BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1011 |Hearing |3/30/16 |
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|Author: |Mendoza |Tax Levy: |No |
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|Version: |3/17/16 |Fiscal: |No |
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|Consultant|Favorini-Csorba |
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Public officers: contracts: financial interest
Expands the definition of remote interest to include the
financial interests of a public officer's child, parent, or
sibling, or the spouses of those individuals.
Background
California state and local officials who negotiate, make, or
vote on public contracts are subject to two main conflicts of
interest laws: Section 1090 et seq. of the Government Code
(known simply as "Section 1090") and the Political Reform Act of
1974.
Section 1090. The origins of Section 1090 formalized the
longstanding common law rule prohibiting public
officials-including board members, officers, and employees-from
having a personal financial interest in the contracts they
participate in making while exercising their official
capacities. Financial interest has been liberally interpreted
by the courts and includes the property and income of his or her
spouse. The consequences of violating Section 1090 are severe:
a contract that runs afoul of the law is void, even if it is
fair and the affected official did not intend to receive a
personal benefit. Willful violators can also face criminal
penalties ranging from fines to prison time, plus a lifetime ban
on holding public office.
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Section 1090 contains several exceptions. In particular, state
law identifies 17 situations that do not constitute financial
interests, but that present some risk of undue influence. These
"remote interests" include when a public contract would
financially benefit a public official's minor child or a
nonprofit corporation at which a public official is also a
non-salaried officer. Section 1090 requires an official with a
remote interest to publicly disclose his or her interest, note
the interest in the public record, and abstain from voting on
the contract or influencing the other board members. The
government body on which he or she sits may only approve the
contract if there are sufficient votes to pass it without the
interested official. Thus, only public officials that sit on
multi-member boards may use the remote interest exception;
officers and employees may not. The courts and the Attorney
General have found that there is an additional, non-statutory
exception to Section 1090: a "rule of necessity" that allows an
interested public official to participate in a contract if (1)
the government agency must contract for essential services but
no other source is available, and (2) the board or official is
the only authority that can legally act on the matter.
The Political Reform Act. In 1974, California voters passed
Proposition 9 to create the Political Reform Act (PRA), along
with the Fair Political Practices Commission (FPPC), the agency
tasked with enforcing the PRA through administrative and civil
penalties. In 2013, the Legislature expanded the FPPC's
jurisdiction to include Section 1090 (AB 1090, Fong). The PRA
is broader than Section 1090 because it prohibits any state or
local public official from using his or her official position to
influence any "governmental decision" in which the official has
a financial interest. The PRA also applies to decisions that
will have a material financial effect on a member of the
official's "immediate family," which the Legislature has defined
as a government official's spouse or dependent children. The
PRA supersedes most other conflict of interest laws, including
Section 1090, in the case of an inconsistency. Public officials
must therefore consider whether a conflict exists under either
the PRA or Section 1090, or both.
Common Law Conflict of Interest. In 1850, California's first
legislature adopted the English common law as the state's basic
legal framework, insofar as it did not conflict with state
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statutes or the state and federal Constitutions. This legal
framework remains in place today. Independent of Section 1090
and the PRA, California courts continue to apply the common law
doctrine against conflicts of interests to invalidate public
contracts tainted by self-dealing, even in situations when
Section 1090 or the PRA do not apply. In several recent
opinions, the Attorney General's Office has suggested that the
common law doctrine against conflicts of interest is broader
than Section 1090 and the PRA, even prohibiting public contracts
that raise only potential conflicts of interest, or even the
mere appearance of impropriety. For example, the Attorney
General has opined that a contract that benefits the adult child
of a public official might be prohibited under common law, even
though neither the PRA nor Section 1090 consider it a financial
interest. Courts can void a contract that violates this common
law doctrine.
Proponents of stricter conflict of interest laws want to expand
Section 1090, bringing statutory conflict of interest
prohibitions closer in line with the common law doctrine.
Proposed Law
Senate Bill 1011 bill expands the definition of what constitutes
a remote interest under Section 1090 to include the financial
interest of the child, parent, or sibling of a public officer,
or the spouse of a child, parent, or sibling. In order to be
considered a remote interest, the financial interest of those
individuals must be known to the public officer. These
provisions become effective on January 1, 2018.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill. Existing law does not expressly forbid
state and local officials from awarding public contracts to
their adult children, parents, siblings, in-laws, or other
relatives. This bill is motivated by concerns that the financial
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interests of family members beyond an official's household may
be unduly influencing official decisions in public contracting,
thereby undermining public confidence in government. For
example, a 2015 audit of the City of Industry found that the
former mayor and his family benefited from favorable contracts
totaling more than $326 million over 20 years. SB 1011 furthers
the intent of Section 1090, which was originally enacted to
codify common law prohibitions against conflicts of interest in
contracting. It also adds much needed clarity to common law by
unequivocally stating that it is unacceptable for public
officials to participate in contracts that benefit their
families and in-laws.
2. Raising the stakes. While SB 1011 would clearly prohibit
public officials from making or voting on public contracts that
would benefit certain close family members, California judges
can already use the common law doctrine against conflicts of
interest to invalidate agreements tainted by this kind of
self-dealing. However, officials who violate the common law
doctrine are not subject to criminal prosecution. SB 1011 would
significantly stiffen the penalties for a public official that
makes or votes on a public contract benefitting his or her adult
child, sibling, parent, or in-law. Should state law impose the
same penalty in these cases as when a public official directly
enriches him or herself?
3. Universally remote. The remote interests statute only
applies to public officials that sit on multi-member boards.
Thus SB 1011 does not prevent a public employee or other public
officer from participating in a contract that would benefit
their family members. If it is improper for a board member to
participate in these contracts, it may also be improper for
employees or other public officials who make similar decisions.
4. Related legislation. SB 1011's provisions are substantially
similar to the provisions of SB 330 (Mendoza, 2015), which would
have repealed the current remote interest exception for the
financial interest of a minor child of a public officer and
declared the financial interest of the spouse, child, parent, or
sibling, or spouse of the public officer's child, parent, or
sibling. SB 330 passed the Senate Governance and Finance
Committee on a 7-0 vote but was held under submission in the
Assembly Appropriations Committee.
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Support and
Opposition (3/24/2016)
Support : Unknown.
Opposition : Unknown.
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