| Date: | 02/28/1990 |
|---|---|
| Organization: | State Ethics Commission |
Members of the board of directors of a foundation created and supported by a state college to perform a governmental function for the college are special state employees of a state agency under G.L. c. 268A, section 1(p). Directors must observe the limitations of sections 7 and 23 in their dealings with other state agencies.
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You are the President of ABC College (College), an institution under the authority of the Board of Regents of Higher Education (M.G.L. c. 15A, s.3) and the College Board of Trustees (M.G.L. c. 73, s.19). You also serve without compensation on the board of directors of the ABC College Foundation, Inc. (Foundation). The Foundation is a non-profit corporation, established in 1981 and organized under M.G.L. c.180. It qualifies as a tax-exempt organization under the Internal Revenue Service Code s.501(c)(3).
Based on information provided by you, we understand that the establishment of the Foundation arose from the desires of College faculty and staff members for a means to raise money for special projects and programs which were not funded through the state budget. The Foundation has access to funding sources normally unavailable to public institutions. Additionally, proponents of the non-profit foundation stated it was a means to "keep funds separate from state coffers" and that similar organizations had been formed in a number of state educational institutions.
According to its articles of organization, the Foundation was formed as a "charitable educational corporation...to render financial assistance and support to the educational programs and development of the College...and to solicit, receive and accept inter-vivos and testamentary gifts of real and personal property, administer, invest, reinvest, change investments, and...manage said property..." Annual membership in the Foundation is open to any individual contributing more than $100 in a fiscal year.
The Foundation's board of directors originally consisted of six members of the College's administration who, via a majority vote, selected five additional board members. As of June 29, 1989, the Foundation's by-laws, provide for twenty (20) members on the board of directors consisting of: (1) the College president; (2) the College vice president of academic affairs; (3) one College faculty member (elected by College faculty members); (4) two College trustees (selected by the College Board of trustees); (5) five alumni (ae) of the College (selected by Alumni Association); (6) and ten directors not affiliated with the College (elected by a majority of the Foundation directors). Additional "Honorary Directors" may be elected by majority vote but serve as members who do not vote. A Director's term is a three-year appointment with a maximum tenure of two consecutive terms. Vacancies on the Board may be filled by the directors. A quorum consists of one-half of the directors holding office. A majority vote of the directors attending a valid meeting is required for the board of directors to take action. Directors may serve in the corporation "in any other capacity and receive compensation for any such service." Section 4.15.
The corporate officers of the Foundation, its chairperson, vice chairperson, treasurer and clerk are annually elected by the directors. Corporate officers may, but are not required to, be members of the board of directors. The Foundation's executive director acts as the corporation's chief executive officer and is subject to the control of the directors. The executive director is generally responsible for the operation and supervision of the corporation. (Section 55). Legal documents (deeds, leases, transfers, checks, etc.) are made by the chairperson and the treasurer.
The Foundation's current Board of directors includes a 25% representation of College alumni (ae) (or five seats). As indicated above, this percentage requirement stems from the Foundation by-laws, which incorporate the Alumni Association as a "permanent undertaking of the Foundation according to an agreement reached on March 10, 1986." Section 8. The Alumni Association's tax exempt status is derived through the Foundation. The Alumni Association has full use of certain College facilities and Foundation services. The 1989 guidelines for the Alumni Association indicate that its membership consists of College graduates and College students completing one year of study. The Association helps the Foundation with fundraising activities and the Foundation acts as the repository for certain scholarship funds for the Association. Changes in the Alumni Association's operation guidelines are subject to review by the Foundation. In sum, the Alumni Association operates as a "subsidiary" of the Foundation: the Foundation primarily acts as a fundraising entity and the Association assists the College by providing programs and publishing an alumni newsletter. For example, the
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cost of postage for the 1988 Alumni Newsletters (which were prepared, printed and distributed by the Association) was primarily derived from Foundation funds. In addition, the College provided $3500 towards the postage for the Newsletter.
The Foundation's funding is derived in most part from private sources. In addition to paying for its own clerical and bookkeeping personnel, the Foundation (and Alumni Association) receives support from the College via the gratuitous use of: College office and meeting room space; secretarial help; exhibition services; postage, telephone, photo copying, bulk mail services; organizational services for large projects, maintenance of alumni lists, and the issuance of alumni identification cards. The College provides the Foundation and the Association with a mailbox and someone to answer day-to-day correspondence and phone calls. The College provides additional support at its discretion.
Furthermore, the College's paid Director of Development and Alumni Relations also acts as the Foundation's unpaid Executive Director. The College also provides the Foundation with the services, at no cost, of three College employees in the College's development office. While there is no formal agreement as to the use of these three employee's services, you state the College "derives benefits in the form of gifts from the Foundation which substantially exceed the value of services and supplies provided by the College."
1. Is the Foundation subject to the jurisdiction of the conflict of interest law?
2. If so, how would the Foundation's board of directors be subject to the conflict law?
3. Would changing the number of Directors to increase the number of unaffiliated seats to comprise a majority of the Board change the jurisdictional result?
4. Would G.L. c. 268A, s.s.8A or 23A prohibit appointment of Foundation directors who hold positions in the College or on its Board of trustees?
2. They would be subject generally to G.L. c. 268A. In particular, they would be subject to s.s.7 and 23.
3. No.
4. No.
The fundamental question posed by your request is whether the Foundation, for the purposes of the conflict law, is a "state agency" or an instrumentality or division of a state agency within the meaning of M.G.L. c. 268A, s.1(p). That provision defines a "state agency" as: "any department of a state government...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."
The Commission has previously determined that the organizational structure of an entity is not dispositive of jurisdictional status under the conflict of interest law. See, EC-COI-88-19, 84-147, citing In the Matter of Louis Logan, 1981 SEC 40, 45. The fact that the Foundation is organized as a non-profit corporation in accordance with G.L. c. 180 therefore, is not a sufficient basis to remove it from the definition of a state agency. EC-COI-88-24; 89-24; cf. 88-19.
The Commission has, in prior opinions, identified four factors which it will examine in determining whether an entity falls within the jurisdiction of c. 268A. These factors are:
(1) the means by which the entity was created (e.g., legislative or administrative action);
(2) the entity's performance of some essentially governmental function;
(3) whether the entity receives and/or expends public funds; and
(4) the extent of control and supervision exercised by government officials or agencies over the entity. See, EC-COI-88-2; 85-22; 84-65.
None of these factors standing alone is dispositive. Rather, the Commission considers the overall effect of these criteria in light of the particular entity. EC-COI-84-65; 88-19; 89-1; 89-24. In light of Commission precedent, we conclude that the Foundation is a state agency within the definition of s.1(p).
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The creation of the Foundation as a chapter 180, non-profit corporation originated from the actions of College officials. The fact that such officials would be considered "state employees"[1] within the meaning of the conflict law, c. 268A, would not be controlling in determining whether the Foundation is a governmental creation. The Commission "looks to the impetus for the creation, rather than merely the affiliation of the entity's organizers." EC-COI-88-24 at p.3; EC-COI-88-19; cf. EC-COI-84-65. For example, the Commission found governmental creation concerning a non-profit corporation formed by two state college faculty members where that corporation's primary purpose was to benefit and support their state college department. EC-COI-89-24. The Commission concluded in that opinion that the impetus for the corporation's creation stemmed from the state college's "legislatively mandated functions of education and research." Id. at p 5. In addition, the Commission has previously found governmental creation where municipal officials in a municipal agency created a non-profit organization to further the agency's statutory mandate. EC-COI-88-24. Similarly, where a state agency on its own initiative created a non-profit corporation to further its legislative purpose, the Commission confined a prior opinion and found the corporation was governmentally created. EC-COI-89-1; EC-COI-84-147. See also, EC-COI-84-66 (though created pursuant to specific state statute or regulations, a committee would be considered governmentally created where it would become part of a state agency's operations and would function to promote that state agency's legislative purpose).
We conclude that the impetus for the creation of the Foundation is akin to the aforementioned opinions and therefore is a governmentally created entity. We base this conclusion on the fact that the Foundation's primary purpose is to render financial assistance and support to College programs by soliciting and raising funds. This purpose is no different from the legislatively mandated responsibilities ascribed to the College's Board of Trustees under G.L. c. 15A, s.10(e). That provision states the College trustees are responsible for seeking, accepting and administering for faculty research, programmatic ant institutional purposes grants, gifts and trusts from private foundations, corporations and alumni as well as other sources. The statutory responsibilities of the college trustees, therefore, are being furthered by the Foundation and the Association. This result is consistent with our conclusions in EC-COI-89-24; 88-24; 89-1 and 84-66. Furthermore, the reason behind the creation of Foundation is dissimilar from other instances where the Commission has found no governmental creation. EC-COI-84-65 (trust fund created by a will not governmentally created); EC-COI-88-19 (governmental creation did not apply to a non-profit corporation created by a private contract).
Closely related to the above analysis concerning the impetus for the Foundation's creation is whether the Foundation is performing some function which is essentially governmental in nature. We conclude the Foundation and its Alumni Association are performing a governmental function by raising funds to support and subsidize the College, a public institution of higher education. The Commission has previously determined that revenue raising for a state college and a specific department within that college to be a governmental activity. EC-COI-89-24. Similarly, the Commission in EC-COI-89-1 stated governmental function will be found where the legislature has imposed an obligation on a state institution's board of trustees to finance and ensure the financial viability of that institution. See also, EC-COI-88-19. The Foundation's primary function, to raise money and to provide supplemental financial assistance to the College, is clearly a function which the legislature has deemed to be a responsibility of the College's Board of trustees. G.L. c. 15A, s.10(e) and c. 73, s.1. Thus, the Foundation both facilitates and carries out a statutory mandate. CF. EC-COI-85-44.
The Foundation and Alumni Association raise most of their funding from private sources. There is, however, significant support from the College by means of in-kind support as well as monetary assistance. For example, the College gave $3,500 to the Foundation to help defray the costs of mailing the Alumni newsletter. Also, the College provides the Foundation and Alumni Association with free office and meeting room space, telephones, photo copying, exhibition and other assistance for large projects, alumni lists and bulk mailing services. The college also provides the Foundation with a mailing address and with personnel to respond to inquiries. Importantly, the College permits three of the employees to render their services to the Foundation free of charge, at its discretion. In addition, the College's Director of Development and Alumni Relations also serves as the Foundation's unpaid executive director. These facts indicate that considerable state resources and public funds are used to sustain the Foundation (and Alumni Association). EC-COI-88-24 (a non-profit entity's use of public agency's employees and faculties is viewed as
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substantial use of public funds).
The extent of governmental control over an entity may be evidenced by the selection process and composition of that entity's governing board. EC-COI-84-147; 89-1; 89-24. While the facts considered here indicate less governmental control over the Foundation than situations previously reviewed by the Commission, we find that both the potential for, and the reality of, significant governmental control exists under the facts you have presented. On its face, the composition of the Foundation Board appears neutral as only five of the twenty directors are College- affiliated. However, since the by-laws are silent on the whether the alumni directors may be College-affiliated individuals, there is a potential for a majority of the director positions to consist of College-affiliated individuals. Additionally, the Foundation's executive director and staff are College employees.
Balancing all the factors discussed above, we conclude that the Foundation is an instrumentality of the College.[2] EC-COI-89-24; 89-1; 88-24; 84-147. Therefore, members of the board of directors are "state employees" within the meaning of the conflict law. Since Foundation directors serve in their positions on an uncompensated basis, they would also be considered "special state employees." See, s.1(o)(1). Generally, Foundation directors would be subject to s.s.2, 3, 4, 6, 7, and 23 of the conflict law. See, Guide to the Conflict Law for State Employees. In particular, s.s.7 and 23 are relevant to your questions.
Section 7 prohibits a special state employee and a regular state employee from having direct or indirect financial interest in contracts made by state agencies. For example, absent an exemption from s.7, a state employee is prohibited from having a second paid state job. See, EC-COI-84-109. The purpose of this section is to avoid the perception that state employees have an inside track on state contracts.
Section 7, however, would not apply to a Foundation director (special state employee) who has outside private employment which is not funded by a state contract or who holds other unpaid state positions. In addition, this section would not apply to any Foundation director who serves in that position by virtue of his college-affiliated position. EC-COI-84-147.[3] Section 7 would apply to any Foundation director who holds a paid position which is funded under a state contract and where that state position does not envision his Foundation directorship. For example, absent compliance with an exemption, a Foundation director would be prohibited under s.7 from being a paid consultant to the Department of Public Health because she would be a special state employee with an impermissible financial interest in a contract made by a state agency.
Despite the general prohibition of s.7, there are a number of exemptions from this section. A general exemption provided in s.7(b) is available to a state employee who is not employed by the contracting agency or an agency which regulates the activities of the contracting agency and who does not participate in or have official responsibility for any of the activities of the contracting agency if the contract is made after public notice and who files a disclosure form with the State Ethics Commission. EC-COI-87-24. EC-COI-83-35; 83-158. Furthermore, if the contract involves personal services, additional requirements must be met. See, EC-COI-83-97.
A special state employee "who does not participate in or have official responsibility for any of the activities of the contracting agency and who files with the State Ethics Commission a statement making full disclosure of his interest and the interest of his immediate family in the contract" is eligible for an exemption under s.7(d). This exemption is unavailable to any special state employee whose official duties would require him to oversee or interact with the contracting agency. See, EC-COI-86-7; 85-3; 84-87; 81-26.
If an overlap exists between the special state employee's duties and the contracting agency, a s.7(e) exemption is available to a Board member who files with the State Ethics Commission a statement making full disclosure of his contract, if the governor with the advice and consent of the Executive Council exempts him. This exemption may be necessary for a Foundation director who is for example, also a part-time paid consultant to the College or to the Foundation.
A special provision applies to a Foundation director who also is a faculty member or teacher in a state educational institution. Section 7(e), paragraph three states:
This section shall not prohibit a state employee from teaching in an educational institution of the commonwealth; provided, that such employee does not
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participate in, or have official responsibility for, the financial management or such educational institution; and provided, further, that such employee is so employed on a part-time basis. Such employee may be compensated for such services, not withstanding the provisions of section twenty-one of chapter 30.
Due to the numerous exemptions under s.7, individual Foundation directors who may be subject to this provision are advised to seek individual advice.[5]
Section 23, the standards of conduct provision, applies to all state employees. These supplemental provisions to c. 268A are intended to avoid state employees from engaging in activity presenting the appearance of a conflict of interest.
Section 23(b)(2) prohibits any Foundation director from using his official position to secure for himself or others any unwarranted privileges or exemptions of substantial value.[6] For example, this section would prohibit a director from endorsing a private venture with his official Foundation position ( EC-COI-83-82; 84-127 ) or from using Foundation facilities to promote his private work ( 81-87; In the Matter of Frederick C. Langone, 1984 SEC 187).
Additionally, s.23(b)(3) prohibits a state employee from engaging in activity which could reasonably appear to improperly or unduly influence the performance of his official party or person. An exemption under this provision is available, however, if the appointed state employee (director) discloses in writing to his appointing authority (the entire Foundation Board) the facts creating the appearance of a conflict. The disclosure under this provision should be made in advance of activity proscribed by this section.
Section 23(c) further prohibits a current and a former state employee from using or improperly disclosing confidential information which was learned in his state position. See, EC-COI-85-23. Under this section, confidential information is that which would not be considered a public record under M.G.L. c. 4, s.7.
Finally, s.23(e) provides that a constitutional officer or head or an agency may establish and enforce additional standards of conduct. See, EC-COI-85-12.[7]
Section 8A provides:
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.
The applicability of s.8A turns on whether the Foundation is under the "supervision" of the College board of trustees. The Commission has previously considered the degree of independence of an entity's finances, operational, control and organization with respect to a state board. See, EC-COI-84-25. In EC-COI-84-147, the Commission found that the non-profit holding company's activities were not subject to the direct management and regulation by the institution board and therefore, s.8A did not restrict institution board members from being appointed company board members. The Commission noted in that opinion that the threshold for finding "supervision" under s.8A is "higher than for finding the factor of 'exercisable government control' in establishing jurisdiction under chapter 268A." Id. at p. 6.
Applying s.8A to the Foundation's Board of directors we find that the corporate by-laws provide that two College trustees, selected by the College board of trustees, are to hold Foundation director positions. There is no indication, based on the facts as we currently understand them, that the College trustees supervise the Foundation board of directors. The fact that the Foundation by-laws allow trustees on its board of directors does not create a level of interaction amounting to the trustees' supervision of the directors.[8] See also, EC-COI-80-44. Thus, we conclude that s.8A would not prohibit the appointment of College trustees to the Foundation's board of directors.[9]
In summary, for the purposes of the conflict law, the Foundation is considered a state agency and thus Foundation directors are considered special state employees, subject to the provisions of G.L. c. 268A.
