Advisory Opinion No. 2016-32 Rhode Island Ethics Commission Advisory Opinion No. 2016-32 Approved: September 27, 2016 Re: Marco Pacheco QUESTION PRESENTED: The Petitioner, a member of the East Providence Economic Development Commission, a municipal appointed position, requests an advisory opinion regarding whether he may apply for a commercial loan through a low interest loan program administered by his Commission. RESPONSE: It is the opinion of the Rhode Island Ethics Commission that the Petitioner, a member of the East Providence Economic Development Commission, a municipal appointed position, is prohibited by the Code of Ethics from applying for a commercial loan through a low interest loan program administered by his Commission. The Petitioner is a member of the East Providence Economic Development Commission (“the EDC”). He represents that the EDC is a nine-member board that is responsible for attracting new industries to the City of East Providence (“the City”) and encouraging the expansion of existing City businesses and industries. To help accomplish its purposes, the EDC administers the East Providence Commercial Loan Program (“the Loan Program”), which provides low interest loans to qualified City businesses seeking funds in amounts ranging from $10,000 to $100,000. The Petitioner states that the Loan Program is intended to enable businesses to locate, expand and/or develop business operations in the City and that loans for projects in manufacturing, processing, research and development, and other similar activities are eligible under the Loan Program. In his private capacity, the Petitioner is the owner of a business in the City known as Jordan’s Liquors. The Petitioner represents that he meets the Loan Program’s criteria and wishes to apply for a loan of just under $100,000 in order to help fund the expansion and improvement of his retail location. He seeks the instant advisory opinion to determine whether the Code of Ethics permits his application to the Loan Program, given his membership on the EDC. The Petitioner notes that, if so permitted, he would recuse from the EDC’s consideration of his own application. Under the Code of Ethics, a public official may not have any interest, financial or otherwise, direct or indirect, which is in substantial conflict with the proper discharge of his duties in the public interest. R.I. Gen. Laws § 36-14-5(a). A substantial conflict of interest occurs if he has reason to believe or expect that he or any family member or business associate, or any business by which he is employed or represents will derive a direct monetary gain or suffer a direct monetary loss by reason of his official activity. Section 36-14-7(a). He also is prohibited from using his public position or confidential information received through his position to obtain financial gain, other than that provided by law, for himself, a family member, business associate, or any business by which he is employed or represents. Section 36-14-5(d). Finally, no person subject to the Code of Ethics shall represent himself, or any other person or entity, before any municipal agency of which he is a member or by which he is employed. Section 36-14-5(e). This prohibition applies while the public official is a member of the agency and for one year thereafter. Section 36-14-5(e)(4). The Ethics Commission has considered similar questions regarding loan applications. In Advisory Opinion 94-105, appointed members and employees of the Rhode Island Historical Preservation & Heritage Commission (“HPHC”) asked the Ethics Commission whether the Code of Ethics permitted them to apply for and receive loans from a fund operated by the HPHC. The Ethics Commission opined that an employee of the HPHC could apply for and receive a loan through the program, provided that he did not use his official position or confidential information to influence his selection for the loan, and further provided that he recuse from participation in matters relating to his loan. However, as to the appointed members of the HPHC, who had ultimate decision-making relative to the administration of the program and the selection of loan recipients, the Ethics Commission opined that the Code of Ethics prohibited their application to participate in the loan program. Due to the HPHC members’ “pervasive involvement” in every aspect of the program, the Ethics Commission stated that “Commissioners so empowered should not benefit from the resources and policies which are generated as a result of their official actions.” In the years following Advisory Opinion 94-105, the Ethics Commission continued to differentiate between public officials or employees who had a ministerial role in the administration of a loan program versus those persons who exercised discretion or decision-making in the creation of the loan program or in the approval or rejection of loan applications. For example, in Advisory Opinion 2000-28, the Ethics Commission opined that a West Warwick Town Council member, and local business owner, could apply for a $10,000 business loan administered by the Town from funds allocated to the program in 1998, prior to his election, but could not apply for a loan funded in later years because he participated in the Town Council’s decision to continue funding the loan program. Also relevant to the Commission’s analysis was the fact that the Town Council had no involvement in processing or approving individual loan applications. Since Town employees were responsible for processing and approving such loans, the Ethics Commission required that the Council member recuse from discussion and voting relative to the salaries or other personnel issues involving any such Town employees. Most recently, in Advisory Opinion 2015-30, the Ethics Commission opined that a member of the Lincoln Town Council was not prohibited by the Code of Ethics from participating in the Town’s 50/50 Sidewalk and Curb Replacement Fund Program (“the Program”) available to all homeowners in the Town, whereby the Town pays for half of the cost of replacing the curbing and sidewalks on a residential property. Relevant to the Commission’s opinion was the fact that the Program was established and funded many years prior to the petitioner’s election to the Town Council, that it was available to any resident who wished to apply, and that the Petitioner as a Town Council member had no ongoing oversight over the funding or administration of the Program. See also A.O. 2006-19 (Solicitor for South Kingstown may participate in low interest loan program to upgrade his cesspool to a DEM-approved septic system under a program created through an agreement between South Kingstown and the Rhode Island Clean Water Finance Agency (“RICWFA”), even though as Solicitor he reviewed the proposed agreement prior to its adoption, given that the loan program was administered, and all loans were serviced, by the RICWFA and not the Town); A.O. 2001-57 (Central Falls City Councilor could receive a Storefront Improvement Loan administered by the Central Falls Planning Department, provided that he: 1) received funds allocated by the Council prior to his election; and 2) recused from participating and voting on salaries and/or personnel matters involving the members of the Planning Department who process and approve the individual loan applications); A.O. 2001-48 (a Providence Neighborhood Housing Corporation (PNHC) employee could participate in the City of Providence’s Employee Advantage Homebuyer Program where he otherwise met loan eligibility criteria, provided that he 1) did not participate in establishing Program eligibility criteria; and 2) recused from participation in all PNHC matters involving his application and loan). Based on these prior advisory opinions, it is clear that a key factor in our analysis is whether the EDC has such “pervasive involvement” in the creation and/or administration of East Providence’s Loan Program that its members should not be permitted to participate. In the instant matter, details surrounding the administration of the Loan Program were provided by James Moran, the City’s Principal/Economic Planner in the Planning Department. He advised that the Loan Program was established in the mid-1980s and was originally funded from the proceeds of a federal Urban Development Action Grant. Today, the City maintains a revolving loan fund of approximately $700,000 for the Loan Program, with an additional $142,000 in community development funds that are available if needed. Currently, because the Loan Program has become more active over the past few years, there is approximately $200,000 available for the City to loan qualified businesses. Loans are made on a first come, first served basis to qualified businesses as long as there are funds available to loan. Moran further advised that applications to the Loan Program are made using an official application form approved by the EDC which requires extensive supporting documentation including, but not limited to: resumes and personal financial statements of all owners, officers and directors of the business; balance sheets; profit and loss statements; current operating statements; monthly cash flow statements; listings of collateral; and letters from participating banks or other funding sources. Application packets are initially submitted to the City’s Planning Department, which checks to make sure the application is complete, and are then transmitted to the EDC its for review at one of its monthly meetings. At the meeting, the EDC essentially acts as the underwriter for the loan, reviewing the application and attached documents, questioning a representative of the business who is generally required to be present, requesting additional information as needed, sometimes discussing the application in executive session, and then voting to approve or deny the loan. The EDC’s loan approvals are technically advisory pursuant to a City ordinance, with loans of under $100,000 transmitted to the City Manager for final review, and loans of $100,000 or more transmitted to the City Council for final review. In practice, due to the extensive due diligence provided by the EDC on each loan, and because the City Manager is an ex officio member of the EDC, nearly all of the EDC’s loan approvals are ratified. Based on the above representations, we find that the EDC has a substantial and pervasive role in the administration of the Loan Program. We recognize that the Petitioner was not involved in the City’s initial decision in the 1980s to create or fund the Loan Program. However, since his appointment to the EDC he has been involved in the EDC’s decision-making relative to loan requests that would either deplete or preserve the revolving loan fund balance. The form and content of the loan application form is a creation of the EDC and subject to its continuing review and revision. The EDC is solely responsible for the City’s due diligence and “underwriting” of loan applications. Although the EDC’s role in approving most loans is technically advisory to the City Manager, in practice the EDC appears to be the primary decision-maker. Given the EDC’s substantial and pervasive role in the Loan Program, it is our opinion that the members of the EDC may not simultaneously place themselves in positions to benefit financially from the program by applying for loans. If EDC members were permitted to apply to the Loan Program then, even if they recused from their own applications, their decision-making relative to other loan applications would have an impact on whether there is sufficient capital remaining to fund their own loans. This creates a situation where, contrary to the requirements of section 36-14-5(a) of the Code of Ethics, EDC members would have private interests that are in substantial conflict with the proper discharge of their duties in the public interest. Furthermore, allowing EDC members to apply to the Loan Program would also implicate the prohibitions of section 36-14-5(e) of the Code of Ethics, insofar as applicants are normally required to appear at EDC meetings to answer questions and to provide additional support for the loan application. As previously discussed, section 36-14-5(e) prohibits public officials from representing themselves before their own agencies, while a member and for one year thereafter. For all of the above reasons, it is the opinion of the Rhode Island Ethics Commission that the Code of Ethics prohibits the Petitioner from applying for or receiving a loan through the Loan Program administered by the EDC, while a member of the EDC and for one year thereafter. This Advisory Opinion is strictly limited to the facts stated herein and relates only to the application of the Rhode Island Code of Ethics. Under the Code of Ethics, advisory opinions are based on the representations made by, or on behalf of, a public official or employee and are not adversarial or investigative proceedings. Finally, this Commission offers no opinion on the effect that any other statute, regulation, ordinance, constitutional provision, charter provision, or canon of professional ethics may have on this situation. Code Citations: § 36-14-5(a) § 36-14-5(d) § 36-14-5(e) Related Advisory Opinions: A.O. 2015-30 A.O. 2006-19 A.O. 2001-57 A.O. 2001-48 A.O. 2000-28 A.O. 94-105 Keywords: Financial interest Government loans