California Fair Political Practices Commission
M E M O R A N D U M
To: Chairman Getman, Commissioners Deaver, Makel, Scott, and Swanson
From: Kathleen Gnekow, General Counsel
Luisa
Menchaca, Assistant General Counsel
John
Vergelli, Staff Counsel
Re: Materiality standards for Real Property Economic Interests--Regulations 18704.2 and 18705.2 (Conflicts project, phase 2, project D).
Date: June 26, 2000
I. Introduction
This project addresses the Commission's materiality standards for real property in which public officials have economic interests.(1) The Commission first deliberated on this project at the February 2000 meeting.(2) At that meeting the Commission made several tentative decisions about the emerging regulatory changes. Specifically, the Commission tentatively decided that:
Whether the public official's real property is within 300 feet (a distance which may or may not change, see part III.C.2., below) of the property which is the subject of the decision will be considered another test for direct involvement in the governmental decision, not as a materiality standard. (In the terms of the "eight-step" analysis (see Regulation 18700(b)), it will be moved from step five to step four).(3)
The "streets, water, sewers, etc." rule will also be considered another test for direct involvement, not a materiality standard (i.e., moved from step five to step four).(4)
For directly involved real property, the materiality standard (Regulation 18705.2(a)) will be revised to make it clear there is a presumption of materiality.(5)
This memorandum presents a draft regulation which builds on the Commission's tentative decisions, the input received from the "regulated community," and the staff's research. (The draft regulation is in Appendix A.) The draft regulation presents five "decision points" on which Commission guidance is necessary.
In a nutshell, these materiality standards are the answers to the question, "how much of a financial effect on real property is enough to trigger a conflict?"(6) These materiality standards are particularly important: Although no empirical data exists, it is widely believed that personal residences of public officials, which are considered economic interests in real property, are the economic interest which most frequently triggers a conflict of interest.
II. What must be proved to rebut the presumption of materiality when the real property is directly involved in the governmental decision?
As noted above, the Commission has tentatively decided on revisions which will make it clear that materiality is presumed when real property is directly involved in the governmental decision.(7) (See the January 24th memo, pp. 9-10.) The next question is what must be proved to rebut this presumption?
Under the Commission's current regulations, when real property in which a public official has an economic interest is directly involved in a governmental decision, the materiality standard is usually very strict: Any reasonably foreseeable financial effect--even a penny's worth--from the decision on the real property is considered material. (Regulation 18705.2(a); see also, January 24th memo, pp. 6-7.)
It has been argued that the current "any financial effect" materiality standard is impractically and unreasonably low. This argument takes the following form: The statute (Section 87103) provides there is a conflict only if there is a reasonably foreseeable material financial effect on the real property in which a public official has an economic interest. If the regulations trigger conflicts in situations where the reasonably foreseeable financial effect is immaterial to such real property, then the regulations are not true to the statute, and lead to unnecessary disqualifications of public officials.
Instead, it has been suggested that the Commission replace the current "any financial effect" standard (a.k.a., the "one-penny" rule) with a de minimis financial effect standard. De minimis means "very small or trifling." (Black's Law Dict., 5th ed. 1979, p. 388, col. 1.(8)) That is, a financial effect of a governmental decision on real property which is directly involved in that decision would be deemed material if it was more than a de minimis financial effect. The proponents of this higher standard urge that it would eliminate arguably absurd disqualifications where the reasonably foreseeable financial effect of a governmental decision is only perhaps hundreds of dollars on the real property.
The arguments in favor of the current "any financial effect" standard are two-fold. First, and most importantly, it is a decisive implementation of an important public policy: Public officials simply should not make governmental decisions about their own interests. If the public official's real property is directly involved in governmental decision, the public official simply should not take part in the proceeding if it will financially affect the real property at all.
Second, the "one-penny" rule is a "bright line" test: If it is reasonably foreseeable that there will be any financial effect from the governmental decision on the real property, the public official with an economic interest in that real property is disqualified (unless the public generally exception applies). This rule is simple to understand, and it is easy to enforce. It does not require the expenditure of any resources by the public official to determine whether he or she can vote or participate in the decision.
A de mimimis rule, on the other hand, is a complicated rule. In some instances, it will become more difficult for a public official to determine, with certainty, if a governmental decision will have a reasonably foreseeable material financial effect on his or her economic interests. In order to determine whether the effect of a decision is below the de minimis threshold, the official will need to expend additional resources to determine whether he or she can vote or participate in a decision. Likewise, the Enforcement Division contends it will be required to expend further resources to verify independently the official's assertions.
The draft revision in Appendix A has optional language which allows the Commission to choose between three alternatives. Decision no. 1, option a, would retain the current "any financial effect" materiality standard, recasting it in terms of what must be proved to rebut the presumption of materiality that exists when the real property is directly involved in the governmental decision.
Decision no. 1, options b and c, are alternatives for substituting a de minimis financial effect standard, again casting it in terms of what must be proved to rebut the presumption of materiality. Option b does not mention a dollar figure--it simply uses the words "de minimis" to express the notion of a trifling, or inconsequential, financial effect. Option b could be called an "unquantified de minimis" financial effect standard.
Option c would express the notion of de minimis in terms of a set dollar amount--the financial effect of a governmental decision on real property is material if it is more than a set amount signifying a de minimis effect. Option c could be called a "quantified de minimis" financial effect standard.
If the Commission decides to opt for a de minimis financial effect standard, the advantage of choosing option b, the unquantified version, is flexibility. If not pegged to a specific dollar amount, the de minimis standard could float up or down depending on the circumstances of the real property and the governmental decision. For example, a relatively larger financial effect could still be deemed de minimis for a large or especially valuable property, while a lower notion of de minimis could be used for a more modest property.
The disadvantage of option b, the unquantified version, is that it is a "subjective," standard. A given financial effect may seem de minimis to one reasonable observer, but may seem quite material to another reasonable observer. Reasonable minds will undoubtedly often disagree about what "de minimis" means. If a premium is placed on certainty, rather than flexibility, then the unquantified de minimis standard should not be favored. Finally, Enforcement contends it will be difficult to enforce.
Option c, the quantified version of the de minimis financial effect standard, would express the notion of de minimis in terms of a set dollar amount. This option strives for more certainty in application. The disadvantage of this option is that it is a "one-size-fits-all" rule: the same dollar amount would express the notion of de minimis for a prime, downtown, commercial property as it would for a modest tract home.
If the Commission opts for a quantified de minimis standard like option c, an important implementing decision is picking a dollar figure to express this de minimis financial effect standard. Option c presents three possible figures, $250, $500, and $1,000, as well as a blank. A figure like one thousand dollars is a round number which arguably captures the basic idea: If the financial effect of the governmental decision on the real property is less than one thousand dollars, the public official with an economic interest in the real property is not disqualified, even if the real property is directly involved.
Another school of thought is that a lower figure, perhaps $250 to $500, is more in keeping with the policy that public officials should not, as a general rule, decide matters involving their own interests. A lower figure, this argument continues, provides the "safety valve" for truly inconsequential effects, while preserving the "heart" of the rule.
Decision no. 1: Should a de minimis financial effect materiality standard replace the "any financial effect" materiality standard for real property directly involved in the governmental decision?
Recommendation: The Commission has already tentatively decided this issue for business entities, settling on the "any financial effect" option. The staff recommends the same decision here. Specifically, we recommend against adopting a de minimis financial effect standard. Staff prefers the present rule, the "any financial effect" standard for three reasons. First, it implements a sound public policy: Public officials should not decide matters directly involving their own economic interests. Second, it is a well-established, bright line rule. No appraisal or estimation is called for. Third, this any financial effect standard is easier to enforce. The staff recommends option a for decision no. 1.
III. Materiality standards for real property which is indirectly involved in a governmental decision
Background
Current law, and the effects of the tentative decisions the Commission has already taken.
When the public official's real property is indirectly involved(9) in a governmental decision, the current regulation is based on a straightforward idea: The farther the public official's real property is from the real property which is the subject of the governmental decision, the less likely that the financial effect of that decision on the public official's real property will be material.
The current implementation of that idea (current Regulation 18705.2(b)) creates three zones around the real property which is the subject of the governmental decision, and also creates a materiality standard for each zone.(10) Which materiality standard applies to the public official's real property depends on which zone it falls into.
The "inner zone" might be called the "very close" zone. If the real property in which the public official has an economic interest is "very close" to the real property which is the subject of the governmental decision, then one can presume that the governmental decision will have a material financial effect on the public official's real property. So, there is a very stringent materiality standard for the "very close" zone: The effect of a decision is deemed material, "unless the decision will have no financial effect upon the official's real property." (Regulation 18705.2(b)(1)(A).) Three hundred (300) feet serves as the outer boundary of the "very close" zone; this distance is borrowed from other state law.(11)
As mentioned in the introduction above, the Commission tentatively decided in February 2000 to recast this "inner zone" materiality standard as another test for deciding whether real property is directly involved in a governmental decision. (See footnote 7, above.) That is, instead of looking at this rule as a materiality test ("step five") it will be looked at as a rule for deciding whether a material financial effect should be presumed ("step four").(12) The effect of that tentative decision--without anything more being done--will make the current three-zone classification for indirectly involved real property into a two-zone classification.
The "outer zone" in the current regulatory classification might be called the "probably-far-enough-away" zone. As the distance from the real property which is the subject of the decision to the public official's real property increases, at some point, the public official's real property is far enough way to presume that a material financial effect is not likely. The 1985 Commission picked one-half mile as a radius to describe the inner boundary of this "probably-far-enough-away" zone, and rounded this figure to 2,500 feet.
The 1985 Commission factored the "public generally exception" concept into their reasoning: As distance from the real property which is the subject of the decision to the public official's real property increases, there are likely to be more and more properties similarly financially affected by the decision. That is, for real property in the "outer zone," the uniqueness of the financial effect is a factor (but not the only factor) in evaluating materiality.
Under Regulation 18705.2(b)(2), if the real property in which a public official has an economic interest is more than 2,500 feet from the real property which is the subject of the decision, the financial effect of the decision on the public official's real property is considered material only if two conditions are met:
(1) There are "specific circumstances" indicating a reasonably foreseeable material financial effect using the dollar thresholds from the "middle zone" rule (see below); and
(2) "The [financial] effect will not be substantially the same as the effect upon at least 25 percent of all the properties which are within a 2,500 foot radius of" the public official's real property or there are not at least 10 properties under separate ownership within a 2,500 foot radius of the public official's real property.
Between the "very close" zone and the "probably-far-enough-away" zone, Regulation 18705.2(b) creates a "middle zone" (300 feet to 2,500 feet, Regulation 18705.2(b)(1)(C)). In this "middle zone," no presumptions were seen to be supportable because of the wide variety of governmental decisions, of real property interests, and of interrelationships of the decisions and properties. In the current scheme, the public officials must "confront the analysis" if their real property is located in the "middle zone" or "no presumptions zone."
The analysis which must be confronted is this: the public official must decide if it is reasonably foreseeable that the governmental decision will increase or decrease the fair market value of the real property in which he or she has an economic interest by $10,000 or more, or increase or decrease its rental value of the real property by $1,000 or more per 12-month period. (Regulation 18705.2(b)(1)(C).)
Mr. Chouteau's proposal.
At the February, 2000 meeting, the Commission discussed a proposal by Rene Chouteau, the City Attorney of Santa Rosa, to eliminate the current "middle zone" materiality standard for real property which is indirectly involved in the governmental decision (i.e., the more-than-300-feet-but-less-than-2,500-feet provision). (Regulation 18705.2(b)(1)(C).)(13) This materiality standard provides that a financial effect of $10,000 on the fair market value, or $1,000 on the annual fair market rental value, is material. Mr. Chouteau's argument boils down to two main points:
All five of the Commissioners expressed reservations about the "middle zone" materiality standard, specifically about the difficulty of applying it in "the real world." The Commission directed the staff to return with a draft regulation with the following options:
(1) Retain a "middle zone" or "no presumptions zone" but with a test which does not rely on dollar thresholds.
(2) Eliminate the current "middle zone," with its dollar-based tests, and come up with something new. As explained below, when combined with other decisions tentatively made by the Commission, this means a regulation with one materiality standard covering real property which is directly involved in the governmental decision, and one materiality standard covering all other real property.
A new "middle zone" materiality standard?
As explained in more detail in the January 24th memo (see pp. 2-4) the idea behind the "middle zone" materiality standard is straightforward: In the "middle zone," the real world is too complex to allow presumptions. That is, considering the diverse nature of real properties and surrounding areas, the many types of governmental decisions, and the almost uncountable ways in which these factors can interact, no presumptions are supportable. In this zone between "too close" and "probably far enough away," deciding whether a material financial effect is reasonably foreseeable inevitably requires confronting the facts and making an evaluation of the governmental decision's financial impact on the real property.
With this in mind, the staff has found it impossible to formulate a new materiality standard for the "middle zone" which does not involve an estimation of a governmental decision's impact on the real property in dollars. Generally, the Act regulates financial conflicts of interest--finances are measured in dollars. Specifically, the task at hand is implementing the statutory language, "material financial effect"--again, finances are measured in dollars. Since the "middle zone" is specifically premised on the fact that presumptions are not supportable and case-by-case financial evaluations must be made for real properties within it, a materiality standard not based on presumptions seems inevitably to entail dollar-based evaluations.
The Commission's first option is retaining the current rule, despite its reservations about the dollar thresholds. (These thresholds could, of course, be modified.)
Arguments against retaining the current rule.
The arguments against this option are, of course, those made by Mr. Chouteau in his proposal to eliminate the current "middle zone" rule. (See above.) To restate them, the "middle zone" is among the most complicated of the conflicts rules and creates enormous difficulties for (1) public officials who must apply the rule, and (2) the Enforcement Division, which finds itself rarely able to prove a violation in that "middle zone."
Arguments in favor of retaining the current rule.
The argument in favor of the current rule: The Commission, in 1985, decided that between "very close" and "probably-far-enough-away" lay a middle ground in which a case-by-case, fact-intensive inquiry was prudent. Case-by-case, fact-intensive inquiries have inevitable costs. However, the benefits of the current regulatory strategy of the real property materiality standards outweigh the costs.
First, some would argue that there is an area around real property which is the subject of a governmental decision in which material financial effects are too possible to ignore, but not so certain as to warrant presumptions. A champion of the current rule would respectfully disagree with Mr. Chouteau's assertion that material financial effects beyond 300 feet are so "highly speculative" that we can simply wipe the rule off the books.
Also, a case-by-case approach has the virtue of flexibility. Although it is harder, it may be more likely to get "correct" results in a given case than more inflexible, presumptive rules.
A third argument in favor of the current regulation is really a criticism of Mr. Chouteau's proposal, namely, that it is an oversimplification. A simple rule is good, unless that simplicity is achieved by glossing over the realities of a complex, dynamic "real world."(14)
An enormous, multi-billion dollar marketplace of realtors, real estate appraisers, and lenders, among others, exists to profit from the making of fine discriminations about the relative value of properties. These discriminations turn on many factors, including governmental policies. In the context of this complex environment, one could argue it is oversimplification to prescribe only two presumptive rules to regulate the entire universe of real properties, governmental decisions, and the interrelationships between them.
Finally, there is an old saying to the effect that "the devil you know is better than the devil you don't know." As explained below, the Commission's other options (i.e., the options available if dollar-based tests are not used) have their problems, too. Also, there is always the problem of unforeseen and unintended consequences. This is not to argue for slavish devotion to the status quo, but a reflection on the fact that the current rules didn't just happen. They came about as a result of experience, and after long consultation with the regulated community.(15)
Possible materiality standards if the "middle zone" rule is eliminated.
Assuming the Commission sticks to its tentative decision to recast the current "inner zone" rule as another test for deciding whether real property is directly involved in a governmental decision, and assuming that Mr. Chouteau's proposal to eliminate the current "middle zone" materiality standard is accepted, a regulatory proposal along the following lines emerges: There will be one materiality standard which will apply to all directly involved real property, and one materiality standard which will apply to all indirectly involved real property. (That is, for indirectly involved real property, two of the current three zones--the "inner zone" and the "middle zone"--will move or disappear.)
Implementing this emerging regulatory proposal means facing two sets of interrelated issues, which are presented as "decisions points" in the draft regulation.
What would be the materiality standard for indirectly involved real property?
The draft regulation (Appendix A) presents two options on this issue. The following discussion is premised on the assumption that the Commission does not want to consider a dollar-based materiality test (i.e., if the Commission eliminates the current "middle zone" rule largely because it is a dollar-based test, it probably does not want to replace it with another dollar-based test).
If the new materiality test is not to be based on dollars, then the choices seem to narrow to a test which focuses on factors indicating the uniqueness of the governmental decision's financial effect on the public official's real property. This is, of course, also the focus of the "public generally exception." (See Section 87103, Regulations 18707 - 18707.6.)
Using the current "outer zone" materiality standard. (Decision 2, option a.)
Mr. Chouteau's proposal envisages that the current "outer zone" test would apply to all indirectly involved real property more than 300 feet from the property which is the subject of the decision. (However, see part III.C.2., below, about whether this 300 feet distance should be increased if the current "middle zone" test is deleted.) Regulatory language implementing this approach is labeled "Decision 2, option a" in the draft regulation.
The current "outer zone" test is in Regulation 18705.2(b)(2): If the public official's real property is more than 2,500 feet (300 feet in Mr. Chouteau's proposal) from the real property which is the subject of the decision, the financial effect of the decision on the public official's real property is not considered material unless:
(1) There are "specific circumstances regarding the decision, its effect, and the nature of the real property in which the official has an interest," which make it reasonably foreseeable that the fair market value of the property will increase or decrease by $10,000, or that the fair market rental value will increase or decrease by $1,000 in a twelve-month period. The current "outer zone" rule expressly refers to the current "middle zone" rule for these thresholds. And,
(2) Either of the following is true:
(a) "The effect will not be substantially the same as the effect upon at least 25 percent of all the properties which are within a 2,500 foot radius of" the public official's real property; or
(b) There are not at least 10 properties under separate ownership within a 2,500 foot radius of the public official's real property.
There are two important things to notice about this materiality standard, in the context of Mr. Chouteau's proposal. First, the current "outer zone" materiality standard relies, in part, on the very dollar-based thresholds Mr. Chouteau's proposal would otherwise do away with by eliminating the "middle zone" test.
With this in mind, a number of city attorneys have proposed a variation on Mr. Chouteau's proposal which would eliminate the dollar tests, but retain the second half of the test (see next paragraph), with certain modifications.
Second, the "outer zone" materiality standard uses two different 2,500 feet distances. The first distance is measured from the property which is the subject of the decision to the public official's real property: If this distance is more than 2,500 feet (300 feet in Mr. Chouteau's proposal), then this materiality standard (i.e., current Regulation 18705.2(b)(2)) applies.
The second distance comes into play once one has thus decided that the provision indeed applies. The second distance establishes a roughly circular(17) perimeter of 2,500 feet around the public official's real property, in order to ask questions about the other properties inside that perimeter. These questions go to how many other properties there are in the perimeter (at least ten under separate ownership?), and how many of these other properties feel substantially the same effect from the decision (at least 25 percent?). These are, of course, the same kinds of questions which are asked to determine if the public generally exception applies. (See Regulation 18707(b).)
It has been suggested by a number of city attorneys that this perimeter be retained, with the 2,500 feet distance unchanged, but with the percentage in the first half of the test raised to 50%; that is, the financial effect of the governmental decision would not be considered material unless there are specific circumstances making it reasonably foreseeable that 50% of the properties within 2,500 feet of the public official's property will not be affected in substantially the same manner.
Two obvious questions arise here: First, how much of the area and population of a given jurisdiction is affected by this 2,500 feet perimeter?;(18) and, second, whether this second 2,500 feet radius needs to be adjusted to accommodate the change in the first radius (i.e., the proposed decrease from 2,500 feet to 300 feet).
In Appendix B is data relevant to this first of these questions. In Table 2, notice the last line. Around a one-acre parcel,(19) a circular perimeter of 2,500 feet encloses an area of 0.77 square miles. For the sake of comparison, 0.77 square miles represents about 8% of the area of the City of Dixon, in which about 8% of the population lives; while it represents about 1.6% of the area of the City and County of San Francisco, in which about 1.6% of the population lives.
As to the second question, decreasing the second 2,500 feet distance decreases the size of the perimeter around the public official's real property, which in turn makes it less likely that there are at least ten other properties inside the perimeter, and less likely that 25% of them are affected in substantially the same way. In other words, decreasing the second 2,500 feet radius, the one that describes a perimeter around the public official's real property, makes the rule "tougher," in a "pro-reform" sense. Increasing the second 2,500 feet radius has the opposite effect.(20)
Advantages and disadvantages. The advantage of this option is familiarity: Regulation 18705.2(b)(2), on which it is based, has been on the books since 1985.
A disadvantage of this option is that it relies on dollar-based thresholds. The first part of the "outer zone" test looks at whether there are "specific circumstances" which make it reasonably foreseeable that the very "middle zone" dollar thresholds otherwise being eliminated are met. If the idea is to rid the regulation of dollar-based tests, one must ask if this amounts to "one step forward, but one step back." Eliminating the dollar tests, as suggested by some city attorneys, would mitigate this problem.
(See part III.D., below for a recommendation.)
b) Using a new materiality standard which directly analogizes to the "public generally exception" and which has no dollar-based test.
The Commission may choose to delete the current "middle zone" test, but not want to rely on the current "outer zone" test, perhaps because it has a dollar-based test. In that case, another option is to create a new materiality test which defines materiality solely in terms of the relative uniqueness of the financial effect on the public official's real property. For indirectly involved real property, the financial effect of a governmental decision would be material only if it is sufficiently unique on that real property when compared to the rest of the real property in the jurisdiction.
The draft language borrows from the current public generally exception applicable to real property. Under the current formulation of the public generally exception, the financial effect of a governmental decision on real property is indistinguishable from its effect on the public generally if 10% or more of all property owners, all home owners, or all households in the jurisdiction are affected in substantially the same manner as the public official's real property.(21) (Section 87103; Regulations 18707(b).)
The proposed materiality standard would provide that the financial effect of a governmental decision on indirectly involved real property is not considered material unless "less than ten percent (10%) of all property owners, all homeowners, or all households in the jurisdiction of the public official's agency, or the district that he or she represents, will be financially affected in substantially the same manner." (See draft regulation, Appendix A, page 6, lines 20-28.(22))
In the context of the "eight-step process" (see Regulation 18700(b)), the materiality standard would be used to frame the "step six" standard question: Is it substantially likely that less than ten percent (10%) of all property owners, all homeowners, or all households in the jurisdiction of the public official's agency, or the district that he or she represents, will be financially affected in substantially the same manner? (See Regulation 18706.) If the answer is "no," then there is no conflict. (Ibid.) If the answer is "yes," then there is a conflict, unless the public generally exception applies. (Ibid.; deciding whether the public generally exception applies is step seven of the eight-step process (see Regulation 18700(b)(7).)
Advantages and disadvantages.
This approach is similar to the current "outer zone" test, in that both look at the relative uniqueness of the financial effect of the decision on the public official's real property. However, it is simpler than the preceding option because it does not use any dollar-based tests.
A disadvantage to this test is that it may, in some minds, blur the distinction between deciding whether a financial effect is material ("step five" of the standard analysis), and deciding whether the public generally exception applies ("step seven"). This is a valid criticism. Using this test at the materiality/step five analysis certainly preordains part of the step seven/public generally result. However, the public generally exception step still is relevant because some of the "special purpose" versions of the public generally exception may still apply even if the new materiality standard is met. (See Regulations 18707.1-18707.6.)
If this approach is adopted, the resulting materiality standard could be made much "tougher," in a "pro-reform" sense, than the current materiality standards, or much more "lenient." This depends on two factors:
By manipulating these factors, the Commission can emphasize or de-emphasize conflicts where real property is indirectly involved in a governmental decision. These are issues with which the Commission is wrestling in other phase 2 projects which address the "public generally exception." The interrelationship of these other projects to this option for defining materiality is critical. This project and the public generally exception projects ('I,' 'J,' and 'K') are deliberately scheduled for deliberation at the same meeting (July 2000) to facilitate coordination.
(See part III.D., below for a recommendation.)
Should the 300 feet distance be increased?
The Commission presumes that governmental decisions will have a material financial effect on properties within a certain distance (currently 300 feet) of the property which is the subject of the decision. The Commission may wish to consider increasing this distance for either of two reasons.(23) (This is labeled as "Decision 3" in the draft regulation.)
First, the Commission originally settled on 300 feet as the outer boundary of the "inner" or "too close" zone as part of a larger scheme.(24) If the Commission dramatically modifies the rest of that bigger concept, by eliminating the "middle zone" and perhaps significantly changing the materiality standard in the new, expanded "outer zone," does the 300 feet distance need to be modified, too?
Second, when making decisions about the materiality standards for indirectly involved real property interests (see above), the Commission may decide to de-emphasize conflicts where real property interests are indirectly involved. (Or, it may be worried that it will do so unintentionally.) One way to compensate for this would be to expand the area in which real property is considered to be "close enough" to the property which is the subject of the decision to presume a material financial effect. Such a compensation would be accomplished by increasing the 300 feet distance.
The argument for no change.
Mr. Chouteau (and others) argue that the 300 feet distance should not be changed. He argues, "[a]s to projects lying further than 300 feet from a particular piece of property, any effect on the property is highly speculative, and to the average citizen, even the appearance of conflict is not readily apparent." (See January 24th memo, Appendix A.) Another argument for not changing the 300 feet distance is that it is a familiar distance in other land use law. (See footnote 11, above.)
The argument for increasing the distance.
The "middle zone" materiality standard has been an integral part of this regulation since 1985. Simply eliminating it, as Mr. Chouteau proposes, inevitably raises concerns that the conflicts rules will be "weakened." As noted above, whether the proposed changes "weaken" or "strengthen" the conflicts rules depends largely on what the Commission decides to use as a materiality standard for indirectly involved real property. (See above.)
To whatever extent one is persuaded by the argument, a way to compensate for these consequences is to increase the number of real properties which are presumed to be materially affected by a given decision. One way to accomplish this is to increase the 300 feet distance by which the Commission "captures" real properties which are not the subject of the governmental decision, but which are "close enough" to be deemed directly involved.
Another consideration is that the Commission may wish, for policy reasons, to deliberately de-emphasize conflicts where the public official's real property is indirectly involved. If the Commission wants to "balance" such a policy shift, it could do so by increasing the 300 feet distance.
Appendix B, Table 2 presents data tied to the various alternatives which have been suggested for increasing the 300 feet distance.
Recommendation (Decisions 2 and 3).
There has been considerable criticism of, and indeed exasperation with, the current, dollar-based "middle zone" rule. There is considerable sentiment, inside and outside the Commission, to eliminate this kind of rule. This change would be a fundamental one, and the consequences should be clearly understood.
The alternative materiality standards would, in some manner, focus on the relative uniqueness of the financial effect on the public official's real property as a measurement of the materiality of the decision's financial effect. "Uniqueness" would be expressed in word-formulas such as the "effect will not be substantially the same as the effect" (Decision 2, option a) or "in substantially the same manner" (Decision 2, option b).
Two potential problems are apparent. First, arguably, neither of these essentially similar word-formulas are precisely defined.(25) This creates the danger that the new materiality test will be criticized as "subjective" or "uncertain." Public officials, their advisors, their critics, and other reasonable minds may well wrangle over whether financial effects are "substantially the same."
Second, more fundamentally, is "uniqueness" a good yardstick against which to measure "materiality?" A financial effect may be utterly unique, but also utterly trivial. Conversely, a financial effect may be ubiquitous, but devastating. If the point is to prevent bias due to material financial consequences (Section 81001(b), 87103), one may question whether uniqueness and materiality are necessarily the same thing.
On Decision 2, there is no staff consensus. Some support elimination of the "middle zone" in order to simplify the regulation, and its enforcement. Others are concerned that "we're jumping out of the pan into the fire" because there are significant questions about the viability of using relative uniqueness as a measurement of materiality.
As to Decision 3, staff recommends that the 300 feet distance be increased if the
perceived impact of Decision 2 is to de-emphasize conflicts where real property is
indirectly involved. By expanding the area in which real property is directly involved
because of its proximity to the property which is the subject of the decision, the
Commission will balance the de-emphasis, and, importantly, do so with regard to real
properties more closely connected (by proximity) to governmental decision.
IV. Should the words "or substantially" be removed from the "streets, water, sewer, etc." rule?
Under the current regulations, the "any financial effect" or "one-penny" materiality standard applies whenever the "decision involves construction of, or improvements to, streets, water, sewer, storm drainage or similar facilities, and the real property in which the official has an interest will receive new or substantially improved services." (Regulations 18705.2(b)(1)(B), emphasis added.) The Commission tentatively decided in February 2000 to recast this rule as a criterion for deciding whether real property is directly involved in a governmental decision.(26)
The Enforcement Division suggests that the words "or substantially" be struck from the provision. (This is labeled "Decision 4" in the draft regulation.) The argument for this change is that it makes enforcement of the provision easier by eliminating the need to argue and prove what are "substantial improve[ments]." Instead, a prosecutor would need only to prove "new or improved services."
On the other hand, it has been argued that the words "or substantially" provide an important prudential limit on the provision's scope. The champions of this position argue from an example: Suppose a dirt road runs in front of a city councilmember's house. A decision to pave the dirt road would be a substantial improvement, and the member should be disqualified. On other hand, suppose the road is already paved, and the decision is to fix potholes or other routine maintenance. In this latter case, one could argue while fixing the potholes is undoubtedly an "improvement," this is not the kind of case which should trigger disqualification.
Recommendation: Led by the Enforcement Division, the staff recommends striking the words "or substantially."
V. Leaseholds
A public official may have an economic interest in real property by leasing, as well as owning the real property. (Section 82033.(27)) When it comes to deciding whether real property in which a public official has an economic interest because of a lease is directly or indirectly involved in a governmental decision, the regulations are perceived as ambiguous.
The problem flows from the following language in Regulation 18704.2:(28)
"(a) An interest in real property is directly involved in a governmental decision under the following circumstances:
"(1) The decision involves the zoning or rezoning, annexation or deannexation, sale, purchase, or lease, or inclusion in or exclusion from any city, county, district or other local governmental subdivision, of real property in which the official has a direct or indirect interest (other than a leasehold interest) of $1,000 or more, or a similar decision affecting such property;" (Regulation 18704.2 (emphasis added).)
There are more subdivisions under subdivision (a) in Regulation 18704.2, but there are no other explicit exclusions of leasehold interests. Given that the exclusion for leaseholds is in the first subdivision, there is a question as to whether the exclusion from the direct involvement test for real property interests applies only to (a)(1), or also to (a)(2) - (a)(5).(29)
Here's the difference the question makes: If the exclusion for leasehold interests applies only to subdivision (a)(1), then leasehold interests may be directly involved in governmental decisions under (a)(2)-(a)(4). On the other hand, if the exclusion for leaseholds applies to all of subdivision (a), not just subdivision (a)(1), then leaseholds are never to be considered directly involved in a governmental decision.
The ambiguity apparently arises from 1988 amendments to this regulation.(30) Prior to the 1988 amendments, the language in subdivision (a)(1) constituted the entire subdivision. This language expressly excluded leasehold interests from its scope. In 1988, subdivisions (a)(2)-(a)(5) were added to the regulation. The Commission staff has been advising that the language excluding leasehold interests from the scope of the various new subdivisions appears to have been inadvertently omitted. (See, e.g., Dunsford Advice Letter, No. A-97-369.)
Unfortunately, the rulemaking files do not shed much light on the situation. It is apparent from a 1985 staff memorandum that the Commission originally intended to handle leasehold interests separately from ownership interests. (See current Regulation 18705.2(c).) However, there seems to be no available information about the 1988 amendments, and whether there really was an inadvertent omission as explained above.
There are plainly situations in which a public official's leasehold interest in real property could be considered directly involved in a governmental decision. Consider, for example, a public official with a long-term commercial lease in a piece of real property located in a redevelopment area. If the public official owned the real property, it would be considered directly involved in redevelopment decisions, and get the strict materiality standard for directly involved real property economic interests. (Regulation 18705.2(a)(4).) However, if the exclusion for leaseholds from direct involvement applies to all of Regulation 18705.2(a), then the public official with the long-term lease would have an economic interest considered only indirectly involved. One may legitimately question whether the public official with the long-term commercial lease is any less likely to be biased in this scenario than if he or she owned the property.
Approving "Decision 5" would accept the explanation there was apparently an inadvertent omission in 1988. It would "fix" the "problem" by moving the exclusion for leasehold interests from subdivision (a)(1) to the introductory language in subdivision (a), where it is clear the exclusion applies to all of subdivision (a), not just to (a)(1); and would make conforming changes throughout Regulations 18704.2 and 18705.2.
Rejecting Decision 5 would remove the exclusion from the regulation entirely. This would mean that real property in which a public official has an economic interest--whether because of ownership or a lease--would be considered directly involved (or not) under one set of rules, period.
The Commission also has the option of maintaining the status quo by directing staff to return with language which accomplishes that.
Recommendation: The staff recommends rejecting Decision 5.
1. A public official has an economic interest in real property in which he or she has a direct or indirect interest of $1,000 or more. (Section 87103(b); Regulation 18703.2.) This includes leaseholds, except for month-to-month tenancies. (Section 82033; Regulation 18233.) An indirect investment or interest means any investment or interest owned by the spouse or dependent child of a public official, by an agent on behalf of a public official, or by a business entity or trust in which the official, the official's agents, spouse, and dependent children own directly, indirectly, or beneficially a 10-percent interest or greater. (Section 87103.)
2. This memorandum refers to the staff memorandum, dated January 24, 2000, which supported the Commission's deliberations at the February meeting, for foundational and background material. A copy of the January 24th staff memorandum is available at the Commission's website, www.fppc.ca.gov.
3. See January 24th memorandum, pp. 6-8.
4. See January 24th memorandum, pp. 6-8.
5. See January 24th memorandum, pp. 9-10.
6. For more complete background information on the real property materiality standards, including their history, see the November 23rd memo, pp. 1 - 4.
7. Real property is considered "directly involved" in a governmental decision if any of the following are true:
"(1) The decision involves the zoning or rezoning, annexation or deannexation, sale, purchase, or lease, or inclusion in or exclusion from any city, county, district or other local governmental subdivision, of real property in which the official has a direct or indirect interest (other than a leasehold interest) of $1,000 or more, or a similar decision affecting such property;
"(2) The decision involves the issuance, denial or revocation of a license, permit or other land use entitlement authorizing a specific use or uses of such property;
"(3) The decision involves the imposition, repeal or modification of any taxes or fees assessed or imposed on such property; or
"(4) The decision is to designate the survey area, to select the project area, to adopt the preliminary plan, to form a project area committee, to certify the environmental document, to adopt the redevelopment plan, to add territory to the redevelopment area, or to rescind or amend any of the above decisions; and real property in which the official has an interest, or any part of it is located within the boundaries (or the proposed boundaries) of the redevelopment area." (Regulation 18704.2(a).)
8. "De minimis non curat lex." The law does not concern itself about trifles. (Black's Law Dict., 5th ed. 1979, p. 388, col. 1.)
9. For purposes of assigning a materiality standard, real property which does not meet the criteria for being directly involved (see footnote 7, above) is considered indirectly involved. (Regulation 18704.2(b).)
10. Current Regulation 18705.2(b) also creates one other materiality standard, one which does not depend on the distance from the public official's real property to the real property which is the subject of the decision. If the "decision involves construction of, or improvements to, streets, water, sewers, storm drainage, or similar facilities, and the real property in which the official will receive new of substantially improved services," then the financial effects of the decision are deemed material. (Regulation 18705.2(b)(1)(B).) At the February 2000 meeting, the Commission tentatively decided to recast this provision as a criterion for deciding whether real property is directly involved in a governmental decision.
11. Under Government Code Section 65091, all owners of real property within 300 feet of real property which is the subject of certain land-use decisions are entitled to written notice of hearings on the decision. The drafters of Regulation 18705.2(b)(1)(A) borrowed this distance as the radius for the "very close" zone.
12. See January 24th memo, pp. 6-8.
13. For background information on the current structure of the materiality standards for indirectly involved real property interests, see January 24th memorandum, pp. 2-4. For more on City Attorney Chouteau's proposal, see January 24th memo, pp. 4-6. Mr. Chouteau's letter to the Commission is Appendix A to the January 24th memo.
14. "Things should be kept simple, as simple as possible, but no simpler." --Albert Einstein.
15. The current conflicts regulations, including these materiality standards, were overhauled in 1985 after long consultation between the Commission and, among other, the League of California Cities. The very "dollar-based" tests now under fire were seen at the time as an improvement over the earlier rules, in that they were "objective" in comparison to the previous "subjective" rules.
16. The Commission will finish deciding on the materiality standard for directly involved real property by deciding what must be proved to rebut the presumption of materiality; see part II, above.
17. The perimeter is usually an irregular shape because the 2,500 feet distance is measured from each of the boundaries of the property, including the corners.
18. Another obvious questions is how many parcels will be enclosed in the 2,500 feet perimeter. The answer to this question will vary widely by jurisdiction. For example, in a rural area, there may only be a handful of other properties in the perimeter, while in a densely urban area there may be many. Given this wide spread, the arithmetic mean may not be particularly useful.
19. These computations are based on an one-acre parcel. In Regulation 18705.2, the various distances are measured from the boundaries of the property which is the subject of the decision. Thus, the area within x feet of the boundaries of a one-acre parcel will be greater than the area within x feet of a one-half acre parcel, but less than the area within x feet of a two-acre parcel.
20. Note that in the second option, discussed next, the relevant area is increased to cover the entire jurisdiction.
21. Technically, a significant segment, in the meaning of Regulation 18707(b)(1), can also be comprised of 5,000 individuals who are affected in substantially the same manner. However, this provision presents some conceptual difficulties: How can 5,000 individuals be affected in substantially the same manner as a parcel of real estate? This issue is being covered in Project 'K,' which is also before the Commission at this meeting. The 5,000 individuals test is deliberately excluded from this draft.
22. The current draft language conforms to the terminology and numeric thresholds in current public generally exception regulation, Regulation 18707. As part of "phase 2" of the Conflicts Project, the Commission is also addressing changes to Regulation 18707. If, as part of the work on the public generally exception projects, the Commission changes any of the terminology or thresholds, this materiality standard may be reworded to conform to the changes. The important point is the concept--that is, that the new materiality standard would focus on the "uniqueness" of the financial effect on the public official's real property.
23. When considering this question, the 300 feet distance's new role should be kept in mind: Based on the Commission's tentative decision in February, real property within 300 feet of the property which is the subject of the decision will be considered directly involved in the decision. That means a material financial effect is presumed, and the presumption may be rebutted only by proof there will be no financial effect on the public official's real property.
24. See January 24th memo, pp. 3-4.
25. The Commission's current regulations present a definition of "substantially the same manner," as the word-formula is used in the public generally exception: "(2) Substantially the Same Manner: The governmental decision will affect the official's economic interest in substantially the same manner as it will affect the significant segment identified in subdivision (b)(1) of this regulation." (Regulation 18707(b)(2).) This definition still requires a reasonable person to reach a conclusion as to the meaning of "substantial" as applied to particular facts.
26. See January 24th memorandum, pp. 6-8.
27. Under Regulation 18233, the Commission has excepted month-to-month tenancies; that is, if the public official has only a month-to-month tenancy, he or she does not have an economic interest in the real property.
28. Although this problem arises from language in the degree of involvement regulation for real property (Regulation 18704.2), it has an important impact on the real property materiality standards, which are, of course, the primary focus of this project. This is so because which materiality standard is applied to real property in which a public official has an economic interest because of a lease depends on whether it is considered directly or indirectly involved in the governmental decision.
29. Subdivision (a) of Regulation 18704.2 provides the real property in which a public official has an economic interest is considered directly involved under certain circumstances. Subdivisions (a)(1)-(a)(5) lay out those circumstances. Subdivision (a)(1) covers zoning, rezoning, annexation/deannexation, sale, purchase, lease, or inclusion/exclusion in a governmental subdivision, of the real property. Subdivision (a)(2) covers the licensing, permitting, and other entitlements for the real property. Subdivision (a)(3) covers taxation and fees on the real property. Subdivision (a)(4) and (a)(5) cover redevelopment if the real property is in the redevelopment area.
30. Then numbered Regulation 18702.1(a)(3).