89.13

OPINION NO. 89-13

An advisory opinion has been requested by the Governor's Appointments Secretary concerning whether he may participate in the State's Shore Erosion Control loan program, and whether he may have a financial interest in a proposed federally chartered bank. Based on the information from the Requestor, the Shore Erosion Control Office and the Department of Natural Resources, we conclude that the erosion control project may continue, provided that the Requestor has no official involvement in it or dealings with this program in connection with his official duties. We also advise that the proposed federally chartered bank investment would not be barred by the Ethics Law, as long as he does not participate in any legislative or other matters that could reasonably impact on the bank.

As Appointments Secretary, the Requestor manages the process by which the Governor makes appointments to staff positions in executive and other agencies, as well as to State Boards and Commissions. Though he does not have substantive program authority, he is a member of the Governor's immediate staff and is significantly involved in the selection of top personnel that are responsible for all aspects of State government. His office reviews resumes, applications and recommendations, interacts with other persons and entities, both public and private, and prepares appointment recommendations for the Governor's review. Thus, generally, as the Appointments Secretary, he has a broad area of agency interaction and special assignments which could raise conflict issues regarding private affiliations. As part of the senior executive staff the Requestor is also given assignments unrelated to appointments, including legislative matters.

This opinion request relates to two proposed private activities of the Requestor, which we will address separately. The first involves property that the Requestor owns on Tilghman Island, and a proposed shore erosion control project to be constructed on the property. The Shore Erosion Control Program (SECP) functions as part of the Department of Natural Resources, and has existed since the early 1960's. Its purpose is to provide no-interest loans to landowners for the construction of capital improvements "to stabilize waterside, shorelines, and banks, and to change drainage patterns, all in order to halt or retard erosion of shorelines and deposit of eroded sediments in the waters of the State." (Natural Resources Article, §8-1002, Annotated Code of Maryland.)

The law provides that the owner of any property abutting on any body of water in the State may apply for State assistance in the design, construction and funding of a shore erosion control project. The Program provides technical assistance to property owners, provides for the design of projects, arranges for construction of such projects, and administers the Shore Erosion Control Construction Loan Fund. Work is done in accordance with a schedule of priorities that takes into account the rate of erosion, amount of silt being deposited in the waters involved, the date of DNR approval, the nature and amount of public benefits provided by the project, and any other factors defined in rules adopted by the Department. Property owners participating in the Program are required to pay a lump sum cash contribution computed based on a formula relating to the total cost of the project. Loans are without interest, and repaid through a benefit charge levied by the State on the property benefited by the project.

When a construction contractor is selected and the property owner's cash contribution is paid, a lien is placed on the property for the amount of the loan. Actual undertaking of the project requires the approval of the Board of Public Works. The SECP then sees to the completion of the construction paid for from the Loan Fund and the owner's cash contribution. After the completion of construction the Board of Public Works levies a benefit charge that is basically a loan repayment schedule in installments over 25 years. The payment of the benefit charge is the obligation of the property owner, and any subsequent purchaser of the property takes it subject to the charges and the lien placed against the property.

This request involves participation in this program by the Requestor, who has been the Governor's Appointments Secretary since January 1988. It involves property (67 acres) originally owned by a hunting club, which had an erosion control project constructed on part of the property in the late 1970's, as a result of which a lien of $43,761.50 was placed against the entire property. The Requestor filed application for shore erosion control work for another portion of the property in May 1984 and purchased the property later in the same year, at a time when he held no public office. At the time the property was purchased by the Requestor, the SECP agreed to subordination of its lien to the Requestor's mortgagor. Program officials indicate that this was the first time subordination has been agreed to, though it has often been done since, in order for the purchasers to acquire mortgage funds.

According to the Director of the SECP, the Program accepts most applications except those that are purely beautification projects. Depending on the nature of the erosion problem and application of the other criteria, a project could be prioritized behind many other projects. The office has funded about 500 projects, and usually handles about 30 to 40 per year. It currently has 78 pending. The Director says that an approximate waiting period is about 1-1/2 to 2 years. The Requestor's project would involve two construction sites, one solely on a part of the property he has reserved, and the other partly on this piece and partly on a separate parcel that he has subdivided. The application was on the list for about 2 years, with the approval letter sent to the Requestor on February 27, 1986 informing him that the State would do the project. The Requestor was not at this time a State official or employee.

The property was subdivided in late 1985 into the six separate parcels and the reserved area. Three of the parcels were sold in 1986 and 1987 and the Requestor continues to own the remainder of the property, including Parcel 6 and the reserved area on which the erosion control projects are to be constructed. During the period when these sales were going on, and prior to the Requestor becoming a State official, the agency acted to assess the value of the original lien to the 2 parcels where the work was done and release that lien as to the remainder of the property. The Program Director indicates that this is consistent with the statutory intention that the lien and the benefit charges should run to the property benefited. He indicates that there are four other instances, the first in 1981, where this has been done, consistent with advice from agency legal counsel indicating that the approach was acceptable.

Other action, taken by the agency after the Requestor accepted employment in the Governor's office, was its determination in April 1988 to treat the project as two separate loans.1 Program staff advise that this decision was made when the staff learned that the property had been subdivided into separate parcels, and the work was to be done on two separate parcels. The Project Officer indicates that this has been done in the past in reliance on advice of agency legal counsel of May 13, 1985 regarding the question of whether single landowners' wholly owned adjoining parcels can qualify for separate loans, and the question of whether a large parcel can be subdivided for the purpose of getting more loans and concentrating assistance under the Program.

The Program's approach reflects this legal advice that the statute allows flexibility in agency discretion, as well as the view that the loans and liens reflect the property owners' intentions regarding the use and transfer of the property and the statutory sense that the liens and repayment charges relate to the property that is benefited by the project. Although the separation of the project into two loans allocated to the specific parcels being benefited reduces significantly the initial cash contribution of the landowner, the agency staff believes this was the appropriate decision based on the improvements to be constructed and the need for the project.

After the design was completed, the construction contract was bid and awarded, and the contract placed on the Board of Public Works agenda for June 28, 1989. The project defined a total construction cost of $134,694, with a cash contribution of $8,625.50 and a State loan of $126,068.50. The project involves two loans of $68,625.50 and $57,443, respectively. The contract was removed by the Requestor from the Board's agenda and a request for advisory opinion presented to the Commission. The Requestor indicates that he has had little contact with DNR on the project and the Program Director indicates that this is true. The Requestor notes also that almost all of his contact with the Department relating to the project occurred prior to his State service. He further indicates that he has had no involvement in his current position in the Shore Erosion Control Program and was not involved in shore erosion control legislation or the program's budget.

Given the breadth and significance of the authority and activities of the Office of the Governor, general issues are presented in this request regarding the extent to which members of the Governor's immediate staff may be reasonably involved in private business activities that entail their participation in State programs and interaction with State personnel in that connection. Application of the specific provisions of the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law) is complicated by the broad scope of the activities of the Governor's office and the potential for office staff to become involved in any matter or program.

The shore erosion control aspect of the Requestor's inquiry, for example, could involve consideration of the employment provisions of §3-103(a)(1) of the Law, since he holds the property at least in part for investment purposes, and we have in the past held that the holding of property for investment and commercial purposes generally results in an entity in which the individual has both an employment and interest relationship. The employment provisions of the Law deal with employment and interest relationships with entities that contract with one's agency or are subject to its authority, and also with outside employment activities that could impair the impartiality of the official or employee. There could also be issues raised under §§3-101, 3-104, and 3-107 of the Law, particularly the prestige provisions of §3-104, given the significance of Requestor's position on the Governor's staff and the fact that his status and position are likely to be known to agency personnel with whom he would deal in his private capacity.

In applying these provisions to the particular circumstances of this project, however, we believe that it is significant that the application was filed, the principal review of the project was done, and the basic approval commitment was made prior to his assuming his position on the Governor's staff. Moreover, the agency has indicated that various decisions in the process, including the loan separation determination, did not reflect a departure from agency practice or any special treatment. There is no indication that the Requestor engaged in any official activities in connection with this program or that he encouraged or was granted any special treatment. It is the view of the administering agency that this is a situation where a citizen sought to participate in a State program established to benefit his property and provide certain benefits to the shoreline of the State. His involvement was handled in the normal course of business by the agency and decisions were made by the agency consistent with established policies and legal advice. There is no information in the project file or otherwise available that is inconsistent with this view.

In the absence of any evidence that the activity has been involved with the Requestor's State employment or that he has in any way taken action that would bring the various provisions of the Ethics Law into play, we do not believe that a transaction such as this would be required as a matter of law to be discontinued by the subsequent employment of the individual as a State official. Generally, however, when involvement in a State government program is initiated at a time when a person is employed on the Executive staff, the factual determination that the benefits received are separate from and uninfluenced by their employment presents a need for close evaluation. Thus, while we conclude in this particular case that continuation of Requestor's shore erosion control project would not be inconsistent with the Ethics Law (as long as he continues not to engage in any activities, including legislation, that would relate to it), we advise that as a general matter, persons in the Executive office should not engage in private business or similar activities that involve their participation in State government programs without prior consultation regarding whether the activity can be carried out consistent with the Public Ethics Law.

The second part of Requestor's inquiry deals with his proposed bank investment. As to this, the Requestor has indicated that the bank would be a federally chartered bank beginning initially with one branch in the Annapolis area. Investors include several individual businessmen with whom the Requestor has had prior business dealings or personal relationships. It is anticipated that each investor will contribute a small percentage of the initial capitalization and that the remainder of the stock will be sold to the public. The Requestor would not be an employee or board member of the bank. The issues here are thus whether his financial interest in the bank would be barred by the prohibition of §3-103(a)(1), and to what extent the nonparticipation provisions of §3-101 of the Law would apply.

In addition to its employment limitations (which are not at issue here), §3-103(a)(1) of the Law prohibits an official or employee from having a financial interest in an entity that contracts with or is subject to the authority of his agency. The bank which is proposed to be established by the Requestor and his colleagues would be chartered by the federal government and would be impacted by the State in a more limited way than a State-chartered bank. Under these circumstances, we do not believe that the entity proposed to be established here would be viewed as under the authority of an agency with which the Requestor is affiliated for purposes of the strict prohibition of §3-103(a)(1).

We therefore advise the Requestor that his investment in the new bank would not be completely barred under the Ethics Law. Despite the absence of direct regulation of federal banks, however, the banking industry generally can be impacted by a variety of legislative and other policy decisions involving the Office of the Governor. In our view, the Requestor should therefore take care to be aware of the existence of such issues and be careful to avoid any involvement in them. This would include taking account of the application of the participation, prestige and information provisions of §§3-101, 3-104, and 3-107 of the Ethics Law, and making it clear as a matter of record that he would not participate in or have access to information regarding any proposed policy, legislation, or other actions to be taken by the State that would impact upon this business investment.

William J. Evans, Chairman
   Rev. C. Anthony Muse
   Robert C. Rice, Ph.D.
   Barbara M. Steckel

Date: September 8, 1989

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1 Note that during the 1988 Session of the Legislature design costs were added as amounts to be included in total project costs. This change, however, applies to future projects rather than those, like Requestor's, that had already been approved.