Texas Register
(30 TexReg 6250).
New §25.30 implements the requirement under Senate Bill 1691, 79th
Legislature, Regular Session (2005) (Senate Bill 1691) (to be codified at §825.110,
Government Code) that the Board adopt rules excluding compensation in a TRS
member's final years of employment that represents amounts converted from
noncreditable compensation to creditable salary and wages. The proposed section
applies to converted amounts received in any of the three years prior to retirement.
The characterization of the compensation in the fourth or subsequent years
prior to retirement is used to determine whether conversion occurred. New §25.30
provides that ineligible compensation converted to eligible compensation is
excluded if it is received in any of the last three school years prior to
retirement. The new section explains when conversion occurs and provides that
the compensation must be for services that are performed in the future. Payment
for unused accrued leave, including compensatory leave for overtime, is expressly
excluded as being eligible for conversion. This provision does not represent
a change in current policy but reinforces that payment for unused leave cannot
be converted to creditable compensation because by definition it is not salary
and wages.
New §25.30 also provides that the "look-back" period will include
only compensation converted after the current 2005-2006 school year. The new
section allows a member to convert ineligible compensation during the current
school year and avoid exclusion under the rule, provided the member begins
to receive the eligible compensation during the current school year. New §25.30
relies on the certification of the reporting entity to notify TRS if conversion
has occurred. The rule allows a member to provide documentation supporting
a determination that the compensation is creditable if compensation is reported
as converted salary but provides that TRS makes the final decision regarding
its status as creditable compensation. Further, the new section provides for
TRS to refund member contributions on excluded amounts.
TRS received comments on new §25.30 as published September 30, 2005
from the Texas Federation of Teachers (TFT) and from Texas Tech University
(Texas Tech). TFT commented that the proposed rule should be changed to apply
only to members in certain job classifications such as school district superintendents
and other employees "able to exert direct and substantial influence on the
amount and form of their own compensation." TRS disagrees with this suggestion
because there is no express provision in the bill that limits the application
of the law to only members serving in certain job classifications. Further,
there is no information available at this time that supports a determination
by the TRS Board that increases in the salaries of TRS members in the suggested
job classifications have any more significant actuarial impact on the pension
fund than late-career increases in the compensation of other members in other
job classifications.
TFT and Texas Tech both commented that the proposed rule published September
30 should be changed so that payments for unused compensatory time made to
non-exempt employees under the Fair Labor Standards Act (FLSA) would not be
excluded from creditable compensation. Texas Tech further commented that payments
for unused state compensatory time should also not be excluded as creditable
compensation. TRS disagrees with these comments. The definition of compensation
as salary and wages is established in the statutory terms of the TRS plan
and that definition precludes a determination that payments for unused compensatory
time are creditable compensation. Rules adopted by the Board cannot change
the law. To avoid any confusion on this type of payment and to promote consistency
in the application of the law to all members, the proposed new rule includes
language that specifically addresses payments for unused compensatory leave.
Additionally, TFT commented at the November 4, 2005 Board meeting on new §25.30
that TRS should credit payments for accrued FLSA compensatory time because
employers control whether the employees receive overtime wages as they earn
them or compensatory leave in lieu of the wages. TRS disagrees with this comment
because the characterization of compensation as creditable is not based on
the member having any control over the type or amount of compensation received
but whether the compensation is salary and wages as defined in the TRS plan
terms. If the employee is paid with compensatory leave for overtime worked,
the compensation is leave, not a payment of money as required for TRS purposes.
If the employer later pays the employee money for any compensatory leave not
taken, the payment of money is for unused leave, not for service, and is usually
valued at the current rate of pay, not the rate of pay at the time the overtime
service was rendered. Further, the fact remains that current statutory law--§822.201,
Government Code--prevents TRS from crediting compensation received for unused
FLSA compensatory time.
Texas Tech also suggested that TRS add a subsection to new §25.30
to clarify that the rule does not apply to amounts deducted from regular pay
pursuant to a written salary reduction agreement for a federally or state
qualified deferred compensation arrangement, tax sheltered annuity program,
or cafeteria plan for benefit options. TRS disagrees with the suggestion because
statute already clearly provides that certain types of deferred compensation
when paid as provided in §822.201, Government Code, are creditable compensation
that would not be subject to the proposed conversion rule as published. Also,
the additional language proposed by Texas Tech goes too far in that it could
exempt amounts converted from noncreditable compensation so long as the amounts
paid for unused compensatory leave are paid as deferred compensation in subsequent
years. TRS does not agree that converted amounts paid through deferred compensation
arrangements should have protection from exclusion under this rule.
On new §25.30, the Texas Classroom Teachers Association (TCTA) commented
that FLSA compensatory time earned during the three (or five) years prior
to retirement should be included in the calculation of the defined benefit
for the employee and that the rule should be changed accordingly. TRS disagrees
with TCTA's comment and suggestion because, as already stated in response
to similar comments, the statute §822.201, Government Code, defines salary
and wages as payments of money for service and prevents TRS from crediting
payments for unused compensatory time. Aside from the statutory obstacle,
TCTA's suggestion would have an adverse actuarial impact on the system by
crediting the compensation only when it benefits the member and depriving
the pension fund of the contributions on this type of payment over the career
of the member and thereby defeat the purpose of both §825.110 as amended
by SB 1691 and new §25.30 implementing it. Under TCTA's suggestion, member
contributions would be deducted from payments for unused compensatory time
only during the last years of employment preceding retirement. Member contributions
on these types of lump sum payments that are deposited with TRS just prior
to retirement cannot begin to fund the increased retirement benefits associated
with the payments. Including payments for unused compensatory leave only during
the last years prior to retirement puts the entire burden of the cost of the
lifelong increased payments on the pension fund. This type of late career
increase in salary is the type of increase TRS is required to address in §825.110.
New §25.31 implements the requirement under SB 1691 that the Board
adopt rules limiting the amount of increases in annual compensation subject
to credit and deposit during a member's final years of employment. The proposed
new rule caps the increase in compensation during the last three years before
retirement at the greater of 110% of the previous year's compensation or the
previous year's compensation plus $10,000. The base line amount used to determine
the amount of allowable compensation in the third school year prior to retirement
is the greater of either the amount of compensation paid in the fourth school
year prior to retirement or the fifth school year prior to retirement. If
there is no compensation in either the fourth or fifth school year prior to
retirement, the base amount is the earliest salary credited in the three school
years prior to retirement. If the member does not have credited compensation
in at least three school years during the last five school years prior to
retirement, the cap does not apply. The proposed rule specifies that increases
in compensation because of a change in employers, a change in duties, the
performance of additional duties or work, legislation, or federal or state
law will not be excluded. Also, the rule provides that no adjustment in compensation
will be made under the new rule if the limit on compensation will not affect
the member's retirement benefit. Proposed new §25.31 also provides that
only compensation earned after the 2005-2006 school or contract year will
be subject to the limit on increases and only salaries earned in the 2005-2006
school/contract year and thereafter will be used to calculate the base salary
amount. The proposed rule provides for the refund of member contributions
on ineligible compensation. The exceptions provided in proposed new §25.31
address the most common reasons employers give to justify increases in salary.
TRS received comments from the Texas Federation of Teachers (TFT) on this
proposed rule. TFT commented that the proposed rule should be changed to apply
only to members in certain job classifications such as school district superintendents
and other employees "able to exert direct and substantial influence on the
amount and form of their own compensation." TRS disagrees with this suggestion
because there is no express provision in the bill that limits the application
of the law to only members serving in certain job classifications. Further,
there is no information available at this time that supports a determination
by the TRS Board that increases in the salaries of TRS members in the suggested
job classifications have any more significant actuarial impact on the pension
fund than late-career increases in the compensation of other members in other
job classifications. However, by establishing the $10,000 threshold amount,
the 110% cap effectively will apply only to those members making more than
$100,000.
TFT also commented that amounts paid for unused FLSA compensatory time
should not count towards any limit proposed in §25.31. TRS agrees with
this comment, but for a different reason. The definition of compensation as
salary and wages is established in the statutory terms of the TRS plan and
that definition precludes a determination that payments for unused compensatory
time are creditable compensation. Rules adopted by the Board cannot change
the law. Because these payments are not compensation for TRS purposes, they
will not count towards the limit in this rule. However, payments for overtime
worked under FLSA to non-exempt employees is creditable compensation when
it is paid as it is earned and in the proposed rule amounts paid for overtime
worked under FLSA (federal law) are not counted towards the limit.
Additionally, TFT commented at the November 4, 2005 Board meeting on new §25.31
that TRS should credit payments for accrued FLSA compensatory time because
employers control whether the employees receive overtime wages as they earn
them or payments for unused leave. TRS disagrees with this comment for the
same reason stated above in connection with new §25.30: the characterization
of compensation as creditable is not based on the member having any control
over the type or amount of compensation received but whether the compensation
is salary and wages as defined in the TRS plan terms. The fact remains that
current statutory law--§822.201, Government Code--prevents TRS from crediting
in benefit computations compensation received for unused FLSA compensatory
leave.
Statutory Authority for New §25.30 and §25.31: §22
of SB 1691, which amends §825.110, Government Code, to require the Board
to adopt rules (1) to exclude from annual compensation all or part of salary
and wages in the final years of a member's employment that reasonably can
be presumed to have been derived from a conversion of fringe benefits, maintenance,
or other payments not includable in annual compensation to salary and wages
and (2) to adopt a percentage limit on the amount of increases in annual compensation
that may be subject to credit and deposit during a member's final years of
employment; and §825.102, Government Code, which authorizes the Board
to adopt rules for the administration of the funds of the retirement system.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on January 11, 2006.
TRD-200600167
Ronnie G. Jung
Executive Director
Teacher Retirement System of Texas
Effective date: January 31, 2006
Proposal publication date: September 30, 2005
For further information, please call: (512) 542-6438