The Board of Trustees of a state institution passed a resolution to assist in establishing a holding company for a system of non-profit and for-profit entities which would help produce revenues for the state institution. The board of the holding company would be selected by the institution's board, and would include four (4) institution or subsidiary trustees and two (2) persons specifically identified by their institution positions.
1. Would board members of the holding company be considered state employees within the meaning of G.L. c. 268A?
2. If so, how would G.L. c. 268A apply to company Board members?
1. Yes.[1]
2. Company Board members would be subject to the limitations set forth below.
1. Status of a Company Board Members as State Employees
Chapter 268A defines state employee as "a person performing services for or holding an office, position, employment, or membership in a state agency, whether by election, appointment, contract of hire or engagement, whether serving with or without compensation, on a full, regular, part-time, intermittent or consultant basis..." G.L. c. 268A, § 1(q). The issue of whether company Board members are considered state employees therefore depends upon whether the holding company is a state agency, which is defined by the conflict of interest law as "any department of a state government including the executive, legislative or judicial, and all councils thereof and thereunder, and any division, board, bureau, commission, institution, tribunal or other instrumentality within such department and any independent state authority, district, commission, instrumentality or agency, but not an agency of a county, city or town." G.L. c. 268A, § 1(p).
Prior opinions of the Commission have identified several criteria useful to an analysis of whether a particular entity is a public instrumentality for the purposes of G.L. c. 268A. The three deciding factors in this case are:
(a) the impetus for the creation of the entity (e.g. legislative or administrative action);
(b) the entity's performance of some essentially governmental function; and
(c) the extent of control exercisable by government officials or agencies over the entity.
None of these factors standing alone is dispositive. The Commission considers the cumulative effect produced by the extent of each factor's applicability to a given entity, as well as analyzing each factual situation in light of the purpose of the conflict of interest law. Keeping these precedents in mind, the Commission concludes that the holding company's trustees would be performing services for a state agency within the meaning of c. 268A.
a. Creation
As a private corporation, the holding company would be created by filing the necessary articles of organization and bylaws with the Office of the Secretary of State pursuant to G.L. c. 180. However, the impetus for the formation of the holding company came from the members of the institution Board, who are state employees, in the form of a resolution to assist in the establishment of [a holding company to help produce revenues for the institution]. [Citation omitted]. The institution Board is presently the body which governs the activities of the institution and its subsidiaries. The Commission concludes that the creation of a corporation to perform a part of those duties, namely to maintain the competitiveness of one of its subsidiaries through the development of new ventures, constitutes the creation of an independent state instrumentality. While it may be true that the holding company's organizational structure is that of a corporation rather than a traditional public sector agency or department, the application of c. 268A cannot be conditioned on the organizational status of an entity. In the Matter of Louis L. Logan, 1981 Ethics Commission 40, 45. Just as a housing authority is independent from municipal government yet considered a municipal agency for Chapter 268A purposes, the holding company's separate corporate identity under G.L. c. 180 does not preclude it from being a state instrumentality within the meaning of Chapter 268A. Moreover, the permanent character of the holding company distinguishes it from the temporary, ad hoc advisory role of those
groups the Commission has regarded as exempt from the definition of state agency. Compare EC-COI-82-139; 82-81; 80-49. See also EC-COI-84-55.
b. Governmental Function
For the reasons stated above, the Commission finds that the holding company will be performing an essentially governmental function. The Commission recognizes that the [list of the potential revenue-producing activities of the holding company omitted] are activities which can be either publicly or privately performed. However, the underlying function of searching out new revenue producers for the subsidiary is a government function because the subsidiary is included within the [institution], a state institution. The fact that this function would carried out by a corporation organized under c. 180 does not change the character of that function from public to private. Because the Legislature has delegated to the institution Board the responsibility for financing and managing the institution, which includes the subsidiary, efforts to protect the financial viability of the subsidiary are within the domain of state responsibility.[2] Thus, it is the public purpose behind the development of new sources of revenue, coupled with the interrelation between the holding company and the institution discussed below, which results in the holding company's performance of a governmental function.
c. State Agency or Government Control Exercisable Over the Holding Company
The proposed bylaws of the holding company provide for the make-up of the company's Board of Trustees as follows:
[Omitted citation refers to the four institution or subsidiary trustees and the two persons
specifically identified by their institution positions].
Thus, six members of the company's Board, which "shall at all times consist of at least nine (9) but not more than eleven (11) persons" will be institution-affiliated public employees. Id. The Commission has previously found that the fact that a majority of an entity's Board of Trustees are public officials or employees is not conclusive evidence that an entity is public. See, e.g. EC-COI-84-65. Yet the proposed bylaws of this company further provide that all company trustees "shall be selected by the institution Board of Trustees from a slate of nominees approved by the subsidiary's Board." [Citation omitted]. In other words, both the selection process and the composition of the company's Board of Trustees are state dominated. Because that Board is entrusted with administering the funds and directing the policy of the company, the Commission concludes that the amount of state control exercisable over the holding company via the selection of its Board renders that company a state instrumentality.
2. Application of G.L. c. 268A to company Board Members
a. Section 8A
"No member of a state commission or board shall be eligible for appointment or election by
the members of such commission or board to any office or position under the supervision
of such commission or board. No former member of such commission or board shall be so
eligible until the expiration of thirty days from the termination of his service as a member of
such commission or board."
Whether § 8A precludes the appointment of an institution Board member to the company Board depends upon whether the company is under the "supervision" of the institution Board. The Commission has previously found that an entity is not under the supervision of a state board for § 8A purposes where the entity is independent from the board with respect to its finances, operational control and organization. EC-COI-84-25. The factors the Commission considered in that opinion included the following:
(1) absence of operational management and regulation on the part of the institution or
board over the entity;
(2) the entity's utilization of its own private counsel, accounting and printing services; and
(3) the entity's independence in funding, grant decisions and personnel decisions.
Based on these criteria, the Commission finds that the company would not be subject to the direct management and regulation of its activities by the institution Board. The ongoing operations of the company will be managed by an Executive Director and other staff. The company's finances will be separate from the institution's, and the company will keep separate financial books and ledgers, retain its own accounts and attorneys, and purchase its own goods and services. From this absence of direct supervision on the part of the institution or the institution Board, the Commission concludes that § 8A does not outright prohibit members of the institution Board from being appointed as members of the company's Board.[3]
b. Section 7
Section 7 prohibits a state employee from having a financial interest in a second state contract. The commission finds that this prohibition is not applicable to company Board members. All institution affiliated members of the company Board are serving in that capacity by virtue of their institution positions. Therefore, the Commission finds that their service as state employees for the company and the institution is connected to only one state contract, their original institution contract. See EC-COI- 84-148.
End of Decision
