    OFPKE   05 THE AlTORNEY   GENERAL.   STATE OF TEXAS

    JOHN CORNYN




                                                   March 17,200O



The Honorable Sherri Greenberg                            Opinion No. JC-0197
Chair, Committee on Pensions & Investments
Texas House of Representatives                            Re:    Whether section 49.069(b) of the Water
P.O. Box 2910                                             Code authorizes a water district to establish a
Austin, Texas 78768-2910                                  retirement system for district directors, and related
                                                          question (RQ-0128-JC)


Dear Representative      Greenberg:

         Section 49.069 ofthe Water Code authorizes a water district to “establish a public retirement
system in accordance with” chapter 810 of the Government Code. TEX. WATER CODE ANN.
§ 49.069(b) (Vernon Supp. 2000). Section 810.001 of the Government Code, with exceptions not
applicable here, generally permits a political entity to establish and maintain a public retirement
system for its appointive officers and employees. See TEX. GOV’TCODEANN. 5 810.001(b) (Vernon
1994). You ask whether section 49.069(b) of the Water Code authorizes a district to establish a
retirement system for district directors.     See Letter from Honorable Sherri Greenberg, Chair,
Committee on Pensions &Investments, Texas House OfRepresentatives, to Honorable John Comyn,
Texas Attorney General (Sept. 28, 1999) (on file with Opinion Committee) [hereinafter “Request
Letter”]. We conclude that it does not authorize a water district to include in its retirement system
district directors who hold elective offices.

        You also ask whether directors “perform service” for an eligible employer under section 457,
26 U.S.C., which codifies the tax treatment oflocal governments’ deferred-compensation plans.    See
Request Letter, supra, at 1; 26 U.S.C. 5 457 (1994); Rhea1 v. Commissioner, 58 T.C.M. (CCH) 229,
23 l(1989). Because this issue properly lies within the province of the Internal Revenue Service and
because the law in this area is unclear, we do not answer the question.

        Your questions center upon section 49.069(b) of the Water Code, which authorizes the
governing body of a water district to establish a public retirement system and a deferred-
compensation plan:

                          The board may establish a public retirement system in
                  accordance with the provisions of Chapter 810, Government Code.
                  The board may also provide for a deferred compensation       plan
                  described by Section 457 of the Internal Revenue Code of 1986 (26
                  U.S.C. [§I 457).

TEX. WATERCODEAim. 5 49.069(b) (Vernon Supp. 2000).
The Honorable   Sherri Greenberg    - Page 2      W-0197)




         The heading of section 49.069, “Employee benefits,” does not by itself limit the reach of
subsection (b) to employees if the statutory text plainly includes water-district officers in the class
of those for whom a water district may establish a public retirement system or a deferred-
compensation plan. Your letter suggests that section 49.069’s heading limits a public retirement
system or a deferred-compensation     plan authorized by subsection (b) to one in which district board
members may not participate. See Request Letter, supra, at 1. A statute’s heading cannot limit the
plain meaning of the statute. See TEX. GOV’T CODE ANN. 5 3 11.024 (Vernon 1998); Hays County
Appraisal Dist. v. Southwest Tex. State Univ., 973 S.W.2d 419, 422 (Tex. App.-Austin 1998, no
pet.) (restating Code Construction Act); Brooks v. State, 682 S.W.2d 437,438 (Tex. App.-Houston
[lst Dist.] 1984, pet. ref d, untimely filed) (same).

         Regardless, we conclude that the text of section 49.069 does not authorize a water district
to establish a retirement system for district directors who hold offices that are, by nature, elective.
Chapter 810 of the Government Code, which section 49.069 incorporates by reference, limits a
political entity’s authority to establish a public retirement system in which only “appointive officers”
may participate. &~TEx.Gov’TCODEANN.              4 810,00l(b)(Vemon    1994); TEX. WATERCODEANN.
 5 49.069(b) (Vernon Supp. 2000). Under section 810.001 of the Government Code, the governing
body of a political entity that is not specifically prohibited from doing so may include in its public
retirement system “its appointive officers.” TEX. GOV’TCODEANN. 3 810.001(b) (Vernon 1994);
see also id. 5 810.001(d) (stating that authority to establish and maintain public retirement system
does not extend to political entity in certain circumstances).     An “appointive” office depends upon
 appointment.     See I OXFORD ENGLISH DICTIONARY578 (2d ed. 1989). Water-district directors
 generally hold elective, not appointive, offices (even though a particular director may be appointed
to fill a vacancy). See TEX. WATER CODE ANN. $4 49.054(b), .055(a), .lOl-,105 (Vernon Supp.
 2000). Accordingly, section 49.069 of the Water Code and chapter 8 10 of the Government Code do
 not permit a water district to establish a retirement system for officials holding elective offices.

         We next consider whether water-district directors “perform service” for an “eligible
employer” in the context of section 457(b), 26 U.S.C., and thus may participate in a water-district-
established deferred-compensation     plan. Under section 457, compensation deferred under an
“eligible deferred-compensation   plan” is included in a participant’s gross income in the taxable year
in which the participant receives the money, not in the year in which the participant earns the
compensation.     See 26 U.S.C. 5 457(a) (1994); id. 5 7701(a)(23) (1994) (defining “taxable year”);
cf id. 5 45 l(a) (1994) (stating general rule that “amount of any item of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer,” unless some
exception applies). Subsection(b) defines the term “eligible deferred-compensation      plan” as “a plan
established and maintained by an eligible employer          . in which only individuals who perform
service for the employer may be participants           .” Id. 5 457(b) (emphasis added). The term
“eligible employer” includes a political subdivision of the state, see id. § 457(e)(l).

        We are unable definitively to answer this question. Whether a given deferred-compensation
plan qualifies for tax deferral under 26 U.S.C. 5 457 is a determination ultimately to be made by the
Internal Revenue Service. See Arizona Governing Comm. for Tax Deferred Annuity & Deferred
Compensation Plans v. Norris, 463 U.S. 1073, 1076 n.1 (1983) (Marshall, J., concurring).
The Honorable Sherri Greenberg      - Page 3       (JC-0197)




         Moreover, the answer is not clear. On the one hand, under the plain language ofthe skdte
a water-district director appears to be eligible to participate in a deferred-compensation       plan
established by the water-district because the director performs services for a water district. See 26
U.S.C. 5 457(b) (1994). Additionally, an officer of a water district may participate in a deferred-
compensation plan created under state law. See TEX. GOV’T CODE ANN. $ 609.102(a) (Vcmon
1994); see also id. 5 609.001(2) (defining “employee” to include “officer or employee of a state
agency or political subdivision”).

          On the other hand, Internal Revenue Service regulations suggest that a water-district director
may not participate in a deferred-compensation       plan under 26 U.S.C. 5 457. Under Internal Revenue
Service regulations, “only         an employee        or      an independent contractor” may participate
in a deferred-compensation        plan under 26 U.S.C. 9 457. See 26 C.F.R. 3 1.457-2(d) (1999)
(emphasis added). The regulations do not define the term “employee,” and the statutory definition
of “employee” does not indicate whether officers of governmental entities are included within the
term. See 26 U.S.C. 5 7701(a)(20) (1994) (defining “employee” for purpose of applying 26 U.S.C.
subtitle A to “include a full-time life insurance salesman who is considered an employee for the
purpose of chapter 2 1, or in the case of services performed before January 1, 195 1, who would be
considered an employee if his services were performed during 1951”). According to the United
 States Supreme Court, however, when the term “employee” is used in the law without an
accompanying       definition, the term presumably         describes “the conventional      master-servant
relationship as understood by the common-law agency doctrine.” Nationwide Mut. Ins. Co. v.
Durden, 503 U.S. 3 18,322-23 (1992) (quoting Community for Creative Non-Violence Y. Reid, 490
U.S. 730, 739-40 (1998)); see Priv. Ltr. Rul. 97-44-009 (July 31, 1997) (applying in context of 26
 U.S.C. $457 common-law definition of “employee”). Thus, “an employer-employee                relationship
 exists if the business for which the worker performs services has the right to control and direct the
 worker, not only as to the result to be accomplished by the work but also as to the details and means
 by which the result is to be accomplished.”        Priv. Ltr. Rul. 97-44-009 (July 3 1, 1997). A water-
 district director is subject to little control (other than the law) from any executive, judicial, or
 legislative authority; consequently, the director is not an employee of the district under the common
 law. See Porter v. Commissioner, 856 F.2d 1205,1208 (8th Cir. 1988); Aldine Indep. Sch. Dist. v.
 Standley, 280 S.W.2d 578,583 (Tex. 1955) (quoting Dunbar v. Brazoria County, 224 S.W.2d 738,
 740 (Tex. Civ. App.-Galveston        1949, writ ref d)) (distinguishing public officer from employee by
 examining whether “any sovereign function of the government is conferred upon the individual to
 be exercised by him for the benefit of the public largely independent of the control of others”)
 (emphasis added). But see Porter, 856 F.2d at 1209 (determining that federal judges are treated as
 employees for purposes of IRA deductibility); see also Fuhrmun v. Commissioner, 73 T.C.M. (CCH)
  1792 (1997) (following Porter). If a director is not an employee ofthe water district, then under the
 regulatory interpretation of 26 U.S.C. § 457, the director may not participate in a water district’s
 deferred-compensation       plan. See Foil v. Commissioner, 920 F.2d 1196, 1201 (5th Cir. 1990)
 (according Internal Revenue Service interpretations of federal law “serious consideration”).
The Honorable   Sherri Greenberg     - Page 4      (X-0197)




                                         SUMMARY

                         Section 49.069(b) of the Water Code does not authorize a
                water district to establish a public retirement system for district
                directors. It is not clear under the law whether water-district directors
                may participate in a deferred-compensation      plan that the district has
                established under 26 U.S.C. 5 457.




                                                 Attorney General of Texas



ANDY TAYLOR
First Assistant Attorney General

CLARK KENT ERVIN
Deputy Attorney General - General Counsel

ELIZABETH ROBINSON
Chair, Opinion Committee

Kymberly K. Oltrogge
Assistant Attorney General - Opinion Committee
