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Subjects › Legal › Conflicts of Interest
Updated 11/2012

Conflicts of Interest

Contents

Introduction

Are you a municipal officer for a city, county, or special purpose district who has felt uneasy about taking an action because you think that action raises conflict of interest issues? If so, your instincts are probably right. Your common sense should be a good guide to identify a potential conflict of interest although, as explained below, some conflict of interest issues may not be as easy to spot.

Why should you care? Because acting ethically is the right thing to do. If that isn't sufficient motivation, the ramifications for violations can be serious, including possible monetary penalties, having a contract made in violation of such rules declared void, and possible forfeiture of office for officers who violate these laws.

Washington law governing conflicts of interest regarding municipalities is derived from the State Constitution, statutes, and from law made from court decisions (also known as common law). The general rule from which our state's conflict of interest law derives is that a municipal officer shall not use his or her position to secure special privileges or exemptions for himself, herself, or others. As expressed by our state supreme court many decades ago, the common law principle that a municipal officer is prohibited from adjudicating his or her own cause is "a maxim as old as the law itself." See, Smith v. Centralia, 55 Wash. 573 (1909).

Our state law rules regarding conflicts of interest are based on the fundamental principle that municipal officers hold a public trust and they are required to uphold that trust. These rules apply to real and perceived conflicts of interest and, as below described in more detail, include a prohibition against elected officials voting on matters in which they stand to benefit financially.

What is a Municipal Officer?

Under RCW 42.23.020(2), "municipal officer" is defined broadly to include:

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

    together with:

  2. All deputies and assistants of such officers; and
  3. All persons exercising or undertaking to exercise any of the powers or functions of a municipal officer (including, for example, city managers, city administrators, county administrators, special district superintendents, and others).

What Penalties May Apply for Violations?

Regarding violations of chapter 42.23 RCW, good faith is not a defense and under RCW 42.23.050:

  • 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.
  • Any officer who violates chapter 42.23 RCW may have to forfeit his or her office.

Common Law Conflict of Interest - Special Privileges & Exemptions

Under common law conflict of interest principles, as articulated, for example, in Smith v. Centralia, 55 Wash. 573 (1909), there is a general prohibition against a municipal officer specially benefitting financially from a matter he or she votes upon. In Smith v. Centralia, the court invalidated a street vacation ordinance because a councilmember who stood to benefit financially from its enactment cast the deciding vote.

This court-made law has subsequently been codified under chapter 42.23 RCW, specifically RCW 42.23.070. The general rule is that no municipal officer may use his or her position to obtain special privileges for himself, herself, or others. A "special privilege" relates to being allowed to do something that would otherwise be prohibited. A "special exemption" relates to being relieved from doing something that would be otherwise mandated. For a good description of the difference between a special benefit and a special exemption, see, for example, the analysis in issue 3 as addressed in AGO 2010 No. 3.

Prohibited Contract Interests

Consider this scenario:

In addition to being a councilmember (or mayor, or commissioner, etc.), you own a consulting firm. Your firm is looking to enter into a professional services contract with the city. The contract will come before the council for approval. What should you do?

In such situations, there are several key issues to consider under chapter 42.23 RCW, including:

  • 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?

Contract Interests

What Constitutes a Contract Interest?

As provided in RCW 42.23.030, a contract interest is one in 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.

Note also that a municipal officer 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. See RCW 42.23.030.

What is a "contract" under chapter 42.23 RCW? Under RCW 42.23.020(3), the term is defined broadly to include contracts generally (e.g., employment agreements, contracts for services, public works contracts), and also includes any sale, lease, or purchase.

Regarding the above scenario, the councilmember - who is a municipal officer - stands to benefit financially from the professional services contract. Additionally, the contract is made by, through, or under the supervision of the councilmember.

What is the "Making" of a Contract?

What does it mean for a contract to be "made by, through or under the supervision" of the officer under RCW 42.23.030? The Washington state supreme court has emphasized that it is the making of the contract that implicates 42.23 RCW. Only certain municipal officers are prohibited by state law from entering into contracts with their municipality because many officers do not have any authority with respect to the making (entering into) of contracts on behalf of their municipality. Note, however, that local codes of ethics may include prohibitions that are broader than those in chapter 42.23 RCW. Also, keep in mind that a municipal officer with authority over the making of the contract may not simply delegate that authority to another officer and then enter into the contract.

Another issue that may arise relates to the timing of such contracts. A contract is not prohibited by chapter 42.23 RCW if it was entered into prior to the contracting party becoming a municipal officer with the authority to make or supervise the making of the contract. However, future amendments and/or revisions (e.g., change orders) to the contract would implicate RCW 42.23.030 because, in effect, the contract would be "re-made" under the officer's supervision or by or through his or her office.

Considerations Regarding Exceptions

In the above scenario regarding the personal services contract, does an exception apply? It depends. Various exceptions can be implicated in such scenarios based on the type of municipal government at issue, the amount of the contract, and, in some circumstances, the population of the jurisdiction.

In this scenario, for example, if the city at issue has a population of less than 10,000 and the amount of the contract is less $18,000 in any calendar year, an exception applies. Under that exception, even though the councilmember would benefit financially from the contract, the exception applies because the city's population is less than 10,000 and the dollar amount of the contract is less than $18,000 in any calendar year. See RCW 42.23.030(6)(b), (6)(d)(ii). The result? The councilmember may enter into this contract, but he/she may not vote on the contract, he/she must disclose his/her contract interest to the council, and the interest must be noted in the council minutes "before the formation of the contract." See RCW 42.23.030 (last paragraph).

More generally, RCW 42.23.030 includes several exceptions which allow affected municipal officers to have certain contract interests with their municipality. As explained in the scenario above, an exception applies to cities with a population of less than 10,000. There is also an exception for counties with a population of less than 125,000 and for irrigation districts encompassing 50,000 acres or less. Under these exceptions, a municipal officer may have a financial interest in a contract with the municipality that would be made by, through, or under the supervision of his or her office if the total amount received under the contract by the municipal officer or his or her business does not exceed $1,500 in any calendar month. See RCW 42.23.030(6)(a), (d)(ii).

For towns, second class cities, and noncharter code cities with a population less than 10,000, and certain county fair boards, the exception in RCW 42.23.030(6) applies as long as the total amount does not exceed $18,000 in any calendar year. See RCW 42.23.030(6)(b),(d)(ii).

Other statutory exceptions and requirements are provided. Some of the contract prohibitions in chapter 42.23 RCW do not apply to specific types of activities (e.g., furnishing of utility services, designation of public depositories for municipal funds, publication of legal notices required by law - discussed in more detail below). See RCW 42.23.030(1) - (3). As discussed above, some exceptions apply based upon the type and population of the municipality (e.g., second class cities, noncharter code cities, county fair boards, port districts, school districts, public hospital districts). Given that the prohibitions and exceptions can apply to different types of municipalities differently, it is important to read RCW 42.23.030 very carefully and become familiar with its details. Note, for example, that RCW 42.23.030(6)(e) requires municipalities to maintain a list of all contracts that are awarded under RCW 42.23.030(6) and to have that list available for public inspection and copying.

It is worth repeating, as above explained, that even if an exception under RCW 42.23.030 applies, the municipal officer at issue may not vote on the contract, the officer must disclose his or her contract interest to the governing body of the municipality, and the interest must be noted in the governing body's official minutes or similar records "before the formation of the contract." See RCW 42.23.030 (last paragraph).

Contract Interests Prohibited at Any Dollar Amount

Regardless of the dollar amount, certain contract interests are prohibited. Under RCW 42.23.030(6)(d), a municipal officer cannot purchase or lease property from the same municipality. Also, a municipal officer cannot provide legal services to the municipality (except for reimbursement of expenditures). See RCW 42.23.030(6)(d)(i), (iii).

Moreover, as above referenced, although RCW 42.23.030(6)(a) includes an exception for the letting of a contract in which the total amount received under the contract or contracts by the municipal officer or the municipal officer's business does not exceed $1,500 in any calendar month, the exception does not apply to the letting of any contract by a county with a population of 125,000 or more, a city with a population of 10,000 or more, or an irrigation district encompassing more than 50,000 acres. See RCW 42.23.030(6)(d)(ii).

There's an Exception for That?

In addition to the exceptions above described, there a number of more specifically targeted exceptions in RCW 42.23.030, and the applicability of these particular exceptions will depend upon the type of municipality at issue. You may be surprised by some of the other exceptions that apply in more specific situations.

Consider this more specific scenario:

You are an elected commissioner of a public hospital district and your spouse is employed by the same hospital district. What should you do?

There is a specific exception in RCW 42.23.030(12) for hospital district spouses. Under this exception, a hospital district commission can authorize, approve, or ratify any employment contract with the spouse of a district commissioner if:

  • 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.

There are other provisions in RCW 42.23.030 that may surprise you. For example, under RCW 42.23.030(1) - (5) a municipal officer is allowed to have a financial interest in a contract related to:

  • 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 any municipality, upon competitive bidding or at rates not higher than prescribed by law for members of the general public.
  • The designation of a school director as clerk or as both clerk and purchasing agent of a school district.
  • The employment of any person by a municipality for unskilled day labor at wages not exceeding $200 in any calendar month. However, this does not apply to a county with a population of 125,000 or more, a city with a population of more than 1,500, an irrigation district encompassing more than 50,000 acres, or a first-class school district.

Given the detail in RCW 42.23.030, it is important to review that section thoroughly to determine if a particular exception applies to the specific type of municipality at issue.

Remote Interests

Consider another scenario:

In addition to being an elected municipal officer, you own stock in a corporation that is looking to enter into a contract with your municipality. 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?

Such a contract is prohibited because no exceptions apply. Due to the monthly and total dollar amounts of the contract, the exceptions regarding the dollar thresholds are inapplicable. Moreover, because the municipal officer at issue owns 1% or more of the shares of the corporation, the interest is not considered a "remote interest" (see below) and that officer is considered to be financially interested in the contract.

In such a situation, the municipal officer has a choice: (1) for the company not to pursue the contract with the municipality; or (2) the municipal officer can resign his/her position with the municipality so that his/her company can enter into the contract.

Key Point: It would not be sufficient for the municipal officer at issue here to recuse himself/herself from consideration of and voting on the contract because this contract interest is prohibited.

What is a Remote Interest?

Under RCW 42.23.040, certain contract interests are considered acceptable "remote interests," regardless of the dollar amount. A "remote interest" is:

  • That of a nonsalaried 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 1% of the shares of a corporation or cooperative which is a contracting party.

However, RCW 42.23.040 provides that certain conditions must exist for a remote interest to apply. If a municipal officer with authority over the making of a contract has a remote interest:

  • The municipal officer must fully disclose the contract interest to the governing body;
  • The municipal officer is not to vote on the contract, or, as the statute puts it, the officer's vote cannot be counted (the former approach is advisable);
  • The remote interest must be noted in the governing body's minutes before entering into the contract, and
  • The governing body must approve the contract "in good faith."
  • Also, if the municipal officer influences or attempts to influence any other members of the governing body on the matter, the remote interest exception does not apply.

Consider another scenario:

In addition to being an elected municipal officer, you are an unpaid member (not an officer) of a local nonprofit organization (e.g., the Lion's Club, Rotary) and the organization is seeking to contract with your municipality. What should you do?

Under this scenario, the contract is allowed. Keep in mind that 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, the officer at issue would have no legally recognized financial interest in the contract - not even a remote interest. The municipal officer in this situation may advocate regarding entering into the contract and may vote on the contract.

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

Consider another scenario:

In addition to being an elected municipal officer, you are a non-shareholding employee of a corporation earning a fixed salary. The corporation is looking to contract with your municipality. The contract is for $50,000 per year. What should you do?

The contract interest at issue would be considered a remote interest based on two of the remote interest conditions because the municipal officer in this scenario (1) is an employee on fixed salary or wages, and (2) is the holder of less than one percent of shares in the corporation. As such, the municipal officer would not be regarded as an officer "interested" in the contract and the contract would be allowed. However, the municipal officer in this scenario cannot vote on the contract and cannot influence or attempt to influence the other members of the governing body regarding the matter.

Consider Adopting a Local Ethics Code

A municipality may adopt an ethics policy that includes additional local requirements. Such policies cannot conflict with state law, but they can supplement it. Many municipalities throughout Washington state have adopted their own local ethics codes. There are several good reasons for doing so, including:

  • It allows the municipality to further explain what is covered in state law.
  • Such local policies can cover employees as well as officers.
  • Such policies can address ethical issues in addition to contractual conflict of interest under chapter 42.23 RCW, such as giving and receipt of gifts and rewards, disclosure of confidential information, use of public facilities, political activities, and other issues.

We have links to a variety of local ethics codes from jurisdictions throughout Washington state. To review these polices, see our Sample Codes of Ethics website.

Closing Summary

The information above addresses a specific facet of conflict of interest doctrine that applies to municipal officers - contractual conflicts of interest under chapter 42.23 RCW. Keep in mind, however, that there are other important conflict of interest and ethical principles which also govern the conduct of municipal officers that may be implicated in some situations, including the appearance of fairness doctrine under chapter 42.36 RCW, a prohibition against mid-term or post-election pay increases for officials who fix their own compensation under Article XI, Section 8 and Article XXX of the state constitution, and, as above mentioned, related to giving and receipt of gifts and rewards, disclosure of confidential information, use of public facilities, and political activities.

If you are a municipal officer, it is essential you take seriously and act in accordance with the requirements of chapter 42.23 RCW and the other conflict of interest and ethical principles that govern such activities. If you have any questions about these issues, consult with your municipality's attorney. Additionally, please feel free to discuss these issues with a MRSC legal consultant.

Selected Court Decisions

  • Peterson v. Citizens for Des Moines, Inc., 125 Wn. App. 760 (2005), review denied, 157 Wn.2d 1014 (2006)

    The court of appeals held that a city councilmember who is the president and majority shareholder in a local towing company that city police and other city staff preferred to use when vehicles needed to be towed from city property did not violate the conflict of interest prohibition in RCW 42.23.030. The city had no express or implied contract with the councilmember's towing firm and had no written policies regarding towing requests, and thus there was no contractual interest to implicate the statutory prohibition.

  • City of Raymond v. Michael Runyon, 93 Wn. App. 127 (1998), review denied, 137 Wn.2d 1030 (1999)

    A city commissioner challenged a finding that he violated RCW 42.23.030 because his interests in city contracts conflicted with his duties as an elected official. The commissioner owned a quarry which sold rock to contractors holding city contracts authorized both before and after he took office. In 1996 he sold the city over $92,000 worth of rock in violation of the statutory limit of $9,000. The court noted that good faith efforts to comply are not a remedy for violation. Any contract violating the statute will be void as to the interested official's interest and result in a statutory fine and forfeiture of office.

  • Barry v. Johns, 82 Wn. App. 865 (1996)

    A city councilmember challenged the validity of a contract entered into by the city with a nonprofit organization that limits the liability of the organization's board members for discretionary decisions made in their official capacity. The plaintiff councilmember contended that the limitation of liability gives those board members a beneficial interest in the contract. Two city councilmembers were board members. The court held that the beneficial interest in contracts prohibited by RCW 42.23.030 is limited to financial interests. The contract at issue did not confer a financial benefit on the nonprofit organization's board members, because state law provides them with the same benefit. Thus, the court concluded that the contract was not invalid under RCW 42.23.030.

  • Seattle v. State, 100 Wn.2d 232 (1983)

    RCW 42.23.030 deals with the "making" of a contract, not with the implementation of the contract after it has been made.  Chapter 42.23 RCW does not require invalidation of the city's campaign finance law.

  • Smith v. Centralia, 55 Wash. 573 (1909)

    Street vacation ordinance held invalid for reason, among others, that councilmember who stood to benefit financially from its enactment cast the deciding vote on the passage of the ordinance.

Selected Attorney General Opinions

  • AGO 1999 No. 1

    A person who is elected to an unexpired term on a city council may not constitutionally receive, during the unexpired term, any changes in compensation previously enacted by the council during that term.

  • AGO 1996 No. 15

    RCW 42.23.030 does not prohibit the service of one spouse as a county commissioner (and ex officio local health board member) while the other spouse serves as administrative officer of the health department; these positions are both public offices and the compensation for them does not arise out of contract.

  • AGO 1978 No. 17

    Except under certain special circumstances whereby the normal relationship between a board of county commissioners and a county housing authority is modified, as discussed in the opinion, the sale of real property by a county commissioner to a county housing authority within the same county does not violate any statutory provision concerning conflicts of interest.

  • AGLO 1973 No. 6

    The provisions of RCW 42.23.010, et seq., prohibiting certain municipal contracts because of "beneficial interests" therein by officers of the municipality do not apply where the officer's interest is not of a pecuniary or financial nature.

  • AGLO 1972 No. 47

    RCW 42.23.040 does not prohibit the spouse of a chief deputy sheriff who is not covered under the Sheriff's Civil Service Act from being employed as a deputy sheriff. That statute has no applicability to this situation for the simple reason that the sole authority to appoint any deputy sheriffs for a given county is vested in the sheriff himself - and not in any of his deputies.

  • AGLO 1970 No. 89

    The marriage of a county commissioner to a secretary of one of the other elected officials of the county does not pose a conflict of interest as a result of the secretary's current continuing employment. RCW 42.23.030 does not declare illegal or void any contract that preexisted the appointment or election of the officer to his position of conflict; nor any contract in which an officer acquires an interest in good faith after the contract has been made. The contract itself, although of an indefinite month-to-month nature, is a subsisting contract and one which is not renewed or "made" in each month by any official action of the board, assuming that the contract provisions remain unchanged.

  • AGO 1954 No. 355

    Health and welfare benefits given to elective officials during their present term of office constitute additional compensation and would violate article 11, section 8 of the Washington Constitution.

Documents

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