Date:September 11, 2012
As published in PublicCEO.com*
Cities, counties, schools and special districts in California are fortunate that citizens step to the plate every year to run and serve in public office. Elected and appointed officials wield the power of government and serve as guardians of taxpayer dollars and the public’s trust. Thomas Jefferson said that those who assume a public trust should consider themselves public property because they serve as stewards of both the public’s resources and trust. This also means that the public holds those officials to high standards of ethical conduct.
Since most public offices are part-time and provide little or no pay, most elected and appointed public officials continue to work in the private sector. To avoid potential conflicts of interest and to protect the public’s welfare, the California Legislature and voter initiatives have created a complex scheme of more than 350 statutory laws and regulations that set minimum standards of ethical conduct for public officials.
A series of these ethics law statutes specifically deal with a public official’s potential financial conflicts of interest involving income, gifts, ownership, employment or other interests in private business entities. Perhaps the biggest landmine for public officials involves a lesser-known law buried deep in the Government Code concerning potential conflicts of interest in government contracts. Known as Section 1090, this law bans any public official — or a public agency consultant or independent contractor whose official capacities carry the potential to exert influence over a public agency’s contracting decisions – from having any direct or even indirect personal interests in the agency’s contracts.
No Man May Serve Two Masters
Section 1090 can be traced back to the historical self-dealing admonition that “No man may serve two masters” and the state’s first conflict of interest law established in 1851. The basic prohibition has remained unchanged banning a public official from being financially interested in a contract in both the official’s public and private capacities. The goal is to prevent public officials from exploiting their positions for their personal benefit. Eliminating temptation for public officials, avoiding the perception of impropriety and obtaining their undivided loyalty are the underlying public policy goals served by this important statute.
Section 1090 violations can lead to serious civil and criminal consequences. All that is required for a violation is that the public official acting in his or her official capacity knowingly made or caused to be made a contract in which he or she had a financial interest. Even if the contract is fair and in the best interest of the public agency it is void. Willful violation of Section 1090 may be punished as a felony. For an official to act “willfully” under 1090, his or her actions under the contract must be purposeful and with knowledge that he or she might have a financial interest in the contract. Disgorgement of profits or anything received is a consequence of both civil and criminal liability. Payments made to the contracting parties must be returned to the public agency and no claim for future payments under such contract may be made. The public agency is entitled to retain any benefits which it receives under the contract.
In addition, criminal liability could involve a state prison sentence and a lifetime bar from holding office in California. When the official enters into a contract that is later found to be in violation of Section 1090, the official has committed a crime. This is true even when the official did not intend to secure any personal benefit, and even if the official did not intend to violate Section 1090. Because of the strict liability nature of this statute, public officials need to be ever vigilant when entering into public contracts in their official capacity.
The objective of Section 1090 is to prevent any personal interest from influencing an official’s decision and to void any contract that had been obtained where a conflict of interest existed. The prohibition applies even when there is only a possibility of a financial benefit. As one court noted, the public is harmed just as much as when a public official acts with the hope of a financial gain as when the official is motivated by certain financial gain.
A Conflict for One is a Conflict for All
The basic rule under Section 1090 states that the making of a governmental contract in which the official has a financial interest is illegal. When the public official with the proscribed financial interest is a member of a public body or board, the prohibition of Section 1090 extends to the entire body or board. This means that even if the board member discloses his or her financial interest and disqualifies from participating or voting on the matter, the remaining board is still prohibited from entering into the contract in question. Thus, contracts approved under such circumstances are void and unenforceable even if the financially interested member refrains from participating in making the contract.
When a public employee, rather than a public officer such as a district board member, city council member or county supervisor is financially interested in a contract, the employee’s agency is prohibited from making the contract only if the employee was involved in the contract-making process. Therefore, as long as the employee plays no role whatsoever in the contracting process, the employee’s agency is not prohibited from contracting with the employee or the business entity in which the employee is interested. Because of the draconian nature of this statute the Legislature has added a limited number of narrow exceptions to this rule beyond the scope of this article. Those exceptions to Section 1090 prohibitions are: (1) remote interests; (2) non-interests and (3) the rule of necessity.
To make things more confusing for the good-faith public official, Section 1090 does not actually define what constitutes a financial interest. However, a review of case law and statutory exceptions infer that the term is to be liberally interpreted. As one court stated: ”However devious and winding the chain may be which connects the officer with the forbidden contract, if it can be followed and the connection made, the contract is void.” It does not matter if the official’s financial interest is positively or negatively affected. Thus, an important question any public official should ask when dealing with government contracts: ”Will this contract affect my personal financial interests in any way?”
The broad definition of a “contract” under Section 1090 of the Government Code sparks the most confusion and misunderstanding for public officials and their boards. For example, development agreements, subdivision improvement agreements, grants and donations of public agency funds to nonprofit entities, payment of spousal expenses and civil service appointments are all contracts for purposes of Section 1090. In addition the making of a contract includes any public official influence or other involvement in preliminary discussions, negotiations, planning and solicitation of bids. It is not strictly limited to voting on the contract itself.
Indirect Financial Interests
Public agencies and their public officials find themselves in trouble most often when not considering potential indirect financial interests. While direct financial interests are easily identifiable because one of the public officials on the council or board is the party contracting with their agency, this is not the case when the financial interest is outside the four corners of the contract. An indirect financial interest is not so obvious to the naked eye because it involves an official who has some other type of financial relationship with the contracting party or may receive some personal benefit from the contracting party not directly related to the contract itself.
Here are some examples that illustrate the kinds of indirect financial interests that can lead to violations:
- A county supervisor in his private capacity was a member of a business partnership that sold and leased road work equipment. The county Board of Supervisors entered into a contract with one of the partnership’s longtime customers, a private road construction corporation, for a road improvement contract. At the time, there were no financial transactions between the corporation and the board member’s private business partnership. But later, the corporation rented equipment from the supervisor’s partnership that was needed to fulfill the county contract. Because the supervisor’s private partnership had an on-going business relationship with the corporation there was an implied contract for rental between the two parties when the county contract was made. This created an indirect financial interest for the supervisor in violation of Section 1090.
- A member of the county Board of Education leased a store to the owner of an ice cream manufacturing plant. This public official also served on the board’s committee dealing with contracts and was instrumental in influencing the committee to recommend to the full board an ice-cream contract for his tenant manufacturer. Section 1090 was violated because the landlord-tenant relationship supported the conclusion that the board member was interested in the contract being awarded to his tenant.
- A city councilmember was also an employee of a private contractor, which entered into a contract with the city council. However, the city councilmember who was employed by the contractor did not participate in any way in the city’s decision. A violation of Section 1090 occurred and the contract was void. The employee/council member has a prohibited financial interest in public contracts with the contractor because all such business increased the likelihood or potential the employee’s salary or promotional opportunities being increased.
- A county supervisor sold his printing business to his son and took a secured promissory note on the business. Subsequently, the son was awarded printing contracts by the county Board of Supervisors. A violation of 1090 occurred and the contract was void because the board member still had a financial interest in the business due to the secured note.
- An official also has an interest in the community and separate property income of his or her spouse. This means a public official has a financial interest in her husband’s private sector employment or business affairs because the financial success of the husband’s firm or business and his continued employment and compensation will indirectly affect the financial interests of the public official/spouse member. Whether or not a contract is involved any governmental decision involving a spouse’s financial interests must be considered and analyzed as a possible statutory conflict of interest violation.
- A city has an on-going contract with a private water company to provide water services to the city and its residents. A regional manager and shareholder in the water company was subsequently elected to the city council. The city now wants to change the terms of the lease. Although the regional manager has had no involvement with the lease agreement on behalf of the company since his election to the city council, a renewal of, or an amendment to, a government agreement — even when the renewal involves no renegotiation and the agreement remains unchanged — constitutes the making of a new contract. Section 1090 would therefore prohibit the lease from being renewed or modified while the company’s regional manager serves on the city council.
- Campaign contributions generally are not financial interests under Section 1090. However, when a governmental decision is made because of a campaign contribution and the contribution is made in anticipation, or as a result, of the decision, there may be a prohibited financial interest. For example, in a recent case, the court found that a contractor hired to do public works for the city was in violation of Section 1090 because he illegally used campaign donations as a quid pro quo to several city council members as a means to getting the city’s public works contract. Also a bribe provided at any time to a public official in exchange for the approval of a contract creates an indirect financial interest in violation of Section 1090.
- A string of indirect transactions connected to a governmental contract can also invoke Section 1090. The courts have said it doesn’t matter how small or indirect a financial interest is; a violation occurs if the official’s personal interests deprive the public of the official’s overriding fidelity to the public’s interests. For example, a city councilman got into trouble when his council approved a residential development even though he disqualified himself from the vote because he was selling his own property to the developer in an unrelated transaction indirectly related to the development agreement. The developer needed the councilman’s property as part of a park project to be dedicated to the city before zoning changes would be made to allow for his residential development project. The developer, in a side deal, purchased the councilman’s land. The developer then donated the land to be used as part of the city’s park project. Once this series of transactions were completed the council approved the developer’s residential development. The councilman who sold his property to the developer ultimately lost the purchase price of land and the land itself.
The bottom line: An appreciation and basic understanding of Section 1090 is a must if public officials want to avoid public contract landmines, maintain their careers and reputations, and enhance the public’s trust in their public service.
* This article was first published by PublicCEO.com on September 11 and 12, 2012. Republished with permission.