BILL ANALYSIS Ó
Bill No: AB
527
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Bill Analysis
AB 527 Author: Roger Hernandez
As Amended: June 22, 2011
Hearing Date: June 28, 2011
Consultant: Paul Donahue
SUBJECT : Public officials: Financial interests
SUMMARY : Declares that a public officer has a financial
interest under conflict of interest laws if the officer has
an independent contracting relationship with one who enters
a contract with the body of which that officer is a member.
Existing law :
1) Provides that members of the Legislature, state, county,
district, judicial district, and city officers or employees
shall not be financially interested in any contract made by
them in their official capacity, or by any board of which
they are members.
2) Specifies that, if a prohibited financial interest is
found, the affected contract is void from its inception,
and the official who engaged in its making is subject to
specified civil penalties. If the violation was willful
the official is subject to criminal penalties, including
imprisonment and permanent disqualification from holding
public office. (Gov. Code § 1090)
3) Defines a series of "remote interests." Where a
financial interest is remote, a public officer may comply
with the law by making full disclosure of the interest,
noted in the entity's official records, and abstaining from
voting on the affected contract or influencing other board
members in any way. (Gov. Code § 1091)
4) Lists a series of non-interests or minimal interests
AB 527 (Roger Hernandez) continued
PageB
that technically are financial interests otherwise subject
to conflict of interest prohibitions, but are statutorily
excluded because they are deemed insignificant. (Gov. Code
§ 1901.5)
This bill :
1) Specifies that members of the Legislature, state,
county, district and city officers or employees shall be
deemed to be financially interested in a contract if the
officer has an independent contracting relationship with an
individual or non-governmental entity that enters or seeks
to enter a contract with the body of which the officer is a
member.
2) Excludes members of the judiciary from this independent
contracting relationship prohibition.
3) States that this independent contractor provision shall
not limit the liability of any person under existing
conflict of interest law.
COMMENTS :
1) Rationale : The author states that public officials can
circumvent safeguards in existing law by entering into
business relationships with entities that are vying for
public funds, and having colleagues consistently vote to
approve their clients' interests.
The author cites examples of impropriety, including an
instance in which the family business of a local community
college official was paid more than $500,000 for working on
a public construction program that she oversaw on her
campus. The author also states that in the City of Bell, a
business partner of the City's CAO owned an engineering and
planning service firm, was also the city planning director,
and was awarded multiple city agreements.
2) Applicability of existing conflict of interest laws :
The conflict of interest law that this bill modifies
focuses on the making of a contract in which a public
officer has an impermissible interest, whereas the
Political Reform Act is the primary law governing conflicts
AB 527 (Roger Hernandez) continued
PageC
of interest in the making of all government decisions.<1>
The conflict of interest law dates back as early as 1851,
and codifies the long-standing common law rule that barred
public officials from being personally financially
interested in the contracts they formed in their official
capacities.<2> Financial conflicts of interests are
prohibited in order not to impair public officials from
discharging their fiduciary duties with "undivided loyalty
and allegiance to the public entities they are obligated to
serve."<3>
To determine if the conflict of interest law has been
violated, a court would focus on (1) whether the official
or employee participated in the making of a contract in
their official capacities, (2) whether the official had a
financial interest in that contract, (3) whether the
financial interest falls within any one of the exceptions
for remote or minimal interests.
3) Remote financial interests and minimal financial
interests : Under the remote interest exception, an officer
may comply with the law by disclosing the interest and
abstaining on the vote on the contract.
If the financial interest is non-existent or minimal, as
defined, there is generally no bar at all to participation
in the making of a contract, although in some instances the
definition of non-interest includes specific disclosure
requirements.
Examples of remote financial interests, requiring only
disclosure and abstention by the public officer include (a)
the public officer is also an officer or employee of a
nonprofit entity; (b) an attorney, stockbroker, insurance
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<1> See Gov. Code § 87100 et seq. The PRA prohibits
participation in a decision in which one has a "financial
interest." (§ 87100) A financial interest is defined as a
"material financial effect, distinguishable from Ŭthe
decision's] effect on the public generally..." (§ 87103)
<2> See Brandenburg v. Eureka Redevelopment Agency (2007)
152 Cal.App.4th 1350; People v. Honig (1996) 48 Cal.App.4th
289
<3> Stigall v. City of Taft (1962) 58 Cal.2d 565
AB 527 (Roger Hernandez) continued
PageD
or real estate agent or broker, if these persons will not
receive payment as a result of the contract; and (c) a
landlord or tenant of the contracting party.
A minimal financial interest does not prohibit
participation in the making of a contract by the public
officer. Examples include (a) the ownership of less than 3
percent of the shares of a corporation, as long as the
total dividend income received by the official does not
exceed 5% of the official's annual income; (b) that of a
non-compensated officer of a nonprofit, tax-exempt
corporation; and (c) that of a spouse of an officer or
employee of a public agency in his or her spouse's
employment.
4) AB 527 may conflict with existing law and recognized
exceptions thereto :
The "independent contracting relationship" described in
this bill is not defined, and may have ramifications that
go well beyond that which may have been contemplated by the
author. For example, section 1091(b)(8) of the Government
Code defines one of the so-called remote interests as "that
of a supplier of goods or services when those goods or
services have been supplied to the contracting party by the
officer for at least five years prior to his or her
election or appointment to office." Under this bill, this
remote financial interest would seem to violate conflict of
interest laws if a public official or board entered into a
contract with the supplier.
Under the bill, an "independent contracting relationship"
could include anything from a complex contract to a simple
non-written purchase transaction, which could have
far-reaching unintended consequences. For instance, cities
and other local agencies would likely be barred from
entering into routine business or service contracts with an
individual or entity that has an existing independent
contracting relationship with a public officer or employee,
thereby negatively affecting ordinary city operations.
Passage of AB 527 in its current form would seem to place
public officials and boards in situations where it may be
difficult to avoid inadvertent violations of conflict of
interest laws due to their involvement in normal
relationships with vendors and service providers.
AB 527 (Roger Hernandez) continued
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Furthermore, the provisions of AB 527 would disqualify not
only an individual member of a board, but the entire body
on which he or she sits, from considering any contract
where one board member or employee has an "independent
contracting relationship" with the party seeking to
contract with the entity.
Moreover, the time limit related to the independent
contracting relationship language is also unclear, so past
or future relationships might have to be considered,
further broadening the interpretation and limitations on
current public contracting.
5) Independent contractors already subject to conflict of
interest laws under existing law :
This bill declares that public officers (other than
judicial officials) are deemed to be financially interested
in a contract if the officer has an independent contracting
relationship with an individual or non-governmental entity
that enters or seeks to enter a contract with the body of
which the officer is a member.
Many courts have concluded that independent contractors,
who serve in advisory positions that are frequently held by
officers and employees, are in fact subject to state
conflict of interest laws. Specifically, "independent
contractors whose official capacities carry the potential
to exert considerable influence over the contracting
decisions of a public agency may not have personal
interests in that agency's contracts." <4>
More directly to the point, existing law has been
specifically interpreted to apply to independent
contracting relationships. In interpreting the law to
cover independent contracting arrangements, "it seems clear
that the Legislature in later amending Section 1090 to
include 'employees' intended to apply the policy of the
conflicts of interest law ? to independent contractors who
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<4> Hub City Solid Waste Services, Inc. v. City of Compton
(2010)186 Cal.App.4th 1114
AB 527 (Roger Hernandez) continued
PageF
perform a public function?"<5>
The courts have held that a financial consultant retained
temporarily to provide advice in connection with a bond
issue is covered by the conflict of interest law despite
being an independent contractor.
An official has a financial interest in a contract, for
purposes of the law prohibiting public officials from
having a financial interest in contracts made by them in
their official capacity, "if he might profit from it."<6>
If a city council member or other official has an
independent contracting relationship with a person who is
contracting with the council member's city, it seems
obvious that the council member might profit from this
contract.
6) Broad interpretation of conflict of interest laws : The
courts have held that the existing conflict of interest law
"cannot be given a narrow and technical interpretation that
would limit Ŭits] scope and defeat the legislative
purpose."<7> Financial interest includes both direct and
indirect interests in a contract.<8>
Recently, the California Supreme Court recently discussed
expansively the broad manner in which conflict of interest
laws are interpreted in Lexin v. Superior Court (2010) 47
Cal.4th 1050, (citations omitted):
"ŬT]he term 'financially interested' in section
1090 cannot be interpreted in a restricted and
technical manner. The defining characteristic of
a prohibited financial interest is whether it has
the potential to divide an official's loyalties
and compromise the undivided representation of
the public interests the official is charged with
protecting. Thus, that the interest might be
small or indirect is immaterial so long as it is
--------------------
<5> (Emphasis added), California Housing Finance Agency v.
Hanover/California Management and Accounting Center (2007)
148 Cal.App.4th 682, citing 46 Ops.Cal.Atty.Gen. 74 (1965)
<6> Klistoff v. Superior Court (2007) 157 Cal.App.4th 469
<7> People v. Honig (1996) 48 Cal.App.4th 289
<8> See Thomson v. Call (1985)38 Cal.3d 633
AB 527 (Roger Hernandez) continued
PageG
such as deprives the Ŭpeople] of his overriding
fidelity to Ŭthem] and places him in the
compromising situation where, in the exercise of
his official judgment or discretion, he may be
influenced by personal considerations rather than
the public good Ŭdirect and indirect interests
are equally prohibited]?We and the Courts of
Appeal have long recognized that where public
officials on behalf of a public entity
participate in making a contract with a second
entity for which they work, the scenario poses at
least the risk that the officials will be
compromised by serving 'two masters.' Prohibited
financial interests are not limited to express
agreements for benefit and need not be proven by
direct evidence. Rather, forbidden interests
extend to expectations of benefit by express or
implied agreement and may be inferred from the
circumstances."
The Committee may wish to consider the issues discussed
above in deciding whether the provisions of AB 527 are
sufficiently clear to be applied fairly, and whether or not
the issues raised are significant enough to call into
question the need for the bill.
The Committee should note that the conflict of interest
statutes in question apply also to Members of the
Legislature.
7) Opposition : Opponents are concerned that there is no
definition for "independent contracting relationship," and
if this bill becomes law would create significant confusion
regarding what types of contractual relationships would
violate this bill. Opponents cite as an example, if a
board member had a gym membership, would that violate the
bill if the gym wished to expand its facility and needed
board approval? Any number of contractual relationships,
even banking accounts, could trigger the independent
contractual relationship and prohibit the entire board from
being able to vote on a contract, regardless of whether the
board member stands to benefit financially.
In addition, opponents note that it is unclear if the
remote interest exception would apply to the prohibitions
advanced in this bill. It is unclear if existing
AB 527 (Roger Hernandez) continued
PageH
exemptions apply in this bill that allow a board member
with a financial interest to abstain, but that permit the
body to make a decision refer only to provisions of law not
contained in this bill.
Opponents write that, given the ambiguities in this bill,
in addition to the severe penalties associated with this
section of law, we urge the committee to consider the
consequences of enacting this legislation.
8) Related legislation :
AB 2801 (Carter) Chapter 163, Statutes of 2008 adds a
"remote interest exception" to conflict of interest law to
allow resolution of litigation involving a public body and
a member of the public body and sets forth the criteria
under which that exception applies.
AB 1754 (Housing Committee) Chapter 348, Statutes of 2005
establishes that no conflict of interest exists for a
California Housing Finance Agency employee or board member
who participates in specified loan contracts under specific
conditions.
SB 1086 (Sher) Chapter 16, Statutes of 2004 creates a new
remote interest exemption for conflicts of interest in the
Government Code, pertaining to Stanford University and the
City of Palo Alto.
SB 155 (Scott) Chapter 701, Statutes of 2003 includes
within the definition of "remote interest" of public
officials and employees a person owning less than three
percent of the shares of a contracting party that is a
for-profit corporation.
AB 1208 (Cogdill) Chapter 822, Statutes of 2003 creates a
new exception in the conflict of interest laws for the
boards of small water or irrigation-related agencies,
allowing them to approve certain contracts.
SUPPORT:
American Federation of State, County and Municipal
Employees
Consumer Federation of California
Los Angeles County District Attorney's Office
AB 527 (Roger Hernandez) continued
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OPPOSE:
Association of California School Administrators
Association of California Water Agencies
California Association of Sanitation Agencies
California Special Districts Association
California State Association of Counties (unless amended)
Desert Water Agency
East Valley Water District
Eastern Municipal Water District
El Dorado Irrigation District
League of California Cities
Regional Council of Rural Counties (unless amended)
FISCAL COMMITTEE: Senate Appropriations Committee
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