The city Office of General Counsel recommended that JEA officials dissolve its board-approved employee performance-based bonus program because of questions of its legality under the City Charter, state and federal law.
A memo from General Counsel Jason Gabriel dated Nov. 12 urged JEA to terminate its Long Term Performance Based Unit Plan. A week later, utility Managing Director and CEO Aaron Zahn announced the plan would not be implemented.
In the memo, Gabriel questioned whether the JEA board has the authority to approve and implement a plan to invest city money without City Council authorization.
“Because of how unique this suggestion was to the government sector, it was important to (the Office of General Counsel) to conduct its own research with respect to the validity and legality of the plan under federal, state and local law, with special emphasis on what is permitted required or prohibited under the Charter,” Gabriel wrote.
The plan was designed to offer 100,000 performance units to all JEA employees for purchase at $10 each. The unit value would increase as the utility hit financial targets within a three-year cycle.
The JEA board approved the performance incentive program July 23. It was part of a suite of resolutions giving Zahn and senior staff the authority to explore selling the public utility and approve employee job protection and retention bonuses if JEA were to be sold.
The payout to employees was billed as a performance incentive for JEA employees “to pay attention to the financial health of the utility,” JEA Vice President and Chief Customer Officer Kerri Stewart said Nov. 22.
The program also would address “a lack of buy-in or skin in the game for employees,” she said.
The board authorized 30,000 units to be sold in the first payout cycle.
Third-party consulting firm Willis Towers Watson drafted the plan framework, according to JEA officials. Gabriel's memo states the utility also had its outside legal counsels, Foley & Lardner and Pillsbury Winthrop Shaw Pittman, review the program — the same firms providing JEA consulting services in its possible sale.
Scrutiny begins
The plan came under public scrutiny after the Council Auditor’s Office issued a memo Nov. 18 that included a financial assessment showing the incentive program could cost JEA up to $636.6 million if the utility was sold to a private company.
Billy’s analysis showed the three-year cost of the performance incentives to JEA ratepayers when the plan sold 100,000 units could be $101.35 million, based on a comparison of the utility’s audited financial statements from fiscal years 2018 and 2015.
This differed from JEA's calculations. Billy's memo stated that the utility's internal analysis showed the employee incentive program would cost ratepayers $15.778 million over the 3-year life of the program, or $167.78 per performance unit.
The general counsel's review, according to Gabriel's memo, determined that the performance program would not be allowed as drafted under the city Charter.
Because the performance units were investing city money, Gabriel wrote that “at a minimum” Council approval would be needed to implement the plan.
While Zahn recommended the JEA board kill the plan, the board did not meet in November. The board is expected to meet in December but has not released an agenda.
The Council approved a resolution 19-0 at its Nov. 26 meeting encouraging the JEA board to rescind the performance plan. The legislation was introduced by Council member Randy DeFoor.
Council member Matt Carlucci has called for Zahn's resignation for his handling of the performance unit plan and JEA's effort to privatize.
Gabriel wrote “should JEA insist on pursuing some version” of the performance bonuses, the utility leadership needs to meet several prerequisites:
• Obtain Council review and approval.
• Obtain an opinion based on Florida statute from a federal agency or agencies on its taxable status.
• Obtain an opinion from the IRS about possible adverse tax consequences for the utility.
• Removal of any plan requirement that obligates JEA to pay excise tax, interest or penalties.
• Removal of non-JEA employees as plan participants.
Gabriel's memo states that, at the time of the JEA board's July 23 vote, his office understood the plan “in general conceptual terms as an employee incentive program.”
But the memo goes on to say JEA officials assured the general counsel's office that it had time between the board's approval and employee enrollment to “learn the details of the plan, review outside counsel's findings as to the validity and legality of the plan” and independently research and provide JEA with a position and conclusions.
JEA Vice President and Chief Legal Officer Lynne Rhode responded to then-board member Alan Howard, who asked her during the July 23 board meeting if the plan had been reviewed by the general counsel's office.
Rhode, who also answers to the Office of General Counsel, told Howard: “Yes sir.”
Timeline
JEA officials said the decision to postpone the plan was not determined by financial analysis, but by the uncertainty whether the utility will remain municipal or become a private company.
However, Zahn's initial announcement that the plan would be “suspended indefinitely” came after a Nov. 5 meeting with the general counsel's office where Gabriel recommended the plan be “officially dissolved.”
According to Gabriel's memo, that meeting included Zahn, JEA Chief Administrative Officer Hershel Vineyard, Assistant General Counsel Lawsikia Hodges, Rhode and the utility's outside lawyers. The topic was legal issues with the performance bonuses.
Gabriel said that while similar stock option programs are common for comparable multibillion-dollar companies in the private sector, it's “unique” for a public sector entity.
“This fundamental (performance unit plan) principle is not only a novel concept to our Consolidated Government but is also novel to government concepts and principles in general.”
Zahn informed Gabriel that JEA had decided to postpone implementation of the employee incentive program in a Nov. 12 letter. At that time, the utility CEO did not state an intention to recommend the board vote on the postponement.
Gabriel responded to Zahn that day, reminding the JEA CEO of his recommendation.
“On November 12, 2019, the JEA CEO sent a letter to me informing me officially that JEA was 'postponing indefinitely' the PUP. On that same date I, in turn, sent JEA a letter reiterating that there were outstanding legal issues with the plan as currently structured,” Gabriel wrote.
A Nov. 18 letter from JEA board Chair April Green to the Council auditor followed, stating the board would “address the indefinite postponement of the Long-Term Performance Unit Plan” at its Dec. 17 meeting.
Green’s letter left wiggle room to reinstate the employee incentives, stating the program “would be best implemented, if ever, post decision on the strategic direction of JEA as determined by the board.”
The next day, Zahn sent a letter to Council President Scott Wilson that states JEA management will recommend the board terminate the long-term incentive plan at its December board meeting.
JEA officials said that Zahn's decision was independent of the general counsel's opinion.
“JEA management and the board requested the formal opinion of the state Attorney General on Oct. 1 to ensure that the draft plan was fully compliant with Florida law,” JEA Media Relations Manager Gina Kyle said in an email Wednesday night. “The plan was canceled by CEO Aaron Zahn prior to the issuance of the (office of general counsel) opinion.
“Additionally, it is important to note that JEA CFO Ryan Wannemacher would not have established the value of the performance units under the draft performance unit proposal. They would have been established by a third-party auditor.”