STATE OF NEW YORK
STATE ETHICS COMMISSION

Advisory Opinion No. 90-6:

Whether it is a violation of §73 or §74 of the Public Officers Law for the Executive Vice President of [a Public Authority], a State agency, to serve as a voting officer and member of the Board of Directors of a not-for-profit local development corporation and its wholly owned for-profit subsidiary local development corporation, which do business with other State agencies.

INTRODUCTION

The following is an advisory opinion, issued in response to an inquiry by the Executive Vice President of [a Public Authority], as to whether §73 or §74 of the Public Officers Law precludes an individual who serves as a State officer or employee of a State agency from serving as a member and officer of the Boards of Directors for a not- for-profit local development corporation and its wholly owned for-profit subsidiary. By law, the not-for-profit local development corporation is eligible to do business with the individual's employing agency. The for-profit subsidiary is currently leasing office space to the State in a building owned by the for-profit corporation.

Pursuant to the authority vested in the New York State Ethics Commission (hereinafter "Commission") by §94(15) of the Executive Law, the Commission hereby renders its opinion that it is a violation of §74 of the Public Officers Law for a State officer or employee to serve as a member of the board of directors, in a voting capacity, for a not-for-profit corporation or its for-profit subsidiary in circumstances where both corporations do extensive business with the State of New York because, in doing so, the appearance of a conflict of interest results.

BACKGROUND

The Commission has received an inquiry from the Executive Vice President of [a Public Authority], who has served in the position since her appointment on September 4, 1988. Prior to that time, she was an administrator with the City University of New York.

At the present time, beside her position at the [Public Authority] ("Authority"), the requesting individual is a member and officer of the Boards of Directors for two local development corporations. [Corporation A], is a not-for-profit local development corporation. Its wholly owned subsidiary, [Corporation B], is a for-profit local development corporation. The individual does not receive any compensation for any work done on behalf of the corporations and has not received any reimbursement for travel or other expenses in relation to any activities on behalf of the corporations.

The Authority is a New York State public benefit corporation, created pursuant to Article 8 of the Public Authorities Law. The purpose of the Authority is to ". . . assist, promote, encourage, develop and advance the general prosperity and economic welfare of the people of the State and to improve their standard of living."1 Among the methods used to accomplish this purpose is the financing of certain projects with loans to non-profit local development corporations. For example, the statute provides, in relevant part, that ". . . the cost of projects for the construction, acquisition, rehabilitation or improvement of any new, existing or former . . . industrial or manufacturing plant . . . building used for research and development, . . . or other eligible business facility within the State" will be financed in part by loans from the Authority.

[Corporation A] is a local not-for-profit development corporation with which the Authority may, pursuant to statute, transact business. Although the Authority may transact business with any qualified non-profit local development corporation, it does not currently have any contracts or repayment agreements with [Corporation A]. The Authority may not do business with [Corporation B] because it is organized as a profit-making corporation.

[Corporation A] was created pursuant to §402 of the Not-for-Profit Corporation Law in 1975. The stated purposes of corporation are, generally, to encourage the development of business and interests in the urban community, particularly a section of New York City.2 [Corporation A] enjoys tax exempt status under §501(c)(3) of the Internal Revenue Code.

Since 1981, [Corporation A] has done business with a number of State agencies. Approximately 75% of all contracts and transactions of the corporation are with State agencies. Included among the agencies are the following: NYS Division for Youth, NYS Division of Housing and Community Renewal, NYS Department of Labor, NYS Office for the Aging, and the NYS Department of State. In the nine year period, [Corporation A] has received contracts totalling $10,032,310.39.

[Corporation B] is a for-profit subsidiary of [Corporation A] and is also a local development corporation. "Corporation B" [ ] was created pursuant to §402 of the Business Corporation Law. Its stated purpose includes a wide range of activities, but, as an example, ". . . (t)o acquire by purchase, lease or otherwise and to improve and develop real property, to erect dwellings, apartment houses, and other buildings, private or public, of all kinds, and to sell or rent the same."

[Corporation B] has current lease agreements with the State Division for Youth and the New York State Assembly. Since [Corporation B] has not made any profits, the requesting individual could not have received any direct financial benefit from the corporation. There is, however, no express procedure or provision for the distribution or expenditure of any profits received by [Corporation B].

The question presented is whether it is a violation of §73 or §74 of the Public Officers Law for the Executive Vice President of the Authority to act in a private capacity as a member and officer of the Board of Directors of the not-for-profit or the for-profit corporation, both of which transact extensive business with the State of New York.

DISCUSSION

In 1987, the Ethics in Government Act was enacted into law. The sweeping reforms made by the Act are intended to restore the public's trust and confidence in government through the prevention of corruption, favoritism, undue influence or abuses of official position. The Act restricts certain business and professional activities of State officers and employees. As Executive Vice President of the Authority, the requesting individual is covered by the provisions of the Act which address conflicts of interest.

Section 73(7) of the Public Officers Law addresses specific violations of ethical conduct, including improper appearances before State agencies for compensation in connection with leases of real property and the selling of goods or services by a public employee or a firm in which a public employee has a 10% or greater interest to a State agency where no competitive bidding has occurred. In the instant case, the requesting individual receives no compensation from either corporation. In addition, the individual has no ownership interest in [Corporation A] or [Corporation B]. Therefore, the Commission finds that §73 does not apply to the facts as presented by the requesting individual and no violation of that section would occur under the facts set forth herein.

We look next to §74 of the Public Officers Law, which specifically addresses conflicts of interest and their appearance in a rule and in standards. The rule with respect to conflict of interest is:

No officer or employee of a state agency, member of the legislature or legislative employee should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.
In the position of Executive Vice President of the Authority, the requesting individual is responsible for the day-to-day operations of the Authority. In addition to routine administration, the requesting individual is the chair of the Loan Advisory Committee. The business of the Authority is to grant loans of State money to qualified non-profit local development corporations for a number of purposes. The Loan Advisory Committee is comprised of loan officers who review applications from potential recipients of loan monies. The officers meet in committee and make recommendations based upon many criteria. The chair of the Loan Advisory Committee may veto any recommendation made by the committee and may influence the outcome of a dispute concerning any given application.

In the positions of member and officer of the Board of Directors for [Corporation A], the not-for-profit corporation, the requesting individual is responsible for voting, as are all board members, on matters of direct concern to that corporation. This includes voting on matters affecting the subsidiary corporation and matters affecting funding for the corporation. The requesting individual may be called upon to vote on subjects concerning business transacted with agencies of the State of New York, in that 75% of all business transacted within the corporation is related to or a direct result of State contracts.

In her position as a member and officer of the Board of Directors for [Corporation B], the for-profit corporation, the requesting individual is responsible for voting on any number of business matters which may result in direct remuneration to the corporation and, potentially, its members and officers. The requesting individual is in a position to influence the board of the corporation concerning all business transacted with the State of New York and any other potential clients.

The question is whether the activities of the requesting individual, when acting as a member and officer of the boards of directors for these corporations, constitute an interest, financial or otherwise, direct or indirect, which is in substantial conflict with the proper discharge of her duties in the public interest, or whether she has engaged in any business or transaction or professional activity or has incurred any obligation of any nature, which is in substantial conflict with the proper discharge of her duties in the public interest.3

The Attorney General of the State of New York considered a similar question in a Formal Opinion issued in 1979. The Opinion involved the Deputy Commissioner of the Division of Adult Care in the Department of Social Services and his desire to accept a position on the board of a foundation affiliated with an association of operators of adult homes, a not-for-profit corporation. The Attorney General stated the following in that opinion:

The specific questions addressed to me are the following: (1) May the Deputy Commissioner accept the invitation to serve on the Advisory Board of the Foundation?

(2) May he participate in the activities of the Advisory Board in a non-voting capacity?

Guidelines for State officers and employees engaged in business or professional activities outside their State service are set forth in Public Officers Law, §73. The situation, as described, does not appear to conflict with any provision of this section and, therefore, I find that there is no violation of such section. After arriving at this determination, it is necessary to consider whether the situation would offend the Code of Ethics for State officers and employees set forth in Public Officers Law, §74.

An examination of section 74, more particularly subdivision 3, discloses the following language:

h. An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to be engaged in acts that are in violation of his trust."

In analyzing the effect of this subdivision on the proposed activities of the Deputy Commissioner, I express no doubt as to his sincerity in desiring to render assistance in a noble cause, without profiting personally. However, as has been often stated, a public official must not only be innocent of any wrongdoing, but he must be alert at all times so that his acts and conduct give the public no cause for suspicion. He must give no appearance of a potential conflict between his official duties and personal activities even though an actual conflict is not present.

The Division of Adult Residential Care has comprehensive responsibility for approval and supervision of the establishment and operation of all adult homes, be they not for profit or privately owned. The Deputy Commissioner, who is the subject of this opinion, directs the activities of the Division. No matter how well intentioned he may be, if any official act of his should be a subject of fair disagreement in the industry, some suspicion might be raised as to whether he was influenced by his relationship to the Foundation For Long Term Care, Inc.

Therefore, I conclude that the Deputy Commissioner may not accept a position on the Advisory Board of the Foundation nor may he participate in its activities in a non-voting capacity, since to do so would create a conflict of interest and a violation of the Code of Ethics.4

It is important to note that the opinion of the Attorney General related to a circumstance in which the State employee involved had no voting rights. That is not the case here--either in the not-for-profit or for-profit corporation. Further, the Attorney General came to his conclusion without an actual conflict of interest in evidence. As the Commission has stated in prior Advisory Opinions, where the opinions of the Attorney General involve interpretations of §§73 or 74 of the Public Officers Law which have not been amended or enacted by the Ethics in Government Act of 1987, it will apply them to circumstances which now come before it.

In the instant case, not only does the requesting individual have voting rights to influence corporate activity, she also serves on the board of a not-for-profit corporation which is eligible to receive loans from the Authority where she is employed. The fact that [Corporation A] not has requested nor filed any applications for such loans is irrelevant. Her presence on the board may raise reasonable questions as to any such application which might be filed or, more to the point now, as to why "Corporation A" or [Corporation B] are able to obtain the amount of State business they do.

[Corporation A] may not apply for Authority loans because of the extensive State business it now does. The presence of a State employee on the board of such a corporation may raise questions as to the knowledge the corporation has about available State business and the manner in which it was received, as well as the influence the requesting party may exert to gain the State business. The actions of the requesting individual in voting for such State business or the potential to provide information of the availability of State business to [Corporation A] raises further ethical questions. Some applicants to the Authority for loans may conclude that [Corporation A] needs no assistance from the Authority because its Executive Director provides income for it in other ways. As the Attorney General stated, it is not that this activity constitutes wrongdoing in itself; it is the appearance of a potential conflict which is the problem. No State employee should place, or appear to place himself or herself in a position of disclosing confidential information which he or she has received in a State position. Nor, should he or she disclose such information or attempt to obtain unwarranted privileges for others. (See §74(3)(b), (c), (d) and (h) of the Public Officers Law.) The potential for such conflicts of interest exist here.

The potential for conflict is more of a problem with the private, for-profit corporation. For, in the case of [Corporation B], the profits that may be received from doing business with the State may appear to have been the direct result of involvement of the requesting individual, a voting board member. The same appearances of conflict exist as described above. However, a greater difficulty is present where profits are concerned. Although no profits have yet been earned by [Corporation B], it is certainly expected that a for-profit entity will earn a profit at some point. Those profits will be directly attributable to State business (now 75% of [Corporation B's] activity). And, might not some of the Authority loan applicants wonder if they are being denied needed loans because business otherwise available to them may be directed by the chair of the Loan Advisory Committee to a private profit-making corporation, of which she is a voting director. Questions concerning the possible influence of the requesting individual over the receipt of this State business, as well as the concerns that may be raised by other profit or not-for-profit entities as to [Corporation B's] State business, lead the Commission to conclude that the appearance of possible conflicts of interest now or in the future require that she recuse herself from voting on specific issues. The result of recusal, because of the extensive State business engaged in by both corporations would be preclusion effectively from most participation on either board. And, it must be recalled that the Formal Opinion of the Attorney General referred to above, precluded similar board membership even where no voting power existed.

The Commission is aware that public servants, as other citizens in this State, desire to provide contributions to their communities outside of State employment. Such contributions include membership on the boards of not-for-profit corporations which, generally, provide services that for-profit corporations do not. We support these services and it is not the intention of the Commission that this Advisory Opinion be read as a bar to such activity. It is not our intention, nor should it be concluded from this Advisory Opinion, that State officers and employees are precluded by §74 of the Public Officers Law from serving as directors of not-for-profit corporations. In fact, we encourage the continuation of such service, so long as there is no conflict or appearance of a conflict of interest between one's official State duties and the outside activity engaged in by that officer or employee.

We express greater concern about the involvement of public servants in profit-making corporations. For that reason, the Commission promulgated a rule requiring prior approval from the Commission for State officers and employees, who serve in policy-making positions, to serve on the board of directors of such institutions. Our conclusion in this Advisory Opinion is limited to the facts set forth herein. We emphasize that the Opinion of the Attorney General, cited above, should serve as guidance to State officers and employees who wish to engage in such outside activities.

This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the requesting individual who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion.

All concur:

Elizabeth D. Moore, Chair

Angelo A. Costanza
Norman Lamm
Robert B. McKay, Members

Dated: April 23, 1990


ENDNOTES

1. §[ ], Public Authorities Law.

2. Certificate of Incorporation, [Corporation A].

3. See subdivision (2) and (3) of §74 of the Public Officers Law, which set forth the standards by which the rule with respect of conflicts of interest is measured.

4. Op. Atty. Gen. F79-66.