How does Minnesota's 95-percent-of-governor compensation cap apply to school superintendent contracts that include vacation cash-out, deferred compensation, vehicle expense reimbursements, expense allowances, and split-dollar life insurance?

Plain-English summary

In 1995, the Minnesota State Auditor reviewed superintendent contracts in the Twin Cities metropolitan area and found many in violation of the 95-percent-of-governor compensation cap in Minn. Stat. § 43A.17, subd. 9. Some districts amended their contracts; others challenged the State Auditor's reading of the statute. Robert Wedl, then Commissioner of Children, Families and Learning, asked AG Humphrey to provide guidance on nine specific questions.

The AG, through Assistant AG Kenneth Raschke, gave a long, detailed answer that addressed each compensation item the State Auditor had flagged. Here is what the AG held on each:

Cash-out of accrued vacation during employment (Q1 and Q2): School districts have the authority to cash out vacation in situations other than termination. The earlier 1980 opinion on sick-leave cash-out (Op. Atty. Gen. 161b-4, May 27, 1980) supports the proposition that districts can structure compensation in any reasonable way. But once cashed out, those payments count as salary under § 43A.17, subd. 9 because they are "lump sum payments" within the statutory definition of salary. Termination cash-out is treated as severance, not salary (Op. Atty. Gen. 469b, September 14, 1993); mid-employment cash-out is salary.

Deferred compensation contributions (Q3 and Q4): Minn. Stat. §§ 356.24 and 356.25 sharply restrict employer contributions to supplemental pension or deferred compensation plans. Minn. Stat. § 356.24, subd. 1 outlaws employer contributions to supplemental plans except for six enumerated exceptions. The relevant exception (subd. 1(5)(ii)) permits employer matching of employee contributions up to $2,000 per year to a 403(b) tax-sheltered annuity contract. Larger contributions are not authorized as employer compensation; if permitted at all, they must be treated as deferred salary at the employee's request. 457(f) plan contributions are not generally authorized for school district employees; they are permissible only to the extent the plan operates within the severance pay authority of Minn. Stat. § 465.72. Whether the contribution counts as salary under § 43A.17: yes for 403(b) (§ 43A.17, subd. 9 explicitly includes deferred compensation and annuity-contract payroll allocations); for 457(f), inclusion depends on whether the funds have vested in the superintendent.

Vehicle expense beyond § 471.665 (Q5): Districts may pay a mileage allowance or periodic allowance under Minn. Stat. § 471.665 for use of the employee's personal vehicle on official business. Additional payments for insurance, maintenance, fuel, or other vehicle expenses are not authorized. Section 471.665 is the limit, not a starting point, and prior opinions (Ops. Atty. Gen. 359b, October 24, 1989; 104a-9, December 28, 1994) confirm the rule against publicly funding personal vehicles.

Expense allowances and reimbursement procedure (Q6 and Q7): Reimbursement of school district employee expenses must follow Minn. Stat. § 471.38: the claimant must submit an itemized written claim with a signed declaration. Standing monthly "expense allowances" that are not tied to specific incurred expenses are not reimbursements; they are salary. The earlier 1989 housing-allowance opinion (Op. Atty. Gen. 161b-4, Jan. 24, 1989) treated similar fixed monthly payments as salary on the same logic.

Split-dollar life insurance (Q8): The cost of a split-dollar life insurance arrangement counts as compensation under § 43A.17, subd. 9, because the cap covers "all other forms of compensation" and the subdivision 9(3) term-life exclusion does not extend to split-dollar arrangements. The amount included each year is the annual premium paid by the district, less any reimbursement actually received in that same year. Even where the district has a lien for ultimate reimbursement from the death benefit or cash value, the "annual cost" rather than the present-value-discounted cost controls. The district's statutory authority to insure employees under § 471.61 (group life policies) may also constrain the type of policy a district can buy in the first place (Lilly v. City of Minneapolis, Minn. Ct. App. 1995).

Commissioner's enforcement authority (Q9): The Commissioner has no statutory authority to compel school district compliance with the salary cap, either directly (by reducing a superintendent's salary) or indirectly (by withholding state aids). General school district management authority rests with the school board (Minn. Stat. §§ 123.33-123.35). The Commissioner is authorized to reduce state aids only for specific statutory violations enumerated in § 124.15; § 43A.17 violations are not on the list. Administrative agencies can exercise only the power the legislature has given them (Waller v. Powers Dept. Store).

Currency note

This opinion was issued in 1997. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Check current statutory text before applying the opinion's dollar limits or agency-authority discussion.

Historical context: what the AG concluded

The opinion is one of the most detailed Minnesota AG treatments of public-employer compensation rules. It walks through nine factual scenarios from the State Auditor's review.

The 95% cap (§ 43A.17, subd. 9). No person employed by a school district may have salary plus the value of "all other forms of compensation" exceeding 95% of the governor's salary. The statute lists what is included in salary (deferred compensation, payroll allocations for annuity contracts, all other direct and indirect compensation items not specifically excluded) and what is excluded (employee benefits also provided to the majority of full-time employees, vacation/sick leave allowances, health/dental/disability/term-life/pension benefits, dues to professional organizations, reimbursement for actual expenses).

The State Auditor's findings. The 1995 review identified five recurring compensation features in metro Twin Cities superintendent contracts that pushed total compensation above the cap when added to salary: annual cash-out of accrued vacation, deferred compensation contributions, vehicle expense reimbursements beyond mileage, fixed monthly expense allowances, and split-dollar life insurance. Districts amending their contracts after the audit accepted the State Auditor's reading; others pushed back, prompting the Commissioner's request for AG guidance.

Vacation cash-out (mid-employment). The 1980 sick-leave opinion (Op. Atty. Gen. 161b-4) supports districts' authority to cash out unused leave; it is just another form of compensating teachers for services. But § 43A.17, subd. 1 defines salary to include "lump sum payments." Termination cash-out (Op. Atty. Gen. 469b, 1993) is more like severance and is excluded; mid-employment cash-out is salary. The opinion specifically rejected the argument that mid-employment cash-out is like overtime: overtime is hours worked outside the normal schedule under employer direction; vacation cash-out is the employee electing higher salary in lieu of vacation days on regularly scheduled work days.

Deferred compensation: § 356.24 restrictions. Minnesota tightly regulates employer contributions to supplemental pension plans for governmental employees. Minn. Stat. § 356.24, subd. 1 outlaws such contributions with six enumerated exceptions. The relevant ones for school district superintendents:

• Subd. 1(5)(ii): up to $2,000 per year employer match of employee contributions to a 403(b) tax-sheltered annuity contract, if provided for in the personnel policy.
• Subd. 1(a)(4)(ii): employer match of up to $2,000 to a section 352.96 deferred compensation plan (not applicable to school districts).
• Subd. 1(a)(4): payments to a plan that "provides solely for severance pay under section 465.72."

The third exception is the only route by which a 457(f) plan can receive employer contributions. Section 465.72 limits severance pay: generally not more than one year's pay, payable over not more than five years from retirement/termination; "highly compensated employees" (defined in § 465.722) are generally limited to six months' pay.

Deferred compensation as salary. For purposes of the cap, § 43A.17, subd. 9 explicitly includes "deferred compensation and payroll allocations to purchase an individual annuity contract." So 403(b) contributions are salary for the cap, both the employer-match portion and any larger amount funded as a salary deferral. 457(f) contributions are not salary until vested (typically at termination or retirement), because the superintendent has no vested right until then.

Vehicle expense limits. Minn. Stat. § 471.665 is the exclusive authority for paying public employees for personal-vehicle use. It permits either a mileage rate or a monthly periodic allowance. The AG read § 471.665 as the limit on the public expenditure permissible for personal vehicles, not as a base on top of which the district can pay other vehicle-related expenses (insurance, maintenance, fuel). Op. Atty. Gen. 104a-9 (1994) had said the same. The reason: paying insurance/maintenance/fuel "underwrite both business and personal use" of the vehicle and would reimburse the employee for expenses that the employee never personally incurred (the district paying them directly).

Fixed monthly allowances are salary. Minn. Stat. § 471.38 requires that expense claims be supported by itemized written claims with signed declarations. Cases like Leskinen v. Pucelj (Minn. 1962) and Yao Loh v. Waseca County (Minn. 1936) reinforce that public-employee expense reimbursement is tied to specifically-incurred and itemized expenses. A monthly $615 allowance that escalates 3% annually and requires no receipts is "simply an escalating payment of salary." The 1989 housing-allowance opinion (Op. Atty. Gen. 161b-4) reached the same conclusion.

Split-dollar life insurance. Section 43A.17, subd. 9(3) excludes "term life insurance" from compensation but does not exclude other forms of life insurance. Split-dollar policies, which build cash value, are not term insurance. So the cost is includable in compensation. The amount included annually is the premium paid minus any reimbursement received that year. The opinion rejected the netting argument: even if the district has an ultimate lien against the death benefit or cash value, the present value of that future reimbursement is not deducted in computing the annual cost. "Cost" means actual dollars paid in the year, not a netted economic value.

Insurance authority limit. Minn. Stat. § 471.61 authorizes school districts to insure or protect officers and employees under a policy "of group insurance or benefits, covering life." Lilly v. City of Minneapolis (Minn. Ct. App. 1995) read this section as the limit of district authority to provide life insurance. A split-dollar policy that is not group and provides benefits beyond a death benefit may be outside § 471.61's authority entirely. The AG flagged the question without resolving it, since the district had not raised the authority issue.

Commissioner enforcement. The Commissioner of Children, Families and Learning has no statutory authority to modify superintendent contracts directly or to withhold state aid for § 43A.17 violations. Aid-reduction authority is enumerated in § 124.15, and § 43A.17 violations are not on the list. Waller v. Powers Dept. Store (Minn. 1989): administrative agencies can only exercise powers prescribed by legislative authority. The opinion leaves any other enforcement route unresolved.

Common questions

Q: Our superintendent gets unused vacation cashed out every June. Is that salary? A: Under the 1997 opinion, yes. Annual mid-employment cash-out counts as salary for the § 43A.17 cap. Termination cash-out is treated differently (severance, not salary). Confirm the current statute language.

Q: Can we contribute more than $2,000 a year to our superintendent's 403(b) without exceeding the cap? A: Minn. Stat. § 356.24's exception caps the employer match at $2,000 per year for a 403(b). Larger amounts are unauthorized as employer compensation. If the superintendent wants to defer more, the additional amount must come from the employee's salary as a deferral, which still counts as salary for the cap. So a higher contribution does not solve the cap problem.

Q: We pay our superintendent's vehicle insurance and fuel in addition to a monthly mileage allowance. Is that allowed? A: Under the 1997 opinion, no. Minn. Stat. § 471.665 is the exclusive authority for personal-vehicle payments. Additional insurance, fuel, or maintenance payments are unauthorized. The superintendent's compensation should include the salary or salary-equivalent value of any such additional payments, and they may run into both authority and cap issues.

Q: We give our superintendent a $500/month "general business expense" allowance with no receipts required. Is that an expense reimbursement? A: No. The 1997 opinion treated similar fixed monthly allowances as salary. Minn. Stat. § 471.38 requires itemized written claims with signed declarations for genuine reimbursements. A fixed monthly allowance without those formalities is not a reimbursement and is counted as salary for the cap.

Q: Our superintendent contract includes a $300,000 split-dollar life insurance policy. How does that affect the cap calculation? A: The annual premium paid by the district (minus any same-year reimbursement) counts as compensation under § 43A.17, subd. 9. The future lien on death benefit or cash value does not net against annual cost. Also confirm that the district has statutory authority to provide non-group, non-term life insurance under § 471.61 (Lilly v. City of Minneapolis is the relevant case).

Q: The Commissioner found us in violation. Can the state cut our aid? A: Under the 1997 opinion, no. The Commissioner has no statutory authority to reduce state aids for § 43A.17 violations. The State Auditor can publish findings, the public can react, and the school board can negotiate compliance, but the Commissioner cannot administratively enforce the cap.

Q: Can the school district just amend the contract to call payments something different and avoid the cap? A: The 1997 opinion shows that labels do not control. The State Auditor and AG looked through contract labels to the underlying economic substance of payments. Calling salary "expense allowance" or labeling deferred salary "deferred comp" does not change the cap analysis.

Background and statutory framework

Minnesota Statute § 43A.17, the public-employee compensation cap, was enacted to limit total compensation of state and local government employees to a percentage of the governor's salary. The 95-percent cap applies to most local government employees, including school district superintendents. The cap is calibrated to the governor's salary under Minn. Stat. § 15A.082, so it adjusts as the governor's salary adjusts.

The cap is supplemented by several other statutes that govern specific compensation features:

• Minn. Stat. § 471.665 limits personal-vehicle payments to mileage or periodic allowance.
• Minn. Stat. § 471.38 sets the procedural requirements for expense reimbursements.
• Minn. Stat. § 471.61 authorizes employee group insurance, including life insurance.
• Minn. Stat. § 356.24-356.25 restrict supplemental pension and deferred compensation plan contributions for public employees.
• Minn. Stat. § 465.72 governs severance pay; § 465.722 defines highly compensated employees for severance limits.
• Minn. Stat. §§ 123.33-123.35 give the school board general authority to manage the district, including setting compensation.
• Minn. Stat. § 124.15 lists violations for which the Commissioner can reduce state aids; § 43A.17 is not among them.

The opinion stitches these together to give the State Auditor and the Department of Children, Families and Learning a unified reading of the statutory framework. The opinion addresses the disputed contract provisions described in the Commissioner's request.

Kenneth E. Raschke, Jr. signed the opinion as Assistant Attorney General.

Citations and references

Statutes:

• Minn. Stat. § 15A.082 (governor's salary)
• Minn. Stat. § 43A.17, subd. 1 (1996) (salary defined)
• Minn. Stat. § 43A.17, subd. 9 (1996) (95% compensation cap)
• Minn. Stat. § 43A.17, subd. 11 (1996) (severance pay)
• Minn. Stat. § 43A.18 (compensation plans)
• Minn. Stat. § 123.33 (school board management)
• Minn. Stat. § 123.35 (school board specific powers)
• Minn. Stat. § 123.35, subd. 12 (1996) (compensation authority)
• Minn. Stat. § 124.15 (state aid reduction authority)
• Minn. Stat. § 177.25 (overtime definition)
• Minn. Stat. § 352.96 (state deferred compensation plan)
• Minn. Stat. § 353.01, subd. 10 (1996) (PERA salary definition; unused leave excluded)
• Minn. Stat. § 354.05, subd. 35 (1996) (TRA salary definition; unused leave excluded)
• Minn. Stat. § 356.24 (supplemental pension restrictions)
• Minn. Stat. § 356.24, subd. 1 (1996) (six enumerated exceptions)
• Minn. Stat. § 356.25 (1996) (local pension plan prohibition)
• Minn. Stat. § 465.72 (severance pay authority)
• Minn. Stat. § 465.722 (highly compensated employee severance limit)
• Minn. Stat. § 471.38 (expense reimbursement procedure)
• Minn. Stat. § 471.391 (related expense procedure)
• Minn. Stat. § 471.61 (employee group insurance authority)
• Minn. Stat. § 471.665 (personal-vehicle allowance)

Federal statutes referenced:

• 26 U.S.C. § 457(f) (ineligible deferred compensation plans of state/local government employers)

Cases:

• Leskinen v. Pucelj, 262 Minn. 461, 115 N.W.2d 346 (1962) (town officer expense claims must show specific expenses)
• Yao Loh v. Waseca County, 265 N.W. 298 (Minn. 1936) (county school superintendent expense claims must be itemized)
• Waller v. Powers Dept. Store, 343 N.W.2d 655 (Minn. 1989) (administrative agency exercises power only as prescribed by statute)
• Lilly v. City of Minneapolis, 527 N.W.2d 107 (Minn. Ct. App. 1995) (statutory authority limits municipal insurance)

Related AG opinions:

• Op. Atty. Gen. 161b-4, May 27, 1980 (sick leave cash-out is compensation)
• Op. Atty. Gen. 161b-4, January 24, 1989 (housing allowance is salary)
• Op. Atty. Gen. 359b, October 24, 1989 (vehicle authority limits)
• Op. Atty. Gen. 59a-41, February 22, 1984 (deferred compensation)
• Op. Atty. Gen. 469b, September 14, 1993 (vacation cash-out at termination is severance)
• Op. Atty. Gen. 104a-9, December 28, 1994 (county car allowance/vacation leave)
• Op. Atty. Gen. 397 (cross-reference; school district employee compensation)

Source

• Landing page: https://www.ag.state.mn.us/Office/Opinions/
• Original PDF: https://www.ag.state.mn.us/Office/Opinions/161b12-19970804.pdf

Original opinion text

School Board Powers: Superintendent: Salary and Benefits: School district powers regarding salary and benefits for superintendent discussed. Authority of Commissioner of Children, Families and Leaming discussed. Minn. Stat.§§ 43A.l 7, 123.33-123.35, 356.24, 356.25, 471.38, 471.665 16lb-12 (Cr. Ref. 161b-4, 397) August 4, 1997

Robert J. Wedl, Commissioner
Minnesota Department of Children,
Families and Leaming
550 Cedar Street
St. Paul, MN 55101-2273

Dear Commissioner Wedl:

In a letter to Attorney General Hubert H. Humphrey ill, your office noted that "during 1995, the Office of the State Auditor reviewed school superintendent contracts in the metropolitan area. The OSA found in many of the contracts, violations of Minnesota Statutes including violations of the 95 percent compensation cap set forth in Minn. Stat. § 43A.17, subd. 9.e Although some of the school districts have amended their contracts to comply with thee findings of the OSA, others have challenged the OSA's application of Minnesota law to theire particular contracts."e

In order to provide guidance to the educational community, our opinion was sought as to whether school districts are authorized to provide certain benefits to superintendents and whether the value of such benefits must be included in determining whether the superintendent's compensation is within the compensation permitted by Minn. Stat. § 43A.17, subd. 9 which provides in pertinent part:

Subd. 9. Political subdivision compensation limit The salary and the value of all other forms of compensation of a person employed by a statutory or home rule charter city, county, town, school district, metropolitan or regional agency, or other political subdivision of this state, or employed under section 422A03, may not exceed 95 percent of the salary of the governor as set under section 15A.082, except as provided in this subdivision. Deferred compensation and payroll allocations to purchase an individual annuity contract for an employee are included in determining the employee's salary. Other forms of compensation which shall be included to determine an employee's total compensation are all other direct and indirect items of compensation which are not specifically excluded by this subdivision. Other forms of compensation which shall not be

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included in a determination of an employee's total compensation for the purposes of this subdivision are:

(1) employee benefits that are also provided for the majority of all other full-time employees of the political subdivision, vacation and sick leave allowances, health and dental insurance, disability insurance, term life insurance, and pension benefits or like benefits the cost of which is borne by the employee or which is not subject to tax as income under the Internal Revenue Code of1986;

(2) dues paid to organizations that are of a civic, professional, educational, or governmental nature; and

(3) reimbursement for actual expenses incurred by the employee which the governing body determines to be directly related to the performance of job responsibilities, including any relocation expenses paid during the initial year of employment.

The value of other forms of compensation shall be the annual cost to the political subdivision for the provision of the compensation.

For purposes of this inquiry five sets of facts were presented with questions as follows:

FACTS

The superintendents of several school districts receive, on an annual basis, all or a part of their accrued vacation in the form of cash payments. For example, the superintendent of one School District has the following provisions in his contract:

Basic Work Year
The work year shall be for twelve (12) months, including twenty-eight (28) days of paid vacation annually. All vacation time must be taken within19 months of the start of the contract year in which it is received or be forfeited. At the Superintendent's option, sixteen (16) of the twenty-eight (28) vacation days may be work days and the Superintendent shall be additionally compensated at the rate of1/223 for each vacation day worked.

During1993 and 1994, the superintendent was paid $5 ,851 and $6,848 respectively in lieu of taking vacation. If these amounts of cashed out vacation were included in the superintendent's salary for the purposes of Minn. Stat.
§ 43A. l 7, his salary for these years would have exceeded the95 percent cap.

Robert J. Wedl, Commissioner
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The school district believes they have authority to cash out vacation and these amounts are excluded from the "salary" calculation. The school district claims these payments are similar to overtime amounts which are excluded from the calculation under the terms of Minn. Stat. § 43A. l 7.

Based upon these facts you ask substantially the following questions:

QUEST19N ONE

Does a school district have the statutory authority to convert vacation benefits to cash in situations other than termination of employment?

OPINION

We answer this question in the affirmative. The situation described is analogous to that addressed in Op. Atty. Gen. 161 b-4, May 27, 1980. In that Opinion we concluded that a school district had authority to include in contracts with teachers a provision for a payment based upon unused sick leave and personal business days at the end of the year. We observed there:

Such a plan is simply a method of providing compensation to teachers for services rendered during the contract period. The fact that the compensation is calculated on the basis of accumulated sick leave and unused business days does not alter its essential character. Accordingly, since a school district may agree to compensate its teachers, it may, in the exercise of its discretion, agree to do so in this manner,

The same reasoning would seem applicable to the situation you present. Thus it is our opinion that districts subject to limits such as that discussed below do possess authority to provide compensation to superintendents for unused vacation days.

QUESTION TWO

If a school district cashes out accrued vacation in situations other than termination of employment, are such amounts included as salary and the value of

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all other forms of compensation under the compensation limitation found in Minn. Stat. § 43A.17?

OPINION

We answer this question in the affirmative. Minn.Stat.§ 43A.l 7, subd. 1 defines "salary" as:

.... hourly, monthly, or annual rate of pay including any lump-sum payments and cost-of-living adjustment increases but excluding payments due to overtime worked, shift or equipment differentials, work out of class as required by collective bargaining agreements or plans established under section 43A.18, and back pay on reallocation or other payments related to the hours or conditions under which work is performed rather than to the salary range or rate to which a class is assigned.

In Op. Atty. Gen. 469b, September 14, 1993 we concluded that, while the statute was somewhat ambiguous on this issue, compensation paid for unused vacation at the time of termination should not be considered salary for purposes of the salary cap. We then indicated that such a liquidation of vacation at separation was more analogous to a continuation of salary at the regular rate than to an addition to salary. alSil Minn. Stat.§ 43A. l 7, subd. 11 which implies that vacation conversion at termination is more in the nature of severance pay than salary. Such reasoning would not apply, however, to payment for unused vacation in circumstances of continued employment. Such payments would seem rather to constitute "lump sum payments" included within the above definitions of salary. It has been suggested that such payments might be considered "overtime" pay, and thus are excluded from salary. However, the concept of overtime in its normal usage relates to hours worked outside of or in addition to, an employee's normal scheduled days or hours of work. �.
�.Minn.Stat.§ 177.25 (work time in excess of 48 hours per week); the American Heritage Dictionary (Second College Edition, 1995) 887 (working hours in addition to those of the regular

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schedule). That concept would not apply to additional pay received for working on regularly scheduled work days in lieu of taking vacation. For example, unlike a normal overtime situation, it would be impossible to determine which of the superintendent's normal work days could be considered "overtime" when unused vacation is cashed in. Furthermore, it appears that the conversion of vacation to pay is entirely within the discretion of the superintendent, unlike most overtime arrangements which depend upon the specific direction or request of the employer or supervisor. In effect the superintendent here has been given the option of receiving a higher annual salary in exchange for less paid vacation. Thus we believe that the vacation cash-out payments described should be considered salary for purposes of section 43 A. l 7. This conclusion is further supported by the fact that other statutes expressly exclude vacation cash-out payments in defining "salary" for other purposes. CT.., Minn. Stat.§§ 353.01, subd. 10 and 354.05, subd. 35 (1996) which, in defining "salary" for purposes of public employees and teacher retirement, expressly exclude "unused annual leave" payments and "lump sum annual leave" payments. Even if liquidated vacation were not considered "salary," however, it would seem clearly to fall within the ambit of "all other forms of compensation" as defined in section 43A. l 7, subd.

9. That subdivision excludes "vacation and sick leave allowances." However, it does not
   exclude cash payments received during employment for unused vacation or sick leave. CT. Minn. Stat.§ 43A.17, subd. 11 which excludes from severance pay limitations "payments for accumulated vacation ...." Thus it is our opinion that payments for unused vacation days in the circumstances described would be included in computing compensation for purposes of the salary cap.

FACTS

Various school districts offer their superintendents deferred compensation packages. For instance, one school district superintendent's employment contract states the school district "adopted a Deferred Compensation Plan under section 457(f) of the Internal Revenue Code. In accordance with the provisions of that

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Plan, the School District shall contribute $15,000 annually to that (deferred compensation] Plan on behalf of the Superintendent.. .."

For each school year 1993/94 and 1994/95, the district contributed
$15,000 on behalf of the superintendent to deferred compensation plans pursuant to the employment contract. Of the $15,000 invested in 1993/94, $5,500 was invested in a "457(±) plan" and $9,500 was invested in a 403(b) plan. Of the
$15,000 invested in 1994/95, $7,000 was invested in a 457(±) plan and the remaining $8,000 was invested in a 403(b) plan. When these $15,000 deferred contribution payments were combined with the superintendent's salary, it exceeded the 95 percent cap of Minn. Stat.§ 43A.17.

Based upon these facts you ask the following question:

QUESTION THREE

With the exception of an employer contribution totaling $2,000 permitted by Minn. Stat.§ 356.24, subd. l(a)(4)(ii), does a school district have the statutory authority to make an employer contribution or other non-salary amounts into a superintendent's 403(b), 457(±) or other types of deferred compensation plans?

OPINION

We are unable to provide a categorical answer upon the facts supplied. Minn. Stat.
§§ 356.24 and 356.25 severely restrict the authority of school boards to use public funds to purchase supplemental pension or deferred compensation plans. A supplemental plan is defined as a plan "established, maintained, and operated in addition to a primary pension program for the benefit of the governmental subdivision employees." Minn. Stat.§ 356.24, subd. 1 (1996). 1 That subdivision of the statute outlaws employer contributions to supplemental plans. with six specific exceptions. One such exception found in subdivision 1(5) permits an employer to match an employee contribution of up to $2,000 per year, if provided for in the personnel policy of the public employer. This contribution is permitted in one of two circumstances: (i) if

1
The next section prohibits establishment of any local pension plan or fund financed from public funds other than a volunteer firefighter's relief association. Minn. Stat. § 356.25 (1996).

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it is made to a section 352.96 deferred compensation plan (not applicable to these facts) or (ii) if it is part payment of the premium on a tax-sheltered annuity contract under section 403(b) of the Internal Revenue Code. Minn. Stat.§ 356.24, subd. 1(5)(i) and (ii). As applied to these facts, the permissible employer contribution to a 403(b) plan is limited to $2,000, subject to a matching contribution by the employee. We have found no authority, however, to support employer contribution in excess of that amount. Instead, contribution of an amount over this $2,000 if permitted at all, must be considered compensation to the employee deferred at the employee's request. �Op.Atty. Gen. 59-a-41, February 22, 1984; Minn. Stat.§ 123.35, subd. 12 (1996).. The specific details of the Section 457(t) plan referred to are not set out in your letter or the accompanying materials. As we understand 26 U.S.C.§ 457(f), it provides that deferred compensation, provided under certain plans of state or local government employers which are not "eligible" for tax deferral under Section 457, is included in taxable income of the recipient "in the first year in which there is no substantial risk of forfeiture of the rights to such compensation." These amounts are subject to a substantial risk of forfeiture if conditioned upon the future performance of substantial services. 26 U.S.C.§ 457(f)(3)(B). In the instant case the district states that the superintendent would forfeit all rights to the funds held by the district under the 457(f) plan if the contract is terminated for "cause." However, when the superintendent retires or otherwise terminates employment, the benefits would fully vest. We are unable to find general statutory authori.7.ati�n for employer contributions to 457(f) plans, which are distinguishable from a section 403(b) annuity contract plan. & 12 U.S.C. 457(f)(2)(B). Furthermore, the only exception contained in Minn. Stat.§ 356.24, subd. 1 that appears potentially applicable to such an arrangement is paragraph (a)(4), which permits payments to "a plan that provides solely for severance pay under section 465.72 to a retiring or terminating employee."

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Minn. Stat. § 465.72 authorizes payment of severance pay to employees of school districts and imposes limitations thereon. For example, severance payments generally may not exceed the equivalent of one year's pay and must be paid over a period not to exceed five years from retirement or tennination. In the case of a "highly compensated employee" as defined in section 465. 722, severance pay may not, with certain specified exceptions, exceed six months' pay. See also Minn. Stat.§ 43A.l 7, subd. 11 (1996). It is possible that a 457(t) plan may be established so as to operate within the authorization for severance pay. To the extent that it is so constructed, it is our view that a district is authorized to provide funds to satisfy its obligations under such a plan. Thus, it is our view that a school district is authorized to provide funds to a 457(t) plan only to the extent that it is within statutory authority to provide for severance pay and to contribute up to $2,000 to a 403(b) plan. QUESTION FOUR

If the school district contributes to the superintendent's 403(b), 457(t) or other types of deferred compensation plan(s), a.re such amounts salary under Minn. Stat. §43A.l 7?

OPINION

The question is answered in the affirmative, with respect to contributions to the 403(b) plan. Minn. Stat. § 43A. l 7, subd. 9 explicitly provides that "Deferred compensation and payroll allocations to purchase an individual annuity contract for an employee are included in determining the employee• s salary." The plain language of the statute includes as salary, deferred compensation and payroll allocations used to purchase an individual annuity contract such as the 403(b) plan in this case. Up to $2,000 of the contribution may be considered a payment from the employer, as discussed in the answer to Question Three. The remaining contribution would be permitted only as a

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payroll allocation. However, this distinction is meaningless for purposes of Minn. Stat.
§ 43A. l 7, subd.9, which specifically includes deferred compensation as well as payroll allocations in determining the employee's salary. Thus, the entire amount of contributions to a section 403(b) plan should be included for purposes of the salary cap calculation. �Op.Atty. Gen. 59a-41, February 22, 1984 .. It is suggested that these amounts might be excluded pursuant to Minn. Stat. § 43A.17, subd. 9(1) which excludes from the calculation of total the amount of"pension benefits or like benefits the cost of which is borne by the employee or which is not subject to tax as income under the Internal Revenue Code of 1986." We do not agree. The salary cap is imposed by subdivision9 upon"salary and the value of all other forms of compensation." The items listed in paragraphs (1), (2) and (3) of that subdivision are excluded from consideration as"other forms of compensation." However, since the payments in question are expressly included as"salary," we do not reach the question whether they might be considerep."other forms of compensation." Furthermore, the payments in question would not seem to constitute a pension or like "benefit." Rather, they would be in the nature of contributions. Consequently, it is our view that the amounts in question are included in the salary cap computation. Inclusions of contributions to the 457(f) plan would, in our view, not be included, to the extent that the superintendent obtains no vested right thereto prior to termination. As noted above, however, such a plan would be authorized only to the extent that it meets the requirements for severance pay. To the extent that entitlement to the amounts contributed would vest in the superintendent prior to termination, it is our view that those amounts would, at the time of the vesting, be considered "salary" for purposes of the cap. FACTS

Many school districts provide to their superintendents"expense reimbursements" for the use of the superintendents' personal vehicles in addition to the mileage or monthly allowances authorized by Minn. Stat. § 471.665 . These

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"expense reimbursements" include payments for insurance, maintenance, fuel and other expenses. One district's superintendent's contract provides as follows:

"VI. Transportation:
Pursuant to Minn. Stat.§ 471.665, subd. 3, the School Board shall provide the Superintendent the monthly amount of $387.00 to compensate the Superintendent for business usage of his personal vehicle. All expenses for its operation, including insurance and maintenance, shall be home by the School District."

You then ask the following question:

QUESTION FIVE

Does a school district have the statutory authority to pay the insurance, maintenance, fuel, or other expenses of their superintendent's personal vehicle in addition to mileage or periodic reimbursement authorized by Minn. Stat.
§ 471.665?

OPINION
We answer this question in the negative. Prior Opinions have clearly established our view that, absent specific statutory authority a political subdivision may not provide an officer or employee a vehicle for personal use or pay the costs associated with such a vehicle. See. e.�.. Ops. Atty. Gen. 359b, October 24, 1989, 104a-9, December 28, 1994. Minn. Stat§ 471.665 permits a mileage or periodic allowance to be paid to an employee for use of a personal automobile "in the performance of official duties." We are aware of no statute authorizing any payments associated with employees' personal vehicles in addition to those authorized by section 471.665. S-". Op. Atty. Gen. 104a-9, December 28, 1994. Since the payments of all fuel, insurance, maintenance, etc., would underwrite both business and personal use, such payments would be unauthorized. Furthermore, insofar as payments to an employee for use of a personal vehicle on official business are intended to reimburse the employee in part for personal expenses associated with

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ownership and operation of such a vehicle, the payments you describe would result in reimbursing the employee for expenses not incurred.

FACTS

During the OSA's review of the superintendents' contracts, several contracts were discovered_ in which the superintendent received expense allowances. For example, one district's contract states as follows:

The Superintendent shall receive an allowance of$615.00 per month for general business related expenses not otherwise covered in this contract. Effective January 1, 1992 and each January thereafter, the allowance for the calendar year shall be increased by 3% per year.

Under this provision, the superintendent received a set payment of$615 or more each month. This amount was paid in addition to the Superintendent being reimbursed for other expenses under the superintendent's contract. There was no procedure under which the superintendent presented for reimbursement receipts or proved any claim for individual expenditures to be reimbursed by this particular allowance. The OSA determined that this monthly payment constitutes "salary" under Minn. Stat. § 43A.17, subd. 9.

You then ask the following question:

QUESTION SIX

Must expense reimbursements paid to officers or employees of school districts be paid in accordance with Minn. Stat.§ 471.38 and related provisions including§ 471.391?

OPINION

We answer this question in the affirmative. Minn. Stat.§ 471.38 requires that any account, claim or demand against a school district shall not be allowed until the person claiming payment submits the claim, itemized to the extent possible, in writing, and signs a declaration that the amount is just and correct, and that no part has been paid. This statute covers claims for reimbursement of expenses, and payment of a claim is conditioned on an expense actually having

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been incurred. See e,"., Leskinen v. Pucelj, 262 Minn. 461, 115 N.W.2d 346 (1962) (claims of town officers for traveling expenses must be supported by specific showing of each expense incurred); Yao Loh v, Waseca County. 265 N.W. 298 (Minn. 1936) (county school superintendent's claims for expenses must be itemized and verified). On the other hand, if there is no requirement that an expense actually be incurred to trigger "reimbursement," then the only requirement for payment is that the employee be on the payroll. If that is the case, the payment is not an expense reimbursement, but salary.

QUESTION SEVEN

Does a school district have the authority to pay an "expense allowance" without receiving receipts or proof of claim and exclude the amounts paid from the computation of salary under Minn. Stat. § 43A.17?

OPINION

We answer this question in the negative. Min.ti. Stat. § 43A. l 7, subd. 9(3) only allows an exclusion from the calculation of total compensation for "actual expenses incurred" which have been reimbursed. Accordingly, for a reimbursement to qualify as an amount excluded from an employee's total compensation, it must have been reimbursed in accordance with Minn. Stat.
§ 471.38.
In the situation you describe, the superintendent's expense allowance is paid monthly, at a rate set by the contract, and escalates each year. It is paid in addition to the "Duty Related Expenses" reimbursed under another provision of the contract. It is not contingent upon the superintendent actually incurring any expenses, but merely being on the payroll. These characteristics demonstrate that the "allowance" is simply an escalating payment of salary. A similar conclusion was reached in Op. Atty. Gen., 16lb-4, Jan. 24, 1989, which stated that any amount paid for a housing allowance was an element of salary authorized by the school

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board's general authority to compensate its employees. That allowance was therefore included in the calculation of salary for purposes of applying Minn. Stat.§ 43A.17, subd. 9. FACTS

Split dollar insurance arrangements allow an employer to fund the purchase of cash value insurance for an employee. Under a split dollar life insurance policy, the empfoyer pays premiums, styled as advances. These premiums and the earnings they generate fund the provision of life insurance protection to the employee and, it appears, an accumulating cash value which the superintendent can obtain in lieu of death benefit upon terminating the policy prior to death. Such policies may also permit the owner to borrow against the cash value while the policy remains in force. The advanced premiums are ultimately repaid to the employer from the death benefit if the employee dies while the agreement is in effect If the agreement terminates before the employee dies,.the advanced premiums are repaid from the policy's cash value (assuming it is sufficient). However, during the intervening time, the school district has lost both the use of the funds and any return which could have been received if the funds had been invested.

One District agreed to pay for a $300,000 "split dollar life insurance agreement to provide life insurance protection for the Superintendent" This benefit was in addition to term life insurance. In response to an OSA inquiry concerning the split dollar life insurance policy, the District averred that the split dollar life insurance policy was a whole life insurance policy with ultimately "no cost to the School District."· The school district also stated that, under the terms of the Agreement, the School District is ultimately fully reimbursed for its premium contribution. Further, the School District had the protection of a lien against the death benefit to fully reimburse the School District in the.event of the untimely death of the superintendent.
..
Based upon these facts you present substantially the following question:

QUESTION EIGHT

Does the split dollar life insurance policy have a cost to the school district that must be included in the computation of salary and other forms of compensation for the employee? If so, is the cost to the school district the annual premium payments paid by the school district or is some other method of cost valuation appropriate?

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OPINION
We answer the first part of this question in the affinnative. While Minn. Stat.§ 43A.17, subd. 9(3) provides for an exclusion from total compensation for tenn life insurance, there appears no exclusion for the cost of other fonns of life insurance including the "split dollar" insurance you have described. Thus, assuming the district is authorized to provide this type of insurance,2 its cost must be included in computing compensation pursuant to Minn. Stat.
§ 43A.17, subd. 9.
While the matter is not entirely clear, it is our view the amount to be included as compensation is the amount of the premium paid by the district less any reimbursement actually received by the district in the year in which the premium is paid. Minn. Stat.§ 43A.l 7, subd. 9 provides that "The value of other forms of compensation shall be the annual cost to the political subdivision" (emphasis added). Thus, while the district may eventually recover part or all of the money paid out for the policy,3 it is the "annual cost" rather than the net cost over the life of the policy that must be used in computing the value of compensation in any one year for purposes of applying this compensation limit. In that regard, it is our view that each year of the superintendent's contract
.must be considered separately without regard to the potential that all or part of the district's costs might be recovered at some indefinite future time. Consequently, for any year in which the district receives no reimbursement of the premium payments, the amount to be included in computing the superintendent's compensation would be the total premium paid by the district. 2 Minn. Stat.§ 471.61 authorizes school districts to insure or protect officers and employees: "under a policy ... or contract...of group insurance or benefits, covering life ...." Absent other express statutory authority, this section defines this limit of the district's power to provide insurance for employees. Lilly v. City of Minneapolis, 527 N.W.2d 107 (Minn. Ct. App. 1995) To the extent that the policy described is not a group policy and provides for benefits in addition to a death benefit, it might be deemed outside the authority granted by the statute. 3 It appears, however, that in the example presented. the district has waived any lien or claim against the superintendent for repayment of premiums paid by this district.

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It might be argued that, where the district, in consideration for the premium payment, receives an absolute claim for repayment ofthe premium at an indefinite future date, the annual cost could, theoretically, be computed as the amount ofthe premium, less the present value ofthe lien against the death benefit or cash value for the amount ofthe premium as determined pursuant to actuarial and account�g tables. We disagree. Even ifit were possible to value accurately the right to receive reimbursement at an uncertain future date, we think it is clear that the term "cost" does not imply any netting ofthe funds given against the value ofproperty received. QUESTION NINE

Does the Commissioner ofChildren, Families and Learning have the authority to compel school districts' compliance with the compensation cap set forth in Minn. Stat.§ 43A.17, subd. 9 either directly, by reducing a superintendent's salary, or indirectly, by withholding state school aids from a school district which is not in compliance with the compensation cap statute?

OPINION

We answer in the negative. The general authority and responsibility for managing the affairs of a school district and for fixing the compensation lies in the school board. �. �. Minn. Stat.§§ 123.33 - 123.35. We are aware ofno statutory authority for the Commissioner to modify, administratively, compensation fixed by the school board. Likewise, we are not aware ofany authority for the. Commissioner to reduce state aids to districts for violations ofthe section 43A.17 limitations. There are a number ofstatutory violations for which the Commissioner is expressly directed to reduce aids. �. Minn. Stat.
§ 124.15. Transgressions ofthe salary cap, however, are not included. Absent any such statutory authority, it is our opinion that the Commissioner is not empowered either to modify a superintendent's contract or to withhold state aids to which a district is otherwise entitled, pursuant to statute. £=, .c...g... Waller v. Powers Dept. Store, 343 N.W.2d 655,657 (Minn. 1989) (administrative agency can only exercise power in manner prescribed by legislative authority).

Very truly yours,

HUBERT H. HUMPHREY III
Attorney General

KENNETII E. RASCHKE, JR.
Assistant Attorney General

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