What Hospital District Commissioners Need to Know

ETHICS AND CONFLICTS OF INTEREST:

Legal Consultant

Presented by:

JOE LEVAN

Municipal Research and

Services Center of

Washington

November 2011

AWPHD

O P E N Governmen

tWebcast Series

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WELCOME TO THE WEBCAST

BEN LINDEKUGELAWPHD Director of Member

ServicesBenL@awphd.org(206) 216-2528

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• During the presentation, one-way phone connection (we cannot hear you)

• To submit a question or comment

– During the presentation, click the “type here to chat” button on the right of your screen; type your message and click “send”

• A copy of the presentation slides will be available on the AWPHD website tomorrow: http://www.awphd.org/Publications/resources_web.aspx

Quick Technical Notes

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Legal Consultant

JOE LEVAN

Municipal Research & Services Center of Washington

jlevan@mrsc.org

(206) 625-1300

• MRSC provides legal and policy assistance to local governments, including Public Hospital Districts

• Call on Joe and MRSC consultants with questions related to governance laws and for assistance with sample policies and other research

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Introduction

Gifts and Rewards

Prohibited Contract Interests

Special Privileges and Exemptions

Disclosing Confidential Information

Consider Establishing a Local Ethics Code

Additional Resources

Overview1

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3

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5

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Introduction1

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Focus Areas Today

• This presentation will focus on ethics and conflict of interest issues related to hospital district commissioners as elected officials of a local government

• Will not discuss health care law issues, such as fraud concerns under the Stark Statute

Intr

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• Common sense approach

• It you think in your gut that what you’re doing is a conflict of interest or is unethical, chances are … you’re right

• Court-made law and statutory provisions formalize the principles we will discuss today – and provide penalties for violations

Let’s Keep it SimpleIn

trodu

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• We will go through several real world scenarios to understand and apply key principles

• This topic boils down to:

In your role as a hospital district commissioner…

1.There are some things of value you cannot receive; and

2.There are some things of value you cannot give to others.

Scenarios ApproachIn

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“Municipal officer” is defined broadly to include:

1. All elected and appointed officers of a municipality (i.e., commissioners)

together with:2. All deputies and assistants of

such officers, and3. All persons exercising or

undertaking to exercise any of the powers or functions of a municipal officer (including hospital district CEOs and possibly others)

What’s a Municipal Officer?

RCW 42.23.020

(2)

Intr

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Because there are serious penalties for violations of chapter 42.23 RCW

– Good faith is not a defense

– An officer violating chapter 42.23 RCW may be held liable for a $500 civil penalty“… in addition to such other civil or criminal liability or penalty as may otherwise be imposed”

– Any contract made in violation of chapter 42.23 RCW is void

– The officer may have to forfeit his or her office

Why does this Matter?

RCW 42.23.050

Intr

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Gifts &Rewards

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Q:

May a public hospital district commissioner attend a meeting hosted by a private vendor to explain a product or service they want to sell to the district if dinner is included and the dinner is free to the commissioner?

Gifts

and

Rew

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A: Maybe. If the dinner costs $50 or less.G

ifts

and

Rew

ard

s

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A municipal officer may not, directly or indirectly, give or receive any compensation, gift, reward, or gratuity from a source except from the employing municipality for a matter connected with or related to the officer’s services

Gifts and Rewards: The Basics

Gifts

and

Rew

ard

s

RCW 42.23.070

(2)

• But what constitutes a gift, reward, or gratuity?

– Not defined in chapter 42.23 RCW– Defined for state officials and employees

under RCW 42.52.010• Anything of economic value for which no

consideration is given – related to official duties

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Technically, any money or item of value received by a hospital district commissioner from a private party related to the performance of the commissioner’s official duties is an illegal gift, reward, or gratuity

This could include:

• Additional money or compensation provided by a private party to a commissioner

• A free dinner provided by a private party to a commissioner

• A plaque given by a private party to a commissioner

What is Not Allowed? (part 1)

Gifts

and

Rew

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• Technically, “no” because there is not an explicit statutory provision that applies to public hospital districts providing an exception

• However, the Office of the State Auditor has been known to apply a “de minimis” rule that allows public officials to accept something of limited value – which generally means a value up to $50

But isn’t there an Exception?

Gifts

and

Rew

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State officers and employees cannot, with some exceptions, accept:

– gifts with an aggregate value in excess of $50 from a single source in a calendar year, or

– a single gift from multiple sources with a value in excess of $50

– Consult with your district’s legal counsel about whether the same standard applies to your district

What is Not Allowed? (part 2)

Gifts

and

Rew

ard

s

RCW42.52.150

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Under RCW 42.52.150 related to state officials and employees, the following are not considered illegal gifts (even if the value is more than $50):

– unsolicited flowers or plants– unsolicited advertising or promotional

items of nominal value, such as pens, notepads, t-shirts, and key chains

– unsolicited awards, plaques, and trophies

– unsolicited informational materials, publications, or subscriptions related to the recipient’s official duties

– food and beverages consumed at hosted receptions, if attendance relates to official duties

What about other Exceptions for State

Officials and Employees?

Gifts

and

Rew

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• Gift of Public Funds – Lending of Credit

• Prohibition included in our state constitution – Article VIII, Section 7

– No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.

Gifts from the District to Others

Gifts

and

Rew

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s

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• Some activities could constitute an illegal gift by a hospital district, such as:

– Use of district facilities, equipment, or funds for private purposes that are not for the poor or infirm

– Gifts to private organizations, such as the Chamber of Commerce or service clubs

But Note …

Illegal Gifts to OthersG

ifts

and

Rew

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s

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• Key distinction between gifts to the district and gifts to a commissioner or employee or from the district

• RCW 70.44.060(11) gives the district the power:

– To solicit and accept gifts, grants, conveyances, bequests, and devises of real or personal property, or both, in trust or otherwise, and

– to sell, lease, exchange, invest, or expend gifts or the proceeds, rents, profits, and income therefrom, and

– to enter into contracts with for-profit or nonprofit organizations to support the purposes of this subsection, including, but not limited to, contracts providing for the use of district facilities, property, personnel, or services.

Gifts and Hospital DistrictsG

ifts

and

Rew

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• Under RCW 70.44.315, when evaluating a potential acquisition of an interest in a district hospital by, for example, a for-profit entity, commissioners shall determine compliance with several requirements

• Including that the acquisition is allowed under:

– Article VIII, Section 7 of the state constitution (prohibiting gifts of public funds or lending of credit) and

– Article XI, Section 14 (prohibiting private use of public funds )

No Gifting in Relation to Acquisition of District

Hospitals

Gifts

and

Rew

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Prohibited Contract Interests

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Pro

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Scenario 1:

In addition to being a commissioner, you own a consulting firm. Your firm is looking to enter into a professional services contract with the district. The contract will come before the commission for approval.

What should you do?

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Is the contract interest one through which the municipal officer would benefit financially?

Is the contract made by, through, or under the supervision of the municipal officer?

Does an exception apply?

Does the municipal officer have what would be considered a "remote interest" in the contract under RCW 42.23.040?

Questions under Chapter 42.23 RCW

Pro

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• The commissioner – who is a municipal officer – stands here to benefit financially from the professional services contract

• The contract is made by, through, or under the supervision of the commissioner

Scenario 1 AnalysisPro

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• If the commissioner represents a non-rural district, the contract (or contracts) may be allowed if the total amount received under the contract or contracts by the commissioner or his/her business does not exceed $1,500 in any calendar month

Scenario 1 Analysis – $ Thresholds

Pro

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See RCW 42.23.030

(6)(a)

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• If the commissioner represents a rural hospital district the contract (or contracts) may be allowed even if the total amount exceeds $1,500 in any calendar month, as long as the total amount does not exceed $24,000 in any calendar year, as adjusted for inflation (beginning with the 2006 calendar year).

Scenario 1 Analysis – $ Thresholds

Pro

hib

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ontr

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See RCW 42.23.030

(6)(c)

DEFINITION: “Rural Hospital District” a hospital

district whose

geographic boundaries

do not include a city

with a population

greater than 50,000. See

RCW 70.44.460

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Even if the total contract amount is within the allowable monthly or annual dollar thresholds, the contract is allowed only if the commissioner who has the contract interest:

• Does not vote on the contract; and

• Discloses his/her contract interest to his/her colleagues on the hospital district commission; and

• Has the contract interest noted in the commission minutes or similar records “before the formation of the contract” – see RCW 42.23.030 (last paragraph)

Also …

• The hospital district must maintain a list of all contracts that are awarded under RCW 42.23.030(6), and the list must be made available for public inspection and copying – See RCW 42.23.030(6)(e)

But Such Contracts are Allowed Only If …

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• One is which a municipal officer would benefit from financially, either directly or indirectly– The contract must be one that

is made by, through, or under the supervision of the municipal officer, in whole or in part

– Applies to commissioners and others to whom the commission has delegated contract authority (e.g., CEOs)

• A municipal officer also cannot accept, directly or indirectly, any compensation, gratuity, or reward in connection with such a contract from any other person who is beneficially interested in the contract

What is a Contract Interest?

RCW42.23.030

DEFINITION:

“Contract” defined

broadly and includes

employment, sales,

purchases, and lease

agreements – see RCW

42.23.020(3)

Pro

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Regardless of the dollar amount, certain contract interests are not allowed

– A commissioner (or other municipal officer) cannot purchase or lease property from the district

– A commissioner (or other municipal officer) cannot provide legal services to the district (except for reimbursement of expenditures)

Sales, Leases, and Contracts for Legal

Services

Pro

hib

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ontr

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Inte

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See RCW 42.23.030

(6)(d)

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Pro

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Scenario 2:

In addition to being a commissioner, you own stock in a corporation that is looking to enter into a contract with the district. The contract is for $50,000 and exceeds $1,500 in any calendar month. You own 10% of the shares of the corporation.

What should you do?

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• The contract is prohibited because no exceptions apply

• Due to the monthly and total dollar amounts of the contract, the exceptions regarding the dollar thresholds for rural and non-rural districts are inapplicable

• Because you own 1% or more of the shares of the corporation, the interest is not considered a “remote interest” (see next slide) and you are considered to be financially interested in the contract

Scenario 2 AnalysisPro

hib

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Option 1: Your company will not pursue the contract with the district

or

Option 2: You can resign your commissioner position so that your company can enter into the contract

• It would not be sufficient to recuse yourself from consideration of and voting on the contract because this contract interest is prohibited

Scenario 2: You Have a Choice

Pro

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• Certain contract interests are considered acceptable “remote interests” – regardless of the dollar amount

What is a Remote Interest?

See RCW 42.23.040

Pro

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DEFINITION: “Remote Interest”

• That of a non salaried officer of a nonprofit corporation; • That of an employee or agent of a contracting party where

the compensation of such employee or agent consists entirely of fixed wages or salary;

• That of a landlord or tenant of a contracting party; [or]• That of a holder of less than one percent of the shares of a

corporation or cooperative which is a contracting party.

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• If a hospital district commissioner with authority over the making of a contract has a remote interest:

Conditions for a Remote Interest to Apply

See RCW 42.23.040

– The commissioner must fully disclose the contract interest to the board of commissioners;

– The commissioner is not to vote on the contract, or, as the statute puts it, the commissioner’s vote cannot be counted (the former approach is advisable)

– If the commissioner influences or attempts to influence any other commissioner of the board of commissioners on the matter, the remote interest exception does not apply

– The remote interest must be noted in the commission’s minutes before entering into the contract, and

– The commission must approve the contract “in good faith”

Pro

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Pro

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Scenario 3:

In addition to being a commissioner, you are an unpaid member (not an officer) of a localnonprofit organization (e.g., the Lion’s Club, Rotary) and the organization is seeking to contract with the district.

What should you do?

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• The contract is allowed

• What is statutorily prohibited are contract interests in which a municipal officer is financially interested, directly or indirectly

• Here, as a mere member of the nonprofit organization, you would have no legally recognized financial interest in the contract – not even a remote interest

• You may advocate regarding entering into the contract and you may vote on it

But Note: If this situation involved a commissioner who was a nonsalaried officer of the nonprofit corporation at issue, the contract interest would be considered a remote interest and the remote interest conditions would apply

Scenario 3 AnalysisPro

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Pro

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Scenario 4:

In addition to being a commissioner in a rural hospital district, you are a non-shareholding employee of a corporation earning a fixed salary. The corporation is looking to contract with the district. The contract is for $50,000 per year.

What should you do?

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• Your contract interest would be considered a remote interest based on two of the remote interest conditions because:

– You are an employee on fixed salary or wages; and

– You are the holder of less than one percent of shares in the corporation

• You would not be regarded as an officer “interested” in the contract and the contract would be allowed

• But you cannot vote on the contract and cannot influence or attempt to influence the other commissioners regarding the matter (see the previous slide regarding the other remote interest conditions)

Scenario 4 AnalysisPro

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Scenario 5:

You are a commissioner and your spouse is employed by the same hospital district.

What should you do?

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Specific exception for hospital district spouses: A hospital district commission can authorize, approve, or ratify any employment contract with the spouse of a district commissioner if:

Scenario 5 – Spousal Employment

RCW 42.23.030

(12)

• The spouse was employed by the district before the date the commissioner was initially elected;

• The terms of the contract are commensurate with the pay plan or collective bargaining agreement operating in the district for similar employees;

• The interest of the commissioner is disclosed to the board of commissioners and noted in the official minutes or similar records of the hospital district prior to the letting or continuation of the contract; and

• The commissioner does not vote on the authorization, approval, or ratification of the contract or any conditions in the contract.

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• The are a few other less common types of contract interests that are allowed

• A commissioner (or other district municipal officer) is allowed to have a financial interest in a contract related to:

Additional Exceptions

See RCW 42.23.030(1)-

(3), (5)

• The furnishing of utility services by a municipality engaged in the business of furnishing such services

• The designation of public depositaries for municipal funds

• The publication of legal notices required by law to be published by a public hospital district, upon competitive bidding or at rates not higher than prescribed by law for members of the general public

• The employment of any person by a hospital district for unskilled day labor at wages not exceeding $200 in any calendar month

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Special Privileges & Exemptions

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• Common Law Conflict of Interest

• General prohibition against specially benefitting financially from a matter you vote upon

• 1909 court decision invalidating a street vacation ordinance because a councilmember who stood to benefit financially from its enactment cast the deciding vote

Common Law Origins

Smith v. Centralia

, 55 Wash. 573

(1909)

Speci

al Pri

vile

ges

an

d E

xcepti

ons

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• No municipal officer may use his or her position to obtain special privileges for himself, herself, or others

• DEFINITION: Special Privilege - being allowed to do something that would otherwise be prohibited

• DEFINITION: Special Exemption - being relieved from doing something that would be otherwise mandated

Statutory Basics

47

For a good description of the difference between a special benefit and a special exemption see point 3 in: 2010 AGO No. 3

RCW 42.23.070

Speci

al Pri

vile

ges

an

d E

xcepti

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Confidential Information

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• Only reference to confidentiality specifically in the hospital district statute, chapter 70.44 RCW, is in RCW 70.44.062

• But that provision is limited in scope – pertains to holding executive sessions regarding the status of clinical or staff privileges of a physician or health care provider in some circumstances and regarding deliberations of a quality improvement committee

Confidential InformationC

onfidenti

al In

form

ati

on

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• A municipal officer may not disclose confidential information gained by reason of the officer’s position, or otherwise use such information for his/her personal gain or benefit

Confidential InformationC

onfidenti

al In

form

ati

on See RCW

42.23.070(3)-(4)

• A municipal officer may not accept employment or engage in business or professional activity that the officer might reasonably expect would require or induce him/her by reason of his/her official position to disclose confidential information

– This could mean, for example, that a commissioner may not disclose confidential information that was discussed in executive session

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Consider a Local Ethics Code

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• A public hospital district may adopt an ethics policy that includes additional local requirements

• Cannot conflict with state law but can supplement it

• Can cover employees as well as officers

• Many hospital districts do not have formal ethics codes but some do (e.g., Valley Medical – King County PHD No. 1) and MRSC has samples

Consider Establishing a Local Ethics Code

Loca

l Eth

ics

Cod

es

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Additional Resources

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• MRSC Website

– Conflicts of Interest– Sample Codes of Ethics– MRSC Index – General Government: G 5.3

100 - Conflicts of interest, code of ethics for municipal officers, contract interests, Ch. 42.23 RCW

• MRSC Publications:

– Knowing the Territory - Basic Legal Guidelines for Washington City, County, and Special Purpose District Officials – discusses conflict of interest and ethics issues under chapter 42.23 RCW and otherwise

Additional ResourcesA

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Contact Info

JOE LEVAN MRSC Legal Consultantjlevan@mrsc.org(206) 625-1300

BEN LINDEKUGEL AWPHD Director of Member ServicesBenL@awphd.org(206) 216-2528

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Ethics and Conflicts of Interest:What Hospital District

Commissioners Need to Know

www.awphd.orgwww.mrsc.org