Unofficial Opinion 96-21
Coastal Georgia Regional Development Center
You have requested an opinion whether the funding of a supplemental retirement plan, with surplus from the termination of a prior retirement plan, violated the prohibition in the Georgia Constitution against gratuities. The request is submitted upon a statement of facts and exhibits stipulated by the Coastal Georgia Regional Development Commission and the United States Department of Commerce, in connection with an audit by Commerce of a predecessor of the Commission. When material is quoted below without citation to source, the quotation is from the stipulation.
(1) The defined benefit JMERS plan did not entitle employee participants to the surplus created upon termination.
(2) A public employer may not grant additional retirement benefits to former employees who are not current retirees.
(3) While not free from doubt, the supplemental retirement plan in question did not require substantial, or any, new consideration from current employees, and therefore violated the rule against gratuities and extra compensation for service already rendered, even for employees who in fact served after it was created.
In 1985 the Coastal Area Planning and Development Commission ("CAPDC"), the statutory predecessor of the Commission, terminated its retirement plan, which was administered by the Joint Municipal Employees Retirement System (the "JMERS plan" and "JMERS"). Pursuant to instructions in a CAPDC resolution, JMERS distributed accrued benefits to participants in lump sum payments and returned to CAPDC the sum of $220,000, representing "assets remaining after the payment of benefits accrued" (the "remaining funds"). These remaining funds were "partially" the result of contributions CAPDC made to the JMERS plan in its final three years, during which time CAPDC had received actuarial reports showing that no contributions were then necessary "to meet the minimum funding requirements."
CAPDC was advised by counsel "that the 'remaining funds' could not be used for unrelated CAPDC expenses. Legal counsel further concluded that, while not entirely free from doubt, both CAPDC as the employer and the former JMERS plan participants had a claim to the remaining funds." Initially CAPDC used part of the remaining funds to make the periodic contributions required under a new deferred compensation plan. (This apparently replaced the JMERS plan as the retirement plan for CAPDC employees.) In 1988 CAPDC resumed funding its retirement costs with income and "formed a Pension Study Committee to find alternative uses for the remaining $182,000." The Committee "found that the benefits paid from the JMERS plan were inadequate." Substantially adopting a Committee proposal, the Board determined on November 9, 1988, to use the remaining funds as follows: (a) to pay lump sum allocations totalling $6,000 to eleven former participants in the JMERS plan; (b) to establish "a supplemental employee pension plan" for another group of nineteen former participants, using the remaining $176,000 to make a one-time, lump sum purchase of a "group annuity as the funding vehicle for a deferred compensation plan." (In this opinion, from this point on, the phrase, "supplemental plan," will refer to both purposes.)
The Pension Study Committee report, accepted by CAPDC, provided for the supplemental plan to cover "the 30 employees that were vested under the old JMERS plan to correct the inequities associated with the initial distribution of the JMERS pension program." Of the thirty former participants in the JMERS plan receiving the additional benefits, twenty-six were employed by CAPDC when the JMERS plan was terminated; seven were still
employed by CAPDC when the Board adopted its resolution for the supplemental plan, and five were still employed one year later when the nineteen "deferred compensation agreements" were executed. Four other JMERS plan participants, retired or nearing retirement at termination, received no additional distribution from remaining funds because it was determined that their benefits under the JMERS plan had been adequate.
There were discrepancies between the instruments executed to accomplish the supplemental plan and the authorizing resolution. Although the Board resolution "specifically mandated that retirement age would be 65 years old," the deferred compensation agreements did not use the word "retirement" and referred to the age of distribution as 60. The supplemental plan was also implemented by an irrevocable trust not expressly authorized by the Board resolution. The instruments were executed after the Commission became the statutory successor of CAPDC and were signed for CAPDC by its former Chairman, who was not then a member of the Commission.
According to the stipulation, the "intended effect" of the supplemental plan "was to guarantee payment, to former JMERS plan participants of additional compensation for past services to CAPDC, . . . taxation to be delayed until receipt of the funds upon meeting the stated criteria." Since the Constitution expressly prohibits "extra compensation . . . after the service has been rendered," see below, and this was known by those requesting this opinion, the "intended effect" stipulation has been read to refer to individual motives, leaving open the question of whether the legal structure chosen satisfied the objective requirements of the law.
CAPDC has justified the disposition of the remaining funds on the ground that the JMERS plan documents and federal pension law required the remaining funds to be distributed or used for the benefit of participants. Under this view, the supplemental plan and the cash payments were not gratuities but were benefits already earned by agreement. Alternatively, CAPDC also has relied upon the proposition that Georgia gratuities and public employee retirement law permits a governmental employer to increase pension benefits "based upon services rendered prior to the date" of the increase.
(1) Did the Remaining Funds Belong to Employees?
a. Federal Pension Law
The JMERS plan established by CAPDC was a defined benefit plan. That is, it promised a fixed retirement benefit calculated in terms of tenure and salary; CAPDC was required to fund this promised benefit in advance by periodic contributions based on actuarial estimates of the future cost. This is in contrast to a defined contribution plan, in which the plan requires fixed employer contributions to an investment entity rather than promising fixed benefits. See generally Chait v. Bernstein, 835 F.2d 1017, 1019 n.1 (3d Cir. 1987). "If either type of plan qualifies for favorable tax treatment, the employer . . . may deduct its current contributions to the plan; the retiree, however, is not taxed until he receives payment . . . ." Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 154 (1993), citing 26 U.S.C. §§ 402(a)(1), 404(a)(1). Nor is the trust taxed. 26 U.S.C. § 501(a).
During the period of the JMERS plan, substantially as now, federal law regulated retirement plans primarily through these and related sections of the Internal Revenue Code and through the "Employees Retirement Income Security Act" ("ERISA"). State and local government retirement plans are not subject to ERISA. 29 U.S.C. §§ 1002(32), 1003(b)(1). However, the Internal Revenue Service has ruled that the trusts in governmental plans must "qualify" under I.R.C. § 401 for favorable tax treatment. Rev. Rul. 72-14, 1972-1 C.B. 106. The JMERS plan implies, and correspondence annexed to the stipulations indicates, that JMERS and CAPDC undertook to "qualify" the JMERS plan.
The principal requirements for qualification originate in I.R.C. § 401, which contemplates a "trust created . . . for the exclusive benefit of . . . employees." I.R.C. § 401(a)(emphasis added). The underlined phrase received particular attention during the 1980's, when many retirement plans were found to be over-funded, in part as a result of a favorable investment climate, and many such plans were terminated in order to capture the "surplus." See generally Norman P. Stein, "Reversions from Pension Plans: History, Policies, and Prospects," 44 Tax L. Rev. 259 n.1 (1989).
In particular, Section 401 requires that it be "impossible" "under the trust instrument," "at any time prior to the satisfaction of all liabilities with respect to employees . . . for any part of the corpus or income to be . . . diverted to, purposes other than for the exclusive benefit of . . . employees." I.R.C. § 401(a)(2). In order to satisfy the requirement that retirement trusts be exclusively for the benefit of employees, retirement plans included language to that effect. In litigation over the surplus of terminated plans, the particular plan language, ERISA and Section 401 became the basis for employee claims. In general, the employers prevailed, particularly in defined benefit cases if the plan language simply reflected the tax requirement, reserved the right to return surplus to the employer (originally or by amendment), and did not contract away surplus to the employees. Daniel Fischel & John H. Langbein, "ERISA's Fundamental Contradiction: The Exclusive Benefit Rule," 55 U. Chi. L. Rev. 1105, 1153-54 (1988). This was so, in pertinent part, because the Internal Revenue Service and the courts interpreted Section 401 to permit a return of surplus from terminated plans after "the satisfaction of all liabilities to employees," i.e., after computing and paying the present value of accrued benefits. See UAW Local 917 v. Dyneer Corp., 747 F.2d 335, 337 (6th Cir. 1984); 26 C.F.R. § 1-401-2(b) (1996); Rev. Rul. 83-52, 1983-1 C.B. 87; Norman P. Stein, "Reversions from Pension Plans: History, Policies, and Prospects," 44 Tax L. Rev. 259, 261-63 (1988) (criticizing the result on legal and policy grounds but acknowledging the consensus in authority).
Thus, tax law did not require that the remaining funds be used for employees.
b. Trust Law
The courts also have held that trust law in such situations did not require the return of any surplus. On this issue, the courts applied the law of gratuitous trusts, under which funds remaining after the purposes of the trust have been satisfied are returned to the settlor or grantor. See Restatement, Second, Trusts § 430 (1957):
Where the owner of property gratuitously transfers it upon a trust which is properly declared but which is fully performed without exhausting the trust estate, the trustee holds the surplus upon a resulting trust for the transferor or his estate, unless the transferor properly manifested an intention that no resulting trust of the surplus should arise.
The rule is applied, even though employees have provided consideration for the trust by working for their retirement, because the bargained for consideration in a typical defined benefit plan is only the amount needed to fund the defined benefit, not the whole contribution. See, e.g., Borst v. Chevron Corp., 36 F.3d 1308, 1315-16 (5th Cir. 1994). There is apparently no Georgia case applying this trust principle in a retirement case, but the rule itself exists and has been applied otherwise. See Peppers v. Peppers, 194 Ga. 10 (1), 12-13 (1942).
Thus, neither trust law nor pension tax law inherently entitled CAPDC employees to the remaining funds, but all the cases and the Restatement quoted above also look to the language of the particular agreement, to see whether the employer has bargained away the surplus under principles of ordinary contract law. For this issue, the language of the JMERS plan must be studied.
c. Terms and Conditions of the JMERS Plan
On August 8, 1973, CAPDC resolved to establish the subject retirement plan for its employees and entered into a "Contract" with JMERS for that purpose. The Contract consisted of an "Agreement," which established the Plan, and an annexed "Joint Trust Agreement," which established the estate for its funding. At the time, the Commission resolved to "make regular contributions to a Trust Fund, which contributions will be held for and devoted to the exclusive benefit of Participants . . . and used to provide pensions in fixed amounts." (Emphasis added.)
In the Agreement with JMERS, CAPDC again recited its desire "to provide retirement benefits as authorized (by law) for the sole and exclusive benefit of its employees." This recital of desire and purpose is repeated in the Joint Trust Agreement and became a substantive provision of the Plan in Article I of the Agreement: "This Agreement shall constitute the Retirement Plan of (CAPDC) for the exclusive benefit of its employees according to the terms and conditions hereinafter contained. . . ." Agreement Article I (emphasis added).
The JMERS plan also provides, "All Contributions . . . shall be used only for the benefit of the Participants . . . ." As noted, however, the plan is a "defined benefit" plan, meaning
that benefits are fixed by formula and contributions are made according to actuarial estimate. Thus, under the Plan, "Contributions" were defined to be "payments to JMERS to provide the benefits specified in the Plan." Article II, Section 18, page 5. Only the employer made Contributions. Article VIII, Section 2, page 31. Only the Contributions "necessary . . . to fund this Retirement Plan" were required. Article VIII, Section 1, page 31.
The amount . . . shall be based upon the mortality tables adopted by (JMERS), the benefits provided in this Plan, and the number of Participants and their respective ages, Earnings and lengths of Creditable Service and such other factors as the Board of Trustees shall deem appropriate to properly fund this Plan.
Id. It is in this context that, "All Contributions . . . shall be used only for the benefit of the Participants. . . ." Id.
None of the instruments in the original Contract expressly provide for a return of surplus to CAPDC or, for that matter, to employees. However, CAPDC reserved the powers to amend and to terminate the Plan and the Trust. Agreement Articles I, XIII; Joint Trust Agreement, Article X. Pursuant to these powers, CAPDC did amend and terminate the trust on December 12, 1984, in a resolution which instructed the distribution of assets to Participants as provided in original Article XIII, Section 2, of the Plan and a return of any balance to CAPDC after payment of accrued benefits. Resolution at Section 1. The retention and exercise of such powers is permitted under both federal pension law and under Georgia retirement law for public employees, provided that the amendment does not defeat rights already accrued. See Borst v. Chevron Corp., 36 F.3d 1308, 1317 (5th Cir. 1994); International Union of Electronic, Elec., Salaried, Mach. and Furniture Workers v. Murata Erie N. Am., 980 F.2d 889, 904-906 (3d Cir. 1992); Pulliam v. Georgia Firemen's Pension Fund, 262 Ga. 411(1), 412-13 (1992); Pritchard v. Board of Commissioners of Peace Officers Annuity & Benefit Fund, 211 Ga. 57, 59 (1954); Murray County Sch. Dist. v. Adams, 218 Ga. App. 220(1), 221 (1995).
In the JMERS plan, the powers to amend and terminate were subject to terms and conditions which protected accrued benefits. As to amendments, the Agreement contained the following provisos:
. . . that no amendment shall:
a. Reduce the accrued benefits of any Participant. . ., or
b. Authorize or permit any part of (the) Trust Fund held by JMERS to be diverted to purposes other than for the exclusive benefit of Participants . . ., ["Trust Fund being defined earlier as the "total amounts . . . held in trust . . . for the Employer (sic)", see Article II, Section 5] and
c. No amendments shall operate to deprive any Participant . . . of any rights or benefits irrevocably vested in him under the Plan prior to such amendment. . . .
Article XIII, Section 1.
Upon termination, under Section 2, it became JMERS duty to determine the benefit of each participant and to "purchase an annuity which provides the benefits to which each Participant . . . is entitled, or to pay a lump sum . . . Actuarial Equivalent of the benefit."
As noted above, in the federal cases, in general, language which provides that contributions and trust funds must be used for the exclusive benefit of employees, and that no amendment can permit the diversion of trust funds other than for the exclusive benefit of employees, without more, has been read to provide only for compliance with I.R.C. § 401 and, therefore, since § 401 so allows, to permit reversion of surplus to the employer, after accrued benefits are distributed. The JMERS plan provisions are like the provisions interpreted in the cases to entitle the employer to the surplus. They lack the particular language held to deny employer reversions.
Compare Borst v. Chevron Corp., 36 F.3d 1308, 1315-16 (5th Cir. 1994); International Union of Electronic, Elec., Salaried, Mach. and Furniture Workers v. Murata Erie N. Am., 980 F.2d 889, 904-906 (3d Cir. 1992); Outzen v. F.D.I.C., 948 F.2d 1184 (10th Cir. 1991); Chait v. Bernstein, 835 F.2d 1017 (3d Cir. 1988); Wilson v. Bluefield Supply Co., 819 F.2d 457, 461-65 (4th Cir. 1987); District 65, UAW v. Harper & Row, 576 F. Supp. 1468 (S.D.N.Y. 1983); Washington-Baltimore Newspaper Guild Local 35 v. Washington Star Co., 555 F. Supp. 257 (D.D.C. 1983), aff'd without opinion, 729 F.2d 863 (D.C. Cir. 1984); Pollock v. Castrovinci, 476 F. Supp. 606 (S.D.N.Y. 1979); In re Moyer Co. Trust Fund, 441 F. Supp. 1128 (E.D. Pa. 1977), aff'd without opinion, 582 F.2d 1273 (3d Cir. 1978) with Bryant v. International Fruit Products Co., 793 F.2d 118 (6th Cir. 1986) ("In no event and under no circumstances" would "contributions . . . revert . . . to Employer" held to preclude reversion to employer); Delgrosso v. Spang & Co., 769 F.2d 928 (3d Cir. 1985) ("under any circumstances"). These results are also consistent with Georgia contract law. Especially since the agreement is very specific in its definition of benefits, an implied promise to distribute surplus in some unspecified way would be lacking in the material terms needed for a contract of employment. O.C.G.A. §§ 13-3-1, 13-3-2; see Pita v. Whitney, 190 Ga. 810, 814 (1940) (no agreement if something more is contemplated "but silent as to what"); see also City of Decatur v. Georgia Presbyterian Homes, Inc., 251 Ga. 290 (1983).
d. Meaning of Accrued Benefit
CAPDC has suggested that the phrase, "accrued benefit," which provided the basis for distributions to participants at termination of the JMERS plan, is not defined specifically and objectively in the JMERS plan and should not be equated with the meaning given the phrase for employees leaving the service of CAPDC in Article VII, subsection 3(b). Therefore, it is suggested, the "exclusive benefit" and "non-diversion" language of the agreement and of the regulations under I.R.C. § 401, together with the absence of a provision for return of surplus in the original plan, require that plan benefits be increased above the defined benefits at termination using any surplus.
As the stipulations note, "The JMERS Plan document contains no definition of a participant's accrued benefit upon Plan termination." The phrase is germane to an employee participant's rights in three places: After five years
service, an employee "shall be entitled to a Vested Right in his accrued Retirement benefits." Article VII, subsection 3(b). An amendment of the plan may not reduce "the accrued benefits." Article XIII, subsection 1(a). Upon termination, (to the extent that funds permit, as they did in this case), an "active Participant" is entitled to an annuity or a lump sum payment which is the Actuarial Equivalent of his accrued benefit. Article XIII, subsections (a)(3), (b), (c). Only in the first of these areas (five year vesting) does the JMERS plan explain that the accrued benefit is the retirement amount "based upon his Final Average Earnings and Total Credited Service up to the Participant's date of termination of employment."
As a matter of policy and legal debate, a point like the point raised by CAPDC was noted in greater detail in pension plan literature around the time of the termination. For an employee who leaves the service of the employer, there is no reason to base benefit calculations on anything but service and salary to date. For an employee continuing in service, a termination benefit based on service and salary to date may not fairly reflect that actuarial assumptions, plan funding, and employee expectations contemplated additional service and salary increases. Bruce, Pension Claims: Rights and Obligations 612 (1988)(contending that surplus is not just a result of favorable investment results and would not be a windfall for employees).
Factually, the stipulations do not address the actuarial point but do report that at least part of the surplus in this instance arose because CAPDC gratuitously made contributions in excess of the requirements imposed upon it by actuaries and the contract, an entirely different matter. Bruce argues that employees should recover the excess "if part of a plan's overfunding is willful." Bruce, Pension Claims: Rights and Obligations 670 (2d ed. 1993). The technical basis for the argument is the Tax Code requirement that the actuarial assumptions upon which contributions are based should be reasonable. I.R.C. § 412(c)(3). This prevents employers from obtaining excess deductions from gross income. However, that policy basis is not present in the case of CAPDC, and Bruce cites no precedent for his proposition, only general authority about actuarial assumptions. As he notes, and as is noted above, the courts have not been receptive to Tax Code arguments (as opposed to ERISA arguments) in favor of employee capture of surplus. Id. at 672 & n.373.
Nor does the "accrued benefit" argument withstand contract analysis. First, if the excess, gratuitous contributions were paid by mistake, Georgia law would allow their recapture. Cf. Withers v. Register, 246 Ga. 158 (1980) (reformation of pension plan for mistake). Second, the fact that an employer may have reserved against contingencies does not create an entitlement in employees. Cf. Webb v. Whitley, 114 Ga. App. 153, 159 (1966) ("mere expectancy" in pension plan not within constitutional protections). Third, JMERS has responded officially to the CAPDC position by saying the phrase "accrued benefit" is universally understood in tax law, particularly under I.R.C. § 411, and in the pension industry as the amount prescribed in the plan for normal retirement, based upon credited service to date and eligible earned salary to date. Under Article XXV, Section 9 of the JMERS plan, the regulations and bylaws of JMERS would have priority over plan provisions. The materials in the stipulation do not document that the JMERS definition of "accrued benefits" was so promulgated. However, a term in a contract should be given the meaning ordinarily associated with it in its special context, especially so when the meaning is the one understood by public agencies administering the programs in the area. O.C.G.A. § 13-2-2(2); Commissioner of Insurance v. Stryker, 218 Ga. App. 716, 718 (1995), cert. den., (Jan 19, 1996).
Finally, it is difficult to see how an agreement so specific in defining benefits can be held to create an unspecified benefit in excess contributions (including contributions in excess of the estimates of actuaries), "unless the transferor properly manifested an intention that no resulting trust of the surplus should arise." Restatement, Second, Trusts § 430 (1957). See the discussion of gratuitous trusts above and the preceding discussion of lack of agreement on material terms.
Thus, it does not appear that CAPDC employees were entitled to the remaining funds under the original or amended retirement plan. This conclusion is in part based upon what appear to be arguable but settled principles of federal pension law, and it should be noted that this is a specialized area of practice, one which is not routinely undertaken in this Office. On a matter of federal tax or pension law, federal courts would generally require a federal agency such as the Department of Commerce to seek and rely upon federal agencies with regulatory
responsibility and expertise in the area. See, e.g., United States v. Western Pac. R.R., 352 U.S. 59, 62 (1956) (primary jurisdiction doctrine). There is no intent here to avoid the proper deference. However, the question raised appears to involve the interpretation of the agreement as a Georgia contract, under ordinary textual analysis, more than it involves the interpretation of the Internal Revenue Code, and the latter problem in any event appears settled, though not without criticism. For those reasons, the question has been addressed, and there is no perceived, sufficient basis for agreeing with CAPDC that its employees had an interest in the remaining funds. Therefore, it is necessary to consider whether the creation of supplemental benefits with surplus belonging to CAPDC violated the Georgia prohibitions against gratuities and extra compensation.
(2) Was the Supplemental Plan a Gratuity or Extra Compensation?
The Georgia Constitution permits retirement plans for public employees, including increased benefits for retirees, but prohibits gratuities:
Public funds may be expended for the purpose of paying benefits and other costs of retirement and pension systems for public officers and employees and their beneficiaries.
Ga. Const. 1983, Art. III, Sec. X, Para. I.
Public funds may be expended for the purpose of increasing benefits being paid pursuant to any retirement or pension system wholly or partially supported from public funds.
Ga. Const. 1983, Art. III, Sec. X, Para. II.
Except as otherwise provided in the Constitution, (1) the General Assembly shall not have the power to grant any donation or gratuity . . . and (2) the General Assembly shall not grant or authorize extra compensation to any public officer, agent, or contractor after the service has been rendered or the contract entered into.
Ga. Const. 1983, Art. III, Sec. VI, Para. VI(a).
The provision, in the second retirement clause quoted above, "of increasing benefits being paid," refers to current retirees. See 1984 Op. Att'y Gen. 84-19 (COLA's); 1974 Op. Att'y Gen. 74-14 (without such amendment, no increase possible); 1967 Op. Att'y Gen. 67-399 (same). These retirement provisions also do not entirely supersede the gratuities prohibition, but are read in pari materia with it. Thus, the prohibition still operates to prevent any increase in promised benefits to former employees, for the reason that former employees give no new consideration. Cf. Carter v. Haynes, 228 Ga. 462, 465-66 (1971); Burks v. Board of Trustees of the Firemen's Pension Fund, 214 Ga. 251, 253-54 (1958); 1971 Op. Att'y Gen. 71-73. Therefore, it was not permissible for CAPDC to disburse remaining funds to former employees or for their benefit.
However, a present employee may give new consideration, and, therefore, the prospective retirement benefits of current employees may be increased. City of Atlanta v. Anglin, 209 Ga. 170, 174-75 (1952). Because of the new consideration, a public employer may also make tenure prior to the effective date of a retirement benefit a basis for determining the amount of the benefit. Cole v. Foster, 207 Ga. 416 (1950). The situation may be summarized as follows:
1) If A is employed by B for ten years, paid a monthly salary during that time, and at the end of the employment is rewarded for his good and faithful service by B who then promises to pay him $500 per month for the balance of his life, that is a gift. It was not a term of the contract of employment. . . . (2) If A is employed by B and the agreement in advance is that A will receive a salary and in addition, at the conclusion of his employment, he will receive $500 per month for life it is not a gift but part of the consideration supporting the employment contract. (3) If A has been working for B for a number of years and the two then agree that A shall continue to receive his salary but also be entitled, after a given period of time in the future, to terminate employment and receive $500 per month for life, it is not a gift. Neither does it become a gift should it be agreed that A receive partial credit for past years' service toward the total required time for entitlement to the benefits. That merely makes the employment contract more valuable to A. It remains a contract however and not a gift.
Swann v. Board of Trustees of Joint Municipal Employees' Benefit Sys., 257 Ga. 450, 452-53 (1987) (citations omitted)
(upholding retirement of city councilman with credit for time served from 1955 to 1960 and from 1972 until 1985 under plan established in 1984). See also Aldredge v. Rosser, 210 Ga. 28 (1953) (judge served from 1914 through 1944 and retired with prior credit under a 1946 plan by serving in July and August of 1952).
b. Requirement of New Consideration
In Swann and Aldredge, the retirees both served a new period of employment and themselves made contributions to the plan. The requirement of consideration is sometimes stated as if both are required. E.g., Evans v. Employees' Retirement Sys., 264 Ga. 729, 730 (1994). However, it is sufficient for the establishment of a public employee's benefit contract if the employee is only required to give new service. Georgia Ports Auth. v. Rogers, 173 Ga. App. 538, 540 (1985).
What has not been clearly addressed in the cases is whether any particular time of service must be required. The gratuities prohibition is not generally understood as just involving formal contract consideration. The retirement cases involving the gratuities prohibition have tended to be somewhat sui generis, but the Supreme Court has looked at gratuities case law in general in evaluating an employee benefit question. E.g., State Highway Dep't v. Bass, 197 Ga. 356, 369 (1944). In the general area, the Supreme Court recently held the gratuities clause to require the state to receive a "substantial benefit" for the use of state property. Garden Club of Ga., Inc., v. Shackelford, 266 Ga. 24 (1995); accord, Smith v. Board of Commissioners, 244 Ga. 133, 140 (1979). There is no analogous discussion in the short tenure case, Aldredge, supra. In Swann, in its third hypothetical quoted above, the Court posits an increased entitlement only "after a given period of time in the future." A standard recitation of the new consideration requirement concludes as follows: "It is not necessary . . . that the rights of the employee shall have . . . vested . . . while the amendment is in effect. Rather, if the employee performs services during the effective dates of the legislation, the benefits are constitutionally vested, precluding their legislative repeal . . . ." Withers v. Register, 246 Ga. 158, 159 (1980) (dictum). Bass, supra, also addresses the issue. The benefit there was workers compensation, and the court recognized that it was difficult to place an objective value on the services the employee gave for
the benefit. The court held the service "need not be reduced to dollars and cents, but suffice it to say it has a value." 197 Ga. at 370.
c. Analysis of New Consideration under Supplemental Plan
i. Continued Employment
The difficulty with the CAPDC supplemental retirement plan is that it does not appear to require any service.
In places, the committee report and Board resolution might be construed to imply a requirement of continued service. The committee report and the CAPDC resolution do refer to "employees . . . . reach(ing) retirement age of 65." However, the stipulations also make clear that committee and CAPDC resolved to include non-employees in the supplemental plan. The insurer chosen to establish the supplemental plan had to change its specimen form to accommodate the inclusion, and it appears all participants signed the same, modified form. The form does not require service with CAPDC or even "retirement." In setting up the supplemental plan, CAPDC undertook only a single, lump sum payment for the group annuity. It does not make sense, then, to conclude that the resolution required current employees to continue employment when other beneficiaries of the supplemental plan had no such requirement.
If the language is deemed ambiguous, it requires parol evidence for its interpretation. Choice Hotels Int'l, Inc. v. Ocmulgee Fields, Inc., 222 Ga. App. 185 (1996). Parol evidence in the stipulations is as follows: The deferred compensation agreements executed to implement the resolution do not use the word "retirement." Former employees were allowed to participate in the supplemental plan. Finally, according to the stipulation, the motive for the resolution was compensation for past services rendered. This approach, then, also suggests that there was no requirement of continued service, of any duration. The current employees could have quit beforehand and still received the supplemental plan benefit.
Nevertheless, it appears that some employees did work some period of time after the Board resolution and, it will be assumed, some worked after the execution of the supplemental plan documents. As noted above, some of the public retirement
cases construing the gratuities clause appear to say that service of any period of time under the inducement of the benefit is sufficient. The case most directly in point at the time of the resolution determining to establish the supplemental plan allowed retirement with credit for thirty years service in return for less than two months service and contributions of 5% of salary for the two months. Aldredge v. Rosser, supra, 210 Ga. at 28; see also State Highway Dep't v. Bass, supra, 297 Ga. at 369.
For the employees who worked, it is necessary to decide then whether these cases control. The answer is no for two reasons: First, all the cases require some service as consideration, and the supplemental plan did not require any further consideration. It was, therefore, gratuitous. Compare Webb v. Warren Co., 113 Ga. App. 850 (1966) (private employer allowed to renege, after terminating at-will employee, who had no pension benefit, but promising a pension anyway and holding out the possibility of later work without requiring it).
Second, Garden Club should be applied, and under that decision, there can be no substantial benefit to government in awarding a several fold increase in retirement in return for the certainty of no more continued service than a microsecond. Garden Club of Ga., Inc., v. Shackelford, 266 Ga. 24 (1995).
ii. New Consideration other than Service; Compromise
The new consideration required for a pension promise does not have to be continued or new service. It may be loyalty, a promise to consult, and or some other bargained for consideration. See Williams v. Wright, 927 F.2d 1540, 1550 (11th Cir. 1991). In this instance, the other possibility for new consideration is compromise, the "release" signed by cash recipients having indicated that it is a settlement of a potential claim by the recipient against CAPDC.
At least one federal case approves a compromise of a class action in which the employee claim to termination surplus was doubtful and the employees accepted less than the full amount. See Walsh v. Great Atl. & Pac. Tea Co., 96 F.R.D. 632 (D.C.N.J. 1983), aff'd, 726 F.2d 956 (3d Cir. 1984). Under Georgia law, a public body may compromise a dispute with an employee over remuneration. See Howell v. Muscogee County, 105 Ga. App.
515 (1962) (sustaining a settlement defense notwithstanding later case law proved plaintiff had been right on a question of law).
The elements of a binding "compromise and settlement" are dispute and concessions. See 5 Encyclopedia of Georgia Law, "Compromise and Settlement," § 3 (1988 rev.). Assuming the possibility, however, the elements are not unequivocally present. The stipulation does indicate that CAPDC was advised that the employees and CAPDC might both have an interest in the funds and the matter was "not entirely free from doubt." While there is no indication of dispute, the "release" signed by cash recipients also indicates that it is a settlement of a potential claim by the recipient against CAPDC. The release further requires recipients to indemnify CAPDC if a court later determined the funds belonged to a state or federal agency. However, the stipulation does not indicate that the supplemental plan was intended by CAPDC to compromise a doubtful claim, and the CAPDC materials do not urge such a point. Instead, the study committee report and the Board resolution speak in terms of inequity and inadequacy, reflecting concern about fairness, not threat of litigation. The stipulation does not indicate that a requirement similar to the release was imposed on those receiving the deferred compensation. All of the remaining funds in question were applied toward the supplemental plan. Thus, CAPDC did not "compromise" but simply made a determination as to use of funds.
The stipulations were written so as to suggest other issues regarding the way in which these transactions were accomplished. CAPDC has been discussed in this opinion as if it were simply a statutory predecessor of the Commission. In fact, it had incorporated a non-profit corporation and had undertaken to conduct its affairs in that form, though lacking the authority to do so. The supplemental plan documents do not track the Board resolution in seemingly significant ways. The documents were executed on behalf of CAPDC after the statutory entity ceased to exist by a former chairman not then in office or on the Commission. It is not clear whether the Board resolution was complete enough in itself to establish a basis for employee acceptance, the answer determining whether the preparation of documents and their execution became a
ministerial act or a necessary act in an incomplete negotiation. Thus, it is not clear whether or when the supplemental plan took effect.
Be that as it may, the question upon which an opinion was requested concerned the gratuities prohibition. For purposes of the opinion, it has been assumed, without deciding, that employees of CAPDC were probably entitled to rely upon CAPDC actions as being those of the correct, statutory entity, regardless of the form in which CAPDC purported to act and that any discrepancies could be corrected and the transaction ratified or implemented, subject to the issue presented here. If the supplemental plan were to require new service or other consideration, or the law were to permit any service after its effective date to suffice, then the assumptions would not be sufficient and the issues would need examination.
The employees had no interest in the remaining funds after the JMERS termination. CAPDC violated the gratuities prohibition in providing a supplemental retirement plan for former employees. With regard to employees who provided services after the establishment of the supplemental plan, the question is close and the answer given not free from doubt. However, on the stipulation and exhibits as presented, it is my unofficial opinion that the supplemental retirement plan did not require substantial, or any, benefit to the employer, in the form of new service or otherwise, and the supplemental plan therefore violated the prohibition against governmental gratuities and extra compensation for services rendered.
JOHN B. BALLARD, JR.
Senior Assistant Attorney General