82.56

OPINION NO. 82-56

The State Ethics Commission has been asked to advise the Chairman of the Maryland Historical Trust (the Chairman), in the Department of Economic and Community Development (DECD), as to whether he may negotiate and procure a loan from the Maryland Housing Rehabilitation Program, also in DECD.

The Chairman is the owner of a substantial amount of property in Oella, Maryland. This village is an historic old mill town with about 300 housing units, about half of which are owner-occupied, with the rest rental units. The Chairman apparently owns 105 of the rental properties. The Town is listed as an historic district on the National Register of Historic Places. The area is very old and generally in need of repair; there have been no water or sewer lines in the community and many of the dwellings have no indoor plumbing. The occupants tend to be lower-income and have been there for many years.

According to the Baltimore County Development Coordinator, Oella has been the subject of County planning for some time. The County's goal has been to achieve improvements in the Town in such a way as to avoid significant displacement of the long-time residents. To this end, the County has applied funds from various sources, including the U.S. Environmental Protection Agency, the U.S. Department of Housing and Urban Development, and the County itself. These sources are funding installation of community water and sewer systems, as well as plumbing expenses to bring these systems into the dwellings. Though some assessment to property owners is involved, it has been minimized to avoid the need to increase rents, thus displacing current tenants. Also, rent subsidies for tenants could be available under a Federal funding program.

In order to qualify for Federal housing subsidies, and also to meet various County requirements, these dwellings also require additional rehabilitation, such as roofing work and interior renovation. The County has recommended to the Chairman that he seek loan funds under the Maryland Housing Rehabilitation Program (MHRP) to complete this work. The MHRP is a loan program established in Article 41, §257L, Annotated Code of Maryland. It provides long-term loans to property owners at interest rates tied to the rate charged the State when it sells its bonds. In addition to a lower than commercial interest rate, the MHRP loans are for 20 years, while commercial banks will generally not make improvement or rehabilitation loans for more than 5 to 7 years. The program is a cooperative State/County effort; the County serves as a middleman in identifying applicants and projects and developing financing packages, but the State qualifies the borrower and the loans are actually with the State, rather than the County.

The Maryland Historical Trust (the Trust) was established in Article 41, §181A, Annotated Code of Maryland, "for the purpose of preserving and maintaining the historical, aesthetic and cultural properties, buildings, fixtures, furnishings, and appurtenances pertaining in any way to the State of Maryland from earliest times, to encourage others to do so and to promote interest in and study of such matters." The Trust is composed of fifteen trustees, including three State officials serving ex-officio. The non-official private trustees were originally appointed by the Governor for defined terms. Under the law, subsequent appointments have been made by election of trustees for four-year terms. The Chairman was elected to the Trust in 1977, and became Chairman in 1981. He indicates that the trustees generally approve grants, approve rankings of projects, review the budget, and set policy on program emphasis or direction. They do not get involved in much of the administrative or operational work of the agency, and the Chairman is not aware of the Trustees ever evaluating or otherwise being involved with an MHRP project.

The Trust and MHRP are both in DECD; the Trust is in the Local and Regional Development Administration and MHRP is in the Community Development Administration. Both of these Administrations report to the DECD's Assistant Secretary for Housing and Community Development. In addition to this organizational relationship, the Executive Director of the Trust indicates that the two agencies do have some interaction. He indicates that if a proposed rehabilitation project involves historic property, the Trust staff might be requested to provide advice. He notes, however, that Trustee participation is advisory and would not impact on an MHRP loan decision. He also states that, though the Trustees could get involved in this review process, in reality they have never done so. The Chairman's plan for the Oella properties has been informally reviewed by Trust staff in the same way that it provides such reviews for any property owner.

Neither the Executive Director of the Trust nor the Assistant Secretary see the likelihood of any agency problems arising from the Chairman receiving an MHRP loan. The Assistant Secretary indicates that she sees no overlap between his Trust duties and the MHRP; she states that he has had no input at all into the rehabilitation program. Though the program has authority to make loans regarding historic property and may consult the Trust, she is not aware that this has resulted in any interface at all with the Trustees. Though the MHRP law and regulations deal with a waiver of certain income limits based on certification of property as "historic," this specific reference to the responsibilities of the Trust and its staff does not apply directly to owners of rental property such as the Chairman. Thus, there is no required Trust involvement in MHRP's review process for this loan.

The Chairman's inquiry raises issues under the outside employment and financial interest prohibitions of §3-103(a)(1)(i) of the Public Ethics Law (Article 40A, §3-103(a)(1)(i), Annotated Code of Maryland, the Ethics Law).1 This section prohibits an official from being employed by or having a financial interest in an entity that has or is negotiating a contract with the agency with which he is affiliated. As the loan here would be with the MHRP, and the Chairman's affiliation is with the Trust, a first question is whether the loan would be a contract with an agency with which he is affiliated. We have generally treated cabinet departments as single indivisible entities (Opinions No. 82-47, No. 80-13, and No. 80-11). The Trust and the MHRP report to the same Assistant Secretary, and do interact with each other; they are also both involved in housing and property generally. We thus do not believe that the Trust is sufficiently autonomous and separate from the workings of the Department to justify departure from the our "indivisible entity" rule.

Since the MHRP loan is thus viewed as a contract relationship with the Chairman's agency, we believe the prohibition of §3-03(a)(1)(i) applies here. Our policy in applying this section of the Law has been to treat interests in and involvement with rental property as an interest in a business entity as that term is defined in §1-201(d) of the Ethics Law. The Chairman's substantial property interest also meet the Law's concept of financial interest (§1-201(m) and 3-103(a)) as involving a value of $1,000 or more. Moreover, in evaluating relationships of officials and employees with sole proprietorships or small businesses, we have generally found active management involvement to create an employment interest for purposes of §3-103(a)(1), despite the absence of some of the more traditional attributes of an employment relationship for purposes of other laws. (Opinions No. 82-21 and No. 81-45).

Since the proposed loan relationship with MHRP would result in the Chairman's having a financial interest and an employment relationship with an entity contracting with his agency, we conclude that this situation would be prohibited by §3-103(a)(1)(i) unless a basis for exemption exists in this or another provision of the Law. There are several bases in §3-103 for exemption from the outside employment and interest restrictions in subsection (a). We have addressed these exceptions through current and proposed regulations,2 and have evaluated this situation in view of these regulatory provisions. Although these circumstances do for the most part, meet the spirit of these regulations, as a technical matter all of the exception criteria would not be met. We believe, however, that this situation is more appropriately considered under the exemption provision of §2-103(h) of the Ethics Law. This section provides in paragraph (2) that:

The Commission may exempt from the provisions of this article, or may modify the requirements of this article as to, any State Board or Commission if, because of the nature of the board or commission or the size of the municipality, it finds that the application of the article to that board, commission, member, or municipality:
(i) Would constitute an unreasonable invasion of privacy;
(ii) Would significantly reduce the availability of qualified persons for public service; and
(iii) Is not necessary to preserve the purposes of this article.

Paragraph (3) further provides that exemptions may be granted under the §2-103(h) "only upon the written request of the executive agency involved."

Section 2-103(h) sets forth exemption allowances for boards and commissions as entities, for individual members of such agencies, and for municipalities. The section provides for exemption, referencing the nature of the particular board or commission or the size of a municipality, and sets forth three additional criteria. We have considered application of these criteria in the context of board and commission exemptions from financial disclosure requirements (Title 4 of the Law) and municipality exemption from the requirements to enact local ethics laws (Title 6 of the Law). In applying this provision we have recognized that it references several distinctly different exemption situations, and that some of the criteria may be less applicable than others to particular circumstances. For example, reference to invasion of privacy in subparagraph (i) may be a key factor in evaluating application of financial disclosure provisions, but less significant in considering exemption from a conflict of interest provision. We have thus developed the view that these exemption criteria must be read together to effectuate the clear intent of the Law to allow less restrictive application of the Law.

We believe that the circumstances presented in this request reflect the very type of situation that was intended to be addressed in §2-103(h), recognizing that part-time members of boards and commissions often serve with little or no compensation and have other income producing activities. The exemption allowance in §2-103(h) represents a legislative understanding that some persons who volunteer their public service on State boards or commissions may bring special skills to their assignment that would be lost to the State if the conflict of interest prohibitions were strictly applied. In this situation, for example, the DECD in its exemption request points out that given the nature of the Trust and its activities, it is expected that its membership would include persons who have an involvement in and commitment to historic preservation. The Chairman's involvement with the Oella project, as well as designation of the Town as an historic district, both pre-dated his election to the Trust, and were known to the Trust at the time of his election as its Chairman.

Moreover, given the relationship between MHRP and the Trust and the specific background of the proposed loan, allowance of this loan relationship between the Chairman and his agency does not appear to us to be inconsistent with the purposes of the Ethics Law. For example, an important factor here is the significant and long-standing involvement and support of the county both in the Oella rehabilitation efforts and this loan. This project appears to be a joint public and private effort. It includes substantial public funding from other sources as well as private individual commitment by the Chairman. Also, of course, even though the MHRP loans are on slightly more favorable terms than commercial loans, the borrowers do undertake to pay back loans at more than a token interest rate. Also, the loans are made under a standard rate procedure which would likely preclude any possible special treatment.

Also, as is further pointed out in the exemption request from DECD, the relationship between the MHRP and the Trust is unlikely to result in any conflicts between the Chairman's Trust duties and his private activities. MHRP loans such as the Chairman's are not required to be reviewed by the Trust even if they involve historical sites; any review that does take place is based purely on policy goals and the Trust's comments are advisory only. Moreover, based on past practice, there would appear to be little if any likelihood of the Chairman or his fellow Trustees being involved in activities of the Trust staff relating to the Oella project.3

We have as a general matter viewed the §2-103(h) exemption as an extraordinary measure designed to deal with situations where strict application of the provisions of the Ethics Law would clearly be contrary to a defined public interest. We have been especially wary of granting exemptions to individuals regarding particular violations and particular outside relationships. This is because we believe that the basic intention of the Law is that its provisions be uniformly and evenly applied to require avoidance of situations that could impair a State agency's credibility and damage the public's trust in its implementation of its mission. We continue to believe that this is the correct and proper approach to the section, especially given the specific exceptions built into §3-103(a) itself.

However, we think that all of the circumstances of this request taken together represent the type of factual and legal situation that the §2-103(h) exemption provision was intended to address. The project is a joint public/private effort reflecting the Chairman's preexisting commitment to historic preservation; the relationship between the project and his Trust duties is remote; and the Department believes that the credibility of the agency's mission will not be impaired. We therefore advise the Chairman that he is exempted, as to his MHRP loan, from the Ethics Law's §3-103(a)(1)(i) prohibition against having an interest in or employment relationship with an entity that contracts with his agency.4

Herbert J. Belgrad, Chairman
    Betty B. Nelson
    Barbara M. Steckel

Date: December 15, 1982

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1 We have only briefly considered application of the §3-1-3(a)(1)(ii) inconsistent employment provision to this situation, since, given the apparent remoteness of his Trust duties from the MHRP loan program, there seems to be little likelihood of impairment of the Chairman's impartiality or independence of judgment.

2 See the introductory language in subsection (a) and implementing regulations (9:8 Md. R. 839 (April 16, 1982), amended 9:25 Md. R. 2486 (December 10, 1982), final; and 9:24 Md. R. 2431 (November 26, 1982), proposed; as well as subsection (a)(2) and (a)(3) of §3-103.

3 It has been suggested by the Executive Director that any subsequent requests from MHRP for technical review of the Oella rehabilitation would be reviewed by the National Park Service or the Delaware Historical Preservation Board (consistent with cooperative practices among these boards). While we do not believe that this is absolutely essential here, we approve of this approach as a way of further avoiding any appearance of conflict arising out of the Chairman's involvement with these two MHRP entities.

4 It should be noted, however, that this exemption extends only to the employment and interest provisions of §3-103(a). The other provisions of the Ethics Law, including the disqualification provision (§3-101), the prestige provision (§3-104), and the official information provision (§3-107), continue to apply in this situation.