Via Fax & U.S. Mail

File No. I-09-107

Page No. 1

June 2, 2009

VIA FAX & U.S. MAIL

Catherine L. DiCamillo

City Attorney

City of South Lake Tahoe

1901 Airport Rd., Ste. 300

South Lake Tahoe, CA 96150-7051

Re:Your Request for Advice

Our File No. I-09-107

Dear Ms. DiCamillo:

This letter responds to your request for advice regarding the conflict-of-interest provisions of the Political Reform Act (the “Act”).[1] Because you seek general advice and do specify specific government decisions, we are treating your request as one for informal assistance.[2] Nothing in this letter should be construed to evaluate any conduct that may have already taken place, and any conclusions contained in this letter apply only to prospective actions. In addition, this letter is based on the facts presented. The Fair Political Practices Commission (“the Commission”) does not act asa finder of fact when it renders assistance. (In re Oglesby (1975) 1 FPPC Ops. 71.)

Please note that our advice is based solely on the provisions of the Act. We therefore offer no opinion on the application, if any, of other conflict-of-interest laws such as common law conflict of interest or Government Code Section 1090.

QUESTION

May South Lake Tahoe City Councilmember Bruce Grego and his wife South Lake Tahoe Planning Commissioner Geraldine Grego make, participate in making, or influence decisions regarding the Lakeview Commons projectwhen the project is adjacent to real property owned by Mr. Grego’s client,who is also Mrs. Gallegos’employer?

CONCLUSION

Councilmember Grego and Planning Commissioner Grego may participate in decisions involving the Lakeview Commons Project so long as the decisions willnot have a reasonably foreseeable material financial effect on Councilmember Grego’s private law practice, his client, Beachcomber Inn, or his wife’s employer, Beachcomber Inn Vacation Membership Association (the “Beachcomber Association”), which are sources of income to them.

FACTS

You are city attorney with the City of South Lake Tahoe. You seek advice regarding the Act’s conflict-of-interest provisions on behalf of South Lake Tahoe City Councilmember Bruce Grego, and his wife, South Lake Tahoe Planning Commissioner Geraldine Grego. Mr. Grego was elected to serve on the city council in November 2008 and was seated on the city council on December 9, 2008. Mrs. Grego was appointed to the planning commission on January 6, 2009.

Specifically, you wish to know whether the Gregos may participate in decisions regarding the pending project, Lakeview Commons, which is adjacent to real property owned by Beachcomber Inn, which is a client of Councilmember Grego’s, and managed by Beachcomber Association, which is Mrs. Grego’s employer.

Lakeview Commons is a project that will add and improve recreational amenities to a 40-acre parcel of land owned by El Dorado County, and leased for 55 years to the City of South Lake Tahoe. The lease expires on June 30, 2023.

Currently, the project is in the design phase, which is nearing completion. Construction drawings and bid documents are being prepared in anticipation of the project going out for bid this spring or summer. Construction may commence this year.

Some of the potential impacts of the project on the Beachcomber property are limited on-street parking usage by Beachcomber members, and increased use of the launch ramp and beach, which are adjacent to the Beachcomber Inn.

The land bordering one side of the project is a two-acre parcel of land containing a 20-unit timeshare resort called the Beachcomber Inn, a private membership resort. The property is managed by the Beachcomber Association, a California Nonprofit Mutual Benefit Corporation, which employs Mrs. Grego as the resort manager. She earns $49,000 per year, and her duties include day-to-day operation of the resort, hiring, purchasing, overseeing maintenance, and front desk duties. The resort employs about 10 staff. Mrs. Grego also serves as the contact between the five-member Association’s Board of Directors and the staff.

Mr. Grego’s economic interests include his community property interest in the $49,000 annual income of his spouse earned from her employment with the Beachcomber Association as well as his legal representation as attorney for the Beachcomber Inn since 1981. Mr. Grego earns between $1,000 and $2,300 per month from legal services he provides to the Beachcomber Inn. Mr. Grego handles all the transfers of the interval ownership interests, the foreclosures, and prepares the governing documents such as by-laws and other corporate documents. He also handles litigation matters representing the Association on rare occasions.

Mrs. Grego’s economic interests include her community property interest in Mr. Grego’s income of $1,000 and $2,300 per month as attorney for Beachcomber Inn, as well as her salary of $49,000 per year as the resort manager with Beachcomber Association.

ANALYSIS

Section 87100 prohibits any public official from making, participating in making, or otherwise using his or her official position to influence a governmental decision in which the official has a financial interest. A public official has a “financial interest” in a governmental decision, within the meaning of the Act, if it is reasonably foreseeable that the decision will have a material financial effect on one or more of the public official’s economic interests. (Section 87103; Regulation 18700(a).) The Commission has adopted an eight-step standard analysis for deciding whether an individual has a disqualifying conflict of interest in a given governmental decision.

Step One: Are Councilmember Grego and Planning Commissioner Grego“public officials?”

The Act’s conflict-of-interest provisions apply only to “public officials.” (Sections 87100, 87103; Regulation 18700(b)(1).) A “public official” is “every member, officer, employee or consultant of a state or local government agency . . ..” (Section82048.) As a member of the South Lake Tahoe City Council, Councilmember Gregois a public official within the meaning of the Act. As a member of the South Lake Tahoe Planning Commission, Mrs. Grego is also a public official within the meaning of the Act.

Step Two: Will Councilmember Grego and Planning Commissioner Gregobe making, participating in making, or influencing governmental decisions?

A public official “makes a governmental decision” when the official, acting within the authority of his or her office or position, votes on a matter, obligates or commits his or her agency to any course of action, or enters into any contractual agreement on behalf of his or her agency. (Regulation 18702.1.) A public official “participates in a governmental decision” when, acting within the authority of his or her position and without significant intervening substantive review, the official negotiates, advises, or makes recommendations to the decisionmaker regarding the governmental decision. (Regulation 18702.2.) A public official is attempting to use his or her official position to influence a decision if, for the purpose of influencing, the official contacts or appears before any member, officer, employee, or consultant of his or her agency. (Regulation 18702.3.) Councilmember Grego and Planning Commissioner Grego will be making, participating in making, or influencing governmental decisionsinvolvingthe Lakeview Commons Project, when they act, respectively, as a member of the South Lake Tahoe City Council, and as a member of the South Lake Tahoe Planning Commission.[3]

Step Three: What are Councilmember Grego’s and Planning Commissioner Grego’seconomic interests?

Section 87103 provides that a public official has a “financial interest” in a governmental decision if it is reasonably foreseeable that the decision will have a material financial effect, distinguishable from its effect on the public generally, on the official, a member of his or her immediate family,[4] or on any of the official’s economic interests, described as follows:

• An economic interest in a business entity in which he or she has a direct or indirect investment of $2,000 or more (Section 87103(a); Regulation 18703.1(a)); or in which he or she is a director, officer, partner, trustee, employee, or holds any position of management. (Section 87103(d); Regulation 18703.1(b).)

• An economic interest in real property in which he or she has a direct or indirect interest of $2,000 or more. (Section 87103(b); Regulation 18703.2.)

• An economic interest in a source of income, including promised income, which aggregates to $500 or more within 12 months prior to the decision. (Section 87103(c); Regulation 18703.3.)

• An economic interest in a source of gifts to him or her if the gifts aggregate to $420 or more within 12 months prior to the decision. (Section 87103(e); Regulation 18703.4.)

• An economic interest in his or her personal finances, including those of his or her immediate family. This is known as the “personal financial effects” rule. (Section 87103; Regulation 18703.5.)

Councilmember Grego:

Business Position and Source of Income:Under the facts provided, we assume that Mr. Grego is the owner of the law practice, that his investment in his law practice is worth more than $2,000, and that he will receive income of $500 or more in the 12 months prior to the decision from his business. Therefore, Councilmember Grego has an economic interest in his law practicebased on his ownership position, and as a business entity and a source of income. (Section 87103 (a), (c), and (d); Regulation 18703.3.)

In addition, because Councilmember Grego has an ownership interest in his law practice of 10 percent or more, he has an economic interest in each of the clients of his law practiceif his pro rata share of the income is $500 or more within 12 months prior to the time any decisions will be made. (Sections 87103(c) and 82030; Stadum Advice Letter, No. A-07-012.) Therefore, Beachcomber Inn, as a client of Mr. Grego’s business, is a source of income to him.

Spouse’s Income:

Councilmember Grego also has an economic interest in his wife’s salary from the Beachcomber Association, once the income from that source aggregates to a total of $1,000 or more within any 12-month period.[5]

The Commission has long advised that a public official has a reportable economic interest in the source of a spouse’s income. This is because California is a community property state where the default presumption of the law is that each spouse has equal rights in property of “the community.” Because community property law provides that a public official has rights in the incomeearned by his or her spouse, the source of a spouse’s income is a source of income to the public official under the Act. The Act’s definition of the term “income,” at Section 82030 expressly refers to community property interests in a spouse’s income, consistent with state law in this area.

Planning Commissioner Grego:

Business Positions and Sources of Income: Under the facts you have provided, Planning CommissionerGrego has an economic interest because of her business position with Beachcomber Association and her salary of $49,000 a year as resort manager.

Community Property Interest:

Planning Commissioner Grego also has an economic interest in her spouse’s income, as explained above, once the income from that source aggregates to a total of $1,000 or more within any 12-month period.

Personal Financial Effects:

Under Regulation 18703.5 the Gregos, like all public officials, have a potentially disqualifying economic interest in their personal finances. In particular, a government decision has a personal financial effect on a public official if the decision will result in the personal expenses, income, assets, or liabilities of the official increasing or decreasing.[6] (Section 87103; Regulation 18703.5.)

Because you have not providedany information regarding other potential economic interests, including the Grego’s personal finances,we limit our analysis to the interests discussed above. You should seek further assistance if there are decisions implicating other sources of income.

Step Four: Will Councilmember Gregos’ and Planning Commissioner Grego’s economic interests be directly or indirectly involved in the decisions?

Business Entities and Sources of Income
A person, including business entities and sources of income, is directly involved in a decision before an official’s agency when that person, either directly or indirectly by an agent:

“(1) Initiates the proceeding in which the decision will be made by filing an application, claim, appeal, or similar request or;
“(2) Is a named party in, or is the subject of, the proceeding concerningthe decision before the official or the official’s agency. A person is the subject of a proceeding if a decision involves the issuance, renewal, approval, denial or revocation of any license, permit, or other entitlement to, or contract with, the subject person.” (Regulation 18704.1(a).)

Because the Gregos’ economic interests (Mr. Grego’s law practice, Beachcomber Inn, and Beachcomber Association)do not appear to be initiating proceedings nor are they named parties or the subjects of a proceeding, they are not directly involved in the project decisions.

When an economic interest is not directly involved in a governmental decision, it isindirectly involved. (Regulation 18704.)

Step Five: What is the applicable materiality standard?

A conflict of interest may arise only when the reasonably foreseeable financial effect of a governmental decision on a public official’s economic interest is material. (Regulation 18700(a).) Different standards apply to determine whether a reasonably foreseeable financial effect on an economic interest will be material, depending on the nature of the economic interest and whether that interest is directly or indirectly involved in the agency’s decision.

Indirectly Involved Business Entities:

The materiality standards for indirectly involved sources of incomethat are business entities are set forth in Regulation 18705.1(c). The appropriate standard depends on the relative size of the entity. Because you did not mention the size of Beachcomber Inn, we cannot analyze which standard to use to determine whether the financial effects of a governmental decision will be considered material. Assuming that this business is relatively small and not publicly traded, Regulation 18705.1(c)(4) applies. It provides that a financial effect is considered material if:

“(A) The governmental decision will result in an increase or decrease in the business entity’s gross revenues for a fiscal year in the amount of $20,000 or more; or,
“(B) The governmentaldecision will result in the business entity incurring or avoiding additional expenses or reducing or eliminating existing expenses for a fiscal year in the amount of $5,000 or more; or,
“(C) The governmental decision will result in an increase or decrease in the value of the business entity’s assets or liabilities of $20,000 or more.”

Indirectly Involved Non-Profit Entities

The materiality standards for indirectly involved sources of incomethat are nonprofit entities are set forth in Regulation 18705.3(c). The appropriate standard depends on the relative size of the entity. Generally, the financial effects of a governmental decision are not considered material unless the decision impacts the firm or other entity, as set forth in Regulation 18705.3(b)(2), which covers nonprofit entities like the BeachcomberAssociation. The materiality threshold varies depending on the non-profit’s gross annual receipts.

For example, under Regulation 18705.3(b)(2)(E), if the gross annual receipts of the Beachcomber Association are more than $100,000 but less than $1,000,000 the financial effect will be considered material if:

“(i) The decision will result in an increase or decrease of the entity's gross annual receipts for a fiscal year in the amount of $50,000 or more.

(ii) The decision will cause the entity to incur or avoid additional expenses or to reduce or eliminate existing expenses for a fiscal year in the amount of $12,500 or more.

(iii) The decision will result in an increase or decrease in the value of the entity's assets or liabilities in the amount of $50,000 or more.”

Because you did not mention the size of Beachcomber Association, we cannot analyze which materiality standard to use to determine whether the financial effects of a governmental decision will be considered material.

If the reasonably foreseeable financial effect on Councilmember Grego’s private law practice, his client Beachcomber Inn, or his wife’s employer, Beachcomber Association, meets any of the above thresholds, it is deemed material.

Step Six: Is it reasonably foreseeable that the financial effect of the governmental decisions on your economic interests will meet the applicable materiality standard?
An effect meets the“reasonably foreseeable” threshold if the effect is “substantially likely.” (Regulation 18706; In re Thorner(1975) 1 FPPC Ops. 198.) A financial effect need not be a certainty to be considered reasonably foreseeable. On the other hand, if an effect is only a mere possibility, it is not reasonably foreseeable.

Ultimately, whether a material financial effect is reasonably foreseeable at the time a decision is made depends on facts and circumstances peculiar to each case. (In re Thorner, supra, at 198.) Because the Commission does not act as a finder of fact in providing advice (In re Oglesby, supra, at 71), the foreseeability of a particular financial effect is a determination that must be left, in most instances, to the informed judgment of the public official.

Steps Seven and Eight: Public Generally and Legally Required Participation Exceptions.
Even if a material financial effect on a public official’s economic interest is reasonably foreseeable, he or she still may not be disqualified if the financial effect of the governmental decision on the publicofficial’s economic interest is indistinguishable from its effect on the public generally (Section 87103, Regulations 18700(b)(7) and 18707(a)), or if the official is legally required to participate (Section 87103; Regulation 18708). You have not presented any facts indicating that either of these exceptions is applicable to your situation.

If you have other questions on this matter, please contact me at (916) 322-5660.

Sincerely,

Scott Hallabrin

General Counsel

By:Emelyn Rodriguez

Counsel, Legal Division

ER:jgl

[1] The Political Reform Act is contained in Government Code Sections 81000 through 91014. All statutory references are to the Government Code, unless otherwise indicated. The regulations of the Fair Political Practices Commission are contained in Sections 18110 through 18997 of Title 2 of the California Code of Regulations. All regulatory references are to Title 2, Division 6 of the California Code of Regulations, unless otherwise indicated.

[2]Informal assistance does not provide the requestor with the immunity provided by an opinion or formal written advice. (Section 83114; regulation 18329(c)(3).).

[3] If a public official’s office is listed in Section 87200 (“87200 filers” include members of a city council and planning commissions) and he or she has a conflict of interest in a decision noticed at a public meeting, then he or she must: (1) immediately prior to the discussion of the item, verbally identify each type of economic interest involved in the decision as well as details of the economic interest, as discussed in Regulation 18702.5(b)(1)(B), on the record of the meeting; (2) recuse himself or herself; and (3) leave the room for the duration of the discussion and/or vote on the item. For closed sessions, consent calendars, absences and speaking as a member of the public regarding personal interests, special rules found in Regulation 18702.5, subdivisions (c) and (d) apply. (Section 87105.)