Untitled Texas Attorney General Opinion

OFFKE OF THE ATTORNEY GENERAL. STATE OF TEXAS

JOHN CORNYN

January 12,200O

The Honorable Jose R. Rodriguez Opinion No. JC-0165
El Paso County Attorney
500 East San Antonio, Room 203 Re: Constitutionality of “early exit” plan for
El Paso, Texas 79901 school district employees, and related questions
(RQ-0055-JC)

Dear Mr. Rodriguez:

You ask a number of questions regarding an independent school district’s proposed
implementation of an “early exit” plan for school district employees. In essence, you ask whether
the plan would be valid under Texas law and, if not, what changes would make it valid. While we
conclude that the school district may be able to fashion a plan that meets the district’s goals and
complies with state law, we do not determine whether the plan as you have described it is legal in
all respects. As a general rule, a school district has only those powers expressly conferred on it by
law or necessarily implied from powers so conferred. See Harlingen Indep. Sch. Dist. v. C.H. Page
& Bras., 48 S.W.2d 983, 986 (Tex. Comm’n App. 1932, holding approved). A definitive
determination ofwhether the plan you describe is authorized by law would require a thorough review
of the complete details of the entire plan in light of the particular school district at issue and the
particular facts surrounding the plan. Such a determination would best be made by a legal advisor
to the district who is in a position to review a proposed plan and fully analyze the applicable state
and federal laws with the necessary factual information at hand. This office normally does not
construe contracts nor make findings of fact in the opinion process. See Tex. Att’y Gen. Op. Nos.
JC-0152 (1999) at 12; JM-697 (1987) at 7.

You tell us: “The board of trustees of an independent school district organized under Texas
law (the “District”) is considering adoption ofa plan whereby one or more employees ofthe District
meeting certain eligibility requirements and agreeing to participate in the plan would receive certain
payments from the District in the future in exchange for the “early exit” of the employee
(the “Plan”).” Letter from Honorable Jose R. Rodriguez, El Paso County Attorney, to Honorable
John Comyn, Texas Attorney General, at 1 (Apr. 19, 1999) (on file with Opinion Committee)
[hereinafter “Request Letter”]. To be eligible, an employee must be on active service and have more
than ten total years of employment with the District. Id. The Plan would apply to all District
employees, which are of four types: continuing-contract employees, term-contract employees, one-
year contract employees, and at-will employees. Id. at l-2.
The Honorable Jose R. Rodriguez - Page 2 (JC-0165)

An eligible employee must exit the District by retirement or resignation within the three-year
exit period of the Plan. If the employee exits in the first year, he will receive payments totaling
105% of his basic annual salary. If he leaves in the second year, he will receive one hundred percent
of his salary, and if he leaves in the third year he will receive ninety-five percent of his salary. In
each case, the salary will be paid in equal monthly installments over a period of eight years
beginning on the exit date. A participating employee who is eligible for retirement will also be paid
one hundred percent of his accumulated sick leave in three installments over a period of
approximately twenty-four months. The current District policy, you tell us, is to pay a retiring
employee fifty percent of his accumulated sick leave in a lump sum immediately upon exit or soon
thereafter. Id. at 2.

Eligible employees will be given a short period in which to apply for participation in the Plan
before the Plan’s first year. “Once the ‘window’ period closes, Plan eligibility for remaining
employees immediately ceases, and no further participation in the Plan will be allowed by the
District.” Id.

Employees must agree to other terms in exchange for the payments. “Under the Plan, a
participant would be required to execute a release and waiver of all preretirement claims against the
District, including without limitation any claims for race, sex, age, disability, ethnicity, or other
discrimination, and would be required to agree not to seek reemployment in the future with the
District without the District’s consent.” Id. at 2. The Plan might also include a “future performance”
requirement whereby the employee must perform five to eight days of service for the District in each
of the eight years during which payments are being made. Id. You tell us that because payments
under the Plan would be made during the course of a number of different fiscal years, the Plan would
include a “non-appropriation clause.” Id.

The purpose of the Plan is to save money:

Based upon current feasibility studies, the District believes
that, through the operation of the Plan, a significant number of
higher-paid, more-experienced employees will choose to participate
in the Plan and retire or resign from the District sooner than they
might otherwise do. As such, the District expects to be able to
replace such early retirees/resignees with entry-level or less
experienced [yet still competent] persons with lower salaries or
wages. The District hopes to achieve substantial savings by virtue of
the “spread” between the salaries or wages of the early
retirees/designees and the lower salaries or wages of their
replacements. The District feels that the Plan will prove financially
beneficial to the District. The District is interested in implementing
the Plan because of the anticipated savings.

Request Letter, supra, at 3.
The Honorable Jose R. Rodriguez - Page 3 (JC-0165)

With this background, we turn to your questions.

Ouestion No. 1

Is the Plan in its stated form valid under the Texas Constitution?
Would your answer change if one or more of the four categories of
employees were excluded from eligibility under the Plan? Would
your answer change if the Plan limited eligibility to employees who
are age 40 or above [i.e.- potential claimants based upon age under
the Age Discrimination in Employment Act and under Texas Labor
Code § 21.05 1 et. seq.]?

Ouestion No. 2

With respect to eligible employees who participate in the Plan during
the term of their existing contracts, is the Plan in its stated form valid
under the Texas Constitution? Would your answer change if the Plan
limited such persons from electing early resignation or retirement
until the second or third year of the Plan and required continuing
performance of services for the District until such time? Would your
answer change if one or more of the four categories of employees
were excluded from eligibility under the Plan?

While you ask about the Plan’s validity under the Texas Constitution generally, your letter
suggests that you are concerned in particular about constitutional prohibitions on the gratuitous grant
of public funds to private individuals. Article III, section 52 of the Texas Constitution prohibits the
legislature from authorizing “any county, city, town or other political corporation or subdivision of
the State to lend its credit or to grant public money or thing of value in aid of, or to any individual,
association, or corporation whatsoever.” TEX. CONST.art. III, 5 52(a). Article III, section 53
provides that the legislature “shall have no power to grant, or to authorize any county or municipal
authority to grant, any extra compensation, fee or allowance to a public officer, agent, servant or
contractor, after service has been rendered, or a contract has been entered into, and performed in
whole or in part.” Id. § 53; see also Harlingen Indep. Sch. Dist., 48 S.W.2d at 986 (article III,
section 53 applies to school districts). And article XVI, section 6 prohibits appropriations ofpublic
funds for private or individual purposes, TEX. CONST.art. XVI, 5 6, although it does not bar
expenditures made for the direct accomplishment of a legitimate public purpose, see Byrd Y. City of
Dallas, 6 S.W.2d 738,740 (Tex. 1928). Plainly stated, these provisions prohibit a school district
from using public funds to give away something for nothing.

Because your question involves compensation to public employees, we focus our analysis
on the constitutional provision that prohibits a school district from granting extra compensation to
a public employee after services have been rendered or a contract entered into and performed in
whole or part. TEX. CONST.art. III, 5 53. Payments made after a service or contract has been
The Honorable Jose R. Rodriguez - Page 4 (~~-0165)

performed are normally considered to be “extra compensation” where no consideration is offered
by the payee for the additional payments. See, e.g., City of Greenville v. Emerson, 740 S.W.2d 10,
13 (Tex. App.-Dallas 1987, no writ). However, where the payee offers additional consideration for
the additional payments, there is no violation ofthis constitutional prohibition. See Tex. Att’y Gen.
Op. No. MW-68 (1979) at 1. Consequently, payments under the Plan by the school district would
not be unconstitutional if the district received consideration from participating employees in return
for the payments. Consideration for a valid agreement is defined as either a benefit to the promisor
or a loss or detriment to the promisee. See Northern Natural Gas. Co. Y. Conoco, Inc., 986 S.W.2d
603,607 (Tex. 1998).

For example, courts have long held that the performance of employment duties is
consideration for retirement benefits, accumulated leave payments, and other post-employment
payments that are part of the terms of employment, and therefore such payments are not
unconstitutional gratuities. See, e.g., Byrd, 6 S.W.2d at 740; City of Galveston v. Landrum, 533
S.W.2d 394, 397 (Tex. Civ. App.-Houston [lst Dist.] 1976, writ refd n.r.e.); Devon v. City of San
Antonio, 443 S.W.2d 598,600 (Tex. Civ. App.-Waco 1969, writ ref d); City of Orange Y. Chance,
325 S.W.2d 838,840 (Tex. Civ. App.-Beaumont 1959, no writ); City of San Antonio v. Baird, 209
S.W.2d 224,225 (Tex. Civ. App.-San Antonio 1948, writ ref d). Surrendering alegal right has also
been held to be valid consideration. See Northern Natural Gas Co., 986 S.W.2d at 607.
Accordingly, the District may constitutionally be able to offer the Plan to employees who are
currently working under a contract with the District.

The contract may be amended or a new contract entered into, provided new consideration is
given. In City of Greenville v. Emerson, the court held that a new contract with city employees “to
pay them additional benefits above what they received under a prior valid existing contract for no
additional consideration” would contravene the constitution. Ciiy of Greenville v. Emerson, 740
S.W.2d at 13. This statement implies that a new contract with new consideration would have been
valid. And in Attorney General Opinion MW-68, this office considered whether the constitution
prohibited a school district from increasing contract teachers’ salaries after the teachers had begun
performing under their contracts. Tex. Att’y Gen. Op. No. MW-68 (1979) at 1. Certainly, the
opinion stated, additional compensation could not be paid for past services rendered. “The school
board may, however, renegotiate a contract already performed in part where new consideration
passes to the district in exchange for new benefits provided.” Id. at 2.

In our view, the consideration for an employee’s participation in the Plan you have described
would be those things in the Plan to which the employee agrees: leaving employment, waiving
discrimination claims, foregoing future employment with the District, and the like. The District
benefits from the savings in salaries, the release of discrimination claims, and other things that you
list in your letter. In other words, the employees would provide consideration, and the District
would not give away something for nothing.

Whether any particular employee provides valid consideration to the school district for
payments under the Plan will depend upon the particular facts surrounding that employee and may,
The Honorable Jo& R. Rodriguez - Page 5 (X-0165)

as your question suggests, depend upon the type of employee. You tell us that the Plan would apply
to all four types of District employees: at-will employees, one-year-contract employees, term-
contract employees, and continuing-contract employees.

Every teacher, principal, librarian, nurse, or counselor must be employed under a contract.
TEX. EDUC.CODEANN. 5 21.002 (Vernon 1996). Other employees may work at the will of the
District. Id. At-will empIoyees are employees who work without a contract and who may be
dischargedatanytime. SeeMontgome~CountyHosp.Dist. v.Brown,965 S.W.2d501 (Tex. 1998).
Probationary-contract employees are employed for a contract term not exceeding one school year.
TEX. EDUC.CODEANN. 5 21.102 (Vernon 1996). A term-contract employee is employed by a
district for a fixed term not to exceed five school years, at which point the contract may be renewed.
Id. 94 2 1.201, .205-.209. A continuing-contract employeeneed not have his orhercontract renewed
in order to continue working for the district: “Each teacher employed under a continuing contract
is entitled to continue in the teacher’s position or a position with the school district for future school
years without the necessity for annual nomination orreappointment”unti1 the person’s employment
ends by resignation, retirement, discharge, or by several other listed means. Id. $ 21.154.

In order for the Plan to be constitutional with respect to a particular employee, the District
must receive valid consideration from the employee for payments under the Plan. The consideration
given by an employee will vary with each employee depending upon the employee’s current
employment status with the District. Thus, payments under the Plan must be commensurate with
the consideration given by each employee. For example, an at-will employee, who as a general rule
could be terminated at any time, and thus, need not be offered an incentive to leave, in agreeing to
resign does not provide the same level of consideration, and thus would not be entitled to the same
level ofpayments as an employee with five years remaining on her contract. Any promise to or from
an at-will employee is “illusory” and does not constitute consideration if the promise depends upon
a period of continued employment, because either the employer or employee may terminate the
employment at will. See Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644 (Tex. 1994).
“At-will employees may contract with their employers on any matter except those which would limit
the ability of either employer or employee to terminate the employment at will.” Id.

The constitutional validity of the Plan will depend upon the existence of an enforceable
agreement supported by adequate consideration with each participating employee. There must be
evidence that the school district and participating employees formed an agreement before the
employee performs the consideration offered and before payments under the Plan begin. We believe
that a contract that lacks specific identification of enforceable consideration offered by the employee
will not support payments under the Plan and will render the Plan unconstitutional at least as to that
employee. Whether any particular employee provides consideration to the District in return for
payments under the Plan is a question of fact beyond the scope of the opinion process.

You also ask whether our answer would change if the Plan were limited to employees who
are age forty or above, that is, those who are potential age-discrimination claimants. You tell us that
release of age discrimination claims would be of significant benefit to the District. Request Letter,
The Honorable Jose R. Rodriguez - Page 6 (~~-0165)

supra, at 2. As we have said, surrendering a legal right can constitute valid consideration, See
Northern Natural Gas. Co., 986 S.W.2d at 607. Thus, with respect to those employees who are
potential claimants, the District would receive consideration in return for the post-employment
payments. And, provided some other consideration is given for the payments, a Plan that includes
an age-discrimination waiver for all eligible employees is not necessarily invalid with respect to
employees who are under age forty and thus not potential age-discrimination claimants.

Nor would offering the Plan only to employees aged forty and above necessarily violate
federal and state anti-discrimination laws. The federal Age Discrimination in Employment Act
(“ADEA”) forbids an employer to, among other things, “discharge any individual or otherwise
discriminate against any individual with respect to his compensation, terms, conditions, or privileges
of employment, because of such individual’s age.” 29 U.S.C. 4 623(a)(l) (1994). A “discharge”
within the meaning of the ADEA may be constructive if a reasonable person in the employee’s
position would have felt compelled to resign under the circumstances. Christopher Y. Mobil Oil
Corp., 950 F.2d 1209, 1214 (5th Cir.), cert. denied, 506 U.S. 820 (1992). “An attractive early
retirement offer, however, is not a constructive discharge merely because it creates a strong incentive
to retire; an early retirement option can constitute a constructive discharge only if the employee
shows that it sufficiently alters the status quo that each choice facing the employee makes him worse
off.” Id.; see 29 U.S.C. 5 623(f)(2)(B)(ii) (1994). The same rule would apply to an age
discrimination case brought under the Texas Commission on Human Rights Act (“TCHRA”), which
also bars employment discrimination on the basis of age. See TEX. LAB. CODE ANN. 4 21.051
(Vernon 1996); Farrington v. Sysco Food Servs., Inc., 865 S.W.2d 247,251 (Tex. App.-Houston
[lst Dist.] 1993, writ denied) (courts may look to federal case law interpreting Title VII when
determining burdens of proof under TCHRA). Thus, we find no law that would render the Plan
invalid merely because it is offered only to older employees with a requirement that they waive age-
discrimination claims.

While general releases of employment claims are normally enforceable, see Rogers v.
General Elec. Co., 781 F.2d 452,454-55 (5th Cir. 1986) they have their limitations. For example,
an employee may validly release only those federal Title VII claims that arise from discriminatory
acts that precede the date of execution of the release. Id. at 454. Some federal employment
discrimination statutes have particular requirements that must be met to create a valid release. See,
e.g., Oubre v. Entergy Operations, Inc., 522 U.S. 422,427 (1998) (“An employee ‘may not waive’
an ADEA claim unless the employer complies with the statute.“). And certain claims may not be
waived at all. For example, a pre-injury release of a claim for gross negligence is void as against
public policy. SeeMemorialMed. Ctr. ofEast Texas v. Keszler, 943 S.W,2d433,435 (Tex. 1997).
And, certainly, a release will not be enforceable if it was entered into under duress, fraud, mistake,
or the like. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171,178 (Tex. 1997). A waiver
that is not enforceable will not constitute consideration for the Plan. Whether any particular waiver
will be enforceable will depend upon the particular terms of the waiver, the facts surrounding its
execution, and the alleged injury for which the waiver is asserted.
The Honorable Jose R. Rodriguez - Page 7 (JC-0165)

Question No. 3

Is the “future performance” requirement of the Plan essential to its
validity under the Texas Constitution? Would your answer change
if the Plan excluded the “future performance” requirement for
continuing contract and/or term contract employees? Would your
answer change if one or more of the four categories of employees
were excluded from eligibility under the Plan?

Ouestion No. 4

If a participant is unable to meet the “future performance”
requirement due to death or disability, is it valid under the Texas
Constitution for the Plan to still provide for payment of benefits in the
future to the participant or his/her beneficiary? Would your answer
change if one or more of the four categories of employees were
excluded from eligibility under the Plan?

Ouestion No. 5

If a participant is unable to meet the “future performance”
requirement for any reason, is it valid under the Texas Constitution
for the Plan to mandate forfeiture of future, but not past, payments
under the Plan? Would your answer change if one or more of the four
categories of employees were excluded from eligibility under the
Plan?

We understand from your questions that the purpose ofthe future performance requirement
would be to create consideration for payments under the Plan in order to make it constitutional. As
we understand the District’s approach, the payments would be made not for work already performed,
but for work to be performed in the future.

In our view, the future performance requirement is not essential to the Plan’s constitutional
validity with respect to any of the categories of employees, provided other consideration is given for
payments under the Plan. You also ask about the effect of a participating employee’s inability to
meet the future performance requirement due to death, disability, or any other reason. If an
employee is unable to meet the future performance requirement for any reason, payments to the
employee do not necessarily become unconstitutional, since the future performance requirement is
not essential to the Plan’s constitutionality. However, nothing in the constitution prohibits the
District from including in the Plan a provision by which payments are discontinued ifthe employee
cannot perform.
The Honorable Jo& R. Rodriguez - Page 8 (K-0165)

Question No. 6

Would the Plan be valid under the Texas Constitution if the sick leave
payment under the Plan to a participant consisted of 100% of his/her
accumulated sick leave payable over 24 months, as opposed to the
current Districtpolicyofpayment of50%ofhis/her accumulatedsick
leave in a lump sum? Would your answer change if one or more of
the four categories ofemployees were excluded from eligibility under
the Plan?

You ask whether inclusion in the plan of a sick leave policy that differs from the current sick
leave policy would render the Plan unconstitutional. A change in a sick leave policy may not be
made so as to provide additional benefits for work already performed. See Ward v. City of San
Antonio, 560 S.W.2d 163, 165-66 (Tex. Civ. App.-San Antonio 1978, writ ref d n.r.e.); Tex.
Att’y Gen. Op. No. DM-129 (1992) at 3. However, like other employment benefits, new sick
leave policies are not unconstitutional if they form part of the employee’s compensation or if the
employee otherwise offers additional consideration for the policy. See Tex. Att’y Gen. Op. No.
MW-221(1980) at 3-4.

In Ward v. City ojSan Antonio, the court considered the effect of a new state law that
allowed city fire fighters to be compensated for all of their accumulated sick leave upon retirement.
The new law became effective on September 1,1975. Under the old law, retiring fire fighters could
be compensated only for no more than ninety days of accumulated sick leave. The court
held that although retirees could be compensated for all of their sick leave accumulated after
September 1, 1975, they could not be paid for more than ninety days of leave that accumulated
before that date.

The contract between the parties to this suit prior to
September 1, 1975, was for the payment of only 90 days of
accumulated sick leave and an effort to apply the provision of the
September 1, 1975 amendment to accumulated sick leave in excess
of 90 days earned prior to September 1, 1975, would impair the
obligation of the contract as it then existed. The payment of
more than 90 days sick leave accruing prior to September 1, 1975,
would be in violation of Art. 3, 5 53 of the Texas Constitution.

Ward. 560 S.W.2d at 165-66.

In Ward, the terms of the earlier contract did not change, and thus additional sick leave
payments would have constituted extra compensation under that contract with no additional
consideration from the tire fighters. By contrast, under the District’s proposed plan, participating
employees would provide consideration for payments under the Plan. Consequently, we do not
believe the Plan’s amended sick leave policy renders the Plan unconstitutional.
The Honorable Joso R. Rodriguez - Page 9 (JC-0165)

Ouestion No. 7

If you believe that the Plan as stated is unconstitutional, but that a
particular combination of the above-stated basic, additional, or
alternative elements or features of the Plan would render the Plan
valid under the Texas Constitution, what are such combination(s)?

We believe that the Plan you describe may be created in a way that does not violate the Texas
Constitution. As we have said, however, we are unable to craft a plan for the District in the opinion
process. While we can advise you on the general legal principles implicated by the proposal, it is
for the District to determine how it wishes to meet its objectives in compliance with the law and in
light of the particular factual circumstances at hand.

Ouestion No. 8

Are the payments to be made under the Plan an authorized
expenditure ofthe District’s funds under Section 45.105 ofthe Texas
Education Code, assuming that the District’s Board of Trustees
determines that it is in the best interests of the District to implement
the Plan because ofthe anticipated compensation and wage savings?

Public funds may not be spent by a school district except as provided by section 45.105 of
the Education Code. TEX.EDUC.CODEANN.5 45.105(a) (Vernon Supp. 2000). State and county
school funds, which are appropriated to school districts from the state permanent school fund, may
be used only for the payment of teachers’ and superintendents’ salaries and for any interest on money
borrowed to pay those salaries. Id. 5 45.105(b). We do not believe that payments under the Plan
you describe are “salaries” for which state and county funds may be used. But local school funds,
which come from taxes and other local sources, may be used for salaries and “for other purposes
necessary in the conduct ofthe public schools determined by the board oftrustees.” Id. § 45.105(c).

In addition to the authority under section 45.105 to expend local funds for salaries and other
necessary purposes, school districts have authority over the management of districts in general and
over employment policies in particular. “The [board ofj trustees as a body corporate [has] the
exclusive power and duty to govern and oversee the management of the public schools of the
district.” Id. $11.15 1(b). With respect to school district employees, “[tlhe board of trustees of each
independent school district shall adopt a policy providing for the employment and duties of district
personnel.” Id. 3 11.163(a). The employment policy may specify the terms ofemployment with the
district. Id. 5 11.163(c).

Construing the predecessor statutes to sections 45.105, 11.151(b), and 11.163(c), this office
concluded that school districts have implied authority to pay employees for accrued sick leave. See
Tex. Att’y Gen. Op. No. DM-48 (1991) at 3. “Clearly, the Education Code authorizes a board of
trustees to hire employees and to set the terms and conditions of their employment, including their
The Honorable Jose R. Rodriguez - Page 10 (JC-0165)

benefits and compensation. We believe these provisions confer upon boards of trustees the implied
power to adopt policies allowing payment for unused sick leave.” Id. at 2.

Additionally, several courts and numerous opinions ofthis office have concluded that school
district trustees have wide latitude to determine what expenditures are ‘*necessary” for public schools
and thus within the spending authority of section 45.105(c) of the Education Code and its
predecessor, former section 20.48 of the Education Code. See, e.g., City of Garland Y. Garland
Indep. Sch. Dist., 468 S.W.2d 110, Ill-12 (Tex. Civ. App.-Dallas 1971, writ refd n.r.e.) (stating
that trustees could determine whether expenditure for paving streets abutting school property is
“necessary in the conduct of the public schools”); Tex. Att’y Gen. Op. Nos. DM-48 (1991) at 3
(concluding that trustees have “broad discretion to expend local school funds”); JM-1265 (1990) at
4 (concluding that trustees might find college scholarships to be “necessary” in the conduct of the
public schools”); JM-490 (1986) at 2 (concluding that trustees could determine that crossing guards
are “necessary”); H-133 (1973) at 5, 7 (trustees could determine that travel and legal expenses of
trustees were “necessary”); C-601 (1966) at 3-4 (concluding that trustees have discretion to
determine whether expending surplus money from operation of school cafeteria to provide lunches
to needy pupils is “necessary cost in the efficient conduct of its public schools”); Tex. Att’y Gen.
LO-93-93, at 4 (concluding that trustees might find use of local school funds to provide college
scholarships to be “necessary in the conduct of the public schools”).

In our view, the authority of a school district to hire employees, set their compensation, and
establish the terms of their employment could include the authority to offer the type of “early exit”
incentive you describe. Furthermore, section 45.105(c) broadly authorizes a school district to
expend local funds “for other purposes necessary in the conduct of the public schools determined
by the board of trustees.” TEX.EDUC. CODEANN. 5 45.105(c) (Vernon Supp. 2000) . While the
determination as to what constitutes a necessary expenditure of public funds is to be made by a
school district in the first instance, we caution that a district’s decision is subject to judicial review.
See Tex. Att’y Gen. Op. No. H-133 (1973) at 4. Again, we do not determine whether the particular
plan you have described in all respects constitutes a permissible expenditure by a school district.

Question No. 9

Does the Plan constitute a “deferred compensation plan” within the
meaning of Section 609.001 et. seq. ofthe Texas Government Code?

Ouestion No. 10

May an independent school district adopt a deferred compensation
plan that does not comply with Section 609.001 et. seq. of the Texas
Government Code?

Finally, you ask whether the Plan is a “deferred compensation plan” within the meaning of
chapter 609 of the Government Code, see TEX.GOV’TCODEANN. ch. 609 (Vernon 1994 & Supp.
The Honorable Jest? R. Rodriguez - Page I I (X-0165)

1999), and whether the District may create a deferred compensation plan that does not comply with
chapter 609.

For purposes of chapter 609 of the Government Code, a “deferred compensation plan” for
employees ofpolitical subdivisions “means a plan established under [subchapterB ofchapter 6091.”
Id. 5 609.101 (Vernon 1994). Subchapter B of chapter 609 provides for the establishment of a
401(k) plan or a 457 plan for political subdivision employees. Id. 5 609.102. A 401(k) plan is a
deferred compensation plan governed by section 40 l(k) of the Internal Revenue Code, and a section
457 plan is a deferred compensation plan governed by section 457 of the same code. Id.
5 609.001(10), (II); see 26 U.S.C. $5 401, 457 (1994). To establish a 401(k) or 457 plan, an
employer must meet a lengthy series of detailed requirements. See 26 U.S.C. $5 401,457 (1994).
Generally speaking, these plans involve contributions to a trust fund by the employer, the employee,
or both. Federal income taxes on contributions to these plans are deferred until the contributions are
paid f?om the fund to the employee, usually upon retirement or other separation from employment.

Certainly, if the District intends to adopt a deferred compensation plan as that term is defined
by chapter 609, the District may do so only in compliance with chapter 609. Furthermore, a school
district may not adopt an analogous plan unless specifically authorized by law to do so. See Tex.
Att’y Gen. Op. No. JM-1142 (1990) at 26. For example, Attorney General Opinion JM-1142
concluded that absent express statutory authority, an appraisal district had no implied authority to
create a local pension plan where state law specifies pension plans or retirement systems in which
an appraisal district may participate. Id. However, we doubt that the Plan about which you ask can
be described as “deferred compensation” either within the meaning of chapter 609 or within the
ordinary meaning of that term.

To be deferred compensation within the meaning of chapter 609, the Plan must be a 401 (k)
plan or a 457 plan. While the details of the federal tax statutes make us unable to determine with
absolute certainty whether the District’s Plan is a 401(k) or 457 plan, from a review of the
requirements it does not appear to us that the Plan constitutes either one oftheseplans. For example,
a 401(k) plan must be a pension, profit-sharing, or stock bonus plan, see 26 U.S.C. $401(a) (1994),
and a pension plan is described by the Internal Revenue Service as “a plan established and
maintained by an employer primarily to provide systematically for the payment of definitely
determinable benefits to his employees over a period of years, usually for life, after retirement.” 26
C.F.R. 5 1.401-l(b)(l)(i) (1999). The IRS has said that the term “plan” implies a permanent as
distinguished from a temporary program. Id. 5 1.401-l(b)(2). You have told us that the District’s
early exit Plan will be offered only for a limited time. Furthermore, you have not told us that either
the District or participating District employees will make contributions to a trust fund for later
payments under the Plan. Consequently, we doubt that the District’s Plan is a deferred compensation
plan within the meaning of chapter 609 of the Government Code.

While the phrase “deferred compensation plan” has a particular meaning for the purposes of
chapter 609 and for federal tax purposes, the phrase can also describe other types of plans whereby
an employee’s compensation is earned or determined at one point in time, but is actually paid to the
The Honorable Jose R. Rodriguez - Page 12 (JC-0165)

employee at a later time. In a divorce case, a court described deferred compensation as something
that is earned or accrued during the course ofthe employee’s service. See Whorrall v. Whorrafl, 69 1
S.W.2d 32, 37-38 (Tex. Civ. App.-Austin 1985, writ dism’d). Thus, the court held, a “special
payment” made for the purpose of encouraging an employee to retire early so as to eliminate an
unproductive position was not deferred compensation. As you describe the school district’s plan,
the payments would not constitute compensation for work performed during an employee’s term of
employment, but would in essence constitute compensation for leaving employment, like the
“special payment” in Whorrall. Thus, we doubt whether the Plan can be characterized as “deferred
compensation.”

SUMMARY

An independent school district’s “early exit” plan for school
district employees, whereby,certain employees of the district receive
payments from the district in return for leaving employment and other
agreements, is not an unconstitutional gratuity if participating
employees provide consideration to the district for payments under
the plan. Such a plan may be authorized by sections 1 I.163 and
45.105 of the Education Code.

Attorney General of Texas

ANDY TAYLOR
First Assistant Attorney General

CLARK KENT ERVlN
Deputy Attorney General - General Counsel

ELIZABETH ROBINSON
Chair, Opinion Committee

Barbara Griffin
Assistant Attorney General - Opinion Committee