1. Conflicts of Interest: Beyond the Basics
Presented By: Greg Moser, Adriana Ochoa and Tracie Stender
March 2019

2. Conflict of Interest Laws that will apply to charter schools under SB 126:
Political Reform Act, Gov. Code, § et seq.)
But charter schools will develop their own codes
Government Code § 1090
But exception allows employees to sit on charter boards
Authorizer-imposed rules?
Effective date will be January 1, 2020, as passed

3. Even more conflict of interest laws that may apply to charter schools:
Nonprofit corporations
“interested persons” rules on board composition
Corp. Code, §5230 et seq. on board composition, self-dealing
Nonprofit Public Integrity Act, Gov. Code §12586(g) on committees and compensation
Tied to funding sources
Federal funding/grant rules
SB 740 “related party” limits, 4 CCR §

4. Even more conflict of interest laws that might apply to charter schools:
Other general local government restrictions?
Incompatible offices (Gov. Code 1099)
Inconsistent activities and employment (Gov. Code )
Common law conflicts of interest
Anti-nepotism rules

5. New limits on “for-profit” organizations
AB 406 forbids “for profit” operators of charter schools (addition to Ed. Code section in July 2019)
New (proposed) CSFA regulations exclude for-profits from facilities incentive grant program (Regulation section k), and prevent “supplanting” Federal funds under SB 740 (Regulation section 10178)

6. Political Reform Act
Charter schools to be subject to the California Political Reform Act of 1974 (Gov. Code § 81000, et seq.) (“CPRA”)
Requires adoption of conflict code (even in LA?)
Requires annual financial disclosures by designated employees and officials (April 1st filing Form 700)
Requires disclosure and disqualification from decisions that may affect “material” financial interests

7. Conflicts of Interest The Political Reform Act
Under CPRA, public officials/ employees may not participate in making, or in any way attempt to use their official position to influence, a governmental decision in which they know or have reason to know they have an economic interest.
(Note the CPRA limits participation but not board membership.)

8. The Political Reform Act (continued)
To determine whether a conflict of interest exists under CPRA, five questions must be asked:
Is a public official involved?
May the decision affect an economic interest of the official? (May include that of spouse or dependent.)
Is the official making, participating in making, or using his or her official position to influence, a governmental decision?
Is it reasonably foreseeable that the decision could materially affect the official’s economic interest?

9. Conflicts of Interest The Political Reform Act (continued)
Will the effect of the decision on the public official’s economic interest be distinguishable from its effect on the public generally?
If the answer to all five questions is “yes,” a conflict of interest exists and the conflicted individual must disqualify herself from participation in the decision.
Non-employee board members have no personal financial interest in the school’s budget or operations. Employee board members disclose and disqualify themselves from decisions that could affect their interests.

10. Conflicts of Interest The Political Reform Act (continued)
Your examples and questions here . . .
Our examples:
Executive Director’s spouse is employed by curriculum vendor whose contract is up for renewal
Board member leases school site to charter school and annual rent increase is pending
Board member is a teacher; budget on agenda
CFO’s house is 560’ from proposed new site being considered

11. Conflicts of Interest The Political Reform Act – Reporting
Form 700 Annual Report of Economic Interests.
In order to identify and avoid potential conflicts of interest, the CPRA requires that designated employees disclose interests that could impact their decision-making by filing a Statement of Economic Interests, Form 700.

12. Conflicts of Interest The Political Reform Act – Reporting (continued)
Form 700 requires disclosure of income, gifts, investments and financial interests (Gov. Code sections 82028, 82030, , 82034)
A charter school’s conflict of interest code and state law identify officers, employees and consultants who must file a Form 700.
Broader disclosure if official manages investments.
Those persons must disclose certain assets and income.

13. Conflicts of Interest The Political Reform Act – Reporting
(Form 700 continued)
Certain types of gifts, honoraria and loans are prohibited.
Filers may not accept gifts totaling more than $500 in a calendar year from a single source.
Civil and criminal penalties for violation

14. Conflicts of Interest The Political Reform Act: New Regulations of Note
Cryptocurrency donations prohibited (section )
Real property distances restored as criteria for materiality of financial interests (section )
Formal prosecution and penalty guidelines issued
“streamline and warnings” (section )
penalty criteria (section )

15. Gov. Code § 1090
“The law does not permit a public officer to place himself in a position in which he might be tempted by his own private interest to disregard the interests of the public”
(40 Ops.Cal.Atty.Gen. 210)
Government Code, § 1090 to apply under SB 126
California Attorney General opinion issued December 2018.
SB 126 allows employees on board to disqualify under Lexin standards, but no other new exemptions

16. Conflicts of Interest -- Gov. Code § 1090
Prohibits public officials, employees and some contractors from participating in the process by which a contract is developed, negotiated, or executed if the person has even an indirect financial interest.
These contracts are void and cannot be enforced. (Gov. Code, § 1092.)

17. Conflicts of Interest -- Gov. Code § 1090
Section 1090 does not define when an official is financially interested in a contract; however, courts have applied the prohibition to include a broad range of interests.
Sections  , enumerate certain “remote” and “non-interests” that, once disclosed, do not prevent an officer from participating in the making of a contract.

18. Conflicts of Interest -- Gov. Code § 1090
Our examples:
California Department of Education enters into contracts with nonprofit group headed by State Superintendent’s wife
Chief development officer hires her own company to print gala event brochures at cost
School founder and manager leases property to charter school
Board member architect who prepared, for free, “needs assessment” for new school to be built submits proposal to design the campus
School hires spouse of board member to provide legal services
School leases office space from nonprofit; school board member is also board member of nonprofit

19. Conflicts of Interest -- Gov. Code § 1090
Your examples?

20. Nonprofit Corporation Law
Corporations Code section 5233 applies to charter schools operating as nonprofit public benefit corporations
No more than 49% of a board of directors may be interested persons. An interested person is a director who provides nondirector services to the nonprofit public benefit corporation and is paid for the services rendered (e.g. employee-director). (Corp. Code § 5227.)

21. Conflicts of Interests -- Nonprofit Corporation Law
Limitation on self-dealing transactions. “Self-dealing” is where a director has a personal material financial interest in a transaction, except:
Setting director stipends
Benefits received from charitable programs when the director is within the class of persons served
When the lesser of 1% of gross receipts of company or $100,000

22. Conflicts of Interests -- Nonprofit Corporation Law (continued)
A self-dealing transaction can be approved if:
It benefits the corporation
Terms are fair and reasonable
A majority of the Board, excluding the “interested” directors, approves or ratifies
The Board finds no more advantageous deal could have been obtained
(Corp. Code § 5233)

23. Conflicts of Interests -- Nonprofit Corporation Law
Under nonprofit corporate law, arrangements between corporations with directors in common are not void because common directors are present if:
Material facts are fully disclosed/ known AND
A majority of the Board approves or ratifies in good faith without counting the votes of common directors OR the contract was just and reasonable at the time of approval
(Corp. Code § 5234)

24. Conflicts of Interests -- Nonprofit Corporation Law
Corporations Code section 5234 describes directors’ fiduciary “duty of loyalty” to the corporation
Does the transaction advance and achieve the corporation’s charitable purposes?
Is the transaction “arms-length” or unfair and inequitable?

25. Conflicts of Interests -- Nonprofit Corporation Law
Your examples . . .
Our examples:
School founder wrote textbooks school wants to purchase
School hires director’s design firm to handle school recruiting and promotional materials
School outsources information technology support to firm owned by board member’s cousin, or best friend
Director on affiliated foundation board personally grants school $18 million for school facilities

26. Nonprofit Public Integrity Act, Gov. Code § 12586(g)
Board of directors or board committee must approve just and reasonable compensation of chief executive and chief financial officer.

27. Nonprofit Public Integrity Act, Gov. Code § 12586(g)
What should you consider?
Survey peers
Pay executive gets from affiliates, reported on Form 990
Include benefits in analysis
Data from Guidestar, compensation consultants
Whether to apply Government Code limits on severance and health benefits, clawbacks, etc.
Policy putting limits on reimbursements, business expenses
Include a summary of total compensation in agreement

28. Federal Funding and Grant Rules
2 C.F.R. § Conflicts of Interest
The Federal awarding agency must establish conflict of interest policies for Federal awards. The non-Federal entity must disclose in writing any potential conflict of interest to the Federal awarding agency or pass-through entity in compliance with the applicable policy.
So, check your funding source for particular conflict policies.
Example: Federal School Lunch Program
State and Federal Grants typically establish conflict of interest policies as conditions of award.
Affirmative duty to adopt rules, or risk sanctions.
General duty to avoid “supplanting” or diverting federal funds

29. Federal Funding and Grant Rules
7 C.F.R. Part 3019 – Establishes uniform administrative requirements for Federal grants and agreements awarded to non-profit organizations (among others).
7 C.F.R Code of Conduct says:
“No employee, officer, or agent shall participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved.”
“The officers, employees, and agents of the [grant recipient] shall neither solicit nor accept gratuities, favors, or anything of monetary value from contractors...”
“The standards of conduct shall provide for disciplinary actions to be applied for violations…”
Nearly identical regulations apply to many federal grants and programs.
Federal conflict rules are broader than State rules… sometimes!
§ Codes of conduct.
The recipient shall maintain written standards of conduct governing the performance of its employees engaged in the award and administration of contracts. No employee, officer, or agent shall participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved. Such a conflict would arise when the employee, officer, or agent, any member of his or her immediate family, his or her partner, or an organization which employs or is about to employ any of the parties indicated herein, has a financial or other interest in the firm selected for an award. The officers, employees, and agents of the recipient shall neither solicit nor accept gratuities, favors, or anything of monetary value from contractors, or parties to subagreements. However, recipients may set standards for situations in which the financial interest is not substantial or the gift is an unsolicited item of nominal value. The standards of conduct shall provide for disciplinary actions to be applied for violations of such standards by officers, employees, or agents of the recipient.

30. SB 740 Facility Funding
For charter schools accepting SB740 funds from the State, special conflict of interest rules apply.
4 CCR § governs Conflicts of Interest for Charter School Facility Grant Program: “Grantees must avoid actual conflicts of interest when applying for or receiving grants from the Authority”.
Regulations designed to allow “Related Party” lease arrangements.
But not with private person or for-profit entities which are related to the charter school.
(a)(3)(A) “Related Party” shall mean: (A) A School Official or a spouse, domestic partner, or dependent child of a School Official; or (B) A Corporate Entity if a School Official or a spouse, domestic partner, or child of a School Official is an Affiliate of the Corporate Entity.
However, a non-profit Corporate Entity formed exclusively for the purpose of managing or providing support to the Applicant or Charter School or to a group of related charter schools, and any direct or indirect wholly-owned subsidiary of any such Corporate Entity, shall not be considered a Related Party. ( (a)(3)(B))
(a)(3)(C) “School Official” shall mean a board, member, officer, or employee of an Applicant or the Charter School.
(c) Grant funds may not be used by an Applicant or Charter School to pay for any lease or rental agreement with a Related Party, unless all of the following conditions are satisfied:
The Related Party, and, in the case of a Corporate Entity, any School Official who is an Affiliate of the Corporate Entity, abstains from voting, or participating in the discussion of the governing board of the Charter School, regarding approval of the lease, rental agreement, or any amendment thereto.
The Related Party, and, in the case of a Corporate Entity, any School Official who is an Affiliate of the Corporate Entity, abstains from voting, or participating in the discussion of the governing board of the Charter School, regarding the decision to apply for a grant to cover costs associated with the lease or rental agreement, as well as abstaining from participating in the Application administration of the Charter School’s receipt of grant funds.
The Related Party, and, in the case of a Corporate Entity, any School Official who is an Affiliate of the Corporate Entity, discloses its interest in the lease or rental agreement to the governing board of the Charter School.
The amount of the lease or rent is at or below market rate based on an independent appraisal paid for by the Applicant or Charter School or the governing board in approving the lease or rental agreement or amendments thereto has made a finding that the agreement is reasonable under the circumstances.
The lease or rental agreement is not signed by the Related Party, or in the case of a Corporate Entity, by any School Official who is an Affiliate of the Corporate Entity, on behalf of the Applicant or Charter School.

31. Authorizer-Imposed Policies
Some authorizers demanding that charter schools adopt Conflict of Interest Policies, with particulars.
Yet another layer of red tape to navigate.
Fight it or comply? May be preempted by SB 126?

32. Common law conflicts?
Courts have rarely found conflicts based on non-financial but close relationships:
Adult son or daughter
Room-mate
Disqualification is recommended, or decision subject to attack, but courts look for substantial financial interest

33. Nepotism? Generally not illegal to hire or contract with relative
But relatives on nonprofit boards limited to minority
Opens organization to liability for employment claims
Often policies limit direct supervision

34. Incompatible offices (Gov. Code 1099)?
Public official cannot hold two public offices whose responsibilities overlap (e.g., city council and county supervisor)
Official forfeits office first held, but quo warranto proceedings required to enforce rule
Unclear that charter board member is a pubic official
Judicial council guidance suggests judges should avoid serving on charter boards due to uncertainty under rules applicable to judges
Easily overridden by statute or implication (e.g., school board member appointed to charter school board).

35. Incompatible employment or activities?
Public employees can be precluded from “moonlighting” that is inconsistent or incompatible with duties for school
Formal policy required under Government Code sections and 1126, but may not apply to charter schools
Good practice to require disclosure of employment or other activities that could interfere with work, e.g.:
Running a business during work day
Purchasing agent selling school supplies as a sideline

36. Thank you! Questions? Please feel free to contact us any time for guidance.
Greg V. Moser
Partner
Adriana R. Ochoa
Senior Associate
Tracie Stender
Associate