Conflict of interest situations hold serious consequences for public hospital districts. This section summarizes the law relating to what creates a conflict, its implications, and defenses.

Washington statutes strictly prohibit actions by public officials that could be deemed conflicts of interest — particularly actions concerning government contracts. Some ethics violations by public officers are gross misdemeanors and can result in fines, jail terms and loss of public office. One statute, codified as Chapter 42.23 RCW, specifically addresses beneficial interests in public contracts. RCW 42.23.030 states, in part:

The statute defines a “municipal officer” to include all elected and appointed officers of a public hospital district, together with all deputies and assistants of such officers, and all persons exercising any of the powers or functions of a municipal officer.

Certain types of contracts are expressly exempted from the application of the statute. These include:

• The furnishing of electrical, water or other utility services by a municipality engaged in the business of furnishing such services, at the same rates and on the same terms as are available to the public generally;

• The designation of public depositaries for public hospital district funds;

• The publication of legal notices required by law to be published by the public hospital district, upon competitive bidding or at rates not higher than prescribed by law for members of the general public;

• The employment of any person by a public hospital district or unskilled day labor at wages not exceeding $200 in any calendar month;

• The letting of any other contract (except a sale or lease as seller or lessor) by a public hospital district if the total amount received under the contract or contracts by the municipal officer or the municipal officer’s business does not exceed $1,500 in any calendar month. In order to fall within this exemption, the public hospital district is required to maintain a list, which must be publicly available, of each contract to which the exemption applies. In addition, the officer who has the beneficial interest in the contract may not vote on the authorization of the contract.

• The approval of any employment contract made with the spouse of a district commissioner if: (a) the spouse’s employment preceded the commissioner’s election to office, (b) the contract is commensurate with the pay plan or collective bargaining agreement of the local government, (c) the commissioner discloses the contract, and (d) the commissioner excuses himself/herself from voting on any measures regarding the contract.

A municipal officer may not vote on the authorization, approval or ratification of a contract in which he or she is beneficially interested even though one of the exemptions allowing the awarding of such contract applies. The interest of the municipal officer must be disclosed to the governing body of the municipality and noted in the official minutes or similar records of the municipality before the formation of the contract. RCW 42.23.030(11).

Further Legal Background

A district may believe that certain family or financial relationships are problematic, and that stricter standards are needed. Local governments have the authority to adopt their own conflicts of interest policies, so long as they do not directly conflict with state law. Any such policies should be fully discussed by the board, so that the ultimate policy clearly reflects the district’s will. Districts should also consult legal counsel in order ensure that the policy complies with state law.

In addition to the types of contracts that are expressly exempted from the statute, certain other types of contracts result in only “remote” contract interests that are not deemed to result in conflict of interests. The statute provides that a municipal officer is not interested in a contract in violation of the statute if the officer has only a remote interest in the contract and the extent of the interest is disclosed to the board of commissioners of the public hospital district and noted in its official minutes or similar records prior to the formation of the contract, and thereafter the commission approves or ratifies the contract in good faith by a vote of its membership sufficient for the purpose without counting the vote or votes of the officer having the remote interest.

The types of contract interests that are deemed to be “remote interests” are limited to the following:

• That of a non-salaried officer of a nonprofit corporation;

• That of an employee or agent of a contracting party where the compensation of such employee or agent consists entirely of fixed wages or salary;

• That of a landlord or tenant of a contracting party; and

• That of a holder of less than one percent of the shares of a corporation or cooperative which is the contracting party.

The statute expressly provides that the special exemption for remote contract interests will not be applicable to any officer who influences or attempts to influence any other officer of the public hospital district to enter into the contract.

There are also specific prohibitions for municipal officers, including (1) the use of a position to secure privileges, (2) compensation from external sources for matters related to the officer’s services, (3) accepting employment that could reasonably require disclosure of confidential information, or (4) otherwise disclosing confidential information obtained through the position for personal gain. [RCW 42.23.070]

In the past, there had been some question as to whether a commissioner could sit on the governing board of a legal entity established between the hospital district and another party through a partnership agreement, joint venture, or other contractual relationship. Following a 1997 amendment to RCW 70.44.240, commissioners are now clearly allowed to sit on the governing bodies of such organizations without being found in conflict. In fact, a strict interpretation of the new statute requires multiple commissioners to serve on the board of the new entity. For a further discussion of this subject, see Chapter VI, Topic IV, Section E.

Any contract made in violation of the prohibitions discussed above is rendered void. Other penalties may also apply, including forfeiture of office.

In addition to conflicts of interest defined by statute, a common law rule states that a person cannot hold two public positions where the responsibilities of one might conflict with those of the other. In one instance, the Washington Supreme Court held that a Seattle Transit Commission member’s private work, that of a trial lawyer with a firm that occasionally represented plaintiffs suing the Transit System, was an “incompatible office.” The Court held that the mayor of Seattle was justified in asking for the commissioner’s removal because of the conflict, and the reasoning of the opinion is significant for all public officials. The court identified the following standard for determining when two public offices or a public office and a private position are incompatible:

The application of [Kenneth v. Levine] to public hospital commissioners gives rise to hard questions. May a hospital-based physician properly serve on a commission? May a physician on the medical staff also be on a commission? How about an opthamologist who is not connected with the hospital but who might oppose the opening of an eye clinic because it could compete with his or her business? Unfortunately, there is no clear answer to any of these questions, although the introduction of RCW 42.23.070 (Prohibited Acts) may provide new guidance. The facts and circumstances of each case must be analyzed carefully and public hospital district should proceed with actions raising conflicts of interest only after consulting legal counsel and carefully considering the risks.

Another question that arises in this area is whether a commissioner may serve on the board of a non-profit organization that benefits from the activities of the district, even though the commissioner is receiving no individual financial benefit? Generally, this type of potential conflict would fall within the “Remote Interest” exemptions outlined in RCW 42.23.040, specifically as “that of a non-salaried officer of a nonprofit corporation “. As a remote interest, the commissioner could serve on the nonprofit board if the interest was disclosed and noted in the public hospital district’s board minutes. The commissioner could also vote on a contract between the hospital district and the nonprofit organization unless the commissioner would be the deciding vote (see previous discussion "The 'Remote Interest' Exemption", in this section).

In one case, however, the Washington Court of Appeals (Division 1) held that serving on the board of a related nonprofit organization was not a “beneficial interest” under RCW 42.23.030 at all, allowing the commissioner to fully participate in contract decisions and absolving the commissioner of any disclosure requirements. [Barry v. Johns, 920 P.2d 222 (1996)]

While this court decision would seem to suggest a less strict interpretation of the statute, the law remains unclear, and commissioners should consult with legal counsel before entering into any such associations.