A4 MAlTOX AttorneyGeneral

Supreme Coufl Suildin9 f-0. son 1254s

, :s:in,TX. 78711. 2549 :.2!475-2501 Telex 91wS74-1367

- Im3Jplor 51214750288

714Jackson. Suite 700 Plllas. TX. 75202-4506 U742.8944

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iaxar. Suite 700 houiton, TX. 77002.3111 713i22MSSS

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DMain Plaza. Suite 400 mAntonio. TX. 182052797 cl12/225-4191 

# TheAttorney General ofTexas

December 31. 1984

Ms.Rita Honitz Executive Director State Pension Revlw Iboard P. 0. Box 13498 Austin, Texas 78711 Opinion No.m-291 Re: Whether amember of the board of trustees of alocal pension plan violates article 988b, V.T.C.S.. In certain circumstances DearMs.liorwite: Youseek au interpretation of article 988b, V.T.C.S.. informally knownas the local o!:flcials conflict of Interest act. You ask tvo questions with regard to the effect of the act upon the board of trustees of the Dallarr Police andFire Pension Fund:

1. Does Bboard member’s $2500 investment in the stock of a business entity constitute a 1

‘substantia:l interest’ under .sectloa 2(a) of article 9881)‘!
2. Does aboard member’s $2500 participation in a deferred compensation program constitute a
‘substantla:t interest’ under section 2(a) of article 9881,:! Article 988b III a comprehensive local conflict of interest statute vhich applie:l to a broad range of local public officials. Before the enactment of article 988b, no single conflict of interest statute applied generally to all local public officials. See. e.g.. Woolridge v. Folsom, 564S.W.2d 471 (Tex. Clv. App. - Dallas 1978. no writ). Article 988bwplaced article 988. V.T.C.S., repealed in 1983. Acts 1983. 68th Leg., ch. 640, 57, at 4082. Article 988was also a conflict of interest statute, but it applied only to general law cities. Id. Article 088b is not limited to general lav cities. Article 988b a?l>lies a fairly narrow conflict of interest prohibition to abroad group of local public officials. Section l(1) of article 988b defi,nes “local public official” to include the following:

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amemberof the goveruing bodyoranother officer, whether elected or rqlpointed, paid or unpaid, of any district (incl.ctdlng a school district), county, city * precinct, central appraisal district, transit aut’hority or district. or other local governmental entity who exercises responsibilities beyond ,%ose that are advisory in nature. (Emphasis aacied).
Apreliminary question must be resolved of whether article 988b applies at all to the Dallas Police and Fire Pension Fund Board of TNSteeS. Noreported cases deal directly wfth the applicability of article 988b to a similar bo;lrd of trustees. Nevertheless, several courts have dealt vith similar boards in other contexts; these cases must beaddressed Inananalysis of article 988b. The court in Bolen v. Board **of** Firemen, Policemen and Fire Alarm Operators Trustees of San AKtonio, Texas, 308 S.W.Zd 904-06 (Tex. Civ. App. - San Antonio 195r, writ ref ’d), held that a similarly constituted board with powers parallel to those of the board **in** issue was simply not apolitical carporation or apolitical subdivlslon of the state. The court dealt with the pension board In the context of srticle III, section 52of the Texas Constitution. aprovision which is not Inissue here. Onthe other hand, prior to the Bolen case, the Commission of Appeals held that; although contributi%?made by a municipality to apension fund pursuant to article 6243a. the statute authorizing the fund in question here, do not violate article III. section 52. such funds are ne\,ertheless part of a"pblic fund subject to the control of the 1egis:tature.v (Emphasis ad&r McGuire v. City ofDallas, 170S.W.Zd**72i.,** 727-28 (Tex. 1943). Thecourt in Creps v. BocEdofFiremen's Relief 6Retirement Fund Trustees of Amarillo, 456 S.V.2d 434. 439 (Tex. Civ. App. - Amarillo 1970, writ ref

’d n.r.e.1. heli that astatutory trust is not governed by the Texas Trust Act, the laws noverninn- the administration of private **trusts.** Thecourt in !a dealt with afund created pursuant to article 6243e. Similarly, this office clecided that the board of trustees of a Firamens’ Pension and Retirement Fund formed pursuant to article 6243e, V.T.C.S.. is a "govew,mental body" for purposes of the Open Meetings Act, article 6252-17. V.T.C.S. Attorney General Opinion MU-506 (1982). The relationship between municipalities and their various pension fund boards cf trustees as set forth in article 6243e andthe article which authoriz,zd the creation of the Dallas Police and Fire Pension Fundare analogol.;. SeeV.T.C.S. art.6243a. - Consequently. the pension fund board of trustees about which you inquire maybe alocal goveruaental entity for some purposes and not

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for others. see also l4uzqui:c V. City of **San** Antonio, 586 F.2d 529 (5th Cir. 1978) (a similar fund may be “like a municipality ” for purposes **of** Civil Rights **Act.** 42 U.S.C. 11983 (1982)). Moreover, unlike the phrase “or other ,political corporation or subdivision,” which was construed in the :)olen case not to include **a** particular pension fund board of trwsteei), ‘-ehe test in article 988bwas intended to address adifferent problem and is phrased broadly **to** lncludg **any** entity that “exercises respon#;ibilities beyond those that are advisory in nature.” V.T.C.S. art. 98fRl. 11(l). The board of trustees ia the instant case Is composed of city officials serving ex officio and of members of the fire and police departments elected by the c~,ntributors to the fund. V.T.C.S. art. 6243a. il. Thecity treasurer serves as ex officio treasurer for the fund. Id. 55. Article 624:Ia grants the board broad authority to administer the fund. Id. )Il. lC, 15. Moreover, the board holds the power to reduce the percentages (stipulated in article 6243a) which deal with disabilities or w11:bawards granted to beneficiaries. Id. 51. Thus, the board clearly “exercises responsibilities beyond those that are advisory in nature.” Accordingly, article 988b applies to the Dallas Police and Fire Pension FundBoard ofTrustees.

**A** local public official commits a Class A misdemeanor under **section** 3(a)(l) of article 9811b,except in those instances provided in section 5, tf he“knowingly ” participates in IIvote or decision onamatter involving a business entity in which the local public official bar, a substantial Interest if it is reasonably forelseeable **that** an action on the matter would confer an economic benefit to the business entity inv,,:Lved.

. . . (Emphasis added). The elements of the offense involve several factual determinations. See Attorney General Oplnlon JM-178 (1984). Your question,

- however, pertains only to sec:t.ion 2of the act, which indicates what constitutes a “substantial interest.” In particular, you inquire about the meaning of section Z(a)(l); this subsection indicates that a person has asubstantial inter,est in abusiness if

the interest is ovJnership of 10percent ormore of the voting stock or shares of the business entity or ownership of $2,500 or moreof the fair market value of the ~bunlness entity.

. . . Twodifferent interpretations of this language have been suggested. It has been suggested ,that the legislature meant to draw a distinction in section 2(a)(L) between stock-issuing corporations and

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business entities which do no1 issue stock, and to apply the $2500 limitation only to the latter. In our opinion, however, the language of the statute cannot be so construed. It is applicable to the

“ownership of $2500 or more **of** the fair market value” of a“business 

## l ntfty.î
Youexpress concern that, if the legislature did intend a $2500 Investment in stock to be a oabstantial interest undes. the statute, the board vould beparalyzed; it is quite likely that individual board membersmight ownat least $2500worth of stock **in** alarge corporation in which the board might vaut to invest pension funds. Section 3(a)(l)., article 988b. requires officials to abstain from voting on investment decisions involving corporations in which they own a substantial interest. If a$2500 stock investment were interpreted to he a substantial interest. abs,tentions could be frequent. Contrast art. 988b. 12(a)(l)~ with art. 6252-9b. 12(12)(B). Nevertheless, the langual:c! enacted by the legislature applies both the 10 percent limit and the $2500 limit to “the business rntity

.” “Business entity ” Is d.efined bythe statute to include

a sole proprietorship, partnership, firm, corporation, holding cmpany, joint-stock company, receivership, trust,, or an9 other entity recognized in lav. Ait: 988b, 11(2). In construing a statute, it is no; ordinarily permissible to imply an exceqtion vhere none ma9 be found in the statute’s literal language. Amrd v. Reard. 305S.W.Zd231 (Tex. Civ. APP

. - Galveston 1957, writ-;ef ‘d)

. Weconclude therefore that a board member’s ownership of $2!iOOof the stock of anybusiness entity, including one that issues sto&. constitutes a“substantial Interest” under section 2(a)(l). Youalso ask whether funds invested by the board in a deferred compensation program are subject to article 988b. The potential problem Is that a city offici,n:L whoserves as apension fund trustee mayhave an interest in adef ’erred compensation system in which the pension fund might vish to Invest. Wemust first determine vhether the board of trustees may knvest pension funds in a government employees

’ deferred compensat:ton program at all. The trustees of a statutory trust have only thwe powers and duties set forth in the statute which authorized the creation of the oarticular uension fund. Creps v. Board .of Firemen ’s_Relief h Retirement Fund Trustees of Amarillo, supra at 439. Section 15(b) of article ,5243ais aguide for those investments the board is authorized to make:

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In making investments and supervising investments, members of the Board of Trustees shall exercise the judgment and care under the circumstances then prevailing, which men of ordinary prudence, discretion and Intelligence exercise In the mana:gementof their ownaffairs. not in regard to ;tpeculation but in regard to probable income thewfrom as well as the probable safety of their capital. Thus, unlike provisions which govern other, similar types of pension fund trustees, the board is nat expressly limited to specific types of investments. Compare art. 6%3a, 115(b) with art. 6243e. 123; see Attorney General Opinions MU-506 (1982);n-607 (1970). Thus, the board could conceivably consi~ier investing in some type of “deferred compensation

” program if the investment met the test of article 6243a. section 15(b). You do not, however, indicate just what sort of deferred compensation program is in iwue. As used by the legislature’ the term “deferred compensation ” refers to deferred compensation plans for public employees as authorized by article 6252-3b, V.T.C.S. Article 6252-3b does not create aprograminvolving the sale of bonds or other investments; thus it is not aprogram inwhich the board could invest pension funds. Compare V.:l.,C.S.. Title 1LOB. Public Retirement Systems, 165.105 (1983 pamphlet) (authorizes the Municipal Retirement. System to issue bonds). Cowequently , if the board cannot invest funds in this program, no toard member could hsve a conflict of interest by participating in s board vote or decision on a matter involving investment in this deferred compensation program. If, onthe other hand, yourefer to “deferred compensation ” in a generic sense. i.e. with regal:cl to retirement plans generally, and in a context otherthan article 6252-3b, a conflict of interest under article 988b depends uponthe nature of the interest held bythe board -- member. See, e.g., Creps v._I)oardof Firemen ’s Relief 6Retirement FundTrustees of Amarillo, afa at 437; cf. art. 6252-3b (contractual deferred compensation program may differfrom retirement program). Accordingly

’ this office cann3.canswer, in the abstract, vhether all or any employees

’ “deferred compensation ” programs could cause a conflict of interest under article 988b vithout examining the particular program. Board members will have to acquaint themselves vith the portfolio of anysuch program in which they have aninterest and refrain from participating in aboard decision when any security that is apart of that portfo1.i.o is the subject of adecision. if the trustee’s pro rata holding of that security through the program is a substantial interest as defined byarticle 988b.

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Section ?(a)(l) of article 988b. V.T.C.S., prohibits aboard member of the Dallas Police and Fire Pension Fund :Sromvoting to invest pension funds in any business entity in which he holds a $2500 ownership interest, whether or not that Interest is in a tlusiness entity which issues stock. Because a deferred compensation program under article 6252-3b is not the sort of program in which apension fund board of trustees could vote to Invest. article 988b is inapplicable.

JIM UATTOX Attorney General ofTexas TOUGREEN First Assistant Attorney General

. DAVIDR.RICEARDS Executive Assistant Attorney General RICRGILPIN Chairman, Opinion Committee Prepared byJennifer Riggs Assistant Attorney General APPROVRD: OPINIONCOMMITTEE Rick Gilpln, Chairman Susan Garrison TonyGuillory JimMoellinger Jennifer Riggs

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