answer to Question 1 is “yes,” then whether the Board of the Dallas Police
and Fire Pension’s System’s decision, pursuant to the Texas statute in question, to
alter previous withdrawal elections and annuitize the DROP funds over the
respective life expectancy of the Plaintiffs violates Section 66 of the Texas
Constitution.

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Degan v. Bd. of Trs. of Dall. Police & Fire Pension Sys., 766 Fed. Appx. 16, 20 (5th Cir. 2019) (per

curiam). The Circuit’s opinion further summarizes the parties’ constitutional disagreement to be

“whether DROP accounts are ‘service retirement benefits’ (and therefore protected by Section 66)

and whether the DROP withdrawal change reduces or impairs the benefit (and therefore prohibited

by Section 66).” Id. at 18.

II

The Circuit’s first question recognizes that Section 66 protects from reduction or impairment

only certain kinds of benefits. For example, it does not apply to health benefits, life insurance

benefits, or to some disability benefits. TEX. CONST. art. XVI, § 66(c). And while the constitutional

protection expressly applies to service retirement benefits, id. § 66(d), the Circuit’s opinion notes

a disagreement “about whether DROP accounts are ‘service retirement benefits.’” 766 Fed. Appx.

at 18. The first certified question nevertheless assumes that DROP is a service retirement benefit

by inquiring whether the method of withdrawal of funds from DROP is itself a benefit protected by

the Constitution. As usual, the Circuit disclaims any intention or desire that we confine our reply

to the precise form or scope of the questions certified. Id. at 20. Because of the acknowledged

disagreement, we begin with whether DROP is a service retirement benefit as the first question

assumes.

The Retirees submit that a DROP account must be a service retirement benefit under our

reasoning in Eddington v. Dallas Police & Fire Pension System, ___ S.W.3d ___ (Tex. 2019); 2019

WL 1090799 (Tex. Mar. 8, 2019). There, we noted that, contextually, Section 66 recognizes a

pensioner’s annuity payments as a protected service retirement benefit. Id. at ___; 2019 WL

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1090799, at *5. Because a DROP account consists of a collection of these annuity payments and

accrued interest in what we have previously described as a “forced savings account,” it logically

follows that the funds in that account are likewise a service retirement benefit. Id. at ___; 2019 WL

1090799, at *1.

That conclusion finds further support in the text of the constitutional provision and

underlying statute. Section 66 expressly excludes certain types of benefits, but DROP is not among

those excluded. See TEX. CONST. art. XVI, § 66(c). Moreover, all of the “Benefits” available under

the system’s pension plan are listed in section 6 of the plan and underlying statute, and DROP is

enumerated as a benefit in the same manner as the others. See TEX. REV. CIV. STAT. ANN. art.

6243a-1, § 6.14. We therefore agree that the funds deposited in the DROP account (and accrued

interest) are a service retirement benefit to which the protection afforded by Section 66 may apply.

Although the parties have previously taken contrary positions on DROP’s status as a service

retirement benefit for purposes of Section 66, they agree in this Court that the method of

withdrawing funds from DROP is not itself a service retirement benefit. During argument, the

Retirees conceded as much, agreeing that our answer to the first question, as phrased, should be no.

The parties, however, have different views on the consequences that flow from that negative answer.

The Board contends that a negative answer to the first question ends the task certified to us

by the Circuit. The Retirees respond that it does not end our inquiry because the retirement service

benefits at issue here are the funds in their DROP accounts, and the constitutional question is

whether the changes restricting their access to these funds is a prohibited reduction or impairment

to that underlying benefit. We agree that this is the appropriate issue and that it is generally captured

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in the second certified question, which asks whether the Board’s “decision, pursuant to the Texas

statute in question, to alter previous withdrawal elections and annuitize the DROP funds over the

respective life expectancy of the Plaintiffs violates Section 66 of the Texas Constitution.” 766 Fed.

Appx. at 20. We turn, then, to the Constitution’s application to that question.

III

Our guiding principle when interpreting the Texas Constitution is to give effect to the intent

of the voters who adopted it. Cox v. Robison, 150 S.W. 1149, 1151 (Tex. 1912). We presume that

the framers carefully chose the language, and we interpret their words accordingly. Leander Indep.

Sch. Dist. v. Cedar Park Water Supply Corp., 479 S.W.2d 908, 912 (Tex. 1972). In determining the

intent of the framers and adopters of a constitutional proposition, we may consider contextual factors

such as “the history of the legislation, the conditions and spirit of the times, the prevailing

sentiments of the people, the evils intended to be remedied, and the good to be accomplished.”

Harris Cty. Hosp. Dist. v. Tomball Reg’l Hosp., 283 S.W.3d 838, 842 (Tex. 2009) (internal citation

omitted).

The history of Section 66 indicates that its impetus was a Depression-era decision from this

Court that subordinated the pension rights of public servants to the authority of the state to diminish

or abolish future pension payments. See City of Dall. v. Trammell, 101 S.W.2d 1009, 1017 (Tex.

1937) (holding that a “pensioner has no vested right” to future pension payments). In Trammell, the

Court considered whether a public employee, after retirement, had “a vested right to participate in

the pension fund to the extent of the full amount of monthly installments granted to him at

retirement.” Id. at 1011. At issue was whether that monthly amount could be reduced.

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Exemplifying Texas’s historical view of public pensions as a “gratuity,” the Court held that a

pensioner had no vested right to future pension installments and, therefore, the Legislature could

reduce accrued benefits or abolish the pension system altogether. Id. at 1013, 1017.

Section 66 directly responds to that holding as a 2008 Texas Attorney General opinion

explains:

The effect the Legislature—the makers—intended in adopting House Joint
Resolution 54 . . . proposing the constitutional amendment was to insure that
retirement benefits (the monthly pension payments) of vested municipal employees
would not be reduced or impaired by subsequent, unilateral legislative action.

Tex. Att’y Gen. Op. No. GA-0615 (2008). Legislative history thus confirms that Section 66 was

added to the Constitution to overrule our decision in Trammell by protecting the amount of monthly

pension payments from reduction or impairment through subsequent changes to the system. TEX.

CONST. art. XVI, § 66; see also Van Houten v. City of Fort Worth, 827 F.3d 530, 537–38 (5th Cir.

2016) (“Section 66 reverses the core unfairness of the Trammell decision by ensuring that earned

benefits cannot be reduced.”).

Both the Fifth Circuit and this Court have previously considered the protection afforded by

Section 66. In Van Houten, the Fifth Circuit considered whether Section 66(d) prohibited pension

reforms designed to decrease expected, but as-yet unearned, benefits. 827 F.3d at 534. The

employees who objected to the reforms argued that the formula used to calculate the benefit vested

and became constitutionally protected, along with the benefit, when the employee reached retirement

age. Id. at 535. Thus, in the employees’ view, Section 66 foreclosed even wholly prospective

formula adjustments. Id. The Circuit disagreed. It concluded that, in the context of the

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constitutional provision, “benefits” refers to payments but does not encompass the formula by which

those payments are calculated. See id. at 535–37 (discussing the “numerous indications that the term

‘benefits’ refers only to payments”). As the Fifth Circuit observed, “Section 66(d) prohibits the

impairment of accrued benefits for vested employees.” Id. at 534 (emphasis in original). Thus, the

pension reform that altered the rate at which future benefits accrued did not violate the constitutional

provision.

Later, our decision in Eddington agreed with Van Houten’s contextual understanding of the

term “benefit” as referring to the pension’s annuity payments and not the formula by which those

payments are calculated. Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *5. We further

agreed “that ‘accrued’ benefits under Section 66(d) are those that have been earned by service, not

those that may be earned by future service.” Id. at ___; 2019 WL 1090799, at *4 (citing Van

Houten, 827 F.3d at 535). Pensioners in that case contended that Section 66 prohibited the pension

system from reducing the interest rate paid on their DROP accounts. We did not agree that the

change invoked Section 66’s protection because the interest-rate reduction applied prospectively and

therefore did not affect accrued benefits. Id. at ___; 2019 WL 1090799, at *1.

The Circuit suggests the issue here is much closer because the statutory reform introduced

by House Bill 3158 “seems to retroactively nullify a retiree’s election about” payment from a DROP

account and “seems to relate to . . . previously accrued or granted benefits.” 766 Fed. Appx. at 19.

The Retirees similarly argue that the change here does not apply prospectively to the accrued

benefits in their DROP accounts, as was the case of the interest-rate reduction in Eddington, but

rather has a retrospective impact on those funds. Before the change, the Retirees ostensibly

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controlled the rate at which they could draw funds from their DROP accounts. They could elect to

withdraw the funds as a single-sum distribution, as a monthly annuity based on the member’s life,

or in substantially equal monthly or annual payments designated by the member. See Act of June

18, 1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex. Gen. Laws 3432, 3465–66 (formerly TEX. REV.

CIV. STAT. ANN. art. 6243a-1, § 6.14(d)(1)–(3) (1993)). The 2017 amendment to the statute (H.B.

3158) eliminated all but the monthly annuity option for distributing DROP funds. See TEX. REV.

CIV. STAT. ANN. art. 6243a-1, § 6.14(e). The Retirees complain that this change violates Section

66 by retroactively voiding previous elections and effectively denying them access to their accrued

benefits. They essentially contend that the funds in their DROP accounts have been reduced or

impaired because the Retirees no longer have unfettered access to them.

But the reform here does not negatively affect the amount of money in the Retirees’ DROP

accounts. The monthly annuity payments and earned interest collected in those accounts are neither

reduced nor impaired. Only the rate at which the Retiree is permitted to withdraw these funds is

affected. While an outright denial of access to these funds might reasonably be considered an

impairment, the complaint here is that the pensioner’s choices about access have been impaired by

the statutory reform that eliminates two of the three previous methods of distribution. The Dissent

characterizes the statutory choice under former law as a property right that attaches to DROP funds

as they accumulate, and, as such, a right entitled to protection under Section 66. Post at ___. But

Eddington distinguishes between pension annuity payments and plan terms, observing that nothing

in Section 66’s text “suggests that all retirement plan terms are protected benefits” and rejecting the

general notion that DROP is “a contract between the System and a member that cannot be changed.”

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Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *4–*5. The legislative history, moreover,

bears this out. See, e.g., House Comm. on Pensions & Invs., Bill Analysis, Tex. H.J. Res. 54, 78th

Leg., R.S. (2003) (deleting language in earlier version of Section 66 stating that “membership in

such a plan is a contractual relationship”). Instead of a strict contractual regime, Texas chose a

more flexible approach allowing for prospective changes to benefits not yet granted. See Tex. Leg.

Council, Analyses of Proposed Constitutional Amendments, Sept. 13, 2003 Election, at 101 (July

2003) (noting that Section 66 allows prospective changes to “adjust retirement benefits if necessary

to respond to changing economic times”) [hereafter “Legislative Analyses”], available at

https://tlc.texas.gov/docs/amendments/analyses03.pdf.

The constitutional complaint here is similar to the one rejected by the Fifth Circuit in Van

Houten. There, the employees argued that Section 66 prohibited changes to the benefit formula after

vesting in the plan—that is, after the employee became eligible to retire. The Circuit rejected the

notion that the formula also vested at that time, “meaning that even wholly prospective formula

adjustments are foreclosed by Section 66.” Van Houten, 827 F.3d at 535. The Circuit further

rejected a 2008 Texas Attorney General Opinion construing Section 66(d) to “prohibit[] a change

in the method of determining the compensation base of vested employees if such action reduces or

impairs retirement benefits that the employee would have been eligible to receive on or before the

effective date of the change.” Tex. Att’y Gen. Op. No. GA-0615, at 11. “The Circuit disagreed with

the opinion’s analysis, noting that, after finding Section 66’s text and legislative history unhelpful,

the opinion based its ultimate holding on ‘other state supreme courts, particularly those of New

York, Illinois, and Alaska.’” Eddington, ___ S.W.3d at ___; 2019 WL 1090799, at *4 (citing Van

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Houten, 827 F.2d at 536). “It was problematic, the Circuit noted, to assume that Texas had suddenly

decided to copy these states, particularly with respect to public pension protection [an area in which

Texas was known to be an outlier].” Id. (citing Van Houten, 827 F.2d at 537). Indeed, Section 66

strikes a careful constitutional balance, granting “those retirement systems the flexibility the systems

need to adjust retirement benefits if necessary to respond to changing economic times, while still

protecting the benefits that local government employees have already earned.” Legislative Analyses

at 101.

Although not bound by the Van Houten decision, we nevertheless noted our agreement with

the Circuit’s analysis of the constitutional text. Eddington, ___ S.W.3d at ___; 2019 WL 1090799,

at *4. Thus, Eddington similarly construed the term “‘benefits’” in Section 66 as “‘refer[ring] to

payments[,]’” and the protected payments as “the pensioner’s annuity payments.” Id. at ___; 2019

WL 1090799, at *5 (quoting Van Houten, 827 F.3d at 535).

The Board argues that, in contrast to the payments protected under Section 66, the Retirees’

claim here seeks to constitutionalize a lump-sum method of withdrawing DROP funds. The Board

maintains that such a method is simply a plan term that determines how DROP funds are distributed

and, like other plan terms, is subject to change. The Board concludes that Section 66 protects only

monthly pension annuity payments and not the methodology for DROP withdrawals, and thus does

not apply to the change at issue here. But labeling the change as a mere methodology or plan term

does not directly address the constitutional question. The changes determined to be constitutional

in Van Houten and Eddington were so, not because they were terms or methodologies, but because

they did not reduce or impair an accrued benefit. Had the benefit formula in Van Houten or the

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interest rate reduction in Eddington been applied retroactively to reduce an accrued benefit, the

constitutional protection would have plainly been invoked. But the pension reforms in those cases

did not negatively adjust prior accruals or take back earned interest and thus did not implicate

Section 66.

The question of this reform’s retroactive effect is more nuanced, however. The underlying

statute previously permitted a DROP participant to elect one of three alternative methods of

distribution from the fund—an election that, under the statute, could be changed at any time before

the participant left active service. See Act of June 18, 1993, 73rd Leg., R.S., ch. 872, § 1, 1993 Tex.

Gen. Laws 3432, 3465–66 (formerly TEX. REV. CIV. STAT. ANN. art. 6243a-1, § 6.14(d), (f) (1993)).

Thus, the change is retrospective in the sense that previous elections about how the DROP

participant anticipated having the funds distributed are superseded by the statutory amendment

mandating monthly annuity payments. But does that change implicate Section 66 by reducing or

impairing the accrued benefit? The Retirees argue that it does because their election to take a lump-

sum distribution has a greater net value to them than the annuity that replaces it under the pension

reform. Even assuming that to be true, we fail to see how the benefits in their respective accounts

have been reduced or impaired by the elimination of this election or the flexibility it provided under

former law.

In Eddington, we observed once again that issues of constitutional construction may include

“a provision’s history, the conditions and spirit of the times in which it was adopted, the prevailing

sentiments of the people who framed and adopted it, the evils intended to be remedied, and the good

to be accomplished.” Eddington, ___S.W.3d at ___; 2019 WL 1090799, at *5 (internal quotation

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marks omitted). Without question, Section 66’s purpose was to overrule our Depression-era

decision in Trammell. As the Fifth Circuit has observed, “Section 66 reverses the core unfairness

of the Trammell decision by ensuring that earned benefits cannot be reduced.” Van Houten, 827

F.3d at 537–38. But unlike Trammell, the change here does not take away an accrued or granted

annuity payment. And like Eddington, the reforms here do not affect the Retirees’ non-DROP

monthly pension annuity payments or the dollar amount of the funds previously credited to DROP.

Eddington, ___S.W.3d at ___; 2019 WL 1090799, at *5. Moreover, the reform at issue does not

retroactively reverse lump-sum distributions already paid out under former law; it merely changes

the method of withdrawal going forward by requiring the pension system to distribute all DROP

funds with interest in the form of an annuity.

***

Under the Texas Constitution, the pension system must be managed according to sound

actuarial principles for the benefit of its membership. TEX. CONST. art. XVI, § 67(a). The

Government Code further imposes a duty on the Board of Trustees to hold pension system assets

in trust for the benefit of all participants, which includes “the members and retirees of the system

and their beneficiaries.” TEX. GOV. CODE § 802.201. Separate from the Board’s ministerial duty

to hold these assets in trust is its obligation to manage the pension system according to sound

actuarial principles that do not reduce or otherwise impair constitutionally protected benefits. TEX.

CONST. art. XVI, §§ 66(f), 67(a).

While Section 66 modifies Texas’s former “gratuity” approach to pension benefits for non-

statewide plans by protecting some benefits, Section 66 does not prohibit prospective pension

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reforms. See Van Houten, 827 F.3d 538 (noting Texas’s “long-held flexible approach permitting

municipalities to revise their pension plans in light of changing economic conditions”). It does,

however, prohibit the reduction or impairment of an accrued service retirement benefit, which we

have interpreted as protection for the pensioner’s vested annuity payments. A pension reform that

abandons a more flexible distribution scheme—a scheme that allowed the pensioner to elect how

the accrued benefits would be paid over time—in favor of a more predictable scheme—one that

preserves access through a vested annuity—does not violate the constitutional prohibition.

We therefore conclude that House Bill 3158, the 2017 amendment to Article 6243a-1, does

not violate Article XVI, Section 66 of the Texas Constitution. Our answer to both certified

questions is no.

_______________________________
John P. Devine
Justice

Opinion Delivered: January 31, 2020

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