On March 20, 2015, the Texas Supreme Court affirmed in a unanimous opinion the decision by the Houston Municipal Employees Pension System (“HMEPS”) board (the “Board”) that City of Houston convention and hotel workers who were transferred by the city to a quasi-governmental entity controlled by the city remain city employees covered by the city pension plan. The decision is significant for all public pension plans because the ruling means that the city’s efforts to remove city workers from the statutory defined benefit plan by reassigning them to city-controlled entities was disallowed. Baker Botts represented HMEPS and the Board in securing this result.

The city and a small group of employees sued the Board and HMEPS contending that the reassigned employees were no longer city employees, and thus they had a separation of service for purposes of the city pension plan. As a result, pension distributions should be made to the employees from the plan and going forward these employees would no longer be eligible for the city pension plan. The state statute governing the city pension plan identified members as full time employees who appear on a regular payroll of the city. The statute provides the Board with the authority to make all legal and factual determinations to administer the plan, and such determinations are final and binding. Both the district court and the first court of appeals ruled that the Board had the authority to make the determination that the employees were still employees covered by the pension plan and dismissed the suit for lack of jurisdiction to second guess that decision. The city and the plaintiff group of employees appealed to the Texas Supreme Court.

Following extensive briefing and oral argument, the Texas Supreme Court agreed with the Board and ruled against the city and the handful of employees who had wanted to get early distribution of their pension benefit while continuing to be paid for the same job and also be eligible for a new 401(k) plan benefit. In dismissing the ultra vires claims that the Board had violated the statute, the Supreme Court noted that the city had formed “quasi-governmental entities to perform the same governmental functions using the same employees.” The Court also agreed that the Board had the duty and authority to review the facts and to conclude that the employees were still covered employees. The Court observed that the Board’s decision is legally driven by what is in “the greatest benefit of all members” of the plan. The Supreme Court said that the decision was consistent with the common understanding of the term “employee” as someone who is under the control of the employer.

In also dismissing equal protection and due process constitutional challenges made by the city, the Court found that the Board’s actions were consistent with its legal authority and duty and observed that the “pension board has a legitimate interest in preserving sources of pension funding that are adequate to meet the demands of the fund.” The Court also noted that the Board had prevented “double-dipping” - that the Board “had disallowed functional salaries and 401(k) plan contributions originating in the dollar-for-dollar expense reimbursements CCSI (newly created entity) collects from Houston First the City controlled and tax-funded local government corporation.”

To read the Texas Supreme Court opinion, click here.