Does a Texas school employee's vacation-time payout count toward Teacher Retirement System pension benefits?

TX AG Opinion GA-0300: Does a contract calling vacation payout "salary" make it count toward TRS benefits?

Plain-English summary

A state representative asked whether a payment for accumulated vacation time, if an employment contract labeled it as salary, would count as "creditable compensation" for figuring a member's Teacher Retirement System (TRS) benefits. The stakes matter because a member's retirement annuity is based on average annual compensation during the three years of highest pay, so any payment that inflates compensation in those years can meaningfully raise a retiree's benefit.

The opinion concluded the answer is no, regardless of how the employment contract characterizes the payment. Government Code section 822.201 defines creditable "salary and wages" as normal periodic payments that accrue on a regular basis in proportion to service performed, and separately, expressly excludes payments for unused vacation or sick leave from that definition. A TRS administrative rule mirrors the statute. Because a payment for accumulated vacation time is not earned in proportion to current service, and because the statute names it as an express exclusion, it fails the test for creditable compensation on two independent grounds. The opinion also rejected an argument that TRS's 2001 repeal of a rule presuming certain compensation was "converted" from noncreditable pay changed this analysis; the repealed rule was only an administrative tool for spotting improperly reported compensation, and its repeal did not touch the statute's own definition of what counts as salary and wages in the first place. Finally, the opinion noted that parties to an employment contract cannot agree around a state law that says otherwise, drawing an analogy to open records law, where a private confidentiality agreement cannot override a governmental body's statutory disclosure obligations.

Currency note

This opinion was issued in 2005. 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.

Who this opinion affected (as of 2005)

School district employees and administrators negotiating employment contracts: The opinion told these parties that labeling a vacation-time payout as "salary" in a contract would not make it count toward TRS retirement benefits, since the statutory exclusion for unused vacation and sick leave controls regardless of contract language.

The Teacher Retirement System of Texas: The opinion confirmed TRS's own reading of section 822.201 and its administrative rule, and rejected an argument (raised in a brief submitted during the opinion process) that a 2001 rule repeal or section 825.110 limited TRS's authority to treat vacation payouts as noncreditable.

Members approaching retirement with large accumulated vacation balances: The opinion meant that these members could not rely on a contractual characterization of a vacation payout as salary to boost the compensation figure used in their retirement annuity calculation.

Common questions

Does a payout for unused vacation time count toward a Texas teacher's retirement benefit calculation?
No, according to this opinion. Government Code section 822.201(c)(3) expressly excludes payments for unused vacation or sick leave from "creditable compensation," regardless of how an employment contract labels the payment.

Can an employment contract override the statutory exclusion by calling the vacation payout "salary"?
No. The opinion concluded that the parties' agreement in an employment contract that a payment is creditable compensation does not overcome contrary state law, comparing it to how a private confidentiality agreement cannot override the Public Information Act's disclosure requirements.

Did TRS's 2001 repeal of its "conversion" presumption rule change whether vacation payouts are creditable?
No. The opinion agreed with TRS that the repealed rule was only an administrative presumption used to flag suspicious compensation patterns; its repeal did not alter the statutory definition of salary and wages, which still expressly excludes vacation payouts.

Who decides whether a specific payment under a contract is creditable or noncreditable compensation?
TRS does, as a fact question. The opinion noted that whether a particular payment is creditable compensation involves resolving facts specific to that payment, which is beyond what an attorney general opinion can decide.

Background and statutory framework

The Texas Constitution requires the legislature to establish the Teacher Retirement System to provide benefits for employees of public schools, colleges, and universities. TRS is governed by Government Code title 8, subtitle C, and its board of trustees administers the system and adopts rules on membership eligibility, fund administration, and related matters. A member's benefit level depends on compensation: the standard service retirement annuity is calculated from the member's average annual compensation during the three years of highest annual compensation, multiplied by 2.3 percent for each year of service credit, so payments that inflate compensation during those years can significantly raise the resulting benefit.

Section 821.001(4) defines "annual compensation" as compensation reportable and subject to contributions under section 822.201, which in turn defines what compensation may be credited in benefit computations, commonly called "creditable compensation." Section 822.201(a) generally treats a member's "salary and wages for service" as creditable, and section 822.201(b)(1) defines salary and wages as normal periodic payments that accrue regularly in proportion to service performed. Section 822.201(c)(3) then expressly excludes several categories from salary and wages, including payments for unused vacation or sick leave. A TRS rule, 34 Tex. Admin. Code section 25.21(b), mirrors this framework, treating as creditable only payments that accrue proportionally as work is performed, are paid at fixed intervals, and are not otherwise excluded; subsection (d)(3) of the rule specifically excludes payments for accrued sick leave or vacation from annual compensation, while still crediting normal compensation continued during vacation or sick leave actually taken.

The opinion addressed confusion arising from TRS's 2001 repeal of a different rule, former section 25.30, which had established a rebuttable presumption that certain salary increases late in a member's career were "conversions" of noncreditable compensation (like unused fringe benefits) into creditable salary, requiring a member to overcome that presumption with clear and convincing documentary evidence. TRS explained the presumption was unworkable in practice and rarely reported by employers. The opinion agreed the repeal was irrelevant to the vacation-pay question: section 822.201's statutory exclusion of vacation payouts from salary and wages never depended on the repealed presumption rule, and current TRS rules still separately exclude vacation and sick leave payouts from annual compensation. The opinion also rejected an argument that Government Code section 825.110, which authorizes (but does not require) TRS to adopt a presumption excluding certain converted compensation, somehow limits TRS's independent authority to examine and exclude a specific payment as noncreditable; the word "may" in section 825.110 grants discretionary rulemaking authority under the Code Construction Act, and its existence does not create a reverse presumption that all reported salary is automatically creditable absent such a rule.

Citations

Statutes and rules:

• Tex. Const. art. XVI, § 67(b)(1)
• Tex. Gov't Code Ann. §§ 825.101-.102 (Vernon 2004)
• Tex. Gov't Code Ann. § 824.203(a) (Vernon 2004)
• Tex. Gov't Code Ann. § 821.001(4)
• Tex. Gov't Code Ann. § 822.201(a)
• Tex. Gov't Code Ann. § 822.201(b)(1)
• Tex. Gov't Code Ann. § 822.201(b)(2)-(8)
• Tex. Gov't Code Ann. § 822.201(c)(3)
• Tex. Gov't Code Ann. § 825.110 (Vernon 2004)
• Tex. Gov't Code Ann. § 311.016(1) (Vernon 1998)
• 34 Tex. Admin. Code § 25.21(b) (2004)
• 34 Tex. Admin. Code § 25.21(d)(3)
• 34 Tex. Admin. Code § 25.21(f) (2004)
• 34 Tex. Admin. Code § 25.30 (repealed 2001)

Other authorities:

• Tex. Att'y Gen. Op. No. JM-672 (1987)
• Tex. Att'y Gen. ORD-514 (1988)
• Tex. Att'y Gen. Op. No. GA-0128 (2003)
• Tex. Att'y Gen. Op. No. GA-0106 (2003)
• Tex. Att'y Gen. Op. No. GA-0078 (2003)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0300
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2005/ga0300.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

January 27, 2005

The Honorable Robert E. Talton
Chair, House Committee on Urban Affairs
Texas House of Representatives
Post Office Box 2910
Austin, Texas 78711-2910

Opinion No. GA-0300

Re: Whether payment for accumulated vacation time, paid as salary under an employment contract, is creditable compensation for purposes of determining Teacher Retirement System benefits (RQ-0251-GA)

Dear Representative Talton:

You ask whether payment for accumulated vacation time, paid as salary under an employment contract, is creditable compensation for purposes of determining Teacher Retirement System ("TRS") benefits.[1]

The Texas Constitution requires the legislature to "establish by law a Teacher Retirement System of Texas to provide benefits for persons employed in the public schools, colleges, and universities supported wholly or partly by the state." TEX. CONST. art. XVI, § 67(b)(1). TRS is established and governed by Government Code, title 8, subtitle C. See TEX. GOV'T CODE ANN. tit. 8, subtit. C, chs. 821-30 (Vernon 2004). The TRS board of trustees is responsible for the system's general administration and may adopt rules for membership eligibility, funds administration, and other matters. See id. §§ 825.101-.102.

A TRS member's compensation level determines the level of benefits to which he or she will be entitled. For example, the standard service retirement benefit annuity "is an amount computed on the basis of the member's average annual compensation for the three years of service, whether or not consecutive, in which the member received the highest annual compensation, times 2.3 percent for each year of service credit in the retirement system." Id. § 824.203(a) (emphasis added). As a result, payments that increase a member's compensation during the member's three years of highest annual compensation may significantly increase the member's benefits.

Section 821.001(4) defines "annual compensation" for purposes of subtitle C to mean "the compensation to a member of the retirement system for service during a school year that is reportable and subject to contributions as provided by Section 822.201." Id. § 821.001(4). Section 822.201 governs what compensation may be credited in benefit computations, see id. § 822.201(a) ("compensation subject to report and deduction for member contributions and to credit in benefit computations is . . ."), establishing the compensation that you and TRS refer to as "creditable compensation."[2]

Generally, section 822.201(a) defines as creditable compensation "a member's salary and wages for service." Id. The phrase "salary and wages" is defined to mean "normal periodic payments of money for service the right to which accrues on a regular basis in proportion to the service performed," id. § 822.201(b)(1), and other amounts not relevant here, see id. § 822.201(b)(2)-(8). As you point out, section 822.201(c)(3) expressly disqualifies certain payments as creditable compensation, including payments for accumulated vacation time: "Excluded from salary and wages are . . . payments for unused vacation or sick leave." Id. § 822.201(c)(3).

A TRS rule, section 25.21(b), mirrors these provisions. The rule explains that

[s]ome payments made by an employer to a member are not salary or wages, even though the payments may be otherwise considered as compensation under the employment contract or federal tax laws. In general salary and wages creditable and subject to deposit are those types of monetary compensation which:

(1) are earned or accrue proportionally as the work is performed, so that a member terminating employment between pay periods is entitled to a proportional amount of the compensation based on either length of employment or amount of work performed;

(2) are paid or payable at fixed intervals, generally at the end of each pay period; and

(3) are not specifically excluded under subsection (d) of this section.

34 TEX. ADMIN. CODE § 25.21(b) (2004). Subsection (d)(3) of the rule specifically excludes from annual compensation "payments for accrued sick leave or vacation, except that continued payments of normal compensation when vacation or sick leave is actually taken by an employee will be included in annual compensation to the extent otherwise permitted by this section." Id. § 25.21(d)(3). The rule also states that, in determining creditable compensation, TRS may rely on employer certifications or may conduct an investigation to assess whether ineligible compensation has been reported. See id. § 25.21(f).

Government Code section 822.201's plain language resolves your question. Even if a payment for accumulated vacation time is paid as salary under an employment contract, it is not creditable compensation for purposes of determining TRS benefits. Payments for accumulated vacation time earned in past years are not "normal periodic payments of money for service the right to which accrues on a regular basis in proportion to the service performed," TEX. GOV'T CODE ANN. § 822.201(b)(1) (Vernon 2004) (emphasis added), and thus do not constitute salary and wages under section 822.201(a). Moreover, section 822.201(c)(3) expressly excludes payments for unused vacation from salary and wages. See id. § 822.201(c)(3). The parties' agreement in an employment contract that certain payments are creditable compensation for TRS purposes does not overcome contrary state law. Cf. Tex. Att'y Gen. Op. No. JM-672 (1987); Tex. Att'y Gen. ORD-514 (1988) (a governmental body's agreement with a private party to keep information confidential does not overcome Public Information Act disclosure requirements).

We gather that there has been some confusion regarding this issue arising from TRS's repeal in 2001 of an administrative rule that established a presumption regarding conversion of noncreditable compensation to salary, former section 25.30. See 26 Tex. Reg. 6279 (2001), adopted 26 Tex. Reg. 8544 (2001) (repealing former 34 TEX. ADMIN. CODE § 25.30).

TRS adopted section 25.30 pursuant to section 825.110 of the Government Code, which in pertinent part authorizes the TRS board of trustees to adopt rules "to exclude from annual compensation all or part of salary and wages in the final years of a member's employment that reasonably can be presumed to have been derived from a conversion of fringe benefits, maintenance, or other payments not includable in annual compensation to salary and wages." TEX. GOV'T CODE ANN. § 825.110 (Vernon 2004). The rule provided that TRS would "exclude from annual compensation any amounts converted into salary and wages from noncreditable compensation during the last five creditable school years of employment before retirement." 22 Tex. Reg. 6843 (1997) adopted 22 Tex. Reg. 9256 (1997) (codified at 34 TEX. ADMIN. CODE § 25.30(a) (repealed 2001)). The rule established that "conversion of noncreditable compensation to creditable salary and wages occurs when noncreditable compensation is reduced or eliminated and is replaced by creditable salary and wages" and provided that "[a] conversion should normally be presumed when noncreditable compensation provided to a member in a school year is not provided in the immediately following school year and the member's creditable salary and wages for the subsequent year exceeds that of the previous year in which the noncreditable compensation was provided." 19 Tex. Reg. 3565 (1994), adopted 19 Tex. Reg. 9183 (1994) (codified at 34 TEX. ADMIN. CODE § 25.30(d) (repealed 2001)). To overcome the presumption, a member had to submit documentary evidence to TRS that "clearly and convincingly" proved that "the difference was not converted to salary and wages." Id. The rule required employers to certify the amount of noncreditable salary that had been converted to salary.[3]

The repealed rule established a presumption that certain compensation was noncreditable. TRS explains that the rule was unworkable because the presumption was difficult to apply and few employers reported that employees' noncreditable compensation had been converted. See TRS Brief, supra note 2, at 11. We agree with TRS that the rule's repeal has no bearing on whether payments for accumulated vacation time constitute creditable compensation. First, as TRS points out, the rule's repeal did not change the statutory definition of salary and wages, which expressly excludes from creditable compensation payments for accumulated vacation time. See TEX. GOV'T CODE ANN. § 822.201(b), (c)(3) (Vernon 2004). In addition, after section 25.30's repeal, TRS rules have continued to expressly exclude from annual compensation "payments for accrued sick leave or vacation, except that continued payments of normal compensation when vacation or sick leave is actually taken by an employee will be included in annual compensation to the extent otherwise permitted by this section." 34 TEX. ADMIN. CODE § 25.21(d)(3) (2004). And the TRS Benefits Handbook clearly informs members that noncreditable compensation, including payments for unused vacation leave, cannot be used to determine TRS benefits.[4]

Finally, this office has received a brief suggesting that section 825.110 of the Government Code (1) recognizes conversion of noncreditable compensation to salary "as a permitted activity"[5] and (2) limits TRS's authority to determine whether a member's reported compensation includes noncreditable compensation, such as payments for accumulated vacation time.[6] Section 825.110 authorizes but does not require TRS to adopt rules establishing a presumption that certain salary has been converted from noncreditable compensation. See TEX. GOV'T CODE ANN. § 825.110 (Vernon 2004) (the TRS board of trustees "may adopt rules to exclude from annual compensation all or part of salary and wages in the final years of a member's employment that reasonably can be presumed to have been derived from a conversion of fringe benefits, maintenance, or other payments not includable in annual compensation to salary and wages") (emphasis added); see also id. § 311.016(1) (Vernon 1998) ("unless the context in which the word or phrase appears necessarily requires a different construction or unless a different construction is expressly provided by statute[,] '[m]ay' creates discretionary authority or grants permission or a power") (Code Construction Act). Section 825.110 does not recognize conversion of noncreditable compensation to salary as a permitted activity but rather authorizes TRS to adopt a presumption as an administrative tool to identify amounts that may have been improperly reported as creditable compensation. This discretionary authority to adopt an administrative presumption does not establish a reverse presumption that, in the absence of such an administrative presumption, all reported salary must be treated as creditable compensation. Nor does this authority to adopt rules establishing a general presumption preclude TRS from examining particular salary payments to determine whether they are creditable or noncreditable.

In sum, under the governing statute and TRS rule, a payment for accumulated vacation time is not creditable compensation for purposes of determining TRS benefits. Whether a particular payment under a contract is noncreditable compensation, such as a payment for accumulated vacation time, or creditable compensation, such as salary and wages for services performed within the pay period, is a fact matter for TRS to determine, see 34 TEX. ADMIN. CODE § 25.21(f) (2004) (stating that TRS may conduct an investigation to assess whether ineligible compensation has been reported), and is beyond the purview of an attorney general opinion, see Tex. Att'y Gen. Op. Nos. GA-0128 (2003) at 5 (a question requiring resolution of particular facts is "not one in which this office ordinarily engages in the opinion process"); GA-0106 (2003) at 7 ("This office cannot find facts or resolve fact questions in an attorney general opinion."); see also Tex. Att'y Gen. Op. No. GA-0078 (2003) at 2 (stating that this office does not construe particular contracts).

SUMMARY

A payment for accumulated vacation time, paid as salary under an employment contract, is not creditable compensation for purposes of determining Teacher Retirement System benefits.

BARRY R. McBEE
First Assistant Attorney General

DON R. WILLETT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Mary R. Crouter
Assistant Attorney General, Opinion Committee

Footnotes

[1] Letter from Honorable Robert E. Talton, Chair, House Committee on Urban Affairs, Texas House of Representatives, to Honorable Greg Abbott, Texas Attorney General (July 29, 2004) (on file with Opinion Committee, also available at http://www.oag.state.tx.us) [hereinafter Request Letter].

[2] See Request Letter, supra note 1; Brief from Conni H. Brennan, General Counsel, Teacher Retirement System of Texas, to Nancy S. Fuller, Chair, Opinion Committee, Office of the Attorney General at 3, 10-11 (on file with Opinion Committee) [hereinafter TRS Brief].

[3] See 19 Tex. Reg. 3565 (1994), adopted 19 Tex. Reg. 9183 (1994) (codified at 34 TEX. ADMIN. CODE § 25.30(c) (repealed 2001)) ("After a member applies for retirement, each employer of the member during any of the member's best three year's average compensation will, upon request by TRS, certify the amount, if any, of the member's noncreditable compensation previously provided by the employer which was converted into TRS creditable salary and wages paid by the employer during each of the last five creditable school years of the member's employment immediately before the member's anticipated retirement date.").

[5] Brief from Robert A. Schuhman, Feldman & Rogers, L.L.P., to Nancy S. Fuller, Chair, Opinion Committee, Office of the Attorney General at 6 (Oct. 11, 2004) (on file with Opinion Committee).

[6] Id. at 4-6.