School Board Broke Contract When It Suspended 403(b) Contributions

The Supreme Court of Georgia has found that by suspending its contributions to a 403(b) plan without a two-year notice to participants, the DeKalb County School District and the DeKalb County Board of Education violated an employment contract with school district employees.

According to the court opinion, in 1979, the Board withdrew from Social Security in favor of an alternative benefits plan, which included a Tax-Sheltered Annuity (TSA) Plan managed by an outside insurance company. In May 1982, the Chairman of the Employee Trust Fund Advisory Committee proposed an amendment to the Board’s bylaws and policies concerning the “Social Security/Alternative Plan of Benefits.”

The proposal said, in part, “The amount of funds placed annually in the alternative program shall equal the amount that the school system would have paid had the school system remained under Social Security, and “[The Board] shall give a two-year notice to employees before reducing the funding provisions of the Alternative Plan to Social Security.”

The policy was voted on and adopted at the next Board meeting.

In 1983, the county’s Risk Management Director presented the Board with a proposed TSA Plan document that detailed a defined contribution, employer-funded 403 (b) plan. The Board voted to adopt the 1983 TSA Plan during the same meeting at which it was first presented. In 2003, the Board approved a restatement of the TSA Plan, once again adopting the document at the same meeting at which it was presented.

The TSA Plan remained in effect until July 2009, when the Board held an emergency meeting to discuss the reduction of state funding for all of Georgia’s school systems due to the economic recession. The Board voted to “temporarily suspend” the TSA Plan and substantially amended the plan’s funding provisions, ending all contributions to certain employees’ supplemental retirement accounts as of July 31, 2009. Though there was no corresponding amendment to the Board’s bylaws at this time, in June 2010, the Board amended its bylaws, eliminating the two-year notice provision adopted in 1982.

In March 2011, participants filed suit, alleging that the Board and the District had breached the contractual agreement to provide a two-year notice prior to reducing funding to the supplemental retirement plan. After a hearing, the trial court found that neither the 1979 Resolution nor the 1982 Policy formed an enforceable contract between the employees and the School District as a matter of law. However, the Georgia Court of Appeals reversed the trial court’s grant of summary judgment.

The Board cited Georgia case law that provides, a statute or ordinance establishing a retirement plan fora government employee becomes a part of [a] contract of employment as soon as: (1) [the employee] performs services while the statute or ordinance is in effect; and (2) [the employee] contributes at any time any amount toward the benefits [they are] to receive. The Board contended that the Court of Appeals erred in reversing the trial court because: (a) none of the Board’s actions in this case were legislative acts; (b) the Board’s 1982 Amendment did not establish a retirement plan; and (c) the participants did not contribute to the retirement plan and, therefore, did not provide the proper consideration in order to form a contract.

The Georgia Supreme Court looked to basic contract principles in order to determine whether the Board’s actions created a binding contractual relationship with its employees. The court opinion says, “To constitute a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contract can operate.” The court determined that when the Board amended its bylaws to provide its employees with an alternative plan to Social Security funded in the same amount, the Board would have paid under Social Security, and to “give a two-year notice to employees before reducing the funding provisions of the Alternative Plan to Social Security,” it created a standing offer by the Board to provide a two-year notice to all its employees, current and new, before reducing funding to the plan benefits for those employees. And each employee accepted this offer by performing work pursuant to these terms.

The Board contended that, because the 2003 TSA Plan specifically prohibited employees from contributing to their retirement, the participants failed to provide the consideration necessary to form a contract. “We acknowledge the conflict in Georgia case law concerning whether a monetary contribution by an employee is required in order for a retirement plan to be considered a part of an employment contract; however, the true governing principle is to treat the government’s agreement to pay a pension as a contract where there is consideration flowing from both parties,” the state Supreme Court said in its opinion.

“Appellants offered their employees a retirement benefits plan, and also promised to provide two-years’ notice before reducing any of the funding provisions of the benefits plan. In exchange, the employees agreed to begin to work or continue to work for Appellants, and to wait until their retirement to collect these funds. That bargain contemplated the necessary consideration flowing from both parties, thus making the two-year notice provision a part of Appellees’ employment contracts,” the court determined.

The Board contended that its subsequent approval of the 1983 TSA Plan modified the parties’ original agreement and, therefore, must control the analysis. The Georgia Supreme Court noted that a section of the Board’s bylaws states, in pertinent part, “A proposed alteration, amendment, repeal, or new policy must be submitted in writing to the Board, for review by the superintendent and the public, at a regular monthly meeting with a copy for each member. No proposed alteration, amendment, repeal, or new policy shall be voted upon until the next regular monthly meeting subsequent to the meeting at which the proposal is offered.” And, according to the court, by the bylaw’s plain language, when the Board does not follow its specific protocols concerning policy adoption, then a previously enacted bylaw cannot be amended by a later, non-conforming act of the Board.

The court pointed out that the Board followed the required protocols when it enacted the 1982 policy—i.e., the amendment was proposed, in writing, at a regular monthly meeting, and approved by a majority vote of the Board at the next regular monthly meeting. However, the Board did not follow these protocols when it adopted the 1983 and 2003 versions of the TSA Plan—each was adopted at the same meeting at which it was presented.

“Based upon the language of the Board’s own bylaws, the TSA Plan’s provision providing for the termination or suspension of the plan ‘at any time’ cannot amend the two-year notice provision embodied in the bylaws by way of the 1982 Amendment,” the opinion states.

Finally, the Board argued that, to the extent that the retirement plan was a part of employees’ employment contracts, employees did not have a vested right in the contract benefits because the TSA Plan states that it can be amended at any time. However, because the court determined that the 1982 Policy, and not the TSA Plan, controls as to the two-year notice provision, the argument failed.

The Georgia Supreme Court affirmed the Court of Appeals decision.

The suit seeks repayment of past contributions and future payment until proper notice is given. According to the Atlanta Journal Constitution, the district had annually contributed 6% of a participating employee’s salary. During the 2009-10 school year, DeKalb was scheduled to pay $26.5 million into the plan. If it is found to be liable for that much for each year since, the district could be responsible for more than $250 million, just more than 20% of its annual operating budget.

The newspaper also notes that in late 2015, the DeKalb school board voted to establish a 403(b) plan with a match of employees’ contributions up to 2% of deferrals to the plan—less than the halted plan’s 6% contribution that required no employee contributions.