91.11

OPINION NO. 91-11

A request has been presented by the Director of the Water Quality Financing Administration (WQFA) in the Department of the Environment (MDE), regarding whether and how employees of the Department, and particularly the WQFA, may participate as purchasers of bonds issued by WQFA. We advise generally that the holding of these bonds is not inconsistent with the financial interest prohibition of the Public Ethics Law. Employees, however, must be aware of the limitations arising from the participation, prestige, information and other provisions of the Law.

The Maryland Department of the Environment is a cabinet-level department established in 1987 to consolidate the enforcement of environmental laws and regulations. The agency has about 900 employees who administer regulatory and financing programs in the areas of water pollution control, air and water quality control, hazardous and solid waste management, sediment control, and stormwater management. The Water Quality Financing Administration was established in 1988 to maintain and administer the Water Quality Revolving Loan Fund. It is a unit of about 7 staff that reports directly to the Secretary. The Revolving Loan Program includes funds from the federal government, State general obligation bonds, and bonds issued directly by the Administration. The funds are used to make loans to local governments to be used for waste water clean-up projects, such as sewer system construction and storm water control. The loans are only to government entities with no relending and no private entity involvement in repayment. All repayments are from the local government from taxes or water fees, and are secured by bonds issued by the locality to the WQFA. All the financial support for the project development process is provided by the WQFA. This includes, in addition to bond issuance, evaluation of the credit-worthiness of the particular local jurisdiction, and development of paperwork regarding the loan process.

The Loan Fund consists primarily of funds that are the proceeds of Administration-financed bonds. The bonds are issued to finance an Intended Use Plan (IUP) that includes specific projects for particular local government jurisdictions. The IUP is developed cooperatively by WQFA and the Water Management Administration. This is a program unit within MDE that is responsible for the substantive development of the projects funded through the Revolving Loan Fund. The Water Management Administration engineers work with the local governments in putting together project proposals, evaluating those that are worthy of funding and that meet the environmental criteria. These engineers also work with local personnel in design of the project and monitor the process of construction and completion of the project. According to the Administrator of the Water Management Administration, its program engineers operate on the basis that funding will be available for worthy projects. They do not, however, get involved in the particulars of the funding transaction. With higher level managers in the Water Management Administration, the engineering staff makes recommendations as to whether a project is ready and worthy of funding.

The bond issuance process is very similar to the process followed by other bond issuing programs. Underwriters are selected from the general group of investment institutions that provide these services. This selection is made by competitive bidding by the Office of the State Treasurer and results in identification of available entities for a three-year period. Private bond counsel are also selected (by the Office of the Attorney General) through competitive bidding for a three-year period, and the permanent bond trustee is the Bank of New York. Staff of the WQFA, but not the Water Management Administration, serve on the selection panels for these entities, along with representatives of the Treasurer, Comptroller and the Department of Budget and Fiscal Planning, but the WQFA is not the final decision-maker or procurement officer for these services.

Once an IUP is approved a schedule for bond issuance is developed, with target sale dates established. The process is usually a three to four month process, and bonds tend to be issued twice a year in March or April and again in October or November. According to the Director, the WQFA staff work with the borrowers (the local governments) in preparing the paperwork, and submit the bond documents to the Board of Public Works for approval about three to four weeks before the issue date. The WQFA staff, which she indicates is recruited largely from the securities industry, works with the underwriters and with bond counsel as to each stage and milestone of the process. The financial situation is watched to determine the right time for issuance to get the best interest rates. The agency receives financial services and investment advice from advisors hired through the Treasurer's Office. In this process the bonds are rated by three New York rating agencies. WQFA works on this with the underwriters who are responsible for obtaining the rating. Persons involved in this process are subject to federal regulations designed to protect the integrity of the sales.

The WQFA Director indicates that in this process of bringing the bonds to sale the dates and timing tend to be public information. The underwriters contact the key industry publications and likely purchasers in the industry are solicited. Also all of the stages in the process that involve BPW approval are public. Some of the deliberations are confidential, however. According to the Director, the internal deliberation at the time of pricing is especially confidential, as are the strategies with the rating agencies and a variety of issues involving the federal Environmental Protection Agency. The bonds are sold to the selected underwriters who in turn sell to their customers. These may be institutional buyers or individuals. Given the advance marketing by the underwriter it is likely that the major purchasers, particularly the larger institutional buyers, would be known at the time of pricing. According to WQFA staff, the bonds may be purchased by any purchaser through a broker that buys them from the underwriter. They could also be retained as part (probably no more that 5 percent) of an underwriter's mutual or investment fund, which would in turn be sold to any buyer.

All of these financial decisions, as well as decisions subsequent to issuance (such as decisions to recall, or redeem, the bonds before their maturity), are made as financial decisions, primarily by WQFA staff and those in the agency to whom they report, including the Secretary and Deputy Secretary and the Board of Public Works. Water Management higher level managers are involved in negotiations relating to finalization of the Intended Use Plan, but tend to be less involved with the credit-worthiness evaluations and loan transactions with the local governments. Operational engineers in Water Management work with the project at the detail level but have no involvement in the financial aspects. According to WQFA legal counsel, the bonds are issued at a set interest rate and therefore are not impacted by the detail decisions. Since the projects are pooled, the individual projects and jurisdictions would not be likely to impact on the credit-worthiness of the bond, and thus persons involved in the engineering and practical aspects of the project would be unlikely to be able to impact on the bond value or have information that would relate to the continuing value of the bonds once issued.

The primary issue presented in this request relates to whether employees at MDE, and particularly those in WQFA and the Water Management Administration, may purchase and hold bonds issued by WQFA. It involves application of several provisions of the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law). §3-103(a)(1)(i) prohibits employees and officials from having a financial interest in or employment relationship with any entity having certain regulatory and contractual relationships with their agencies. We considered ownership of government agency bonds in our Opinion No. 83-27, where we advised that the ownership of such bonds was not generally prohibited by this provision, since State agencies are not viewed as entities for purposes of this section. Also, as noted in footnote 4 of Opinion No. 83-27, we have generally advised persons in the financial disclosure context (Title 4 of the Ethics Law) that bond holdings in government entities are not disclosable as interests in business entities on financial disclosure statements.

Since we do not believe that the nature of the WQFA bonds requires a different approach, we advise the Department that the purchasing and holding of these bonds by an individual is not subject to the strict financial interest or employment prohibitions of §3-103(a), assuming that the buying and selling activities are not part of an outside employment or business endeavor. Opinion No. 83-27 and others (for example, Opinions No. 81-24 and No. 90-3) addressed the question of participation by State employees in State government programs that are available to the public generally, advising that while such participation may not be strictly and absolutely barred, the conduct of employees regarding such programs can be restrained under the participation, prestige and information provisions of §§3-101, 3-104, and 3-107 of the Law.

Section 3-104 bars the use of the prestige of one's office for his own economic gain or that of another. This provision has generally been applied to limit otherwise allowable activities where a person has regular official contact and relationships with government personnel involved with the activity. (See, for example, Opinions No. 82-37, No. 84-25, No. 84-27 and No. 87-18.) Section 3-107 further prohibits the use of any confidential official information for one's own economic gain or that of another. These provisions have been applied as constraints on conduct, but generally not as strict prohibitions barring private holdings or employment relationships. They do, however, apply to any person who works for the MDE or any other State agency. In particular, no employee of MDE or WQFA may violate either §§3-104 or 3-107 by improperly using their position or confidential information acquired in their position for their economic benefit or the benefit of a relative or any other person. This would include, for example, taking advantage of knowledge of the timing of an issuance or acquaintance through their employment with underwriters or others involved in the process to ensure ability to purchase bonds during the initial issuance period.

Section 3-101 of the Law bars any nonministerial participation in a matter in which an employee or certain relatives has an interest. In interpreting this provision we have viewed participation as including involvement through advice, recommendation and other preliminary and staff involvement in addition to the actual and final responsibility for an action. The term matter has been defined to include any proceeding, application, submission, request for ruling or other determination, contract, claim, case or other such particular matter. (See Opinion No. 80-17.) Section 3-101 would therefore apply to limit participation by MDE staff or other State employees where the participation would impact on them or relatives in some discrete or particularized way. For example, individuals should not participate in the decision to issue bonds or in setting rates or defining the timing of an issuance if they have a current anticipation of purchasing the bonds or if they have holdings that would be directly impacted by the decision. Also, a person who owns a WQFA bond and thus has a direct interest in its value and continued investment return, could not under §3-101 participate in decisions to recall a bond.

Given the nature of the decision process and the relationship of program decisions to financial decisions, as well as our view that the participation limitation applies when there would be an impact on the individual, we do not believe, absent some peculiar facts, that the participation limitation would limit bond ownership or participation of most MDE employees or program employees in the Water Quality Program. This is particularly true in this situation where the projects are pooled. We believe, however, that the participation limitations would impact on persons in WQFA directly involved in the bonding process and to those in the Department chain of command above them, as well as some decision-makers in other agencies directly involved in this process. Though §3-101 is a participation prohibition and not an absolute bar, in our view, persons in positions such as the WQFA staff have significant daily involvement in the bonding process and in discrete determinations that could have financial impact on the bonds. Thus, issues would be raised under this and other provisions of the Law with such regularity and consistency that their holding the bonds would best be avoided.

We recognize that the nonparticipation requirement also applies to participation where certain relatives have interests.1 Given the relatively small number of agency personnel impacted by the limitation, however, we advise that any individual who has a concern about a specific situation with a relative should request specific advice regarding application of §3-101 and the possibility of exception under the section. Also, in response to subsidiary questions raised by the agency in the request, we advise that holdings by individuals in mutual funds that include agency bonds are generally viewed as an interest in the mutual funds, but not in the specific investments of the fund. Especially where agency bonds represent such a small percentage of the fund, these holdings would not require nonparticipation under §3-101.

William J. Evans, Chairman
   Mark C. Medairy, Jr.
   Robert C. Rice, Ph.D.
   Mary M. Thompson

Date: September 25, 1991

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1 Section 3-101 specifically lists spouses, parents, minor children, brothers and sisters.