Does Texas charge interest to restore a reinstated state worker's pension credit?

Plain-English summary

The executive commissioner of the Texas Health and Human Services Commission (HHSC) asked the Attorney General whether HHSC may pay, or an employee must pay, interest on the money used to restore an employee's service credit in the Employees Retirement System (ERS) after the employee is reinstated through a grievance following a wrongful discharge. When an administrative law judge orders a worker reinstated with back pay and full benefits, HHSC pays both the employer and employee retirement contributions for the period the worker was off the payroll, but ERS told HHSC it also requires interest on those amounts under Government Code section 813.202 before it will award the credit.

The Attorney General reframed the question. Although HHSC asked about its own authority, the real issue was whether ERS may require the interest in the first place; HHSC's position was that ERS lacks that authority. ERS administers a constitutional trust fund whose financing must rest on sound actuarial principles and whose assets cannot be diverted, and it must keep the plan qualified under section 401(a) of the Internal Revenue Code. ERS treats "reinstatement service credit" as service credit not previously established, which under the statute can be awarded only after the member pays the amount ERS determines, and ERS reads the relevant sections to require interest in every situation where previously unestablished credit is sought, to capture the time value of the delayed contributions and to satisfy its fiduciary duties.

Applying the rule that courts defer to an administering agency's reasonable construction that does not contradict the plain language, the Attorney General concluded a court would likely uphold ERS's reading and find that ERS is authorized to require the interest before establishing the credit. As for HHSC, an agency has only the powers the Legislature grants plus those reasonably necessary to carry them out, and its own statutory construction is entitled to serious consideration, so it is for HHSC to decide, in the first instance, how it will pay the interest to ERS. The opinion noted in a footnote that section 813.202(c) addresses paying the state's contribution and interest from the fund or account from which the member is compensated.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later Attorney General opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

HHSC (as the opinion described it): The opinion told HHSC that a court would likely uphold ERS's authority to require interest before restoring a reinstated employee's service credit, and that it is for HHSC to determine, in the first instance, the manner in which it will pay that interest. It pointed to section 813.202(c) as addressing the source of the state's contribution and interest.

ERS and other state retirement administrators (as the opinion described it): The opinion described ERS's reading (interest required before previously unestablished credit is awarded) as a reasonable construction entitled to deference, consistent with its duties to base financing on sound actuarial principles, avoid diverting trust assets, follow the exclusive-benefit rule, and keep the plan tax-qualified.

Reinstated state employees (as the opinion described it): The opinion described service credit for the period off the payroll as "service credit not previously established," which ERS may award only after the determined amount, including interest, is fully paid. It did not resolve who ultimately bears the interest; it left the manner of payment to HHSC.

Common questions

If a Texas state worker is reinstated after a wrongful firing, is interest owed to restore pension credit?
The opinion concluded a court would likely find that ERS is authorized to require interest before establishing the reinstated employee's service credit, on top of the employer and employee contributions for the missed period.

Why does ERS get to require interest when no statute mentions wrongful termination?
The opinion explained that ERS administers the credit as "service credit not previously established," and every statutory provision on establishing such credit requires interest or a comparable time-based payment. Courts defer to that reasonable construction because it does not contradict the statute.

Does HHSC or the employee pay the interest?
The opinion did not decide that. It said it is for HHSC to determine, in the first instance, the manner in which it will pay the interest, and noted section 813.202(c) addresses paying the state's contribution and interest from the fund that compensates the member.

Why is interest tied to ERS's role as trustee?
The opinion described ERS's arguments that charging interest captures the time value of delayed contributions and helps it avoid diverting trust assets, follow the exclusive-benefit rule, and preserve the plan's tax-exempt status.

Background and statutory framework

The opinion centered on chapter 813 of the Government Code. ERS treated the disputed credit as service credit not previously established under section 813.202, awardable under section 813.101 only after the member pays the amount ERS determines, and it read sections 813.104-.202 to require interest. The opinion noted that chapter 813 expressly provides for interest in related contexts: section 813.102 (restoring canceled service), section 813.202(b) (lump-sum establishment calculated under section 813.505), and section 813.302 (military service credit). It grounded ERS's fiduciary duties in article XVI, section 67(a)(1) and (b)(2) of the Texas Constitution and in section 815.507(a) (keeping the plan qualified under 26 U.S.C. section 401).

For the deference standard, the opinion relied on Tarrant Appraisal Dist. v. Moore (courts uphold a reasonable agency construction that does not contradict the plain language) and, for HHSC's authority, Pub. Util. Comm'n of Tex. v. City Pub. Serv. Bd. (an agency has only its conferred powers plus those reasonably necessary). The cost figures and appropriations context came from the General Appropriations Act, 82d Leg., R.S., ch. 1355.

Citations

Cases:

• Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993)
• Pub. Util. Comm'n of Tex. v. City Pub. Serv. Bd., 53 S.W.3d 310, 316 (Tex. 2001)

Statutes:

• Tex. Gov't Code Ann. § 813.202 (West 2012); § 813.202(a); § 813.202(b); § 813.202(c); § 813.102; § 813.302; § 813.505; § 813.101; §§ 813.104-.202; § 815.507(a)
• Tex. Const. art. XVI, § 67(a)(1), (b)(2)
• 26 U.S.C. § 401

Other authority:

• General Appropriations Act, 82d Leg., R.S., ch. 1355, 2011 Tex. Gen. Laws 4025, 4232-33

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-1004
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2013/ga1004.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

May 6, 2013

Kyle L. Janek, M.D. Opinion No. GA-1004
Executive Commissioner
Texas Health and Human Services Re: Whether the Health and Human Services
Commission Commission is authorized to pay or, alternatively,
Post Office Box 13247 an employee is required to pay interest on the
Austin, Texas 78711 amount paid to the Employees Retirement System
to restore a reinstated employee's service credit
when the employee has been reinstated as part of a
grievance procedure (RQ-1098-GA)

Dear Dr. Janek:

You ask whether the Health and Human Services Commission ("HHSC") is authorized to pay or, alternatively, an employee is required to pay, interest on the amount paid to the Employees Retirement System ("ERS") to restore an employee's service credit when the employee has been reinstated as part of a grievance procedure.[1]

You state that an employee who had been discharged by HHSC recently filed a grievance claiming that the agency had wrongfully discharged the employee. HHSC Brief at 1. Following a hearing, an administrative law judge employed by HHSC ordered "that the employee's job be restored with back pay and full benefits." Id. Under such circumstances, you explain, HHSC attempts to establish the reinstated employee's service credit in the employee's ERS retirement account. Id. & n.2. To do so, HHSC pays the employer's contribution and tenders the employee's contribution to ERS in the same amounts that would have been paid had the employee not been wrongfully terminated.

You state that you were informed by ERS, however, that it "requires payment of interest on the amount of money paid to restore service credit to a reinstated employee's ERS retirement account" under section 813.202 of the Government Code. Id. at 1. Section 813.202 provides for establishing membership service credit that has not been previously established. TEX. GOV'T CODE ANN. § 813.202 (West 2012). ERS asserts that section 813.202 governs "reinstatement service credit," which is ERS's terminology for service credit awarded retroactively to wrongfully terminated employees once they have been reinstated.[2] ERS contends that section 813.202 requires the payment of the employer's and employee's contributions for the period between the date of the employee's termination and the date of reinstatement, plus interest on those contributions, before ERS may award reinstatement service credit, i.e., credit that had not been previously established. ERS Brief at 8-9.

You note that chapter 813 expressly provides for interest on retirement system contributions to be paid in certain circumstances. HHSC Brief at 5-6 (citing TEX. GOV'T CODE ANN. §§ 813.102 (restoring canceled service), 813.202(b) (establishing service credit in a lump sum calculated under section 813.505), 813.302 (military service credit) (West 2012)). You further note that no statutory provision expressly addresses whether state agencies must pay interest when establishing an employee's service credit that has not been previously established due to wrongful termination. HHSC Brief at 6. It is your position that "a state agency has no authority to pay interest nor can a reinstated state agency employee be required to pay interest in this situation." Id. at 2. You base that position on your conclusion that "ERS does not have authority to compel the payment of interest." Id. Thus, although you phrase your question in terms of HHSC's authority, the issue at the heart of your inquiry is whether ERS is authorized to require the payment of interest before it awards service credit to a wrongfully terminated employee.

ERS is responsible for administering the ERS trust fund established under article XVI, section 67 of the Texas Constitution. TEX. CONST. art. XVI, § 67(b)(2). "Financing of benefits [for the constitutional retirement system] must be based on sound actuarial principles" and the "assets of a system are held in trust for the benefit of members and may not be diverted." Id. § 67(a)(1). ERS has a duty to construe and administer the statutes governing the retirement system's benefit plan so that the plan "will be considered a qualified plan under Section 401(a) of the Internal Revenue Code of 1986 (26 U.S.C. Section 401)." TEX. GOV'T CODE ANN. § 815.507(a) (West 2012).

With respect to service credit not previously established, "any member may establish service credit in the retirement system for membership service not previously established." Id. § 813.202(a). When an employee wishes to establish such service credit, ERS is expressly required to "determine in each case the amount of money to be deposited by a member claiming credit . . . not previously established. The system may not provide benefits based on the claimed service until the determined amount has been fully paid." Id. § 813.101.

In determining the amount that must be paid to establish service credit for a wrongfully terminated employee, ERS construes sections 813.104-.202 of the Government Code as requiring the payment of interest before it can credit an employee for prior service. Although no statutory provision specifically addresses the wrongful termination context, ERS concludes that the obligation to collect interest applies in all situations in which previously unestablished service credit is sought. Indeed, every statutory provision addressing the establishment of previously unestablished employee service credit includes a requirement to pay interest or a comparable time-based payment to ERS. ERS argues that the purpose of the requirement is to compensate the plan for the time value of the delayed employer and employee contributions. ERS Brief at 8-9. Further, as the retirement system fund's trustee and fiduciary, ERS argues it must charge interest so as to (1) avoid unconstitutionally diverting trust funds; (2) adhere to the exclusive-benefit rule under Texas and federal law; and (3) not violate the federal prohibited transaction rule which could risk the plan's tax-exempt status. Id. at 4-7.

When a state agency is charged with administering or enforcing a statute, Texas courts generally uphold that agency's interpretation of the statute, "so long as the construction is reasonable and does not contradict the plain language of the statute." Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993). In this case, ERS construes the Government Code to require that interest be paid before the agency can establish a retirement system service credit for an employee. ERS's construction of the statute comports with the Government Code's consistent recognition that interest or some other form of compensation must be paid before previously unestablished service credit may be recognized by ERS. Moreover, ERS's construction is a reasonable application of its statutory duty to "determine in each case the amount of money to be deposited by a member claiming credit . . . not previously established." TEX. GOV'T CODE ANN. § 813.101 (West 2012). Finally, ERS's construction of the statute does not conflict with any other statutory provisions. Thus, a court would likely conclude ERS has interpreted the statutes it is responsible for implementing within the bounds of its authority and in a manner that is neither unreasonable nor contrary to any statute. Accordingly, a court would also likely determine that ERS is authorized to require the payment of interest before service credit is established for an HHSC employee who has been reinstated after wrongful termination.

With respect to whether HHSC is authorized to make such an interest payment, an administrative agency such as HHSC possesses only those powers conferred by the Legislature. Pub. Util. Comm'n of Tex. v. City Pub. Serv. Bd., 53 S.W.3d 310, 316 (Tex. 2001). However, when the Legislature confers a power upon an agency, it also "impliedly intends that the agency have whatever powers are reasonably necessary to fulfill its express functions or duties." Id. Moreover, as with ERS, HHSC's construction of its authorizing statutes is entitled to serious consideration, and will generally be upheld by the courts unless it is unreasonable or contrary to statute. See Tarrant Appraisal Dist. v. Moore, 845 S.W.2d at 823. Accordingly, it is for HHSC to determine, in the first instance, the manner in which it will pay interest to ERS to establish service credit for an employee who is reinstated after wrongful termination.[3]

SUMMARY

A court would likely determine that ERS is authorized to require the payment of interest to establish service credit of an employee who has been reinstated after wrongful termination.

It is for the Health and Human Services Commission to determine, in the first instance, the manner in which it will pay interest to the Employees Retirement System to establish service credit for an employee who is reinstated after wrongful termination.

DANIEL T. HODGE
First Assistant Attorney General

JAMES D. BLACKLOCK
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

William A. Hill
Assistant Attorney General, Opinion Committee

[1] Letter & Brief from Kyle L. Janek, M.D., Exec. Comm'r, Health & Human Servs. Comm'n, to Honorable Greg Abbott, Tex. Att'y Gen. at 1 (Nov. 7, 2012), http://www.texasattorneygeneral.gov/opin ("Request Letter" & "HHSC Brief"). You state: "HHS agencies reinstated an average of 25 employees each of the last two fiscal years. Employees were off the respective agencies' payrolls an average of six months. The ERS policy would require an average monthly interest payment of approximately $27.00 per reinstated employee." HHSC Brief at 2. The figures you provide indicate that compliance with the ERS policy would require payment of approximately $4,050 per year for the last two years. We note that HHSC retirement contributions in the most recent General Appropriations Act are estimated at $112,451,674 for fiscal year 2012 and $120,710,933 for 2013. General Appropriations Act, 82d Leg., R.S., ch. 1355, 2011 Tex. Gen. Laws 4025, 4232-33.

[2] See Brief from Tim N. Sims, Acting Gen. Counsel, Emp. Ret. Sys. of Tex. at 2 & n.2 (Dec. 17, 2012) (on file with Op. Comm.) ("ERS Brief").

[3] While it is HHSC's prerogative to examine and construe in the first instance the statutes it administers or is charged with implementing, we note that section 813.202(c) provides for the payment of the state's contribution and interest "from the fund or account from which the member receives compensation at the time the service is established." TEX. GOV'T CODE ANN. § 813.202(c) (West 2012).