STATE OF SOUTH DAKOTA
OFFICE OF
THE ATTORNEY GENERAL

December 4, 1974

Mr. Arthur L. Rusch
Clay County State's Attorney
Vermillion, South Dakota 57069

OFFICIAL OPINION NO. 74-50

The legality of city, city manager, and trustee contracts for deferred compensation and retirement income for city managers

Dear Mr. Rusch:

You have submitted the following factual situation:

The City Manager, Vermillion, has proposed (1) to enter into a written agreement with the city of Vermillion as employer, and (2) the city of Vermillion enter into a written agreement with the International City Management Association as trustee pursuant to the terms both of which a portion of the city manager's salary would be deferred. Pursuant to the agreements, a specified dollar amount or percent of compensation of the salary authorized by ordinance would be deferred compensation., Each month, after the monthly salary was earned, the portion specified as deferred compenastion would be paid by the city to the trustee who will hold, invest, and reinvest, the same. Pursuant to the terms of the two contracts, the fund would remain the property of the city until the employee reaches an age of retirement (also specified by the contract), when by contract, the trust fund and accumulated earnings would be paid to the employee provided that at the employee's termination of employment, the accumulated trust fund, may, at the city's option, be transferred to a new employer.

You have requested an opinion on the following question:

Would it be lawful for the city of Vermillion to enter into such contracts and are they legally binding on all parties?

SDCL 9-12-2 reads:

Every municipality shall have power:

(1) To control its finances and property;

(2) To levy and collect taxes for general and specified purposes on real and personal property within the limits allowed by law;

(3) To appropriate money for authorized purposes and provide for the payment of the debts and expenses of the municipality.

SDCL 9-14-28 reads:

Except as otherwise specially provided, the governing body of every municipality shall fix and determine by ordinance the amount of salaries and compensation of all municipal officers and the times at which the same shall be paid.

However, Chapter 35 of the 1974 Session Laws, Section 24, reads:

No political subdivision or public corporation, including municipalities, counties and chartered governmental units, may establish any retirement plan after the effective date of this act, unless such political subdivision or public corporation becomes a participating unit of the system created in this act.

It appears from the contracts contemplated that this would be a trust fund retirement system set up for this particular employee. It would not be in the manner of a payroll deduction as authorized under SDCL 3-10-8, nor would it seem to qualify as a tax sheltered annuity under SDCL 3-10-4 through 3-10-7. There is no vested interest gained by the employee, as in an annuity. There is direct municipal participation that could, by the contract, include matching funds added by the municipality, as in a standard retirement system, rather than simply deducting moneys to pay for an annuity.

What the city would be doing then is deferring some of the compensation normally given to the employee that would be put into a trust fund to be administered by the International City Management Association as trustee. The effect is much the same as a deduction that is automatically put into a retirement fund such as the new statewide Public Officers and Employees Retirement System.

It would appear then that the proposed system requested by the city manager of Vermillion would be in contravention of Section 24, Chapter 35 of the 1974 Session Laws.

Respectfully submitted,

Kermit A. Sande
Attorney General

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