BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: AB 746 HEARING: 6/16/10
AUTHOR: Coto FISCAL: No
VERSION: 6/9/10 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 Attorney General's
opinions, 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
AB 746 -- 6/9/10 -- Page 2
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 and instead divided the
contract. AECOM WATER won a new contract for program
construction and management services. Parsons won a
contract extension for preconstruction services. San
Francisco's Board of Supervisors reviewed the Commission's
actions and authorized the Commission's General Manager to
proceed.
Parsons worries that a competitor or some other third party
could file a lawsuit alleging a violation of Section 1090.
Parsons wants the Legislature to add another specific
situation to the list of activities that do not violate the
conflict-of-interest laws.
AB 746 -- 6/9/10 -- Page 3
Proposed Law
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 schedule, plan, drawing, description, or
technical specification that is attached to or
referenced in any of those documents.
AB 746 -- 6/9/10 -- Page 4
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 preparing certain
documents doesn't lead to an illegal interest in a
contract. Without this statutory protection, experienced
companies will hesitate to tackle consulting work which may
preclude them for bidding on construction projects. For a
large firm, the financial risk of violating Section 1090
could be enormous because the company could be forced to
disgorge the money it earned.
2. Unintended consequences . The Committee may wish to
consider the effect that AB 746 could have had on the
Oracle and Logicon contracting controversy. In 2001, state
officials signed a $95 million, sole-source contract with
Oracle for state employees' access to database software.
Logicon proposed the Oracle agreement to state officials.
An April 2002 report by the Bureau of State Audits found
that Logicon overstated the amount of money that the state
would save from the Oracle agreement. The Auditor found
that state officials failed to verify Logicon's claims,
while Logicon failed to reveal that it had a significant
financial stake in the Oracle agreement. While Logicon
pushed the Oracle agreement, it also had a June 2000 state
contract to write a white paper on best practices for
licensing software for state use. State officials never
received Logicon's final report and cancelled the
consulting contract without payment. One legislative
response was to apply the conflict-of-interest provisions
of state procurement law to information technology
AB 746 -- 6/9/10 -- Page 5
contracts which previously had been exempt (SB 1467, Bowen,
2002). The Committee may wish to consider whether AB 746
allows the kind of behavior that the 2002 Bowen bill
prevents. Should a contractor help public officials
prepare bids for government work and then bid on those
contracts?
3. More unintended consequences . In addition to
protecting the public's interest in honest government,
Section 1090 also protects the 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.
4. 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. Those local decisions seemingly
resolved Parsons' problems. Perhaps adding a 15th
exemption to state law 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.
5. No help at all . Rather than act on AB 746 last summer,
the Senate Local Government Committee postponed its July 1,
2009 hearing to seek an Attorney General's opinion. The
Committee's Chair wanted to ask two questions:
Given the facts of the San Francisco situation,
does a Section 1090 conflict-of-interest exist?
Would AB 746 as written interfere with future
AB 746 -- 6/9/10 -- Page 6
prosecutions of Section 1090 violations?
On September 24, 2009, the State Department of Justice
wrote to Senator Wiggins to confirm that it was "not
inclined to issue any opinion on the proposed questions."
The Department's letter explained its policy to decline
questions about pending bills and to decline questions that
are, or could be, litigation subjects. The Department
declines requests that involve resolving factual disputes,
not legal questions. Questions about future prosecutions
would be strategic questions, not legal questions.
Therefore, the Committee does not have an Attorney
General's opinion to accompany its June 16, 2010
discussions.
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 (6/10/10)
Support : Parsons Water and Infrastructure, Inc, Willie L.
Brown, Jr.
Opposition : Unknown.