Part Two – View Part One here.
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.
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.
Public officials should never hesitate to consult their public law attorney if they have any questions about possible violations of Section 1090. Otherwise, they could face disastrous consequences.
Grover Trask is special counsel at Best Best & Krieger LLP where he leads the law firm’s public policy and ethics compliance practice. Formerly the Riverside County district attorney for 24 years, Trask’s practice at BB&K focuses on government accountability, ethics, conflicts of interest, and election law matters. Trask is among the BB&K attorneys who provide ethics training required for public officials under AB 1234. He can be reached at Grover.Trask@bbklaw.com.