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Overview of Political Reform Act

The Political Reform Act is the single most important conflict-of-interest law in California. It includes several conflict-of-interest provisions and restricts the receipt of gifts and honoraria. These topics are covered in this ethics orientation program.

In addition, the Political Reform Act requires state and local officials to file Statements of Economic Interests. Officials who are required to complete these statements may be required to disclose investments and positions in business entities, interests in real property and sources of income and gifts. This orientation is not a tutorial on disclosure, although reference will sometimes be made to these disclosure requirements.

Defining Some Terms

    Official or Public Official refers to elected or appointed officers and employees.

    Officer refers to high-level officials who exercise some portion of the sovereign power.

    Employee refers to a person who is not an officer and who is employed by a government agency.

    Designated Employee refers to an officer or employee who is covered by an agency’s conflict of interest code.

    Spouse refers to a married person or a registered domestic partner recognized by law. Accordingly, references to an official’s spouse throughout this course include the official’s husband, wife, or domestic partner.

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Political Reform Act - Conflict of Interest

Let’s now begin with the first provision under the Political Reform Act, conflict of interest. Under the Political Reform Act, a public official may not take any part in a governmental decision in which the official has a disqualifying conflict of interest.

A public official has a conflict of interest with regard to a particular governmental decision if it is reasonably foreseeable that the decision will have a material financial effect on one or more of the official’s economic interests.

What are Economic Interests?

Economic interests include particular kinds of financial stakes held by public officials, such as investments in real property or for-profit businesses, or individuals or organizations that have provided income or gifts to public officials.

A public official’s conflict of interest is disqualifying if the financial effect on his or her economic interest is distinguishable from the financial effect of the decision on the public generally. To avoid violating this law, one should learn to recognize the economic interests from which a conflict of interest can arise.

No one ever has a conflict “on general principles” under the Political Reform Act - a conflict can only arise from the particular kinds of economic interests covered by the Act, which are explained next.

Remember These Points

  • This law applies only to financial conflicts, that is, conflicts arising from particular kinds of economic interests.
  • The most important proactive step a public official can take to avoid conflict-of-interest problems is learning to recognize the economic interests from which conflicts can arise.

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Conflict of Interest

The Eight-Step Process

The regulations of the California Fair Political Practices Commission (FPPC), establish an eight-step process for determining whether a public official has a disqualifying conflict of interest under the Political Reform Act.

Follow along as new Governor’s appointee, Jessica Carrington, gets important information about conflicts of interest from her colleague, Jose Lopez.

Jessica: “Hi Jose. Do you have a minute? I’m a bit confused about some of the conflict-of-interest rules for public officials. Can you help me understand how to determine when a public official has a conflict of interest?”

Jose: “Well Jessica, the regulations of the California Fair Political Practices Commission, or FPPC, establish an eight-step process for determining whether a public official has a disqualifying conflict of interest under the Political Reform Act. If you take the facts of your own situation and apply the eight-step process to them, you will be able to determine if you have a conflict under the Political Reform Act.”

Jessica: “That sounds helpful. Does this eight-step process apply to all types of conflicts?”

Jose: “No, the Political Reform Act applies only to financial conflicts, that is, conflicts arising from particular kinds of economic interests. It does not apply to other types of conflicts or biases.”

Jessica: “If I think I may have an economic interest in a decision, what steps should I take?”

Jose: “If you think you may possibly have a conflict of interest, you should consult with your agency legal counsel and think through the eight steps to decide if a conflict of interest actually exists.”

Jessica: “I know that conflicts of interest are a serious matter. What are the penalties for violating the Political Reform Act?”.

Jose: “Violations can be very costly, Jessica. If you violate the conflict-of-interest provisions, you may be subject to administrative fines up to $5,000 per violation, civil penalties or even misdemeanor criminal penalties. I’d study that eight-step process if I were you. That way, you’ll know how to avoid conflicts of interest.”

How can you determine if a disqualifying conflict of interest exists? The regulations of the California Fair Political Practices Commission (FPPC), establish an eight-step process for determining whether a public official has a disqualifying conflict of interest under the Political Reform Act. If you recognize that one or more of your economic interests is involved in a government decision, you should consult with your agency’s legal counsel and think through the eight steps to decide if a conflict of interest actually exists.

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The Eight Steps

We will now explore the eight-step process for analyzing a conflict of interest under the Political Reform Act. We’ll look at each step in greater detail in the following lesson.

Step One  Is the individual a public official?

Step Two  Is the public official making, participating in making or influencing a governmental decision?

Step Three  Does the public official have one of the five qualifying types of economic interest?

Step Four  Is the economic interest directly or indirectly involved in the governmental decision?

Step Five  Will the governmental decision have a material financial effect on the public official’s economic interest?

Step Six  Is it reasonably foreseeable that the public official’s economic interest will be materially affected?

Step Seven  Is the effect of the governmental decision on the public official’s economic interest distinguishable from its effect on the general public?

Step Eight  Despite a disqualifying conflict of interest, is the public official’s participation legally required?

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Step One - Is the individual a public official?

The Political Reform Act’s conflict-of-interest rules apply to “public officials,” as defined in the Government Code. Every member, officer, employee or “consultant” of a state or local government agency is a public official for purposes of the Act.

Who is Considered a Public Official?

The Political Reform Act’s conflict-of-interest rules apply to “public officials,” as defined in the Government Code. Every member, officer, employee or “consultant” of a state or local government agency is a public official for purposes of the Act. If you have questions about whether a given individual is a public official covered by the Act, consult your legal counsel or contact the FPPC for advice.

Who is NOT covered?

Judges and court commissioners in the judicial branch of government are not public officials, for purposes of the Political Reform Act.

Be aware that sometimes difficult issues can surround “consultants,” individuals who manage public investments, and quasi-public organizations.

If you have questions about whether a given individual is a public official covered by the Act, consult your legal counsel or contact the FPPC for advice.

Remember This Point

The Act’s conflict-of-interest restrictions apply only to “public officials,” but that term is defined broadly.

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Step Two - Is the public official making, participating in making or influencing a governmental decision?

The Act’s conflict-of-interest rules apply only to public officials as they are making, participating in making, or influencing a governmental decision. Following is a list of situations in which the Act’s conflict-of-interest rules apply.

  • The public official makes a governmental decision like voting or making an appointment.
  • The public official participates in making a governmental decision such as giving advice or making recommendations to the decision maker.
  • The public official influences a governmental decision by communicating with the decision maker.

A good rule-of-thumb for deciding whether a given public official’s actions constitute making, participating in making, or influencing a governmental decision is to ask whether he or she is exercising discretion or judgment with regard to the decision.

If the answer is “yes,” then his or her conduct with regard to the decision is most probably covered by the conflict-of-interest rules.

Remember This Point

If a public official is exercising discretion or judgment with regard to a governmental decision, his or her conduct is probably covered by the Political Reform Act’s conflict-of-interest provisions.

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Step Three - Does the public official have one of the five qualifying types of economic interest?

Recognizing the economic interests from which conflicts of interest may arise is the most important step in complying with the law. The Act’s conflict-of-interest provisions apply only to conflicts that arise from the five types of economic interests listed below:

  1. Business entities
  2. Real property
  3. Sources of income to the public official
  4. Sources of gifts to the public official
  5. The “personal financial effects” rule

Economic Interest Type 1:   Economic Interests in Business Entities

A public official has an economic interest in a for-profit business entity if either of these two conditions is true:

  1. the official has a direct or indirect investment of $2,000 or more in the business entity; or
  2. the public official is a director, officer, partner, trustee, employee or holds any position of management in the business entity.

A direct investment means an official personally owns an investment. An indirect investment means the official’s spouse, the official’s dependent children or anyone acting on the official’s behalf has an investment. In addition, a public official who owns 10% or more of a business entity has an indirect investment in any investment owned by the business entity in proportion to the public official’s ownership stake.

If a public official has an economic interest in a business entity, the official must be constantly aware of whether that business entity is involved in or affected by governmental decisions in which the official takes part. If such a business is directly or indirectly involved, a conflict of interest is possible.

Remember These Points

A public official has an economic interest in a business entity if:

  • The official has a direct or indirect investment; or
  • The official holds a position in the business.

Let's Review

Question: Tina is a member of a state board. In her private capacity, she works for Pride and Poise, Inc. Her husband owns 100 shares of Technosoft valued at $50 per share. In which, if any, of the following business entities does Tina have an economic interest? Select the best answer.

  1. Pride and Poise, Inc.
  2. Technosoft
  3. Both Pride and Poise, Inc. and Technosoft
  4. None of the above

    Answer: c. Tina has an economic interest in Pride and Poise, Inc. because it is her employer. She has an economic interest in Technosoft because she has indirect investment via her husband.

Economic Interest Type 2:   Economic Interests in Real Property

A public official has an economic interest in real property if the official has an equity or leasehold interest in real property valued at $2,000 or more. The official’s interest includes the official’s direct, as well as indirect, interests.

A direct interest in real property means an official personally holds the interest. An indirect interest means the official’s spouse, the official’s dependent children or anyone acting on the official’s behalf has an interest in real property.

In addition, a public official who owns 10% or more of a business entity has an indirect interest in any real property held by the business entity in proportion to the public official’s ownership stake.

If a public official has an economic interest in particular real property, the official must be constantly aware of whether that real property is involved in or affected by governmental decisions in which the official takes part.

If such real property is involved, directly or indirectly, a conflict of interest is possible.

Remember These Points

  • Interests in real property cover both equity and leasehold interests as well as deeds of trust.
  • Direct and indirect interests are also covered.

Let's Review

Locke is a member of a state commission and an attorney. He and his wife own a single-family home. He leases office space for his law practice. He also owns two of the ten limited partnership shares in a limited partnership that owns a downtown office building. What are Locke’s economic interests?

Question: Does Locke have an economic interest in his home? Yes or No.

Answer: Yes. Locke has an economic interest in his home because he and his spouse own it.

Question: Does Locke have an economic interest in the office space he leases for his law practice? Yes or No.

Answer: Yes. An economic interest in real property does not necessarily require ownership of the real property; a lease may be an economic interest in real property.

Question: Does Locke have an economic interest in the downtown office building? Yes or No.

Answer: Yes. He has an economic interest because his share is 10% or more of the partnership. Even if the title to the building is in the name of the limited partnership, investors with an interest of 10% or more have an economic interest.

Economic Interest Type 3:   Sources of Income to Public Officials

A public official has an economic interest in sources of income to the official. A source of income to a public official is anyone, whether an individual, business entity or an organization, that provides or promises $500 or more in income to the official within 12 months prior to the government decision-in-question.

A person or entity that provides income to an official, either directly or indirectly, may be a source of income to the official.

Indirect Sources of Income

Under the Political Reform Act, the term “spouse” includes registered domestic partners. In California, a public official has a community property interest in his or her spouse’s income. Therefore, a person or entity that provides income to an official’s spouse may be an indirect source of income to the public official, as well.

A public official who owns 10% or more of a business entity is deemed to receive “pass-through” income from the business’s clients in proportion to his or her ownership stake. These clients may be sources of income to the public official, if the official’s proportionate share of the payments is $500 or more.

If a public official has an economic interest in a person because that person is a source of income to the official, the official must be constantly aware of whether that source of income is involved in or affected by governmental decisions in which the official takes part. If such a source of income is involved, directly or indirectly, a conflict of interest is possible.

Remember These Points

  1. A public official has an economic interest in most individuals and entities that provide income to the official.
  2. Sources of income to a public official’s spouse or to a business in which the official has an investment may also be a source of income to the public official.
  3. Even if a public official does not have an economic interest in a business entity by virtue of investment or by holding a position in the business, the business may still be an economic interest if it provides income to the public official.

Let's Review

Jerri is a state board member. Her husband, Ben, is employed by Crashguard Insurance. She is a partner in, and 7% owner of, a family-owned heating oil business operating under the name of Heatright. Her share of the profits from Heatright was $85,000 last year. This business supplies fuel to many local businesses and residences. What are Jerri’s sources of income?

Question: Is Crashguard Insurance a source of income for Jerri? Yes or No.

Answer: Yes. Crashguard Insurance is a source of income to Jerri because she has a community property interest in Ben’s income from the company.

Question: Is Heatright a source of income for Jerri? Yes or No.

Answer: Yes. Heatright is a source of income to her because she received $500 or more in income from the company last year.

Question: Are the customers of Heatright who have purchased more than $5,000 worth of heating oil in the past twelve months a source of income to Jerri? Yes or No.

Answer: No. The customers of Heatright cannot be sources of income to Jerri because she owns less than 10% of Heatright – the required threshold for counting income from a business entity.

Economic Interest Type 4:   Economic Interest in Gift Givers

A public official has an economic interest in anyone, whether an individual, business entity, or organization, that provides gifts to the official totaling $440 or more within 12 months prior to the governmental decision-in-question.

Do not confuse an economic interest stemming from a gift with an economic interest stemming from a source of income that provides or promises $500 or more in income.

If a public official has an economic interest in a person or entity because that person is a source of gifts to the official, the official must be constantly aware of whether that source of gifts is involved in or affected by governmental decisions in which the official takes part. If such a source of gifts is involved, directly or indirectly, a conflict of interest is possible.

Remember This Point

A public official has an economic interest in any individual, business or organization that provides the official with gifts totaling $440 or more within 12 months.

Let's Review

Question: Rex is a director of a state department. He receives two gifts from a business that is interested in his department’s activities. In October, he receives two tickets to a Sacramento Kings game valued together at $140. In February of the next calendar year, he receives a framed photograph of Yosemite valued at $300. In June, he is considering a decision that would affect the business. Select the statement below that is TRUE in this situation.

  1. Rex has an economic interest in the business because he has received $440 value in gifts during the 12 months prior to the decision.
  2. Rex does not have an economic interest because the gifts were received in separate calendar years.

    Answer: a. Rex has an economic interest in the business because he has received $440 value in gifts during the 12 months prior to the decision, as opposed to receipt during separate calendar years.

    Economic Interest Type 5:   Personal Financial Effects Rule

    A public official has an economic interest in the amount of his or her own personal income, expenses, assets, or liabilities, as well as those of his or her immediate family. The interest is triggered when a government decision will either increase or decrease the personal income, expenses, assets or liabilities of the official, or the official’s immediate family. This is often called the “personal financial effects” rule.

    For example, a decision to fine an official for littering would be covered by the “personal financial effects” rule because the fine will directly affect the official’s personal finances. However, a decision that affects the value of the official’s home would not be covered because the decision would affect the official’s interest in real property.

    One place where the “personal financial effects” rule could arise is commonly called the “government salary” exception.

    A public official does not have a conflict of interest where the decision affects only the salary, per diem, or reimbursements for expenses received by the public official or his or her spouse from a government agency.

    However, under the “personal financial effects” rule, this exception does not apply when the decision singles out the public official’s spouse in a way that would peculiarly affect income, expenses, assets or liabilities. For example, a decision to hire or fire, promote or demote would fall under the “personal financial effects” rule and would constitute an economic interest.

    Remember This Point

    An official has an economic interest in decisions that directly affect the personal finances of the official or the official’s spouse or dependent children.

    Let's Review

    Question: Molly is a deputy director of the Department of Finance. Her husband works for another state department as a civil service employee. Molly is working on a pay raise for state civil service employees, including her husband. Does she have an economic interest under the “personal financial effects” rule? Yes or No.

    Answer: No. The “government salary” exception applies since the decision affects only Molly’s husband’s civil service salary. He is affected by the decision no differently than any similarly situated employee.

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    Steps Four Through Six - Determining the financial impact of the governmental decision on the official’s economic interest

    Once an economic interest is potentially involved, how does an official determine if a conflict exists? Now that you have completed step three, the most important step of the eight-step process, let’s look at steps four to six.

    Making a Calculated Prediction

    To determine whether a conflict of interest exists, the official must make a calculated prediction: Is it reasonably foreseeable that the governmental decision will have a material financial effect on the public official’s economic interests?

    Defining Some Terms

    Before we evaluate the interplay between reasonably foreseeable and material financial effect, let’s first define them.

      Reasonably Foreseeable
      The phrase reasonably foreseeable means substantially likely. Deciding whether a financial effect is substantially likely must be based on the entire factual situation.

      Material Financial Effect
      The phrase material financial effect refers to the impact of a governmental decision on an official’s economic interests.

      Material
      As used in the phrase material financial effect, the word material means important.

    There are specific thresholds in the FPPC’s regulations, called materiality standards, for evaluating whether a financial effect on an economic interest is material.

    There are two factors that control which materiality standard will apply to any given conflict-of-interest situation. The first factor is the economic interest itself. That is, there is one set of materiality standards for business entities and another for sources of income. The second factor is whether the official’s interest will be directly or indirectly involved in the decision. An economic interest that is directly involved in a governmental decision creates a bigger risk of a conflict of interest than one that is indirectly involved in a decision.

    There are specific FPPC regulations that define the materiality standards for each type of economic interest depending on whether the interest is directly or indirectly involved. These regulations are much too complex to discuss further in this ethics orientation. For purposes of this orientation, it is sufficient that you understand the framework of the eight-step process. To actually analyze a real conflict-of-interest situation, you must have the materiality standards in your possession as you apply steps four through six.

    Follow along as Jessica Carrington talks with Jose Lopez about steps four through six of the eight-step process.

    Jessica: “Ah, Jose, I’m glad you dropped by. I’ve just been through the first three steps for determining if I have a conflict of interest.”

    Jose: “Good, then you’re ready for step four. In this step you need to decide whether your economic interest is directly involved in the governmental decision. If it is, it is generally presumed that the governmental decision will materially affect your interest. If it is indirectly involved, then you generally will apply a series of thresholds in step five to determine if the effect is material.”

    Jessica: “Would you give me an example of how step five works?”

    Jose: “Well, if you have an economic interest in a person because that person is a source of income to you, then you should examine the materiality standards for sources of income. Usually, the larger the financial resources of the individual or entity involved, the larger the effects of the decision will have to be in order for them to be considered material.”

    Jessica: “All right, let me see if I am following the application of step five. You’re saying that if my source of income is a Fortune 500 company, the effects of the decision will have to be pretty substantial to be material; but, if my source of income is my next door neighbor to whom I sold a painting, the effect would not need to be nearly so great to be material?”

    Jose: “Exactly! That’s the general rule. The fifth step where you apply the FPPC’s materiality regulations will help you figure it all out. Now, in step six, you need to ask whether it is substantially likely that the material financial effect in step five will actually occur.”

    Jessica: “What happens if it is substantially likely that the material financial effect will occur?”

    Jose: “If the answer to this question is yes, then you would have a conflict of interest unless the ‘public generally’ exception in step seven applies. If the answer is no, then you would not have a conflict.”

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    Step Seven - Is the effect of the governmental decision on the public official’s economic interest distinguishable from its effect on the general public?

    Jessica: “Ok, I’ve got a conflict through step six, but step seven with its odd sounding name, may give me a way out? Is that right?”

    Jose: “That’s right. Not all conflicts of interest result in disqualification. If the ‘public generally’ exception applies, a public official may take part in a governmental decision despite the conflict of interest.”

    Jessica: “Why does the ‘public generally’ exception exist?”

    Jose: “This exception exists because a public official is less likely to be biased by a financial impact on one of his or her economic interests when a significant segment of the population is likely to feel a substantially similar impact from a governmental decision.”

    Jessica: “So is it correct to say that the ‘public generally’ exception applies most of the time?”

    Jose: “No. Certainly not. The ‘public generally’ exception must be considered with care. You may not just assume that it applies. There are specific rules for identifying the significant segments of the population with which you may compare your economic interest, and specific rules for deciding whether the financial impacts are substantially similar.”

    Remember This Point

    Not all conflicts of interest are disqualifying - but the “public generally” exception must be rigorously analyzed and may not be assumed.

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    Step Eight - Despite a disqualifying conflict of interest, is the public official’s participation legally required?

    Despite a disqualifying conflict of interest, participation is occasionally legally required. Learn more about the specifics of step eight from Jose Lopez.

    1. “This ‘legally required participation’ rule applies only in certain, very specific circumstances where the government agency would be paralyzed from acting.”

    2. “Public officials are most strongly encouraged to seek advice from agency legal counsel or the FPPC before acting under this rule.”

    Remember This Point

    The “legally required participation” rule is rarely applied.

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    You have completed the "Overview of Political Reform Act" module. The next module is Limitations on Receipt of Gifts.

    presented by
    The California Attorney General's Office and the Fair Political Practices Commission

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