Economic Interests, Conflicts of Interest, and Disclosure

Economic Interests and Conflicts of Interest

Economic Interests

Defined as held by:
- You or your spouse, registered domestic partner, or dependent child.
- A business in which you or your family have a 10% or more interest.
Recusal may be required if a matter involves a business entity related to your investment or income source (e.g., parent, subsidiary, or businesses with the same majority owners).
State law provides detailed factors for conflict analysis.
City attorney provides guidance due to the complexity of state factors.

Conflict Analysis

Key Considerations by City Attorney:
- Is your economic interest the subject matter of the city decision?
- Could the decision have a material financial effect on your economic interest (i.e., significantly affect it)?
Presumption: If your economic interest is the direct subject of the decision, it's generally presumed the decision will have a significant financial effect.

Disqualification

Required unless an exception applies.
Example: Spouse's employer applying for a variance.
- The employer (source of income) is the subject of the decision.
- You cannot participate in or influence the decision.
Disqualification may be required even if your economic interest is indirectly affected.

Indirect Effects and Significance

Disqualification depends on the significance of the financial effect.
State Regulations: Specify factors for determining when an effect is significant.
Example: Stock ownership in a company indirectly impacted by a city decision.
Recusal required if the decision impacts company's revenues, expenses, liabilities, or assets above certain monetary thresholds, or its real estate.
When in doubt, err on the side of caution to protect the city's decision and avoid violations.

Real Property Interests

State law provides a similar analysis for real property.
Examples requiring disqualification:
- Decision affects the character of your property (view, traffic).
- Decision rezones your property or changes development criteria (height restrictions).
- Property is within 500 feet of affected property.
- Property is 500-1000 feet from affected property, and it changes market value, development potential, income potential, or best use.
Different analyses apply to commercial property and leasehold interests.

Detecting and Avoiding Conflicts

Be aware of your financial interests that may conflict with city decisions.
A conflict exists if a city matter would benefit or hurt your interests.
A thorough analysis is required.
Contact the city attorney's office for advice if there's a possibility of conflict.
Provide specific details for accurate advice.

Actions to Take When a Conflict Exists

Inform your supervisor, appointing authority, or agency head if the city attorney determines you have a conflict.
Do not participate in or attempt to influence the decision in any way.
- This includes voting, obligating your agency, negotiating contracts, providing advice, writing reports, or communicating with city officials.
Limited exception: speaking as a member of the public at a public meeting.

Penalties for Violations

Criminal and administrative penalties.
City decision can be nullified by the court.
Recusal notification form (Form 51) required for board/commission members each time they disqualify themselves.
- Filed with the ethics commission, board secretary, city attorney's office, and mayor's office within 15 days of the meeting.
- Required even if you don't attend the meeting.
- Must leave the room during consideration of the item.
Elected officials and planning/pension board commissioners must make a verbal statement on the record identifying the conflict before leaving the room.
Additional written/verbal public disclosure may be required for certain city officials in contracting matters.

Repeated Recusals

If a board/commission member repeatedly recuses due to financial conflicts, the ethics commission reviews the recusals.
If a significant and continuing conflict exists, the ethics commission can order divestment of the conflicting interest or resignation.

Avoiding Persistent Conflicts

Agencies should try to hire/appoint individuals without assets/business interests that will present persistent conflicts.
Seek advice from the city attorney when considering individuals with potential conflicts.

Common Law Doctrine of Conflicts of Interest

Public officers must exercise powers with disinterested skill, zeal, and diligence for the public benefit.
Do not place yourself in a position where personal interests conflict with your duty to serve the public.
Applies to both financial and nonfinancial interests.
Disqualification may be required when a city decision could affect a nonfinancial interest (e.g., close friend, family member, organization where you volunteer).
A court can void a city decision if an official with a personal interest participates.

Campaign Contributions

Board/commission members and elected officials are prohibited from participating in decisions involving a license, permit, or entitlement if they received contributions of more than 250 in the prior 12 months from a party or participant with a financial interest.
Contributions from the party/participant and their representatives are aggregated.

California Government Code Section 1090

Regulates conflicts of interest in contracting.
Prohibits being financially interested in a contract when your city duties require you to participate in making it.
Applies to city advisory bodies and some consultants.
Prohibits members of a body and officials/employees involved in contracting from subsequently deriving a financial benefit from that contract.

Participating in Making a Contract

Involved in any steps leading to the execution of a contract.
Includes:
- Initial decision to contract.
- Developing the proposal.
- Negotiating, recommending, influencing, advising, or voting.
Courts have established a broad standard.
An official may be criminally convicted even if they recused themselves or weren't present at the meeting (unless an exception applies).

Financial Interest in a Contract

Not defined in Section 1090 but interpreted by courts and the Attorney General.
Includes direct or indirect interest in the contract.
Actual monetary or proprietary benefits or the possibility of such benefits.
Includes your spouse's financial interests.
Contact city attorney's office if you or your family might benefit directly or indirectly from a city contract.

Indirect Financial Interest

Financial relationship with a contracting party or will receive some benefit from the making of the contract.
Examples: attorney, real estate/insurance/stockbroker, supplier of goods/services, landlord/tenant, investor in/officer/employee of a contracting party.
If a connection can be found, the contract is prohibited.

Disqualification of Entire Board

Generally, if a board member is financially interested in a contract, the entire board is disqualified.
The contract may be referred to the city's board of referred powers (city council members).
Limited situations where the board can act if the member with the financial interest recuses (e.g., board member is also on the board of a 501(c)(3) organization that is a party to the contract).

Consequences for Violating Section 1090

The contract is void and cannot be enforced.
A civil lawsuit may seek to recover public funds.
Criminal penalties, including felony charges, imprisonment, and a fine of up to 1,000.
May be barred from holding public office in California.
The state's fair political practices commission may impose civil or administrative penalties.

Restrictions on City Contracting Decisions Related to Former Employer

City law prohibits making, participating in making, or attempting to influence city decisions relating to a contract if you were employed by a party to the contract within the last 12 months.
The purpose is to ensure impartiality and prevent self-dealing.

City's Appearance Standard

The city seeks a higher standard of conduct than required by law.
City charter states that it's not in the public interest for you to act on a matter if you don't believe you can act objectively or if the public might reasonably question your objectivity.
The city attorney can provide a written opinion on whether an action would be considered in the public interest.
May disqualify a city official or board from acting on a matter.
Example: A client of your law firm appears before your city board. The city attorney would likely advise that it's not in the public interest for you to act on the matter.
Matters where a whole board/commission is disqualified may need to be transferred to the board of referred powers.

Simultaneously Holding Multiple Public Offices

May be a conflict of interest when duties overlap or clash.
When an official assumes a public office, they take on fiduciary duties to that agency.
Holding multiple offices that are incompatible is prohibited by law.
This prohibition applies to elected officials, general managers, most assistant general managers, and most members of city boards and commissions.
May apply to two city offices or a city office and an office held in a different jurisdiction.
Offices are incompatible if one has budgetary, supervisory, or regulatory power over the other, or if there's a clash of loyalties.
Example: City planning commissioner and state highway commissioner found to be incompatible due to conflicting interests regarding highway location.
Consequence: Upon accepting a second incompatible office, a public official automatically forfeits the initial office.
Contact the city attorney for guidance if you have questions about whether your position is considered a public office or if you wish to accept an additional public position.

Avoiding Conflicts: Disclosure

Identifying personal economic interests that could conflict with your city actions is key.
State law requires public disclosure of personal economic interests on the statement of economic interests (California Form 700).
You may also have to identify and disclose your spouse's, registered domestic partner's, or dependent child's economic interests.
City law requires elected officials, board/commission members, and general managers to disclose personal interests associated with sources actively engaged in business with the city on Form 60.
These disclosure forms help identify potential conflicts and allow the public to monitor potential conflicts of city officials.

What Economic Interests are Reportable on Form 700?

Investments in business entities (stock holdings or ownership interest).
Positions with business entities.
Interests in real property.
Sources of income, including gifts and loans.

How to determine which economic interests to report

Listed in your agency's conflict of interest (COI) code.
COI code lists each position that has the authority to make or participate in city decisions.
Assigns each position a disclosure category based on scope of authority and level of decision-making authority.
The disclosure category describes the types of financial interests that could be affected by city actions and therefore must be reported.
Elected officials, the city administrative officer, the city treasurer, a citywide planning commissioner, a pension board commissioner, or an official who manages public investments are required by state law to disclose all investments, business positions, income, and interests in real property.

Periodic Reporting

Provides a systematic way to review what interests you hold, assess where potential conflicts could arise, and seek guidance about whether you should act on a matter.
Seek guidance from the city attorney whenever you think you might have a conflict of interest, even if the interests are not required to be reported.

Investments Not Required to Report

Bank accounts, interests in diversified mutual funds, money market funds, insurance policies, or government bonds.
Certain exchange-traded funds (ETFs) or closed-end funds that function like diversified mutual funds if they:
- Pool money from more than 100 investors.
- Hold securities of more than 15 issuers.
- Do not have a stated policy of concentrating their holdings in the same industry or business.
- You cannot influence or control the decision to buy or sell the specific fund on behalf of your agency or influence or control the selection of any specific investment bought or sold by the fund.

Real Property Reporting Criteria

You, your spouse, your registered domestic partner, or your dependent child has an interest in the real property valued at 2,000 or more.
The real property is located in the city or within two miles of either the city's boundaries or any property owned or used by the city.
Real property held by a trust or business in which you have an ownership interest must be reported.
Leasehold interests are also reportable.

Income Reporting

Income from a particular source must be reported if it totals 500 or more and the source is located in, doing business in, planning to do business in, or has done business in the city in the past two years.
Examples: salaries, wages, reimbursed expenses, and income from the sale of a house or car.
Includes your community property share (50% of your spouse or registered domestic partner's income).

Business Positions Reporting

Depending on your disclosure category, you may need to report business positions you have with a reportable business, even if you haven't received income from the business.

Items NOT Required to Report as Income

Salary received from the city or any other governmental entity.
Social Security or disability payments received from the government.
Returns on a security that is registered with the Securities and Exchange Commission, including dividends, interest, or proceeds from a sale of stocks or bonds.

Gifts reporting

A gift is anything you receive that gives you a personal benefit for which you do not provide consideration of equal or greater value.
For instance, a gift can be a meal, admission to an event, or a travel reimbursement.
You are required to report gifts received from a reportable source