The Acting President of a Community College (the College) has requested an opinion as to whether a conflict of interest would arise if the College were to enter into a loan transaction with a local bank where one of the members of its Board of Trustees serves as a Senior Vice-President and trust officer. The request arises as a result of preliminary College plans to construct a new facility, using funds borrowed from a local bank. The College is a community college established pursuant to Education Article, Title 16, Annotated Code of Maryland. It has a Board of Trustees appointed by the Governor and consisting of 7 members. The Board has the general authority set forth in Education Article, §16-201, including the authority to enter into agreements. (For a more detailed discussion of the make-up and functioning of the Boards of Trustees of Community Colleges, see Opinions No. 84-4, No. 83-39, and No. 83-36.) The College is funded in part by State funds that subsidize student tuition fees, as well as with County funds.
Community colleges are, as set forth in the Education Article, §16-104, subject to the authority of the State Board for Community Colleges for purposes of establishing general policies for the operation of the colleges, and administering the State's financial support of the colleges. According to the Deputy Director of the State Boards, however, the colleges have considerable autonomy, including, for example, the power to set tuition rates. The College thus apparently could enter into a transaction with a local bank to construct a facility, and fund it through the county or a raise in tuition. The State Board must approve facility construction, to ensure that the facility is needed, and where its construction would give rise to continuing maintenance and upkeep costs. The State Board would not look into the details of the entire transaction, but would consider these general policy issues. According to the Board's Deputy Director, some other colleges have built facilities, with State Board approval, generally with funds provided by the sponsoring county government.
The Acting President indicates that the College is in the preliminary stages of planning this project, and also that it is one in which the Board of Trustees has been and would be significantly involved at each step of the process. He states that the College's policy is to deal with local businesses and says that there are only two potential lenders in the County. According to him, the interest rates charged the College are bond rates to begin with, but a quarter to a half a percentage point could make a big difference, given an estimated project cost of $1.2 million. For this reason, he says, he would like to be able to negotiate with both banks, rather than having to take whatever interest rate he could get if he were limited to only one. Of the two potential lenders identified by the Acting President, one employs as a Senior Vice-President and trust officer an individual who is a member of the College's Board of Trustees.
This individual was appointed to the Board in December 1984 to fill a vacancy that will expire in June 1988. At the time of his appointment, the College severed its pre-existing depository relationship with his bank. His position with the bank was included on his resume, but he did not submit an appointee exemption form. Nor has he disclosed his employment on an annual Financial Disclosure Statement. The Member indicates that his department at the bank is not involved in any way in the bank's loan activities. Apparently, a loan such as this would be handled as a commercial loan and staffed by the loan department. Given its probable size, it would be decided by the bank's Board of Director, of which he is not a member. The Member indicates that he is not involved in any bank-wide committee or organization that would review the loan on an intermediate basis. He is however, also a stockholder in the bank, his 128 shares valued at approximately $3,200.
This request raises issues under the outside employment and financial interest provisions of §3-103(a) of the Public Ethics law (Article 40A, §3-103(a), Annotated Code of Maryland, the Ethics Law), particularly the strict prohibition of subsection (a)(1)(i). This provision bars an official from being employed by or having an interest in an entity that has or is negotiating a contract with his agency. Since any loan agreement between the College and the Member's bank would be a contract, either negotiation or execution of a loan contract would bring the Member into violation of §3-103(a)(1)(i), unless an exception can be applied. There are several possible exceptions in this situation, pursuant to §3-103(a)(1), and also under other provisions of the Law.1
The more generally applicable exception provisions are set forth in §3-103(a)(1) and implemented in Ethics Commission regulatory criteria published at COMAR 19A.02.01 and 19A.02.02. Section 3-103(a) provides that its prohibitions apply, "except as permitted by regulation of the Commission where such interest is disclosed or where such employment does not create a conflict of interest or appearance of conflict." The regulations set forth various guidepost criteria that are designed to evaluate whether the private interest or employment relationships are sufficiently remote from the employee's duties and agency program that a conflict of interest or appearance of conflict is unlikely. They include evaluation of the relationships of the individual's agency job and program to the private employment, and also consideration of how the private duties interact with the employee's agency. The regulations also provide for a general evaluation of the total circumstances of the situation in view of the statutory criteria regarding conflicts and appearances of conflict, and include consideration of the value of the entity's agency contracts. (See our Opinion No. 83-34 for a more detailed discussion of the exception regulations.)
In reviewing the circumstances of this request, we have concluded that an exception would not be appropriate here. We note that issues can be raised under both sets of criteria, given the nature of the involvement of the Trustees in the approval process for the construction project. This Board has only seven members, and the interaction between Board and staff in this process is described as continuing and significant, with the Board the final decision-maker. We note also that the Member's financial interest in the bank could also raise issues under one particular financial interest criterion, given the size of the loan and the likely interest income it would produce for the bank.
We believe this situation presents even more significant problems than those we considered in an earlier community college Opinion, No. 83-39. That Opinion involved community college trustees whose banks were college depositories, and who were able to assure that depository decisions were made primarily by staff without significant Board involvement. It also involved existing relationships, and the College indicated that there had been no issues raised in the past. Nevertheless, we were reluctant to grant exception under the §3-103 regulations, given the ultimate and significant authority of the Board of Trustees over all the college's activities, and we believe that the same principles must be applied to foreclose an exception here.
The Ethics Law also provides other possible bases for exemption under §2-103(h) and 3-103(a)(3), which apply particularly to part-time members of boards and commissions, who often serve with little or no compensation and are generally expected to have other income-producing activities. Our general approach to these exemptions has been that they are extraordinary measures designed to deal with situations where strict application of the provisions of the Ethics Law would clearly be contrary to a defined public interest. In our view 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. Moreover, both of these statutory exemption provisions are available based on a request from the agency, and in the case of §3-103(a)(3), the recommendation of the Governor. There is no clear exemption request presented under either of these provisions in this situation, and, in any case, we are not persuaded the expertise is so unique or special as to warrant the type of extraordinary exemption action contemplated by these provisions.
We realize that the College would prefer to deal with a local bank. This is, however, a matter of discretion with the College, and there appear to be many possible financial institutions that could be competitive in a project of this size. There are also other financing methods (such as local government revenue bond funding). Based on all of these circumstances, including the significance of the financial benefit to the Member's private employer, and the substantive involvement of the Board in the project, we cannot conclude that the relationship between private and official activities is sufficiently remote to warrant exception or exemption in this situation. We therefore advise the College and the Member that contemporaneous service on the Board if his bank has or is negotiating a loan agreement with the College would be barred by §3-103(a) of the Ethics Law, and that this prohibition cannot be overcome by any exemption or exception in the Law.
Thomas D. Washburne, Chairman
Herbert J. Belgrad
Reverend John Wesley Holland
Betty B. Nelson
Barbara M. Steckel
Date: March 19, 1986
1 As a general matter we do not believe that the automatic board and commission member exceptions of §3-103(a)(2)(i) or (iii) can be applied. Subsection (a)(2)(i) applied to except a "public official who is appointed to a regulatory or licensing authority pursuant to a statutory requirement that persons subject to the jurisdiction of the authority be represented in appointments to it." Subsection (a)(2)(iii) is the time of appointment exception applicable where disclosure of a conflict is made and evaluated by the appointing authority in connection with the appointment process. As the Member here was not appointed to fill a seat of a regulatory group, and there was no disclosure on the time of appointment form, we do not believe that either of these exceptions applies.