OFFKE OF THE ATTORNEY GENERAL. STATE OF TEXAS

JOHNCORNYN

January 12,200O

The Honorable Jose R. Rodriguez El Paso County Attorney 500 East San Antonio, Room 203 El Paso, Texas 79901 Opinion No. JC-0165

Re: Constitutionality of “early exit” plan for 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, ifnot, what changes would make itvalid. While we conclude that the school district may be able to fashion aplan 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 ageneral rule, aschool district has only those powers expressly conferred on itby law ornecessarily 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 theplan you describe isauthorized by lawwould require athorough 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 adetermination would best be made by alegal advisor to the district who is in aposition to review aproposed 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 offact 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 oftrustees ofanindependent school district organized under Texas law (the “District”) isconsidering adoption ofa plan whereby one ormore employees ofthe District meeting certain eligibility requirements and agreeing toparticipate inthe 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”]. Tobeeligible, anemployee must be onactive service and have more than ten total years of employment with the District. Id. The Plan would apply to all District employees, which are offour types: continuing-contract employees, term-contract employees, oneyear contract employees, and at-will employees. Id. at l-2.The Honorable Jose R. Rodriguez - Page 2 (JC-0165)

An eligible employee must exitthe District byretirement orresignation within the three-year exit period of the Plan. Ifthe employee exits in the first year, he will receive payments totaling 105% ofhis basic annual salary. Ifhe leaves inthe second year, he will receive one hundred percent ofhis salary, and ifhe leaves in the third year he will receive ninety-five percent ofhis salary. In each case, the salary will be paid in equal monthly installments over a period of eight years beginning on the exit date. Aparticipating employee who iseligible forretirement will also bepaid
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 ofhis accumulated sick leave in alump sum immediately upon exit or soon thereafter. Id. at 2. Eligible employees will be given ashort period inwhich to apply forparticipation inthe 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 berequired to execute arelease and waiver ofallpreretirement 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. at2. The Plan might also include a“future performance” requirement whereby the employee must perform five to eight days ofservice forthe District ineach ofthe eight years during which payments are being made. Id. You tell us that because payments under the Plan would bemade during the course ofanumber ofdifferent fiscal years, the Plan would include a “non-appropriation clause.” Id.

The purpose ofthe 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 isinterested in implementing the Plan because ofthe 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 ifone or more ofthe four categories of employees were excluded from eligibility under the Plan? Would your answer change ifthe 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 1et. seq.]?

Ouestion No. 2

With respect to eligible employees who participate inthe Plan during the term oftheir existing contracts, isthe Plan inits stated form valid under the Texas Constitution? Would your answer change ifthe 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 forthe 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 areconcerned inparticular about constitutional prohibitions onthe gratuitous grant ofpublic funds toprivate individuals. Article III, section 52ofthe Texas Constitution prohibits the legislature from authorizing “any county, city, town orother political corporation or subdivision of the State to lend its credit or to grant public money orthing ofvalue in aid of, orto 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, orto authorize any county ormunicipal authority to grant, any extra compensation, fee or allowance to apublic 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 6prohibits appropriations ofpublic funds for private or individual purposes, TEX.CONST. art. XVI, 5 6, although it does not bar expenditures made forthe direct accomplishment ofalegitimate public purpose, see Byrd Y.City of Dallas, 6 S.W.2d 738,740 (Tex. 1928). Plainly stated, these provisions prohibit aschool 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 aschool district from granting extra compensation to apublic 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 beenThe 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 ofGreenville 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 isno 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 ifthe district received consideration from participating employees inreturn forthe payments. Consideration for avalid agreement is defined aseither abenefit to the promisor
or aloss ordetriment tothe 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 ofSan Antonio, 443 S.W.2d 598,600 (Tex. Civ. App.-Waco 1969, writ ref d); City ofOrange Y. Chance, 325 S.W.2d 838,840 (Tex. Civ. App.-Beaumont 1959, no writ); City ofSanAntonio 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 acontract with the District.

The contract may be amended oranew contract entered into, provided new consideration is given. In City ofGreenville v.Emerson, the court held that anew contract with city employees “to pay them additional benefits above what they received under aprior valid existing contract for no additional consideration” would contravene the constitution. Ciiy ofGreenville v. Emerson, 740 S.W.2d at 13. This statement implies that anew contract with new consideration would have been valid. And in Attorney General Opinion MW-68, this office considered whether the constitution prohibited aschool 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 ourview, the consideration for anemployee’s participation inthe 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 ofdiscrimination 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)

asyour question suggests, depend upon the type ofemployee. You tell usthat the Plan would apply to all four types of District employees: at-will employees, one-year-contract employees, termcontract employees, and continuing-contract employees.
Every teacher, principal, librarian, nurse, or counselor must be employed under acontract. TEX.EDUC.

CODE ANN.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 acontract term not exceeding one school year. TEX.EDUC.

CODE ANN.5 21.102 (Vernon 1996). A term-contract employee is employed by a district for afixed term not to exceed five school years, atwhich point the contract may be renewed. Id. 9421.201, .205-.209. Acontinuing-contract employeeneed nothave his orhercontract renewed in order to continue working for the district: “Each teacher employed under acontinuing contract isentitled to continue inthe teacher’s position or aposition 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 aparticular employee, the District must receive valid consideration from the employee forpayments 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 asageneral 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 ofconsideration, and thus would not be entitled to the same level ofpayments asanemployee with five years remaining onher contract. Any promise toorfrom
an at-will employee is“illusory” and does not constitute consideration ifthe 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 anymatter except those which would limit the ability of either employer or employee to terminate the employment atwill.” 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 andbefore payments under the Plan begin. Webelieve that acontract that lacks specific identification ofenforceable consideration offered bythe employee will not support payments under the Plan and will render the Plan unconstitutional atleast astothat employee. Whether any particular employee provides consideration to the District in return for payments under the Plan is aquestion of fact beyond the scope ofthe opinion process.
You also ask whether our answer would change ifthe Plan were limited to employees who
are age forty or above, that is,those who arepotential age-discrimination claimants. You tell usthat 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 forthe payments, aPlan 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 tohis compensation, terms, conditions, orprivileges of employment, because of such individual’s age.” 29 U.S.C. 4623(a)(l) (1994). A “discharge” within the meaning of the ADEA may be constructive if areasonable 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, isnot aconstructive discharge merely because itcreates astrong incentive to retire; an early retirement option can constitute a constructive discharge only ifthe employee shows that itsufficiently 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 onHuman Rights Act (“TCHRA”), which also bars employment discrimination on the basis of age. See TEX.LAB. CODEANN. 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 itisoffered only to older employees with arequirement that they waive agediscrimination 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 avalid 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, apre-injury release of aclaim for gross negligence is void as against public policy. SeeMemorialMed. Ctr. ofEast Texas v.Keszler, 943 S.W,2d433,435 (Tex. 1997). And, certainly, arelease will not be enforceable ifitwas entered into under duress, fraud, mistake,
orthe like. See Schlumberger Tech. Corp. v.Swanson, 959 S.W.2d 171,178 (Tex. 1997). Awaiver that isnot 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 forthe Plan to stillprovide forpayment ofbenefits inthe future to the participant orhis/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 ifone ormore ofthe 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 tocreate consideration for payments under the Plan in order tomake itconstitutional. As
weunderstand the District’s approach, the payments would bemade not forwork already performed, but for work to be performed in the future.

In our view, the future performance requirement isnot essential to the Plan’s constitutional validity with respect to any ofthe categories ofemployees, provided other consideration isgiven for payments under the Plan. You also ask about the effect of aparticipating 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 inthe Plan aprovision 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 ifthe sick leave payment under the Plan to aparticipant consisted of 100% ofhis/her accumulated sick leave payable over 24 months, as opposed to the current Districtpolicyofpayment of50%ofhis/her accumulatedsick leave in alump sum? Would your answer change ifone or more of the four categories ofemployees were excluded from eligibility under the Plan?

You ask whether inclusion inthe plan ofasick 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 ifthey form part ofthe employee’s compensation or ifthe 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 tobe compensated for all oftheir 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 ofArt. 3, 553 ofthe 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 becreated inaway that does not violate the Texas Constitution. As we have said, however, we are unable to craft aplan for the District inthe opinion process. While we can advise you on the general legal principles implicated by the proposal, itis for the District to determine how itwishes to meet its objectives in compliance with the law and in light ofthe particular factual circumstances athand.

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 itisin the best interests ofthe District to implement the Plan because ofthe anticipated compensation and wage savings?

Public funds may not be spent by a school district except asprovided by section 45.105 of the Education Code. TEX. EDUC. CODE ANN.545.105(a) (Vernon Supp. 2000). State and county school funds, which are appropriated to school districts from the state permanent school fund, may beused only forthe payment ofteachers’ and superintendents’ salaries and for anyinterest onmoney borrowed to pay those salaries. Id. 545.105(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 inthe 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 ofdistricts 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 oftrustees ofeach independent school district shall adopt apolicy providing forthe employment and duties ofdistrict 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 topay employees for accrued sick leave. See Tex. Att’y Gen. Op. No. DM-48 (1991) at 3. “Clearly, the Education Code authorizes aboard of trustees to hire employees and to set the terms and conditions oftheir employment, including theirThe Honorable Jose R. Rodriguez - Page 10 (JC-0165)

benefits and compensation. We believe these provisions confer upon boards oftrustees 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 todetermine what expenditures are ‘*necessary” forpublic 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 ofthe public schools”); JM-490 (1986) at2(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 toprovide lunches to needy pupils is “necessary cost in the efficient conduct ofits 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 ofthe public schools”).

In our view, the authority ofaschool district tohire employees, settheir compensation, and establish the terms oftheir 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 ofthe public schools determined by the board of trustees.” TEX.EDUC.CODE ANN. 545.105(c) (Vernon Supp. 2000)

. While the determination as to what constitutes anecessary expenditure of public funds is to be made by a school district inthe first instance, we caution that adistrict’s decision is subject tojudicial review. See Tex. Att’y Gen. Op. No. H-133 (1973) at4. Again, we do not determine whether the particular plan you have described in all respects constitutes apermissible 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. ofthe Texas Government Code? Finally, you ask whether the Plan is a“deferred compensation plan” within the meaning of chapter 609 ofthe Government Code, see TEX. GOV’T CODE ANN.ch. 609 (Vernon 1994 & Supp.The Honorable Jest?R. Rodriguez - Page II (X-0165)

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

For purposes ofchapter 609 of the Government Code, a“deferred compensation plan” for employees ofpolitical subdivisions “means aplan 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 a457 plan for political subdivision employees. Id. 5 609.102. A 401(k) plan is a deferred compensation plan governed by section 40l(k) ofthe Internal Revenue Code, and asection 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 alengthy series of detailed requirements. See 26 U.S.C. $5401,457 (1994). Generally speaking, these plans involve contributions to atrust fund bythe employer, the employee,
orboth. Federal income taxes oncontributions to these plans aredeferred until the contributions are paid f?om the fund to the employee, usually upon retirement or other separation from employment. Certainly, ifthe District intends toadopt adeferred compensation plan asthat term isdefined by chapter 609, the District may do so only in compliance with chapter 609. Furthermore, aschool 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 alocal 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 ofthat term.

To be deferred compensation within the meaning ofchapter 609, the Plan must be a401(k) plan or a457 plan. While the details ofthe 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 itdoes not appear tousthat the Plan constitutes either one oftheseplans. For example,
a401(k) plan must be apension, profit-sharing, or stock bonus plan, see 26U.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 tohis employees over aperiod ofyears, 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 apermanent as distinguished from atemporary program. Id. 5 1.401-l(b)(2). You have told us that the District’s early exit Plan will be offered only for alimited 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 thatthe District’s Plan isadeferred compensation plan within the meaning ofchapter 609 ofthe Government Code.

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

employee at alater time. In adivorce case, acourt described deferred compensation as something that isearned oraccrued 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 forwork 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 ofthe district receive payments from the district inreturn forleaving 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 1I.163 and 45.105 ofthe Education Code.

Attorney General ofTexas

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