Law: Plan Amendment Election (November 2014)
Type of reform: Police officers and firefighters in Dallas were allowed to participate in a Deferred Retirement Option Plan (DROP) and remain employed while their pension checks were deferred and held in special accounts with interest accruing at 8 to 10 percent. On Nov. 13, 2014, the Dallas Police and Firefighter Pension System approved and ratified the results of a Plan Amendment Election held in October and November 2014, by which the police and firefighters agreed to reduce the interest rate earned on the deferred pension checks by 1 percent each year until it reaches 5 percent in 2017. Additionally, the police and firefighters agreed to accelerate the withdrawal requirements for DROP accounts. The changes were scheduled to become effective on Jan. 1, 2015.
Case: Eddington v. Dallas Police and Fire Pension System, Cause No. DC-14-12001 (District Court Dallas County, TX, 116th Judicial District)
Status of litigation:
Several current and former firefighters and police officers sued the Dallas Police and Fire Pension System seeking an injunction to stop the changes from taking effect, contending that the interest rate applied to the deferred pension checks was a pension benefit protected by the Texas Constitution.
On Dec. 31, 2014, a Dallas County judge agreed with the plaintiffs and ruled against the pension fund. The judge held that the funds’ Plan Amendment would reduce and impair pension benefits in violation of Article 66, section 16(d) of the Texas Constitution.
After initially ruling in favor of the retirees, State District Judge Tonya Parker reversed herself on rehearing on April 14, 2015. Judge Parker found that the DROP interest amendments and the DROP withdraw provisions do not violate Article 16, section 66, of the Texas Constitution.
The plaintiffs appealed in July 2015, and the case went before the Texas Fifth Court of Appeals as Case No. 05-15-00839-CV.
The court heard oral argument on Sept. 13, 2016. The parties filed post-oral argument submissions regarding a question posed by the panel during argument: whether members of the retirement system who had elected the DROP option could, under the plan amendment, reverse their election.
On Tuesday, Dec. 13, 2016, the Court of Appeals issued a decision affirming the lower court’s ruling that the DROP interest amendments and the DROP withdrawal provision do not violate the Texas Constitution.
The plaintiffs had brought an appeal of the lower court’s decision and asserted that the plan amendments violated the Texas Constitution. The plaintiffs argued that (1) DROP is a “benefit” protected by Section 66 of the Texas Constitution, and (2) the benefits protected under Section 66 include “the formula for calculating retirement benefits.” Consequently, the plaintiffs asserted, both the interest on the DROP and the withdrawal provisions are protected and the lower court was erroneous in holding otherwise. The plaintiffs also appealed the lower court’s decision preventing them from introducing evidence to counter new arguments raised by the defense in post-trial proceedings and to support their request for attorney’s fees.
Section 66 of the Texas Constitution provides that “a change in service . . . of a retirement system may not reduce or otherwise impair benefits accrued by a person” who is retired or eligible for benefits. [TEX. CONST. art. XVI, § 66(d)] Subsection 66(e) provides that “[b]enefits granted to a retiree or other annuitant before the effective date of this section and in effect on that date may not be reduced or otherwise impaired.” The plaintiffs argued that under these sections—and, in particular, subsection 66(e)—the reduction of the DROP interest and the acceleration of the withdrawal requirements were unconstitutional.
Citing the recent decision from the Fifth Circuit of the United States Court of Appeals in Van Houten v. City of Fort Worth, 827 F.3d 530 (5th Cir. 2016) as persuasive, the Court of Appeals found that the interest rate on the DROP accruals was not a protected “benefit” under section 66 of the Texas Constitution. (Decision, p. 21) In Van Houten, the Fifth Circuit determined that “benefits” as used in section 66 refers to payments, not the formula by which the benefits are calculated. [Id. (citing Van Houten, 827 F.3d at 535)] This interpretation “‘ensure[s] that earned benefits cannot be reduced’ and yet ‘[b]y going no further… stays true to Texas’ long-held flexible approach permitting municipalities to revise their pension plans in light of changing economic conditions.’” [Id. (citing Van Houten, 827 F.3d at 538)] While the DROP interest rate is a “key component of the formula for calculating a retiree’s retirement income,” the Court found that the DROP interest itself is not a protected benefit under section 66. Id.
With respect to the accelerated withdrawal provisions of the pension amendments, the plaintiffs asserted that requiring them to withdraw from DROP at a more accelerated pace—within 10 years of reaching the age of 70½—deprived them of DROP interest they could have earned after the age of 80½. Because the Court had concluded that the DROP interest rate was not a protected “benefit” under section 66, it found that the DROP withdrawal provision does not unconstitutionally reduce or impair a “benefit.” (Decision, p. 23)
The Court rejected the plaintiffs’ arguments seeking attorney fees, noting that they were not entitled to fees because the Court was correct in denying them judgment on the merits. The Court did not reach plaintiffs’ remaining argument regarding the introduction of evidence to respond to the defendants’ post-trial submissions.
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