Legal Alerts Dec 20, 2019

FPPC Updates Materiality Standards

Amendments Adopted for Public Official Decisions Related to Nonprofit Gifts and Personal Financial Effects

As part of its ongoing efforts to update conflict of interest regulations, the Fair Political Practices Commission adopted yesterday amendments to the “materiality” standards for a “source of gift” and “official’s personal finances” financial interests in FPPC Regulations 18702.4 and 18702.5.
The California Political Reform Act prohibits any public official from making, participating in making, or otherwise using his or her official position to influence a governmental decision in which the official has a financial interest. Public officials have a financial interest in a decision if it is “reasonably foreseeable that the decision will have a material financial effect” that is distinguishable from the public. The materiality standards established by Regulations 18702.4 and 18702.5 are critical in determining whether a state or local official must recuse himself or herself from a governmental decision.
Materiality Standard for “Source of Gift” (Regulation 18702.4)
Existing Regulation 18702.4 states that the financial effect of a nonprofit’s gift to an official is material if the nonprofit will “receive a measurable financial benefit or loss” or the official knows, or has reason to know, that the nonprofit has an interest in real property that will be financially affected under the materiality standards in Regulation 18702.2. However, officials have found it difficult to interpret Regulation 18702.4 and determine whether a financial interest exists because the term “measurable financial benefit or loss” is undefined. To reduce that uncertainty, the amendments delete the term “measurable financial benefit or loss” and establish a simple, objective rule. The amendments incorporate by reference the materiality standards applied to a nonprofit income source interest in Regulation 18702.3, which provides threshold amounts that make it easier and clearer for an official to determine whether a decision’s financial effect on an income source is material. Regulation 18702.3(a)(3) provides that a nonprofit income source is material if any of the following applies:

  • The decision could increase/decrease the nonprofit’s annual gross receipts, or the value of the nonprofit’s assets/liabilities, in an amount equal to or more than:
    • $1 million or
    • 5 percent of the nonprofit’s annual gross receipts and when the increase/decrease is $10,000 or more.
  • The decision may cause the nonprofit to incur/avoid additional expenses or to reduce/eliminate expenses in an amount equal to or more than:
    • $250,000 or
    • 1 percent of the nonprofit’s annual gross receipts and the change in expenses is at least $2,500.
  •  The official knows, or has reason to know, that the nonprofit has an interest in real property and:
    • The property is a named party in, or the subject of, a decision before the official or the official’s agency as specified in Regulation 18701, and involves action related to a license, permit, entitlement, contract or any decision affecting a real property financial interest as described in Regulation 18702.2(a)(1)-(6) or
    • There is clear and convincing evidence the decision would have a substantial effect on the property.

Materiality Standard for “Official’s Personal Finances” (Regulation 18702.5)
The existing Regulation 18702.5 provides that a decision has a reasonably foreseeable financial effect on an official’s personal finances that is material if the official or the official’s family member will “receive a measureable financial benefit or loss from the decision.” Similar to the changes to Regulation 18702.4, the FPPC is deleting the term “measureable financial benefit or loss” in favor of a clearer rule that is easier for officials to apply. The FPPC repealed and recast Regulation 18702.5 to clarify that a resulting benefit or loss of $500 in any 12-month period is material. However, the 12-month period relative to the decision is not specified, and absent any clarification, may raise questions as to how far into the future the $500 limit applies. The $500 amount aligns with the Act’s current annual gift limit of $500, effective until Dec. 31, 2020, pursuant to Regulation 18940.2.
In addition, the changes to Regulation 18702.5 reinstate language prior to 2015 that a “personal financial effect” is material if the decision:

  • Relates to the hire, promotion, demotion, suspension or disciplinary action of the official or his or her immediate family member or
  • Sets a salary for the official or his or her immediate family member:
    • That is different to other employees in the same position or job classification or
    • When the official or his or her immediate family member is the only individual in that position or job classification.

Regulation 18702.5 also specifies that, if a decision would have a reasonably foreseeable financial effect on an official’s financial interest in a business entity or real property, any related effect on the official’s personal finances is not considered separately, but analyzed only under the respective materiality standards for a business entity (Regulation 18702.1) and real property (Regulation 18702.2).
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If you have any questions about these Regulations or how they may impact your agency, please contact the authors of this Legal Alert listed to the right in the firm’s Government Policy & Public Integrity practice group, or your BB&K attorney.

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