BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: AB 746 HEARING: 7/1/09
AUTHOR: Coto FISCAL: No
VERSION: 2/26/09 CONSULTANT: Detwiler
CONFLICTS OF INTEREST
Existing Law
It is a crime for a public official to have a financial
interest in a contract made by that official or by the
governing board on which the member sits. A willful
violation can result in a fine or prison time, plus a
lifetime ban on holding public office. Observers call this
conflict-of-interest law "Section 1090," after its
Government Code designation.
Contracts that violate the Section 1090 prohibition are
void and unenforceable. Lawsuits to void contracts must be
filed within four years after the plaintiff discovered or
should have discovered a violation (AB 1678, De La Torre,
2007).
However, state law says that an official is not interested
in a contract if the person has only a remote interest.
The official must publicly disclose the interest and the
agency must approve the contract without that official's
vote. State law defines 15 situations that qualify as
remote interests. Further, the Legislature has described
14 specific situations in which it has declared that
officials don't have an interest in a contract.
According to court decisions and opinions by the Attorney
General, independent contractors and consultants who
exercise judgment on behalf of public entities are also
covered by the Section 1090 conflict-of-interest statute.
Background
In 2005, the San Francisco Public Utilities Commission
contracted with Parsons Water and Infrastructure, Inc. for
program, project, and pre-construction management services
in connection with the Commission's major water system
improvement program. In November 2007, the Commission
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amended Parson's contract.
In early July 2008, the Commission issued a request for
proposals for program management services. Parsons learned
that the San Francisco City Attorney's Office was looking
into whether there may be a conflict of interest if the
Commission awarded the contract to Parsons. In late July
2008, an attorney representing Parsons wrote a 16-page
letter to the City Attorney's Office explaining why a court
would conclude that there was no conflict of interest in
this contract.
In August 2008, the City Attorney's Office issued a 10-page
opinion to the Commission. The memorandum noted that
"there is no indication that Parsons acted in bad faith or
attempted to steer the [project management] contract to
itself." However, the City Attorney's Office concluded
that, if the Commission awarded Parsons the contract, "a
court would likely find a violation" of the Section 1090
conflict-of-interest law "because of Parson's key role in
developing the scope of those same services."
In September 2008, the Commission received proposals from
two firms: CH2M HILL and Program Delivery Partners (a joint
venture between Parsons and AECOM WATER). That joint
venture was the highest-ranking proposer; Parsons offered
to perform pre-construction program management, AECOM
offered to perform construction management services.
In November 2008, after considering the City Attorney's
advice regarding a potential conflict of interest, the
Commission rejected all proposals. Instead, the Commission
divided the contract. AECOM WATER won a new contract for
program construction and management services. Parsons won
a contract extension for pre-construction services. The
San Francisco County Board of Supervisors reviewed the
Commission's actions and authorized the Commission's
General Manager to proceed.
Parsons worries that a business competitor or some other
third party could file a lawsuit alleging a violation of
Section 1090. Parsons wants legislative assurance that its
activities do not violate the conflict-of-interest laws.
Proposed Law
AB 746 -- 2/26/09 -- Page 3
For contracts executed on or after September 1, 2008,
Assembly Bill 746 declares that an independent contractor
shall not be deemed to be interested in a contract as a
result of the contractor's preparation, at a governmental
entity's request, of:
A document that serves a purpose independent of the
contract.
A request for proposal.
A request for qualifications.
A request for bids.
Any other bid-related documents.
Comments
1. Let's be clear . The Section 1090 conflict-of-interest
law is clear --- public officials can't be financially
interested in their agencies' contracts. This
long-standing prohibition on conflicts of interest
reassures Californians that their government officials
focus on the broader public interest and not on narrow
private interests. Because it can be hard to apply this
strict statute to the modern complexities of contracts,
consultants, and long-term projects, the Legislature has
defined several situations that aren't conflicts of
interest and described other situations in which there are
only remote interests. But one interpretation might
conclude that the San Francisco Public Utilities
Commission's contract with Parsons Water and
Infrastructure, Inc. violated Section 1090. AB 746 carves
out an additional exception by describing how an
independent contractor's involvement in certain documents
doesn't lead to an illegal interest in a contract. Without
this statutory protection, progress on San Francisco's
water system improvement program could stumble. For
Parsons, the risks are enormous because the company could
be forced to disgorge the money it has earned from the San
Francisco contract.
2. The only thing we have to fear . To alleviate a
potential conflict-of-interest with Parsons and still honor
the results of the competitive process, San Francisco
officials extended Parsons' contract and awarded a new
contract to AECOM WATER. Unlike most bills which have
prospective effects, AB 746 reaches back in time to protect
AB 746 -- 2/26/09 -- Page 4
contracts executed on or after September 1, 2008. Perhaps
that retroactive reach represents an abundance of caution
in a litigious environment where construction consulting
companies jockey for a limited number of lucrative
government contracts. Competitors raise suspicions about
their rivals all the time. But, if San Francisco officials
found a satisfactory solution to their earlier concerns,
what's the need for Sacramento to intervene? Why should
the Legislature create a new statutory exception when local
officials have already solved the problem? Maybe FDR was
right.
3. Get professional help . Many cases and formal opinions
have interpreted the Section 1090 conflict-of-interest law,
sometimes leading to legislative responses. Public
officials need to move carefully and thoughtfully, because
violations have dire consequences for both the public's
confidence in government and for the public officials
themselves. If San Francisco officials or their
contractors still worry that last fall's actions didn't
resolve their concerns about violating the Section 1090
conflict-of-interest law, then legislators should invite
the Attorney General's formal review. Before adopting
another exemption, the Committee may wish to consider
submitting a formal request for a written opinion to
Attorney General Jerry Brown.
4. Unintended consequences ? In addition to protecting the
public's interest in honest government, Section 1090 also
protects public agencies themselves. In 2007, for example,
the California Housing Finance Agency (CHFA) accused two
former CHFA employees for having a financial interest in
contracts made while in their official capacity, violating
Section 1090. A jury awarded CHFA compensatory and
punitive damages and the District Court of Appeal affirmed
the trial court's decisions. An unintended consequence of
creating a new exception to Section 1090 would be to
undercut the statutes that allow public agencies to recover
their losses when their employees and independent
contractors engage in corrupt behavior.
5. It's about time . Regular statutes take effect on the
January 1 following their enactment, while an urgency
measure takes effect as soon as the Governor signs and the
Secretary of State chapters the bill. The California
Constitution says that an urgency bill must be "necessary
AB 746 -- 2/26/09 -- Page 5
for the immediate preservation of the public peace, health,
or safety." The Constitution also requires an urgency bill
to get a 2/3-vote in both the Assembly and the Senate. AB
746 takes effect on January 1, 2010, more than a year after
San Francisco officials extended Parsons' contract. If San
Francisco officials and Parsons are worried about potential
lawsuits alleging violations of the Section 1090
conflict-of-interest law, the Committee may wish to
consider adding an urgency clause to AB 746.
Assembly Actions
Assembly Local Government Committee: 2-2
Assembly Local Government Committee: 7-0 (reconsideration
granted)
Assembly Local Government Committee: 4-0
Assembly Floor: 66-7
Support and Opposition (6/25/09)
Support : Parsons Water and Infrastructure, Inc., Willie L.
Brown, Jr.
Opposition : Unknown.