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Commitment to Nonprofit Causes and Public Service: Some Issues to Ponder, Part 3

This column is a service of the Institute for Local Government (ILG) Ethics Project, which offers resources on public service ethics for local officials. For more information, visit www.ca-ilg.org/trust. The following people contributed ideas and legal analysis for this column: Tom Butt, city council member, City of Richmond; Rob Ewing, city attorney, Danville; Roy A. Hanley, city attorney, Solvang and King City, Hanley and Fleishman; David Hirsch, city attorney, Simi Valley: Selma J. Mann, assistant city attorney, Anaheim; Michelle Sheidenberger, deputy city attorney, Roseville; Larissa Seto, assistant city attorney, Pleasanton; and Daniel G. Sodergren, assistant city attorney, Tracy.

Question Posed in Part 1

I just completed my first campaign for public office and am happy to report that I won. One of the issues that came up in the campaign was my extensive involvement in nonprofits in our area. I am the executive director of one nonprofit and serve on the board of another. I volunteer for a third. I think my extensive community involvement is one reason I was elected, but what issues should I be alert to now that I’m an elected official? I don’t want to make any missteps.

ANSWER

Part 1 of this article, which appeared in the August 2008 issue, explored the ethical issues for public officials to consider regarding relationships with nonprofit organizations. Part 2, which appeared in the October 2008 issue, and Part 3 in this issue focus primarily on the legal issues. The October column explained fundraising disclosure requirements as well as gift and income reporting requirements associated with being involved in nonprofit organizations. This column analyzes conflict-of-interest and bias issues public officials may encounter as a result of their involvement with nonprofit organizations. (Parts 1 and 2 are available at www.westerncity.com/nonprofitethics).

Section 1090 and Contract Issues

Let’s look more closely at the rules related to contracts and nonprofits. When a member of a decision-making body has a financial interest in a contract, the contract cannot occur1 --- that’s the rule. Nonprofits present special issues because they are not owned by anyone and no one reaps a profit in connection with their activities. As a result, public officials may think that this proscription does not apply.

The ban does apply though, because nonprofits are sources of income and provide other benefits to a variety of individuals, as discussed in the October column. Those benefits --- as well as the close relationship a public official may have with a nonprofit --- can cause the public to question whether a public official is putting the general public’s interests first in a given situation.

What is a public official to do if he or she has the kinds of financial ties covered by the law with a nonprofit? Typically, the official must disclose the relationship and not participate in any decision-making related to the nonprofit.

The decision-making process is not limited to the final vote on a matter. The public official needs to step aside from all phases leading up to the contract’s approval, including preliminary discussions, negotiations, compromises and planning.2 If the official doesn’t and attempts to influence his or her colleagues, the official and the agency lose the benefit of the exception that allows the contract to be entered into.3 This requirement assures the public that no preferential treatment is occurring because of a nonprofit’s connection with one or more public officials.

The official must step aside in situations that involve:

  • A Nonprofit Officer --- When an elected official is an officer of the nonprofit (for example, president) and the agency wishes to support the nonprofit;4 and
  • A Nonprofit Employee --- When an elected official or his or her spouse or partner works for the nonprofit, and the agency wishes to support the nonprofit.5

Note, however, that the official does not have to step aside if: 1) he or she is a non-compensated officer of a tax-exempt organization; and 2) one of the nonprofit’s purposes is to support the functions of his or her public agency.6 Also, just being a non-salaried member of the nonprofit doesn’t require a public official to step aside from the decision-making process, all other things being equal.7 (For both of these exceptions to apply, the relationship needs to be disclosed in the agency’s official records.) If, however, there is a question about whether the official’s relationship biases his decision, he should speak with agency counsel about bias issues.

Note that if the financial arrangement pre-dates the official’s service on the decision-making body, there is no problem as long as there is no change or renewal of the arrangement.8 As an example, the attorney general said that a city could continue to lease property to a nonprofit organization even though a newly elected council member is a paid executive director for the nonprofit.9

What about being a member of a nonprofit’s board of directors? Attorneys disagree on the best interpretation of the statutory language. The attorney general believes that being a board member is akin to being an officer, which means board members must step aside from the decision-making process when it comes to agency financial relationships with their nonprofits.10 Some attorneys believe that the concept of being an "officer" of a nonprofit is limited to those positions specified as "officers" under state law related to nonprofits.11

The question in this situation is: On which side do you want to err? If the official participates in decision-making related to the contract, the contract may be void.12 There are other penalties for purposeful failure to disclose one’s status, including loss of office.13 To be safe, nonprofit board members may want to disclose and step aside from the decision-making process until the appellate courts provide guidance on this point.

Political Reform Act and Financial Interest Issues

The previous installment of this column analyzed the issue of travel reimbursement and other things an official might receive from a nonprofit. Such gifts or income can be the basis for having to disqualify oneself from participating in public agen- cy decisions involving the nonprofit. A threshold issue is whether the official has received reportable income of $500 or more or reportable gifts of $390 ($420 in 2009-10) or more within the 12 months preceding the decision. If so, the next series of questions to be analyzed by either the Fair Political Practices Commission (FPPC) or agency counsel is whether it is reasonably foreseeable that a public official’s decision would have a material financial effect on the nonprofit.14

Another situation of potential concern is an official doing business with a nonprofit --- for example, when the nonprofit is a customer or client of a business in which a public official is involved. In such a case, a public official is well advised to speak with either the FPPC or agency counsel about whether the disqualification requirements of the Political Reform Act apply.

For example, the FPPC recently advised one public official not to participate in a decision on funding a nonprofit organization when his consulting firm provided services to the nonprofit. The FPPC did the analysis required under the Political Reform Act. Key issues were whether the official had received income of $500 or more from the nonprofit during the 12-month period before the decision and whether the financial effect of the decision met the materiality standards under the act.15 The FPPC also strongly advised the official to get advice from the attorney general on how the prohibitions against having an interest in contracts apply.16

Bias Issues

In situations where an official is applying an agency’s policies to a specific situation (for example, in a permit or entitlement situation), one must be aware of the potential for bias. Bias is a common-law, or judge-made law, concept. The issue to be concerned with is whether one’s participation in a decision will subject the decision to invalidation.

For example, a planning commissioner ghost-wrote an article in a community newsletter that was critical of a project that ultimately came before the planning commission. When the project was turned down, the project proponent challenged the outspoken commissioner’s participation in the decision. The theory was that the commissioner had prejudged the merits of the application before the public hearing and couldn’t fairly deter mine whether the project satisfied the city’s requirements.17 The appellate court agreed and set aside the decision.

When a decision-maker is applying existing policies to a specific situation, the decision-maker is acting more like a judge. In legal jargon, the official is acting in a quasi-judicial capacity. When one acts in this capacity, certain fair process requirements apply that don’t apply when a decision-maker is enacting those policies in the first place (and acting in a legislative capacity).

When an official is affiliated with a nonprofit organization that has strongly held views on a matter, the official should consult with agency counsel about whether the official will be acting in a quasi-judicial capacity. If so, the official should ask him or herself if he or she can truly be fair in applying the policies to the specific situation. If not, stepping aside satisfies one’s legal and ethical obligations.

Even if an official feels he or she can be fair, another step in analyzing bias is consideration of whether the applicant and others will perceive the official as fair. Has the official made statements that suggest that the official has pre-judged the matter? Is there evidence that could be presented to a court to suggest bias? If so, it may be wise to step aside from the decision-making process.

For more information on bias and fair process requirements in adjudicative decision-making, see the "Everyday Ethics" column from October 2006 (online at www.westerncity.com).

Conclusion

When considering all the good and worthy things nonprofits contribute to a community, it can be very tempting to just think about those worthy ends and not think about the means used to achieve those ends. Some officials may even believe that the ends justify the means.

It’s important to know that ethics laws make it very clear that the means by which a public official pursues worthwhile ends do matter. Using improper means can result in fines, jail time and other penalties, including the loss of one’s standing in the community.

And of course, the laws just create the minimum standards for determining proper means. Merely satisfying the minimum requirements of the law may not satisfy either one’s own or one’s constituents’ standards for what is appropriate. Dr. Martin Luther King Jr. encouraged everyone striving to make the world a better place to use means that are as pure as the end one seeks --- in other words, worthy ends never justify questionable means.

 

About Those Agency-Affiliated Nonprofits

In some situations, public agencies will create nonprofit organizations to support a worthwhile objective. Because of the close tie to the public agency’s interests, public officials sometimes sit on the nonprofit’s governing board. These situations can create complex legal and ethical issues because the agency’s and nonprofit’s interests are so closely intertwined.

For example, what if an agency decides to use its authority when approving a lease, permit or other entitlement to require a contribution to the agency’s nonprofit? The idea can make complete sense, as apparently was the case in one Northern California city. The nonprofit supported the operation of a national park. Most of the buildings and land within the park are owned and maintained by the city. One of the responsibilities of board members is fundraising.

The city’s holdings in the park apparently included land that a company sought to lease for aggregate mining. The lease required environmental review. The council member/board member had the idea that one of the mitigation measures for the mining operation could include a $250,000 contribution to the nonprofit to support the operations of the park. The company apparently agreed to do so, and the council member/board member asked staff to include the commitment in the conditions for project approval.

When asked if the council member/board member could participate in the decision-making relating to the lease, the attorney general said he could. This was largely because the nonprofit was so closely affiliated with the city and therefore the council member did not have a direct or indirect financial interest in the lease.18 The special statutory provisions for nonprofits formed to support public agency objectives played a strong role in the attorney general’s analysis.

How might an official handle such a situation to minimize questions about the dual role an elected official/board member might be playing? One is to consult with the management and legal staff about the contribution idea. Agency attorneys can analyze whether the law permits an agency to ask for this kind of gesture in this situation. For example, if this were a situation not involving city land, the city’s requirements would need to satisfy the laws relating to permissible exactions.19 Management staff can work with planning staff and get their input on the concept.

Getting buy-in on the merits of the approach (in an open meeting, of course) is another option. That helps make the idea to support the nonprofit’s activities the agency’s idea, as opposed to the individual elected official’s idea.

 

For More Information About These Issues

To learn more about legal and ethical issues discussed in this column, see the following related "Everyday Ethics" columns, online at www.ca-ilg.org/everydayethics:

  • Extortion and honest services fraud, December 2006;
  • Bias and fair process requirements in adjudicative decision-making,
    October 2006;
  • Giving public funds to nonprofits, April 2005;
  • First Amendment issues, June 2008; and
  • Where to seek advice on these issues and the limitations of such advice, June 2007.

 

AB 1234 Self-Study Credit Available

Did you already complete the basic AB 1234 training two years ago? Would you like to expand your knowledge by doing something new this time to comply with AB 1234 ? Did you take the Fair Political Practices Commission’s online course, and do you need extra time to bring yourself up to the two-hour total requirement?

The Institute for Local Government (ILG) is offering this three-part article ("Commitment to Nonprofit Causes and Public Service: Some Issues to Ponder," Parts 1, 2 and 3, appearing in the August, October and December issues of Western City) for advanced AB 1234 ethics self-study credit to those officials who have already covered the basic materials required by AB 1234 (see www.ca- ilg.org/ab1234selfstudy ).

To earn two hours of AB 1234 advanced self-study credit, you must complete two one-hour self-study exercises at www.ca-ilg.org/ab1234advancedcredit.

Each one-hour exercise costs $25. In each instance, local officials need to:

  • Print out and read the materials;
  • Print out and take a true-false test; and
  • Mail the test to ILG with the $25 processing fee for each exercise.

ILG will send your corrected test back to you with the answers and explanations, along with your proof of participation certificate(s). Processing may take up to four weeks.

Proceeds from the processing fees help cover ILG’s costs to develop these materials, grade the test and provide the proof of participation certificate(s). ILG thanks you in advance for supporting its work in public service ethics.

Footnotes:

1 Cal. Gov’t Code § 1090.

2 See Stigall v. City of Taft, 58 Cal. 2d 565, 569-71, 25 Cal. App. 441, 443-44 (1962).

3 See Cal. Gov’t Code § 1091(c) ("This section is not applicable to any officer interested in a contract who influences or attempts to influence another member of the body or board of which he or she is a member to enter into the contract.")

4 Cal. Gov’t Code § 1091(b)(1); see also 89 Cal. Op. Att’y Gen. 258 (2006).

5 Cal. Gov’t Code § 1091(b)(1); see also 89 Cal. Op. Att’y Gen. 258 (2006); 85 Cal. Op. Att’y Gen. 76 (2002).

6 Cal. Gov’t Code § 1091.5(a)(8) (a noninterest includes "That of a noncompensated officer of a nonprofit, tax-exempt corporation, which, as one of its primary purposes, supports the functions of the body or board or to which the body or board has a legal obligation to give particular consideration, and provided further that this interest is noted in its official records"; an officer is "noncompensated" even if he or she receives expense reimbursements).

7 Cal. Gov’t Code § 1091.5(a)(7) (defining nonprofit membership as a non-interest). See also Attorney General Conflicts of Interest (2004) at 90 (". . .this office believes that the reference to "members" [in section 1091(b)(1)] refers to persons who constitute the membership of an organization rather than to person who serve as members of the Board of Directors of such organizations.")

8 See City of Imperial Beach v. Bailey, 103 Cal. App. 3d 191, 162 Cal. Rptr. 663 (4th Dist. 1980).

9 85 Cal. Op. Att’y Gen. 176 (2002).

10 Cal. Gov’t Code § 1091(b)(1). See also Attorney General Conflicts of Interest (2004) at 90 (". . .this office believes that the reference to "members" [in section 1091(b)(1)] refers to persons who constitute the membership of an organization rather than to person who serve as members of the Board of Directors of such organizations.")

11 Cal. Gov’t Code §§ 1091(d)(specifying that willful failure to comply with the remote interest requirements is punishable under section 1097), 1097 (specifying that violations are "punishable by a fine of not more than one thousand dollars ($1,000), or by imprisonment in the state prison, and is forever disqualified fro holding any office in this state").

12 See Cal. Gov’t Code § 1091(c) ("This section is not applicable to any officer interested in a contract who influences or attempts to influence another member of the body or board of which he or she is a member to enter into the contract.")

13 Cal. Gov’t Code §§ 1091(d) ("The willful failure of an officer to disclose the fact of his or her interest is a contract pursuant to this section is punishable as provided in Section 1097"), 1097 ("Every officer . . who willfully violates any of such laws, is punishable by a fine of not more than one thousand dollars ($1,000), or by imprisonment in the state prison, and is forever disqualified from holding any office in this state.").

14 See Cal. Gov’t Code §87100 and following; 2 Cal. Code Regs. § 87200 and following. See also Pavlovich Advice Letter, FPPC No. A-94-391 ( January 05, 1995).

15 See Mattas Opinion, FPPC Advice A-08-035 (April 08, 2008).

16 See Mattas Opinion, at n. 2.

17 Nasha L.L.C. v. City of Los Angeles , 125 Cal. App. 4th 470, 483-842, 22 Cal. Rptr. 3d 772, 780-81 (2d

Dist. 2004).

18 See 88 Cal. Op. Att’y Gen. 32 (2005).

19 The Institute offers resources on these issues at http://www.ca-ilg.org/index.jsp?displaytype=&section=land&zone=ilsg&sub_sec=land_property&tert=land_property_fees

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