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Attorney General Opinion Confirms Local Agencies Cannot Purchase Products from Companies Co-owned by Their Elected Officials

by on December 2, 2014

posted in Ethics,

The question is one that small local agencies often face.  What happens when the agency needs to purchase goods or services from a company that is at least partially owned by one of its elected officials?   A very recent Attorney General opinion answers this question clearly: find somewhere else to get the goods or services.

The Facts Considered

In an October 16, 2014 opinion, the Attorney General’s Opinions Unit provided guidance in addressing a question posed by State Senator Anthony Cannella.  It answered “no” to the following question:

“May a city purchase products or order services from a glass business in which a city council member has a 50 percent ownership interest without violating the conflict-of-interest prohibition set forth in Government Code section 1090 if that council member disqualifies herself from any influence or participation in the purchasing or ordering decision?”

Stepping Down Doesn’t Solve the Problem

The key to the Attorney General’s reasoning is that this potential conflict of interest is one that is subject to Government Code section 1090.  This law states that public officials may not be “financially interested in any contract made by them in their official capacity, or by any body or board of which they are members.”  Unlike conflicts of interest that are subject to the Political Reform Act, section 1090 conflicts are subject to a “per se” rule: if the potential conflict exists, it generally cannot be excused by a person recusing herself or declining to participate.

Under the question presented, the hypothetical councilmember’s 50% ownership interest is a clear “financial interest.”  The glass purchases would be made as part of a “contract” with a “body or board” of which she is a member (the city council).  The per se prohibition of section 1090 thus clearly applies.

No Exceptions Applied

Despite their “per se” nature, section 1090 conflicts are subject to some limited sections.

  • The Attorney General explored whether certain financial interests deemed “remote” or “noninterests” applied.  It found none applicable.

 

  • The Attorney General also considered whether the “rule of necessity” could excuse the conflict presented.  This rule allows for agencies to enter into contracts section 1090 otherwise prohibits when acquisition of goods or services are “essential” to the performance of important governmental functions.  The Attorney General noted this rule is a “strict” one, and can only be applied when all other alternatives have been considered and a “real emergency and necessity” exists.  No such circumstances existed under the facts presented.

The Challenge for Small Agencies

Small agencies, especially those removed from major metropolitan areas, struggle the most with the scenario the Attorney General considered.  In some areas, there may only be one local provider of goods and services that an agency needs or uses.  In these situations, the agency will most likely need to contract with providers from more distant locales—unfortunately at a greater cost—because of the difficulty inherent in invoking the “rule of necessity.”

The penalties for violating section 1090 can be drastic, and can include the voiding of the contract that violates the section.  In light of the Attorney General’s opinion, small agencies that contract in areas where exclusive or limited numbers of vendors exist should closely scrutinize their existing business relationships for potential conflicts and should engage their legal counsels to advise regarding any potential conflicts.

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tags: 1090, Attorney General opinion, Cannella, conflicts of interest, Political Reform Act,

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