Sec. 12. DEFERRED RETIREMENT OPTION PLAN. (a) In this section:

(1) "DROP" means the deferred retirement option plan established under Chapter 358, Acts of the 48th Legislature, Regular Session, 1943 (Article 6243g, Vernon's Texas Civil Statutes), and reenacted and continued under this Act.

(2) "DROP account" means a notional account established for a DROP participant that is used solely as an accounting convention to aid in the computation of the DROP participant's DROP benefit. The DROP account may only be used for accounting purposes, and there is no actual separation of assets of the pension fund before the distribution of the DROP participant's DROP benefit.

(3) "DROP benefit" means a DROP participant's total DROP account balance at the time the DROP participant terminates employment.

(4) "DROP election date" means the date the pension system receives a member's election to participate in the DROP in the manner and form determined by the pension system and approved by the pension board.

(5) "DROP entry date" means the date a member ceases to earn service credit and begins earning credit for the member's DROP account, which is the later of the date the member is eligible to participate in the DROP, the date requested by the member, or October 1, 1997, as approved by the pension board. The DROP entry date is the first day of a month and is determined by the normal retirement eligibility requirements of this Act or of Chapter 358, Acts of the 48th Legislature, Regular Session, 1943 (Article 6243g, Vernon's Texas Civil Statutes), as applicable, in effect on the requested DROP entry date. A member who enters DROP on or after January 1, 2005, may not have a DROP entry date that occurs before the date the pension system receives the member's request to participate in DROP.

(6) "DROP participant" means a pension system member who is participating in the DROP.

(b) A member who is eligible to receive a normal retirement pension under this Act and who is in active service with the city or the pension system, or a person who is eligible to receive a normal retirement pension under this Act and who has been separated from service for less than 30 days and has not otherwise been granted a pension or benefit, may file with the pension system an election to participate in the DROP and receive a DROP benefit under procedures established by the pension board. An election to participate in the DROP is irrevocable except as provided by Subsection (j) of this section.

(b-1) Notwithstanding Subsection (b) of this section, for DROP participation beginning on or after January 1, 2005, a member must meet the normal retirement eligibility requirements under Section 10(b) or (c) of this Act to be eligible to elect to participate in DROP. This subsection does not apply to a member who:

(1) met the eligibility requirements under Section 10(b) of this Act in effect before January 1, 2005; or

(2) before January 1, 2005, had at least five years of credited service and a combination of years of age and years of credited service, including parts of years, the sum of which equaled or was greater than 68.

(c) A member who is required to make payments to the pension system to purchase service or to convert service is eligible to participate in the DROP only to the extent that the member is eligible to participate in the DROP without regard to the service covered by the payment obligation, but must complete the obligation. If the payment obligation is not fully met, the member's participation in the DROP is determined as though the payment obligation was not entered into. A member who is participating in the DROP may not change membership from one group to another group, convert service from one group to another group, purchase service credit, or make a claim to purchase military service.

(d) Credited service and normal retirement benefits cease to accrue on the day preceding the member's DROP entry date. The period of a member's DROP participation, unless revoked as provided by Subsection (j) of this section, begins on the DROP participant's DROP entry date and ends on the date of the DROP participant's last day of active service with the city or the pension system. On the first day of the month following the month in which the pension board approves the member's DROP election, the DROP election becomes effective and the pension board shall establish a DROP account for the DROP participant. For each month during the period of DROP participation before a DROP participant's termination of employment, the following amounts shall be credited to the DROP participant's DROP account, including prorated amounts for partial months of service:

(1) an amount equal to what would have been the DROP participant's monthly normal retirement benefit if the DROP participant had retired on the DROP participant's DROP entry date, except that the monthly amount shall be computed based on the DROP participant's credited service and average monthly salary as of the DROP entry date and the benefit accrual rates and maximum allowable benefit applicable on the DROP election date, with the cost-of-living adjustments payable under Subsection (s) of this section, if any, that would apply if the DROP participant had retired on the DROP participant's DROP entry date; and

(2) subject to Subsection (d-1) of this section, interest on the DROP participant's DROP account balance computed at a rate determined by the pension board and compounded at intervals designated by the pension board, but at least once in each 13-month period.

(d-1) Beginning January 1, 2018, the pension board shall establish the interest rate applicable under Subsection (d)(2) of this section as of January 1 of each year at a rate:

(1) except as provided by Subdivision (2) of this subsection, equal to half the pension system's five-year investment return based on a rolling five-fiscal-year basis and net of investment expenses; and

(2) that may not be less than 2.5 percent or more than 7.5 percent.

(e) The monthly amount credited under Subsection (d)(1) of this section may not include any amount that is intended to help defray an increase in group medical insurance costs as described by Section 15(a) of this Act. In any year in which a supplemental payment is made to retirees under Section 15(b) of this Act, an amount equal to the amount of the supplemental payment that would have been made to the DROP participant if the DROP participant had retired on the DROP entry date shall be credited to the DROP participant's DROP account.

(f) The period for credits to a DROP participant's DROP account includes each month beginning with the DROP participant's DROP entry date through the date the DROP participant terminates employment with the city or the pension system. Credits may not be made to a DROP participant's DROP account for a period that occurs after the date the DROP participant terminates employment, except that interest at a rate determined by the pension board may be paid on the person's undistributed DROP account balance after the date the person terminates employment. A DROP participant must pay required contributions to the pension system for all time in DROP that would otherwise constitute service in order to receive allowable credits to the DROP participant's DROP account.

(g) A DROP participant who terminates employment is eligible to elect to receive the DROP participant's DROP benefit in a lump sum, in substantially equal periodic payments, in a partial lump sum followed by substantially equal periodic payments, or in partial payments from the participant's DROP account, in a manner and form determined by the pension board. The pension board may establish procedures concerning partial payments under this subsection, including limitations on the timing and frequency of those payments. A participant who elects partial payments may elect to receive the participant's entire remaining DROP account balance in a single lump-sum payment. The pension board shall determine a reasonable time for lump-sum and periodic payments of the DROP benefit. All distributions and changes in the form of distribution must be made in a manner and at a time that complies with that provision of the Internal Revenue Code of 1986, as amended.

(h) If a DROP participant dies before the full distribution of the DROP participant's DROP account balance, the undistributed DROP account balance shall be distributed to the DROP participant's surviving spouse, if any, in a lump-sum payment within a reasonable time after the pension board has determined that the surviving spouse is eligible for the distribution. If there is no surviving spouse, each beneficiary of the DROP participant, as designated in the manner and on a form established by the pension board, is eligible to receive the beneficiary's applicable portion of the deceased DROP participant's undistributed DROP account balance in a lump-sum payment within a reasonable time after the pension board has determined that the beneficiary is eligible for the distribution. If no beneficiary is designated, the undistributed DROP account balance shall be distributed to the deceased participant's estate.

(i) A DROP participant is ineligible for disability benefits provided by this Act.

(j) An election to participate in the DROP is irrevocable, except that:

(1) if a DROP participant is approved for a service disability pension, the DROP participant's DROP election is automatically revoked; and

(2) if a DROP participant dies, the surviving spouse, if any, or the beneficiary, if any, may elect to revoke the DROP participant's DROP election, at a time and in a manner determined by the pension board, only if the revocation occurs before a distribution from the DROP participant's DROP account or the payment of a survivor benefit under this Act or Chapter 358, Acts of the 48th Legislature, Regular Session, 1943 (Article 6243g, Vernon's Texas Civil Statutes).

(k) On revocation of a DROP election under Subsection (j) of this section, the DROP account balance becomes zero, and a distribution of DROP benefits may not be made to the participant, the participant's surviving spouse, or the participant's beneficiaries. In the event of revocation, the benefits based on the participant's service are determined as if the participant's DROP election had never occurred.

(l) Under a rule adopted by the pension board under this section, the surviving spouse of a deceased member or, if the member has no surviving spouse, the designated beneficiary of the deceased member may make the DROP election that the deceased member would have been eligible to make the day before the member's death and may receive the DROP distribution in a lump sum within a reasonable time after the pension board has determined that the surviving spouse or designated beneficiary is eligible for the distribution. A DROP election by the surviving spouse or designated beneficiary under this subsection may not be made after the sixth month after the date of the member's death. An election may not be made under this subsection if a survivor benefit or other distribution has been made with respect to the deceased member. Notwithstanding any other provision, an election made under this subsection is irrevocable.

(m) If an unanticipated actuarial cost occurs in administering the DROP, the pension board, on the advice of the pension system actuary, may take action necessary to mitigate the unanticipated cost, including refusal to accept additional elections to participate in the DROP. The pension system shall continue to administer the DROP for the DROP participants participating in the DROP before the date of the mitigating action.

(n) A former DROP participant who is rehired by the city or the pension system following termination of employment is not eligible to participate in the DROP.

(o) Except as provided by Subsection (o-1) of this section, on termination of employment, a DROP participant shall receive a normal retirement pension under Section 10 of this Act or under Section 11, 22A, or 24 of Chapter 358, Acts of the 48th Legislature, Regular Session, 1943 (Article 6243g, Vernon's Texas Civil Statutes), as those sections read on the day preceding the participant's DROP entry date, as applicable, except that the credited service under that section is the member's credited service as of the day before the member's DROP entry date, the benefit accrual rate applicable to the credited service shall be the benefit accrual rate in effect on the member's DROP election date, the maximum allowable benefit shall be the maximum allowable benefit in effect on the member's DROP election date, and the member's average monthly salary is the average monthly salary determined as of the later of the member's DROP entry date or January 1, 2005, as applicable. The DROP participant's normal retirement pension is increased by any cost-of-living adjustments applied to the monthly credit to the member's DROP account under Subsection (d)(1) of this section during the member's participation in the DROP. Cost-of-living adjustments applicable to periods after the date of the DROP participant's termination of employment are based on the DROP participant's normal retirement pension computed under this subsection or Subsection (o-1) of this section, as applicable, excluding any cost-of-living adjustments.

(o-1) On termination of employment, and before any benefit or DROP payment, a DROP participant who is an option-eligible participant shall make the required election under Section 11 of this Act. If the option-eligible participant elects a J&S Annuity, the DROP account, including all DROP credits, shall be recalculated from the DROP entry date to termination of employment as provided by Subsection (o) of this section as if the J&S Annuity was selected to be effective as of the DROP entry date.

(p) If a DROP election is not revoked under Subsection (j) of this section, the survivor benefit payable to an eligible survivor of a deceased DROP participant under Section 14 of this Act is computed as a percentage of the monthly ordinary disability pension that the member would have been eligible to receive had the member suffered a disability the day before the member's DROP entry date, except that the ordinary disability pension is computed based on the DROP participant's credited service as of the day before the DROP participant's DROP entry date, the benefit accrual rate applicable to the credited service as of the DROP participant's DROP election date, and the DROP participant's average monthly salary as of the later of the DROP participant's DROP entry date or January 1, 2005, as applicable. A surviving spouse, if any, of a DROP participant who dies from a cause directly resulting from a specific incident in the performance of the DROP participant's duties for the city or the pension system is ineligible to receive enhanced survivor benefits under Section 14(c) of this Act unless the DROP election is revoked under Subsection (j)(2) of this section and the surviving spouse receives a survivor benefit as otherwise provided by this subsection.

(q) The pension board may adopt rules for the implementation and operation of the DROP, including rules regarding the payment of DROP benefits.

(r) Except as provided by Subsection (s) of this section, the pension system may not credit a DROP account with a cost-of-living adjustment percentage on or after February 1, 2018.

(s) On or after February 1, 2018, and for future credit only, the pension system shall credit a cost-of-living adjustment percentage, not compounded, to the DROP account of a DROP participant who was at least 62 years of age as of January 1 of the year in which the increase is made.

(t) The pension board may establish deadlines for the submission of any information, document, or other record pertaining to DROP.