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HomeMy WebLinkAbout2003-11-24 City Council (4)City of Palo Alto City Manager’s Report TO: FROM: HONORABLE CITY COUNCIL ~)~__ CITY MANAGER DEPARTMENT: City Manager’s Office DATE:November 24, 2003 CMR: 531:03 SUBJECT:RECOMMENDATION TO DIRECT THE CITY MANAGER TO PURSUE SPECIAL LEGISLATION TO CORRECT AN ANOMALY IN STATE LAW REGARDING CONFLICT OF INTEREST RECOMMENDATION Staff recommends that the City Council direct the City Manager and Vice Mayor Beecham to pursue, with the support of Stanford University, special legislation to correct the anomaly in California law that precludes any contracts or agreements between Stanford University and the City of Palo Alto in the event that an employee of Stanford University becomes a member of the City Council. BACKGROUND According to State Government Code Section 1090, the City (with certain exceptions) cannot enter into contracts with the employer of one of its Council Members. The law makes an exception for nonprofit corporations, but Stanford University is legally a "trust with corporate powers," so this exception may not apply. The law also makes an exception if the Council Member has been employed at his or her company for three years or more when initially taking office. Vice Provost Cordell has been employed by Stanford University since March 1, 2001. Once Vice Provost Cordell takes office, new agreements between the City and Stanford may be prohibited, and renewals or amendments of existing agreements are called into question, unless special clarifying legislation is in place. Currently, Stanford has critical long-standing agreements with the City for fire protection services, utility leases, and transportation services, among others. Also potentially affected is the Mayfield agreement currently in process. A background memo prepared by the City Attorney is attached to this staff report. DISCUSSION Staff has reviewed a number of options to respond to this unique situation and believes that the best option is to pursue special legislation that would remove the severe and unusual limitation on the City’s ability to contract with Stanford University during Ms. Cordell’s term as a City Council Member. Initial contacts have been made with the City’s CMR:531:03 Page 1 of 3 legislators in Sacramento and there is optimism that such legislation could be introduced in January in the State Legislature. Assuming this emergency legislative proposal is successful, it could become effective by March 31, 2004. Staff has reviewed all contracts with Stanford University that might be contemplated as coming to the City for negotiation or execution during the period January 1 to March 31, 2004. Contracts that were fully negotiated and executed before Ms. Cordell takes office are not affected. However, renegotiation, extension, or modification of an existing contract qualifies as "making" that contract anew. The Attorney General has expressed the opinion that development agreements are among the "contracts" covered by section 1090. This means that, while negotiations on such development agreements may continue until Ms. Cordell takes office, they would need to cease at that time. The law applying section 1090 indicates that any contract, including a development agreement, resulting from negotiations that occurred while Ms. Cordell was on the Council could be void under section 1090, even if she left the Council before the agreement was approved. Staff has done a preliminary review of all contracts that might be impacted if the City was unable to either negotiate with or enter into contracts with Stanford University for the three month period from January 1 to March 31, 2003. The most significant would be negotiations on contracts related to the Mayfield Project. If land use negotiations for the Mayfield project are halted, the City would miss the construction window of summer 2004. This would probably put the City into a spring 2005 construction. Other ag-reements or contracts that might be affected include: a license agreement for use of dark fiber; agreements for cost-sharing of traffic signals and maintenance of traffic signals; any improvements related to the E1 Camino Real master planning process; any minor adjustments that may be required for the Sand Hill agreement to accommodate the Sand Hill Road Bridge seismic retrofit (if bids come in higher than anticipated); any other adjustments required to the Sand Hill development agreement as the actual projects proceed. Staff will continue to research the issue of any additional contracts that might be impacted. With the exception of the delay to the Mayfield Project, staff does not believe that this three-month delay would be critical to that City’s business. To respect the voter’s wishes in selecting Ms. Cordell to represent them on the City Council, staff believes that pursuing corrective legislation, with the support of Stanford University, is an appropriate plan of action. RESOURCE IMPACT CMR:531:03 Page 2 of 3 Delay in executing the contracts described above during the first quarter of 2004 is not estimated to have a significant financial impact on the City of Palo Alto. PREPARED BY CITY MANAGER APPROVAL arIarrison, Assistant City Manager Franker Attachment: November 17, 2003 Memo from Interim City Attorney CMR:531:03 Page 3 of 3 -o ATTACHMENT 1 FROM CITY ATTORNEY November !7, 2003 THE H0!qO.R_’ABLE CITY COUNCIL Pa!o Alto, California P~E:Concern Regarding the ~op!ication of Government Code Section 1090 to Contracts Made Between the City of Pa!o Alto and Stanford University after Counci! Hember-E!ect and Stanford Vice-Provost LaDoris H. Corde!! Assumes Office Dear Members of the Council: Representatives of Stanford University have advised the City Hanager and me of an ambiguity in California law, specific to Stanford, that raises a concern about the validity of future contracts, including leases, between the City and Stanford. Gover.n_ment Code Section 1090 forbids city contracts in which a council member is "financially interested."I The law bars contracts between the city and a counci! member’s emp!oyer unless one of several exceptions applies. S~anford has pointed out that because the university {s a "trust with corporate powers" rather than a non-profit corporation, it {s not clear that any of the exceptions wil! apply when its Vice Provost and Specia! Counselor to the President for Campus Relations, LaDoris H. Corde!!, begins her council te_rm on January !, 2004. This remort_ is _nnenaed{ ’ ~ to advise you of the relevant law and facts as known to our office at this time, and of our ~~tic!e 4 of Chapter 1 of Division 4 of Title ! of the Goverm~nent Code,"Prohibitions Applicable to Specified Officers," Sections 1090-1098. The texz is available in the "Publications" section of the California Attorney General’s Website as part of its 1998 p~mph!et,Conflicts of interest. The Website address is http://caag.state.ca.us Conflicts of interesU provides a guide to both Section 1090 conflicts ~nd the Political Reform Act of 1974. 031117 s)na 0091397 THE HON0~LE CITY COUNCIL November 17, 2003 Page 2 _RE: Goverm~ent Code Section 1090 preliminary view on ways in which the situation may be addressed. Legal Background A.Politica! Refo_~m Act Conflicts California City Council members, (and other public officials), are subject to two different state-wide conflict of interest regulations. The better ~nown is the Politica! Reform Act of 1974, (~P~A"), adopted by the voters and administered by the Fair Political Practices Commission. Under this law, a council member must disclose certain "financial interests" in a~_ua! statements and whenever a matter affecting those financial interests is before the Counci!. Covered financia! interests include both property ownership, such as tea! estate, stocks and bonds, and businesses, and sources of income and gifts, income of your spouses and minor children is included. When a counci! member has a financial interest in a decision, he/she may not vote, participate in the counci! debate, or use your officia! position in an effort to affect the outcome. However, the remaining counci! members may stil! vote to go ahead with the decision, even if it benefits (or damages) the council member’s conflicted finam_cia! interest. The PP~, is im_mlemented through a detailed set of regulations, issued and administered by the Fair Political Practices Commission, Public officials may cal! the FPPC for info_~-ma! advice or obtain written opinions insulating themselves from prosecution for participating in a decision. B.Section 1090 Conflicts !.Basic Prohibition on Contracting. The concern about future Stanford contracts arises from an entirely sep=_a~e set of statutes "Prohibitions .Applicable to Specified Officers,~ usually referred to as "Section 1090." These laws date back in various form to 1851 and are said to ~mere!y express the legislative declarations of 03! ] 17 syn 0091397 THE HONO~’A-BLE CITY COUNCIL November 17, 2003 Page 3 _RE.: Gover_~_ment Code Section 1090 common-law doctrine upon the subject.2" 1090 states: Government Code Section Members of the Legislature, state, county, district, judicia! district and city officers or e~m!oyees shall 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. Nor sha!l state, county, district, judicia! district, and city officers or e~m!oyees be purchasers at any sale or vendors at any purchase made by them in their official capacity. (E~hasis added.) The FPPC does not issue opinions about Section 1090 conflicts and no agency has authority to issue regulations implementing it. instead, we must rely on case law and to a lesser extent, the comments and opinions of the Attorney Genera!.~ Changes to Section 1090 are made through legislative amendments. Section 1090 only regulates contracts, (including purchases and sales and leases,) while the PP~ applies to any city decision that wil!materially affect a council member’s financial interest.(Deciding on public improvements or a rezoning are exar<mles of decisions covered by the P~A but not Section 1090.) Case law, as summarized by the Attorney General, establishes that: Although specia! statutory exemptions may negate the fu!l effect of the section 1090 prohibition, the fol!owing economic relationships generally constitute a financia! interest: em_m!oyee of a contracting party; attorney, agent or broker of a contracting party; supplier of services or goods to a contracting party; land!ord or tenant of a contracting party; officer or employee of a nonprofit corporation which is a contracting party." Conflicts of Interest, p. 51 2 Stockton P. & S. Co. v. Wheeler (1924) 68 Ca!.App. 592, 597, cited in Conflicts of interest at page 45. ~ The Atto_~ney Genera!’s opinions, though only advisory to the state’s courts are entitled to "considerable weight" on the subject of Section 1090.T.horpe v. Long Beach Community College District (2000) 83 Cal..Amp. 45th 655. 03t 117 syn 0091397 THE HONO~A_B. LE CiTY COUNCIL November 17, 2003 Page 4 RE: Goverr_ment Code Section 1090 Financia! interests may also arise from the interests of one’s spouse.- Vice-Provost Corde!l is a Stanford employee, but this fact a!one does not make her financially interested in contracts between Stanford University and the City of Pa!o Alto. The next _question is whether any exemptions apply to her situation. 2.Special Statutory Exemptions. The "special statutory exemptions" referred to by the Attorney Genera! are of two kinds: Section 1091.5 ~noninterests" and Section 1091 ~remote interests." Exemptions apply to your persona! interests and those of your spouse, if any. (a)Nonimterests. A council member with a "noninterest" must disc!ose that noninterest and have it noted in the officia! records.Having done so, the counci! member may participate in the decision on making the contract.The noninterests of Government Code Section 1091.5 arevery specific and i will not try to summarize them exactly here. However, among the exemptions that frequently apply are those for: ¯Unsalaried ~members" of a nonprofit corporation, if the interest is disclosed and noted in the minutes when the contract is first considered by the council. ¯Uncompensated officers of certain nonprofit corporations fo_rYmed to support city functions, such as a ~Friends of the City Symphony" group. ¯Serving as attorney, broker, or insurance agent for the other party, so long as the counci! member involved owns less than !0% of the firm involved and receives no income as a result of the contract. ¯Ownership of less than 3% of the shares of a for-profit corporation provided that certain income tests are met. ~ A~elsen v. Richards 1925) 75 Ca!.App. 680. 031117 syn 0091397 THE HONO~m~LE CITY COUNCIL November 17, 2003 Page 5 _RE: Government Code Section 1090 ¯Being a recipient of city services in the same mam_ner as the rest of the public. ¯Reimbursement for ex~p_enses incurred in your official duties. None of these exemptions apply to council member-elect Cordel!.They are provided by way of background: Section 1090 is so com_mrehensive on its face that a failure to describe the exceptions can be misleading. (b)Remote Interest Exemptions. A counci! member with a "remote interest" in a contract must publicly identify that remote interest and then refrain from participation in the making of the contract.5 Therefore, whenever you identify a P~A conflict on a contract matter and disqualify yourself, you are also dealing correctly with any Section 1090 "remote interest." If your interest in a contract is ~remote," then the city can go ahead with the contract as long as you do not participate in the decision. Remote interest exemptions include: (b)(1) .<n officer or em_m!oyee of a nonprofit corporation, (other than the sort of city-auxiliary nonprofit described above under noninterests.) (b) (2) _An emp!oyee of a contracting party if you were an em_m!oyee for at least three years before you initially accepted your council office, ther~ are at least ten other employees, and you: ¯are not an officer or director of the contracting party, ¯own less than 3% of the contracting party, and ¯did not participate in formulating your company’s bid. ~ Case law defines the making of a contract to include more than voting on it. For a detailed discussion, see Conflicts of interest, pp. 47-51. 031117 syn 0091397 THE HONO~ms CITY COU_-NCIL November 17, 2003 Page 6 RE: Goverm_ment Code Section 1090 ¯(b) (6) A !a~er, insurance or real estate broker or agent, or stockbroker for a contracting party if ¯you receive no remuneration as a result of the contract; and ¯you own less than 10% of the law practice, brokerage, or agency involved. (b) (8) A supplier of goods or services to a company that wishes to contract with the city, provided that the relationship has existed for at least five years before the counci! member’s election or appointment to office. C.issues Presented by Election of Vice Provost Corde!! !.No Definitive Exemption. Hore than one individual employed by Stanford University, or married to a Stanford employee, has served on the City Counci!. When the Stanford emp!oyee has been with Stanford for at least three years before the counci! member first takes office, there is only a "remote interest" under Government Code Section i09!(b) (2). The City can still contract with Stanford. Vice Provost Corde!! began her career at Stanford only after retiring from the state judiciary. She will not have been employed for three years by Stanford before her term begins.6 Therefore, the (b) (2) exemption is not available. This leaves the (b) (!) exemption for both officers and employees of "~"_."_nonprofit corporations Stanford has mointed out that this may not be available either, because Stanford is not a nonprofit corporation, it is "a body having corporate powers under the laws of the State of California." Stanford achieved this distinctive form in 1900, when fo_rmer Article 9, Section !0 was added to the California Constitution.7 We are informed that 6 Vice Provost Corde!! is a senior administrator at Stanford. She is not a trustee of Stanford University, which would appear to be the position analogous to "director." We do not P~now whether she would be considered am. oz~lcer. ~ The 1900 section confi_~med the trusts and estates created to found the University and authorizes the legislature, by specia! act, to grant co_~-porate 031117 syn 0091397 THE HONOP~_BLE CITY COUNCIL November 17, 2003 Page 7 RE: Government Code Section 1090 this may have been done because nonprofit corporations of an unlimited duration were not available at that time.~ While there are many other private, nonprofit colleges and universities in California with ~boards of trustees," most if not al! of those organizations are organized as nonprofit corporations. There are also other charitable trusts in the state. Stanford is continuing to research the legislative history of Section 1090, and we wil! continue to look into it as well. The distinction between a nonprofit corporation and an o_gan!zat_on with corpo_=~e Dowers" may seem slight Furthermore, in a criminal prosecution, PeQm!e v. Sobe!,~ a court exp_lained that Section 1090 was not to be interpreted in a h~e_~ec~n_c=! ma~:ner. Unfortunately, that remark was made in the context of applying the prohibition broadly and the exemptions narrowly Conflict of_.in~e_est rules do not assume wrong-doing or bad faith on anyone’s_Dart. ~hev_ _ are concerned with both the appearance and reality of dua! !oyalties. We are not in a position to assure you that the City could stil! lawfully enter into new contracts, or extend or renegotiate existing contracts, with Stanford Un_vers~y aftercounci! member-elect Cordel!’s te_rm begins. 2.Violating Section 1090. If the City and Stanford ~ ren~e_ into any new agreements, or extend or amend existing ones, after council member-elect Corde!! is in office, then the validity of those contracts may be challenged by a third party in a taxpayers’ suit. if the contract does violate Section 1090, the contract is void, the City is entitled to retain the benefit of the bargain, <nd Stanford must forfeit any consideration that went powers and privileges to the trustees. It exempts Stanford property from state taxes and authorizes future exemption from co~unty and municipal taxation, ~provided, that residents of California shal! be charged no fees for tuition unless such fees be authorized by an act of the Legislature." 8 Stanford’s ~unique fo_~m of organization does not present ~ny difficulties under the P~A, because the P~A refers to "nonprofit entities" rather th~n nonprofit corporations. ~ (1974) 40 Ca!.App.3ra 1046; see also People v. Honig (1996) 48 Ca!.App.4~h 289. 03] ] |7 syn 0091397 THE HONO_R_~_BLE CITY COU_-NCiL November 17, 2003 Page 8 _RE: Government Code Section 1090 to it. in Thompson v. Ca!l,!° a taxpayers’ suit against the City of Albany and a counci!member and his wife, the California Supreme Court required that a counci! member and his wife refund the purchase price of land acquired indirectly from them while the city retained the land. it stated that, "mitigating factors-such as Ca!l’s disclosure of his interest in the transaction, and the absence of fraud-cannot shield Call from liability." A public official may be criminally prosecuted for violation of Section 1090. A conviction for willful violation of Section 1090 is punishable by fine or imprisonment. These prosecutions are brought by the Attorney General or District Attorney, not the City Attorney’s Office. 3."Rule of Necessity Exception." The P~A has a "rule of necessity" exception written into it that pe_rmits counci!members to participate in a decision in which they have a financial interest if there is no other alternative.(This happens rarely, but if so many counci! members have a conflict that ~there is no quorum, they draw straws until a _quorum is reszo_ea.) There is no rule of necessity --~on ai!ow~ngexcepu~’contracts written into Section 1090, but the courts have created a limited one. The Attorney Genera! describes its application to the Stanford situation as follows: [The ~ru!e of necessity" pe_rmits a contract when] the contracting officer .... would be the sole source of supply of such essentia! supply or service, and also would be the only official or board permitted by law to execute the contract. Public policy would authorize the contract despite this conflict of interest. 69 Ops. Cal. Atty. Gen. 102, cited in Conflicts of Interest, page 66. The opinion went on to state that an _solaued town could buy nighttime service from its only gas station, even though it was o%~ed by a counci! member. However, this exception did not 10 (1985) 38 Ca!.3-’~ 633 031117 syn 0091397 ~HE HONOP~ABLE CITY COLrNCiL November 17, 2003 Page 9 RE: Government Code Section 1090 apply to any service that could reasonably be anticipated and therefore, scheduled for daytime service. Pa!o Alto has used the rule of necessity for sole source maintenance of e_quipment acquiired by the City before the Conflict arose. This exception may apply to some of the City’s existing contracts with Stanford; we have not reviewed them in this !ight.~ The noninterest exemption for receiving public services would presuinab!y apply to many if not all of Stanford’s utility service from the City. However, there are other agreements, such as the proposed Hayfield/Stanford Research Park deve!opment agreement, which includes the project to construct soccer fields, which would not be protected by a rule of necessity. This might also be true of some of the city’s transportation and fire service agreements with Stanford. None of this is a problem if it could be definitively determined that there is no Section 1090 problem. D.Hethods for Obtaining Certainty on Contract Validity. We have been asked by the City Manager to advise you if there are means, other than Vice Provost Corde!!’s resignation either from Stanford University or her council position, to be sure that there wil! be no Section 1090 problems with new Stanford contracts when she assumes office,n The Fair Politica! Practices Commission, which can issue protective opinions on Politica! Reform Act conflicts, has no authority with regard to Goverrnment Code Section 1090. The Attorney Genera! could be asked for an opinion on the subject, but his opinions are only advisory, entitled to respect from the courts but not definitive. If the City, or Stanford, wish to pursue this alternative as a helpfu! if partial measure, the assistance of a state legislator wil! be required. n If Vice Provost Corde!! were to resign her Stanford position before assuming office, any Section 1090 problem would be cured immediately. There is no one year waiting period as there is for ending a conflict under the P~A. She would still be barred from participating in any decision involving Stanford for a year. (We are assuming that she would not be involved, on Stanford’s behalf, in formulating Stanford positions in dealings with the City, either.) 03] ] 17 syn 0091397 THE HONOB_~_BLE CITY COUNCIL November 17, 2003 Page ! 0 RE: Government Code Section 1090 Specia! legislation addressing this unusua! situation is more definitive alternative.(The situation is unusua! because Stanford University itself is an unusual creature, legally speaking.) A modification of Section 1091 (b) (a) to refer to ~nonprofit entities," as the P~A does, instead "nonprofit corporations" would be one approach. A broader reform of Section 1090 has been the subject of a Lea~de of California Cities effort for some time; we have not had an opportunityto review those proposals and it is probable that they wi.l.~ ..... be -~uch debated. .<n attempt to include this amendment in that process may be too s!ow to ~avoid al! im_mact on, for example, the Hayfield development agreement. However, there have been more ~party specific" exemption amendments in recent years, including one for ~bona-fide, nonprofit, tax-exempt corporations" that preserve and restore parks, natura! lands, and historic resources. (Government Code Section !09!.5(a) (!2), amended by S.B. 1679, effective July 5, 2000.) While a regular bil! would not be effective unti! January !, 2005, urgency legislation could be effective sooner. While we believe this information is accurate, this report has been prepared on a tight time frame in order to get it to you and the public as quickly as possible. We wil! continue to research the underlying lega! issues and possible remedies, and our conclusions may be changed as a result of that work. WSF:syn Respectfully submitted, Interim City Attorney cc:Frank Benest, City Manager Emily Harrison, Assistant City Manager 031 ] ]7 syn 0091397