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
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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