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Definition of Related Party Transaction Copyright 2014 City of Dubuque Action Items # 2. ITEM TITLE: Definition of Related Party Transaction SUMMARY: City Manager recommending approval of a resolution defining "direct and indirect interest" to include spouse and unemancipated minor children of a City employee or officer for related party transactions. RESOLUTION Approving the definition of a direct or indirect interest for purposes of Iowa Code § 362.5 Prohibiting a City Officer or employee from having a"direct or Indirect interest" in a contract with the City SUGGESTED DISPOSITION: Suggested Disposition: Receive and File; Adopt Resolution(s) ATTACHMENTS: Description Type Definition of Related Party Transaction-MVM Memo City Manager Memo Finance Director's Memo Staff Memo City Attorney's Memo Supporting Documentation Resolution Resolutions THE CITY OF Dubuque U E I erica .i Masterpiece on the Mississippi 2007-2012-2013 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Definition of Related Party Transaction DATE: May 18, 2016 Iowa Code §362.5(2) provides that "A city officer or employee shall not have an interest, direct or indirect, in any contract or job of work or material or the profits thereof or services to be furnished or performed for the officer's or employee's city." The statute does not define "direct or indirect interest." There are a number of exceptions to the prohibitions, such as contracts which are competitively bid. In the absence of definition of "direct or indirect interest," for purposes of the annual audit, the City has applied our external auditor's definition as business providing materials or services to the City that have a five percent or more ownership by a city employee or city official, the spouse, parent, child, sibling, parent in-law or sibling in-law of a city employee or city official, beginning with the audit of fiscal year ending June 30, 2012. These are referred to as "related party transactions." City Attorney Barry Lindahl has researched Iowa Code §362.5 and found that the Iowa Attorney General concluded that a marital relationship does create a conflict for a public officer under §362.5 and "under section 362.5 city officers or employees have indirect interests in contracts with the city involving their unemancipated minor children." By analogy, the Iowa Gift Law, Iowa Code §68B.2(11), defines "immediate family members" to mean "the spouse and dependent children of a public official or public employee." Based on that research, it is recommended that the City should interpret "direct or indirect interest" in §362.5 to mean the spouse and unemancipated minor children of a city employee or officer. Finance Director Jean Nachtman recommends City Council approval of a Resolution defining "direct and indirect interest" to include the following: • Spouse; and • Unemancipated minor children of a City employee or officer. Brian Unsen, Partner with Eide Bailly LLC, stated that the City's definition of a "direct or indirect interest" if adopted in a resolution by the City Council would supersede the audit firm's broader definition. Brian submitted the resolution and associated supporting documentation to the State's Auditor's Office (Andy Nielsen) for review. State Auditor's office agreed with our resolution. I concur with the recommendation and respectfully request Mayor and City Council approval. Mic ael C. Van Milligen MCVM:jh Attachment cc: Barry Lindahl, City Attorney Cindy Steinhauser, Assistant City Manager Teri Goodmann, Assistant City Manager Jean Nachtman, Finance Director Jennifer Larson, Budget Director 2 THE Crrr of DubuIllyque DUB E Masterpiece on the Mississippi TO: Michael C. Van Milligen, City Manager FROM: Jean Nachtman, Finance Director SUBJECT: Definition of Related Party Transaction DATE: May 17, 2016 Background Iowa Code §362.5(2) provides that "A city officer or employee shall not have an interest, direct or indirect, in any contract or job of work or material or the profits thereof or services to be furnished or performed for the officer's or employee's city." The statute does not define "direct or indirect interest." There are a number of exceptions to the prohibitions, such as contracts which are competitively bid. In the absence of definition of "direct or indirect interest," for purposes of the annual audit, the City has applied our external auditor's definition as business providing materials or services to the City that have a five percent or more ownership by a city employee or city official, the spouse, parent, child, sibling, parent in-law or sibling in-law of a city employee or city official, beginning with the audit of fiscal year ending June 30, 2012. These are referred to as "related party transactions." Related party transactions are self-reported to our auditors annually. The Finance Department continuously updates a list of known related party vendors and distributes the list to City departments. Departments are supposed to refer to this list prior to purchasing. Purchases from related party vendors which are not covered by one of the exceptions to the statute are supposed to be competitively bid. New vendors, upon set up, are asked to identify if a related party situation exists. Annually departments are queried to identify any known related party transactions. Due to the changing dynamics of the City's workforce, business community, and business ownerships, a related party transaction is not always identified until after the purchase has occurred. The combination of a large employee base and the broad definition of related parties works towards discouraging City business with locally owned vendors. Discussion City Attorney Barry Lindahl has researched Iowa Code §362.5. See his memo attached. He found that the Iowa Attorney General concluded that a marital relationship does create a conflict for a public officer under §362.5 and "under section 362.5 city officers or employees have indirect interests in contracts with the city involving their unemancipated minor children." By analogy, the Iowa Gift Law, Iowa Code §686.2(11), defines "immediate family members" to mean "the spouse and dependent children of a public official or public employee." Based on that research, it is recommended that the City should interpret "direct or indirect interest" in §362.5 to mean the spouse and unemancipated minor children of a city employee or officer. Brian Unsen, Partner with Eide Bailly LLC, stated that the City's definition of a "direct or indirect interest" if adopted in a resolution by the City Council would supersede the audit firm's broader definition. Brian submitted the resolution and associated supporting documentation to the State's Auditor's Office (Andy Nielsen) for review. State Auditor's office agreed with our resolution. Recommendation I recommend that the attached resolution be submitted to the City Council for consideration, defining "direct and indirect interest" to include the following: • Spouse; and • Unemancipated minor children of a city employee or officer THE CITY OF DUBbE MEMORANDUM Masterpiece on the 'ssissippi 06 BARRY LIND CITY ATTOR E To: Jean Nachtmann Finance Director DATE: May 3, 2016 RE: Iowa Code § 362.5 Relating to City Contracts Here is some background on Iowa law with respect to who is prohibited from contracting or having an interest in a City contract under Iowa Code § 362.5. Section 362.5 generally prohibits a city officer or employee from having a "direct or indirect interest" in a contract with the city. The statute does not define a "direct or indirect interest" nor have we found any definitive opinion from the Iowa appellate courts. The Iowa Attorney General has concluded that "the existence of a marital relationship does create a conflict for a public officer" and that "under section 362.5 city officers or employees have indirect interests in contracts with the city involving their unemancipated minor children." The Iowa Attorney General has noted that the Iowa Gift Law, Iowa Code § 68B.2(11), takes a similar position by defining "immediate family members" to mean "the spouse and dependent children of a public official or public employee." 1994 Iowa Op. Att'y Gen. 119 (1994). A copy of the opinion is attached. So it is at least clear that we should interpret § 362.5 as applying to spouses and unemancipated minor children of city employees and officers. Unfortunately, it is difficult to draw such a bright line test with respect to adult children. In another context, the Iowa supreme court has said that family relationships "standing alone-are nothing more than a remote, and therefore nondisqualifying, interest." Bluffs Dev. Co. v. Bd. of Adiustment of Pottawattamie Cty., Iowa, 499 N.W.2d 12, 17 (Iowa 1993). An opinion of the Iowa Attorney General "observed broadly that a 'mere familial relationship' did not in itself present a conflict of interest, but added that 'an actual financial or beneficial interest or condition which was outrageous or unjustly favorable to OFFICE OF THE CITY ATTORNEY DUBUQUE, IOWA SUITE 330, HARBOR VIEW PLACE, 300 MAIN STREET DUBUQUE, IA 52001-6944 TELEPHONE (563)583-4113/FAx (563)583-1040/EMAIL balesq@cityofdubuque.org the family member in the award of the contract' might present one." See 1994 Iowa Op. Att'y Gen. 119 (1994). Arguably, § 362.5 would apply to an adult child where there is "an actual financial or beneficial interest" to the City employee or officer resulting from the adult child's contract with the city or a "condition which was outrageous or unjustly favorable" to the "adult child" in the award of the contract to the adult child. However, that seems to us to be a situation where the employer or officer has a "direct interest" in the contract and would be prohibited by the express language of § 362.5. 1 would suggest that the resolution define "direct or indirect interest" to include the following: • Spouse; and • Unemancipated minor children. BAL:tIs Attachment FAUSE RS\tsteckle\Lindahl\Memos\Nachtmann_IowaCodeCityContracts_050316.doc 2 Mr. Corwin R. Ritchie, 1994 Iowa Op.Atty. Gen. 119(1994) i 1994 Iowa Op.Atty.Gen.lig(Iowa A.G.),1994 WL 470450 Office of the Attorney General State of Iowa Opinion No.94-7-4 July 12,1994 CITY OFFICERS AND EMPLOYEES: Interest in public contracts.Iowa Code§§331.342,362.2(15),362.5(1993). The general prohibition in Iowa Code section 362.5(1993)against city officers or employees having a direct or indirect interest in a contract with a city applies even if they abstain from awarding the contract.City officers or employees have an"indirect interest"in contracts between their unemancipated minor children and the city.Persons on city boards and commissions serving other than fixed terms,but having all the other attributes of"officers," should comply with section 362.5.(Kempkes to Ritchie,Buena Vista County Attorney,7-12-94) *1 Mr.Corwin R.Ritchie Buena Vista County Attorney 111 West Sixth Post Office Box 1284 Storm Lake,Iowa 50588 Dear Mr.Ritchie: You have requested an opinion from the Attorney General generally regarding Iowa Code sections 331.342 and 362.5(1993), which respectively govern county and city officers or employees interested in privately contracting with their public employers. In answering your specific questions regarding cities,we have concluded(1)persons serving on city boards or commissions may not contract with the city for more than the statutory maximum of$1,500 per year even if they do not participate in awarding the contract;(2)the unemancipated and presumably minor children of such persons,hoping to serve as lifeguards or maintenance workers,may not contract with the city for more than$1,500 per year;and(3)persons serving on city boards or commissions probably amount to`officers"--statutorily defined in part as those persons appointed to fixed terms--even if a city eliminates fixed terms of service for their positions. Chapter 331 governs county officers and employees. Chapter 362 governs city officers and employees. Although the two chapters do not parallel one another word-for-word,they use similar language and undoubtedly have similar goals. Section 331.342 broadly defines a contract as a claim against or agreement with a county and generally prohibits a county officer or employee from having a"direct or indirect interest"in a contract with the county.After setting forth nine exceptions to this general prohibition, section 331.342 then excepts otherwise prohibited contracts for goods and services benefiting a county officer or employee if the county's purchases amount to less than$1,500 in a fiscal year.See Iowa Code§331.342(10). Section 362.2(15)provides that unless the context otherwise requires a city"officer"means a natural person elected or appointed to a fixed term and exercising some portion of city power. Section 362.5 then defines a contract in virtually the same way as section 331.342 and generally prohibits a city officer or employee from having a"direct or indirect interest"in a contract with the city.Section 362.5 sets forth twelve exceptions to this general prohibition,including one that excludes otherwise prohibited contracts for goods and services benefiting a city officer or employee if the purchases by a city,with a population under 2,500, amount to less than$1,500 per fiscal year.Iowa Code§362.5(10). I I. j I VVESTLAW 21 " -f If'r3. Xi> > r,7 Jr:.gira U J n-e!, ' I Mr. Corwin R. Ritchie, 1994 Iowa Op.Atty. Gen. 119(1994) 655,656(1927)(question of fact whether city council member, in business with adult son,had conflict of interest when their contract not part of son's contract with city). Our office has similarly interpreted section 362.5 as it applies to a contract involving an adult child. See 1980 Op.Att'y Gen. 300. We observed broadly that a"mere familial relationship"did not in itself present a conflict of interest,but added that"an actual financial or beneficial interest or condition which was outrageous or unjustly favorable to the family member in the award of the contract"might present one. From the particular facts presented to us,we concluded that a city council member did not have any financial or beneficial interest in the employment of his adult child as a policeman. Whether a conflict of interest arises under section 362.5 through the unemancipated minor children of city officers or employees begins with the common meaning of its key words. See generally Iowa Code§§4.1(3 8),4.2."Indirect"means not immediate or direct,but roundabout or secondary. Webster's New World Dictionary 716(1976). "Interest"means a share in something or an advantage or benefit.Id.at 734. Our office has concluded these words meant that the existence of a marital relationship does create a conflict for a public officer. 1980 Op.Att'y Gen.580;see 1976 Op.Att'y Gen. 551;but see 1974 Op.Att'y Gen. 127; 1972 Op.Att'y Gen.338; 1966 I Op.Att'y Gen.38.Cf. 1924 Op.Att'y Gen.238(nepotism statute,now Iowa Code§71.1,generally precludes parole board from employing member's daughter to work as boar(Ts stenographer). Thus,when the spouse of a city council member worked at and owned stock in an engineering firm performing services for the city, the city council member had an indirect interest in the underlying contracts: In other words,because the engineering firm would profit from a contract with the city and the spouse of the city official would then own six percent. . . of a more profitable corporation,the city official will also benefit from her spouse's share of a more profitable corporation. In this case the city official's interest would be termed an indirect one, as it is not possible nor is it necessary to be able to directly trace the profit from the corporation to the spouse's share of stock and then to the city official's benefit. It is enough that because of the marital relationship this city official will be in a better financial position as a result of the awarding of the contract. *4 1980 Op.Att'y Gen.580(emphasis added). 1 The General Assembly has never reacted to this opinion by changing chapter 362. See State Attorneys General: Powers and Responsibilities 74(L. Ross,ed. 1990)(longstanding practice consistent with opinion from Attorney General evidences lack of legislative concern about its conclusion). Cf. Henessey v. Cedar Rapids Community School Dist., 375 N.W.2d 270, 273 (Iowa 1985) (administrative interpretation of statute entitled to weight,particularly when legislature refuses to intervene over a long period of time).Recently,however,the General Assembly did pass a new law governing gift-giving to public officials. It generally prohibited persons from making gifts to public officials and their"immediate family members,"which,according to the statutory definition,included spouses and minor children. 1992 Acts,74th G.A., ch. 1228, § 9,at 511 (codified at Iowa Code§§ 68B.2(8),6813.713(1)). In view of the foregoing,we conclude that under section 362.5 city officers or employees have indirect interests in contracts with the city involving their unemancipated minor children. Such an interpretation eliminates any suspicion of favoritism and furthers perhaps the most important policy underlying conflicts-of-interest laws:to maintain public confidence in government. 63A Am.Jur.2d,supra,§322,at 898-99.To the city officer or employee,little if any financial difference certainly exists between a spouse contracting with the city and an unemancipated minor child contracting with the city.In both instances the city officer or employee has a financial interest in a very real sense with the awarding of the contract. Cf. Iowa Code of Judicial Conduct §3(D)(1)(1989)(judge disqualified from proceeding in which the judge's impartiality"might reasonably be questioned,"such as when the judge"knows that the judge's...minor child residing in the judge's household has a financial interest in the subject matter in controversy"). III. VVESTLAW _ __ r, r-, _ Mr. Corwin R. Ritchie, 1994 Iowa Op.Atty. Gen. 119 (1994) Assistant Attorney General 1994 Iowa Op.Atty.Gen.lig(Iowa A.G.), 1994 WL 470450 End of Document 21)1 o I homson Reuter,.No claim to orieinal L.S.Government\\orks. VVCSILATY _ _ � .�� ��., - _ �J'.� 'v ..��I�:' IJ .~. RESOLUTION NO. 254-16 APPROVING THE DEFINITION OF A DIRECT OR INDIRECT INTEREST FOR PURPOSES OF IOWA CODE § 362.5 PROHIBITING A CITY OFFICER OR EMPLOYEE FROM HAVING A "DIRECT OR INDIRECT INTEREST" IN A CONTRACT WITH THE CITY Whereas the Iowa Code §362.5 prohibits a city officer or employee from having a "direct or indirect interest" in a contract with the city; and Whereas, Iowa Code § 362.5 does not define "direct or indirect interest"; and Whereas, the City Council has determined that a definition of "direct or indirect interest" should be adopted for purposes of the City's annual financial audit. NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF DUBUQUE, IOWA: Section 1. For purposes of the City's annual financial audit, "direct or indirect interest" in Iowa Code § 362.5 means: • Spouse; and • Unemancipated minor children of a city employee or officer. Passed, approved and adopted this 6th day of June, 2016 Roy D. Buol, Mayor Attest: Kevin `,-rirnstahl, City Cierk