Chapter 12

Ethics and Conflicts of Interest

by Kristina M. Wilson and Crista M. Cuccaro

Ethics in Government: Why It’s Important

The conduct of local government officials and public employees affects public perceptions of and trust in government. Citizens expect local officials and public employees to act in the best interest of the public and not to use their office for their personal benefit. Laws restrict the conduct of local public officials, but in many cases, they have a choice in how to act, such as when deciding whom to hire, when to contract, and how to vote. North Carolina laws governing the conduct of local officials focus on financial interests in voting and contracting, as well as on other ways in which government decision makers might personally benefit from the actions they take. Similarly, when federal financial assistance is involved, the Uniform Guidance defines and prohibits certain conflicts of interest and benefits for employees, officers, or agents of a governmental unit. Additionally, constitutional due process requirements focus on the need for fair and unbiased decision making when certain types of private rights are at stake.

This chapter will begin by describing state law requirements for elected officials, including when elected officials have a duty to vote and when elected officials are prohibited from voting. Next, the chapter will explore statutory prohibitions on receiving a benefit related to a governmental contract. Finally, the chapter will explain the conflict-of-interest rules applicable when governmental units use federal financial assistance.

Requirements for Local Elected Officials

Ethics Education Requirement

North Carolina law requires elected and appointed members of the governing boards of municipalities and counties, unified governments, consolidated municipalities-counties, sanitary districts, and local boards of education to receive at least two clock hours of ethics education within twelve months after each election or reelection (or appointment or reappointment) to office.¹ The education program must cover laws and principles that govern conflicts of interest and ethical standards of conduct at the local government level; it is designed to focus on both legal requirements and ethical considerations so that key governmental decision makers will have the information and insight needed to exercise their authority appropriately and in the public interest. The ethics education requirement is an ongoing obligation triggered by reelection or reappointment to office.²

While state law does not require ethics education for local employees and members of local appointed boards (such as boards of adjustment or advisory committees), a local governing board may impose this requirement on these groups under the board’s local ethics code or other ordinance or policy.

Local Codes of Ethics

North Carolina law also requires governing boards subject to the ethics education requirement to adopt ethics resolutions or policies (often referred to as “codes of ethics”) to guide board members in performing their duties.³ The ethics resolution or policy must address at least five key responsibilities of governing board members enumerated by statute:

1. to obey all applicable laws about official actions taken as a board member,

2. to uphold the integrity and independence of the office,

3. to avoid impropriety in the exercise of official duties,

4. to faithfully perform duties,

5. to act openly and publicly.⁴

The statute does not impose or authorize sanctions for failure to comply with ethics codes. Governing boards have no explicit authority to sanction their members as a means of enforcing an ethics code or for other purposes. However, failure to adopt a code or to comply with its provisions may elicit citizen and media criticism and may itself be considered unethical.

As with the ethics education requirement, state law does not require that ethics codes be applied to local employees and members of local appointed boards (such as boards of adjustment or advisory committees), but a local governing board may choose to extend the provisions of its code of ethics to these groups.

Some state government officials and senior employees are subject to the State Government Ethics Act,⁵ which establishes ethical standards of conduct for those covered under the act and regulates individuals and entities that seek to influence their actions. The North Carolina State Ethics Commission is responsible for enforcing the act, including investigating alleged violations. Most local government officials and employees are not subject to the State Government Ethics Act by virtue of their local government positions.⁶ Consequently, the State Ethics Commission does not have the authority to investigate allegations of unethical conduct by local government officials.

Censuring Board Members

Although state law does not provide specific authority for boards to sanction their members for ethical violations, elected boards do have general authority to pass resolutions or motions, and some boards use a motion or resolution of censure to address ethical or legal transgressions by board members, including violations of the board’s code of ethics. This type of censure has no legal effect other than to express dissatisfaction or disapproval by the board (or a majority of the board) of the actions or behavior of one of its members. There are no specific procedural requirements for such an action. The School of Government’s model code of ethics includes recommendations for a censure process.⁷

Conflicts of Interest in Voting

Ethical and conflict-of-interest issues often arise as questions about whether a board member may, must, or must not vote on a particular matter in which he or she has some personal interest. In general, a governing board member has a duty to vote and may be excused from voting only in specific situations as allowed by statute.⁸

The statutes governing voting by county and municipal board members are slightly different, and, especially for municipalities, there is some ambiguity about the proper procedure for excusing a member. The county statute, G.S. 153A-44, provides that the board may excuse a member, whereas the municipal statute, G.S. 160A-75, simply says that a member “shall be excused” in cases of conflict without specifying who does the excusing. Another important difference is that the municipal statute enforces the duty to vote by providing that if a person is present at a meeting, does not vote, and has not been excused, that person is considered to have voted “yes.”⁹ The county statute does not contain this provision. Both statutes are specific, however, about the reasons for which a person may be excused from voting. In addition, four other statutes prohibit board members from voting in situations involving contracting, land use decisions, and quasi-judicial decisions.

The Duty to Vote

Board members are often advised to avoid even the appearance of a conflict of interest, and in many situations a board member may choose to act or to refrain from acting due to a concern about such an appearance. When it comes to voting, however, a board member’s duty to vote overrides this choice, in some cases requiring a person to vote, while in only limited circumstances is a person required to refrain from voting. The general voting statutes—G.S. 153A-44 (counties) and 160A-75 (municipalities)—allow governing board members of municipalities and counties to be excused from voting only on

1. matters involving the consideration of the member’s own official conduct or financial interest¹⁰ or

2. matters where a member is explicitly prohibited from voting under

1. one of the exemptions in G.S. 14-234(d1)(2), which addresses a public officer’s obligations when the officer is directly benefiting under a public contract;
2. G.S. 160D-109(a), which covers legislative decisions concerning land use and development; and
3. G.S. 160D-109(d), which pertains to quasi-judicial decisions.¹¹
4. Additionally, a recently enacted conflict of interest law, G.S. 14-234.3, also prohibits public officials from voting or otherwise participating in making or administering contracts with certain nonprofits.¹² While the above-referenced general voting statutes do not yet include specific exceptions for G.S. 14-234.3, the language of the latter statute is mandatory, and violating it results in criminal penalties.¹³ As a result, G.S. 14-234.3 likely implicitly trumps the statutory duty to vote.¹⁴

When there is a question about whether a board member has a conflict of interest in voting, the first thing to determine is what type of matter is involved. Specific statutes govern the standard to be applied, depending on the nature of the matter before the board for decision. The following is a short list of circumstances that will help identify the appropriate standard to apply.

1. If the matter involves a development regulation in a legislative land use matter, a board member shall not vote where the outcome of the matter is reasonably likely to have a direct, substantial, and readily identifiable personal financial impact on the member. G.S. 160D-109(a). If the matter involves a zoning amendment, the board member shall not vote if the landowner of the property subject to rezoning or the applicant for a text amendment is someone with whom the board member has a close familial, business, or other associational relationship. Id. Examples of close familial relationships are spouses, parents, children, siblings, grandparents, and grandchildren, including step and half relationships under G.S. 160D-109(f).

2. If the matter involves a quasi-judicial function (such as the issuance of a special-use permit or an appeal of a personnel decision), the standard is as follows: a board member shall not participate or vote if the member has a fixed opinion (not susceptible to change) prior to the hearing; undisclosed ex parte communications; a close familial, business, or other associational relationship with an affected person; or a financial interest in the outcome. G.S. 160D-109(d). Note that this provision applies to any person (not just a governing board member) who serves on a board and exercises quasi-judicial functions.

3. If the matter involves a contract from which the board member derives a direct benefit and a statutory exception allows the contract,¹⁵ the member is prohibited from participating or voting. G.S. 14-234(b1).

4. If the matter involves a contract with a nonprofit organization with which a public official is associated, the public official is prohibited from participating or voting. G.S. 14-234.3(a).

5. For all other matters that come before the governing board for a vote, the standard is as follows: for counties, the board member may be excused if the matter involves the member’s own financial interest or official conduct. G.S. 153A-44. For cities, the board member shall be excused if the matter involves the member’s own financial interest or official conduct. G.S. 160A-75.

Note that each of the first four specific statutes prohibits the member from voting. Under the final category, however, it is unclear whether use of the word “may” in G.S. 153A-44 is intended to make excusing a county governing board member from voting optional or whether it simply describes the permissible grounds for being excused. G.S. 160A-75 has less ambiguous wording, providing that “[n]o member shall be excused except . . .” for cases involving the delineated statutory conflicts of interest or financial interest and official conduct. The use of the word “shall” clarifies that for city governing boards, excusals for financial interest and official conduct are mandatory.¹⁶

What Constitutes Financial Interest

North Carolina courts have often ruled on matters involving conflicts of interest. School of Government professor Fleming Bell fully explores the case law in Ethics, Conflicts, and Offices: A Guide for Local Officials (2nd edition, 2010). It’s important to note, however, that some conflict-of-interest cases arise in the context of constitutional due process considerations or contracting issues, matters currently governed by specific statutes that incorporate standards from the cases. Retired School of Government faculty member David Owens analyzes the case law on conflicts of interest in land use matters in the fourth edition of his book Land Use Law in North Carolina (UNC School of Government, 2023).

Other matters are governed by the general voting statutes, which contain the more broadly stated “own financial interest” standard. Several cases involving legislative and administrative decisions suggest that courts use a deferential standard when evaluating what constitutes a financial interest. For example, in Kistler v. Board of Education of Randolph County,¹⁷ board members’ ownership of property near the area in which a school site was located was considered insufficient to constitute a conflict of interest. Similarly, in City of Albemarle v. Security Bank & Trust Co.,¹⁸ city council members’ direct ties to competing financial institutions did not require them to abstain from voting on a proposed condemnation of a portion of the bank’s land. These holdings seem appropriate given the underlying obligation to vote as well as the usual judicial deference given to local government decisions in the absence of a clear abuse of discretion.

The following factors, based on case law and the statutes, can be useful in determining when a person may be excused from voting under the general voting statutes.

Number of People Affected

The range of financial impact on governing board members of a local unit can be thought of as a continuum based on the extent to which the effect is unique to a board member, on one end of the spectrum, or experienced by many or most citizens, on the other end. If the effect on the board member is the same as the effect on a significant number of citizens, then it is fair to allow the individual to vote. The board member is affected as part of a larger group of citizens, and the vote can serve to represent that group. This is perhaps the most important factor. Even a significant financial effect may not be disqualifying if it is one that is universally or widely experienced by citizens in the jurisdiction.

Extent of the Financial Interest (Benefit or Detriment)

The general voting statutes refer to financial interest, not financial benefit, as some of the other statutes do. This means that a positive or a negative financial impact may be a basis for excusing a governing board member from voting. An insignificant financial interest, however, whether positive or negative, is not enough to sway a person’s vote and should not be used to avoid the duty to vote. Obviously, the significance of a financial interest must be considered in relation to the individual’s particular situation, though it might be assessed based on what a reasonable person would do in that situation.

Likelihood That the Financial Impact Will Actually Occur

Sometimes several actions in addition to the specific vote in question are needed for an alleged financial interest to materialize. For example, a governing board member who is a real estate agent votes in favor of a loan which will facilitate a project that the real estate agency that employs the agent might have the opportunity to offer for sale. Without more to suggest that the sales opportunity will actually arise and be available to the board member, such a chain of events is probably too speculative to form a basis for being excused from voting.

Conflicts of Interest in Contracting

Several state laws limit state and local government elected officials’ and public employees’¹⁹ ability to personally benefit from contracts with the governmental units they serve. Additionally, another statute limits public officials’ ability to contract with nonprofit organizations on behalf of the governmental units they serve when certain conditions are met.²⁰ These laws reflect the public’s need to ensure that contracting and other decisions are made in a neutral, objective way based on the public’s interest and not in consideration of actual or potential benefit to the decision maker. However, these laws do not prohibit all activity the public might consider improper. Instead, they identify particular activities the legislature has identified as serious enough to constitute a criminal offense. Situations that are not illegal may nonetheless be inappropriate, so public officials should always consider the public perception of their actions in addition to the legal consequences. This section will address conflict of interest laws both in the personal benefit context and in the nonprofit context.

Contracts for Personal Benefit

A criminal statute, G.S. 14-234, prohibits an elected or appointed public officer or a public employee from deriving a direct benefit from any contract in which he or she is involved on behalf of the public agency he or she serves. The statute contains two additional prohibitions. Even if a public official or employee is not involved in making a contract from which he or she will derive a direct benefit, the official or employee is prohibited from influencing or attempting to influence anyone in the public agency who is involved in making the contract. In addition, all public officers and employees are prohibited from soliciting or receiving any gift, reward, or promise of reward, including a promise of future employment, in exchange for recommending, influencing, or attempting to influence the award of a contract, even if they do not derive a direct benefit under the contract. Violation of this statute is a Class 1 misdemeanor. Key definitions contained in the statute, along with several important exceptions, are discussed below.

As defined in the statute, a person “derives a direct benefit” from a contract if the person or his or her spouse (1) has more than a 10 percent interest in the company that is a party to the contract, (2) derives any income or commission directly from the contract, or (3) acquires property under the contract.²¹ Note that while the prohibition includes a direct benefit to a spouse, it does not extend to other family members or friends, or to unmarried partners. If the employee or official or his or her spouse does not derive a direct benefit from it, a contract between a public agency and a family member, friend, or partner of a governing board member or employee does not violate the law. Another important aspect of the statutory definition is that it does not make illegal a contract with an entity in which a county or municipal official is an employee, as long as no income or commission is derived from the contract.

Since the definition of direct benefit includes the acquisition of property, governing board members and employees (and their spouses) who are involved in the disposal of surplus property are prohibited from purchasing that surplus property from their unit of government. An elected or appointed official (but not an employee) may be able to do so if the unit the official serves falls within the “small jurisdiction exception” described below.

G.S. 14-234 also specifies what it means to be involved in “making or administering” a contract, which is a necessary element in the statutory prohibition. Individuals who are not involved in making or administering contracts are not legally prohibited from contracting with their units of government. Activity that triggers the prohibition includes participating in the development of specifications or contract terms or in the preparation or award of a contract, as well as having the authority to make decisions about or interpret the contract.²² Performing purely ministerial duties, such as a clerk providing an attestation on a contract, is not considered “making or administering” the contract.²³ The statute also makes clear that a person is involved in making a contract when the board or commission on which he or she serves takes action on the contract, even if the official does not participate. Simply being excused or recusing one’s self from voting on a contract does not absolve a person with a conflict of interest from potential criminal liability. Stated differently, unless an exception applies, there is no means or mechanism that allows a public official with a conflict of interest to contract with the public agency that he or she serves. If an exception applies, as discussed below, the interested party may be excused from voting and legally contract with the unit.

The broad prohibition in G.S. 14-234 is modified by several exceptions. In any case where an exception applies, a public officer who will derive a direct benefit is prohibited from deliberating or voting on a contract or from attempting to influence any other person who is involved in making or administering the contract.²⁴ Contracts with banks, savings and loan associations, and regulated public utilities are exempt from the limitations in the statute,²⁵ as are contracts for reimbursement for providing direct assistance under state or federal public assistance programs under certain conditions.²⁶ An officer or employee may, under another exception, convey property to the unit he or she serves, but only through a condemnation proceeding initiated by the unit.²⁷ An exception in the law also authorizes a county or municipality to hire as an employee the spouse of a public officer; however, this exception does not apply to public employees.²⁸

A final exception, sometimes referred to as the “small jurisdiction exception,” applies only in municipalities with a population of less than 20,000 and in counties with no incorporated municipality with a population of more than 20,000.²⁹ In these jurisdictions, governing board members of the local unit as well as certain members of (1) the social services, local health, or area mental health boards; (2) the board of directors of a public hospital; and (3) the local school board may lawfully contract with the units of government they serve, subject to several limitations contained in the exception.³⁰ First, the contract (or contracts) between a governing board member and the unit he or she serves may not exceed $20,000 for medically related services and $60,000 for other goods or services in any twelve-month period. In addition, the exemption does not apply to any contract that is subject to the competitive bidding laws, which includes purchase and construction or repair contracts with an estimated cost of $30,000 or more.³¹ Contracts made under the small-jurisdiction exception must be approved by special resolution of a unit’s governing board in open session.³² The statute imposes additional public notice and reporting requirements for these contracts and prohibits an interested board member from participating in the development of or voting on such a contract.³³ A contract entered into under the small-jurisdiction exception that does not comply with all the statutory procedural requirements violates the statute.

Contracts entered into in violation of G.S. 14-234 violate public policy and are not enforceable. There is no authority to pay for or otherwise perform a contract that violates the statute unless the contract is required to protect the public health or welfare and limited continuation is approved by the Local Government Commission.³⁴ Prosecutions under the statute are not common—although some have occurred—but situations in which governing board members or public officials stand to benefit from public contracts often make headlines.

Contracts with Nonprofits

In January 2022, the legislature enacted a criminal contracting statute focused on nonprofits.³⁵ Under G.S. 14-234.3(a), public officials may not knowingly participate in making or administering contracts with nonprofits with which they are associated. Three things need to be present for G.S. 14-234.3 to apply: (1) there must be a public official as defined in the statute, (2) there must be a contract at issue, and (3) the contract at issue must be with a covered nonprofit. If all of these elements are present, a conflicted public official must record his or her recusal with the governing board’s clerk and cease to have any involvement with the contract at issue.³⁶ Once a conflicted public official records his or her recusal, the governmental unit can proceed to execute the contract.³⁷ If a conflicted public official fails to record his or her recusal in violation of the statute, both the public official and the unit he or she serves could face Class 1 misdemeanors. ³⁸ The contract at issue could also be deemed void.³⁹

When examining the issue of when public officials are prohibited from making or administering contracts with nonprofit entities, several questions arise. First, which individuals in a local governmental unit are considered public officials under G.S. 14-234.3(a)? Under the statute, a “public official” is “any individual who is elected or appointed to serve on a governing board of a political subdivision of this State, [excluding] employee[s] and independent contractor[s].”⁴⁰ Note that unlike the personal benefit contracting statute, the nonprofit contracting statute does not extend to employees or their spouses or to the spouses of public officials. At a minimum, the statute’s definition of “public official” covers members of city councils, boards of county commissioners, boards of aldermen, and the like.⁴¹ However, the exact scope of the definition is unclear, so if there is any argument in statute or case law that an individual serves on a governing board of a political subdivision, it may be wise for practitioners to assume that the individual is a covered public official for purposes of G.S. 14-234.3.⁴²

Second, there must be a contract at issue for the statute to apply. G.S. 14-234.3(a) regulates any public official who participates in making and administering a “contract.” In particular, it prohibits a public official from “making or administering a contract, including the award of money in the form of a grant, loan, or other appropriation” (emphasis added). As the plain language suggests, G.S. 14-234.3(a) is triggered only if a proposed transaction involves a contract. The legislature used the term “including” to illustrate the types of contracts that fall under this statute (i.e., contracts involving “the award of money in the form of a grant, loan, or other appropriation”), but if a public entity does not enter into a “contract,” the statute does not apply.⁴³

Finally, the contract at issue must be with a covered nonprofit. With the exclusion of boards, entities, or organizations created by the state or its political subdivisions, a covered nonprofit organization (1) is a “nonprofit corporation, or association, incorporated or otherwise, that is organized or operating in North Carolina primarily for educational, charitable, religious, scientific, literary, or public health and safety purposes” (2) “of which the [involved] public official serves as a director, officer, or governing board member.”⁴⁴ Using the statutory definition, practitioners must first analyze whether the contracting nonprofit entity is organized or operating in the state primarily for educational, charitable, religious, scientific, literary, or public health and safety purposes. Assessing whether a nonprofit operates for one of the enumerated purposes will likely require a case-by-case analysis of the specific nonprofit at issue.⁴⁵ If such an analysis determines that the nonprofit does in fact operate for a purpose listed in the statute, the next factor to look at is whether the entity was created by the state or its political subdivisions. If the state or its political subdivisions created the contracting nonprofit entity, G.S. 14-234.3 does not apply. Finally, practitioners should ask whether the involved public official holds a leadership position with the contracting nonprofit organization. The public official must be a director, executive, officer, or governing board member of the nonprofit for the statute to apply. A public official who is merely a volunteer, low-ranking member, or informal participant will not have a conflict under this statute.⁴⁶

Stated differently, there are three ways that a nonprofit may fall outside of G.S. 14-234.3’s scope:

• the nonprofit does not operate primarily for the enumerated purposes,

• the state or its political subdivisions created the nonprofit, or

• the involved public official does not hold a leadership position with the nonprofit.

As noted above, if practitioners conclude that G.S. 14-234.3 applies to a given transaction, the conflicted public official must record his or her recusal with the clerk to the unit’s governing board.⁴⁷ After the clerk records the recusal, the board can legally execute the contract.⁴⁸ What does it mean to record a recusal with the clerk? The statute provides no procedural guidance for recusal. Its plain language does not require formal board action or approval to excuse a conflicted public official, and the public official seemingly can recuse without declaring the conflict or otherwise notifying the rest of the board. However, while the statute apparently permits public officials to recuse themselves, this is not the most transparent procedure. The better approach would be for public officials to declare their conflicts and have boards formally excuse them via majority vote. The vote and the recusal could then be recorded in the board’s meeting minutes. Recording recusals in meeting minutes is likely more efficient than creating a separate recusal document outside of any formal context. Since the statute does not specify any format for the recusal recording, documenting recusals in meeting minutes appears to be a safe-harbor approach that increases transparency and clarity.⁴⁹

After recording a recusal with the clerk, a conflicted public official should cease all involvement with the contract at issue. The official must not deliberate or vote on the contract, attempt to influence others who are deliberating or voting on the contract, or solicit gifts or favors in exchange for attempting to influence those deliberating or voting on the contract.⁵⁰ Given the broad wording of the statute, it is likely wise for a conflicted public official to refrain from discussing the contract or the nonprofit at issue with anyone deliberating or voting on the contract. While G.S. 14-234.3 does not seem to require conflicted public officials to physically leave the room during deliberations, they may choose to do so, especially if they know that their mere presence may be interpreted as an attempt to influence deliberations or voting.⁵¹

Notably, G.S. 14-234.3(b) incorporates several exceptions from the contracting-for-personal-benefit statute (G.S. 14-234), including the “small jurisdiction” exception. As noted above, these exceptions apply to a governmental unit’s ability to contract, not to a conflicted public official’s ability to be involved with a particular contract. In other words, in the personal benefit context, these exceptions allow the governmental unit to proceed with a contract even when a public official, employee, or spouse has a conflict. The conflicted public official or employee, however, still cannot have any involvement with the contract at issue. What do these exceptions mean, then, as incorporated into the G.S. 14-234.3 context?

They do not appear to have any practical effect. ⁵² G.S. 14-234.3(a) already allows a unit to proceed with a contract once a conflicted public official’s recusal is recorded. Thus, the G.S. 14-234 exceptions do not seem to serve any purpose. There is no exception that allows a conflicted public official to participate. Without additional clarification regarding the purpose of these exceptions, local governments should rely exclusively on the exception in G.S. 14-234.3(a) that allows a governing board to contract upon the recording of a conflicted public official’s recusal.⁵³

At first glance, the statutory restrictions on contracting for personal benefit and contracting with nonprofits may seem very similar. Both require contracts to be at issue and both can result in criminal penalties and void contracts. Importantly, both statutes prohibit the conflicted individual from having any involvement with the contract at issue, even when an exception might apply. However, there are important differences to keep in mind. The contracting-for-personal-benefit statute applies to public officials, public employees, and their spouses, while the nonprofit statute applies only to public officials. The personal-benefit statute has several exceptions, while the nonprofit statute has only one exception in practice. Though part of the same statutory Chapter, it is important for practitioners to pay close attention to the requirements of each distinct contracting statute.

Gifts and Favors

Another criminal statute, G.S. 133-32, is designed to prevent the use of gifts and favors to influence the award and administration of public contracts. The statute applies to any contractors, subcontractors, or suppliers who are current contractors, subcontractors, or suppliers; have performed under a contract with a public agency within the past year; or who anticipate bidding on a contract in the future. For these individuals, giving any gift or favor to public officials and employees who have responsibility for preparing, awarding, or overseeing contracts, including inspecting construction projects, is a Class 1 misdemeanor. The statute also makes it a Class 1 misdemeanor for those officials to receive the gift or favor.

The statute does not define gift or favor. A reasonable interpretation is that the prohibition applies to anything of value acquired or received without fair compensation unless it is covered by a statutory exception. These exceptions include advertising items or souvenirs of nominal value, honoraria for participating in meetings, and meals at banquets. Inexpensive pens, mugs, and calendars bearing the name of the donor firm clearly fall within the exception for advertising items and souvenirs. Gifts of a television set, use of a beach cottage, or tickets to a professional sports event probably are prohibited. Although meals at banquets are allowed, free meals offered by contractors under other circumstances, such as lunch, should be refused. Some local governments have adopted local policies establishing a dollar limit for gifts that may be accepted; however, a gift allowed under a local policy must still be refused if it violates state law.

The statute also allows public officials and employees to accept customary gifts or favors from friends and relatives as long as the existing relationship, rather than the desire to do business with the unit, is the motivation for the gift. Finally, the statute specifically does not prohibit contractors from making donations to professional organizations to defray meeting expenses, nor does it prohibit public officials who are members of those organizations from participating in meetings that are supported by such donations and are open to all members—for example, sponsorship of a conference event that is open to all conference attendees.

It is important to distinguish between gifts to individuals and gifts to the government entity itself. A contractor may legally donate goods and services to the local government for use by the unit. For example, a local business can legally donate products to the unit for its own use or for the unit to raffle to employees for an employee appreciation event. Gifts or favors delivered directly to individuals for their personal use should be returned or, in some cases, may be distributed among employees such that each person’s benefit is nominal. The latter approach is common for gifts of food brought to a department by a vendor. Public officials should inform contractors and vendors about the existence of the gifts-and-favors statute and about any local rules in effect within the unit addressing this issue.

Misuse of Confidential Information

G.S. 14-234.1 makes it a Class 1 misdemeanor for any state or local government officer or employee to use confidential information for personal gain, to acquire a pecuniary benefit in anticipation of his or her own official action, or to help another person acquire a pecuniary benefit from such actions. Confidential information is any non-public information that the officer or employee has learned in the course of performing his or her official duties.

Other Financial Gain

In 2021, G.S. 14-234.3 was added to the criminal statutes governing conflicts of interest for public officers. The statute makes it a Class H Felony for an elected official of a political subdivision of the state to solicit or receive personal financial gain from the political subdivision for which that elected official serves by means of intimidation, undue influence, or misuse of the employees of that political subdivision. G.S 14-234.3 does not define “personal financial gain,” but this term is used (although not defined) in the State Government Ethics Act, G.S. 138A-1 et seq. The financial-interest analysis discussed earlier in this chapter may be useful when evaluating a scenario under this statute. As a general principle, personal financial gain is not limited to money; it could also include any forbearance, forgiveness of indebtedness, gift, or other thing of value.⁵⁴ This statute does not apply if the governing board of the political subdivision for which the involved official serves approves the financial gain, or if the financial gain is received by the elected official acting in his or her official capacity.

Conflicts of Interest for Specific Categories of Officials and Public Employees

In addition to the statutes discussed above that apply to all local officials and employees, specific conflict-of-interest prohibitions apply to certain groups of officials and employees, including those discussed briefly below.

Building Inspectors

G.S. Chapter 160D describes several conflicts of interest for members of local government inspection departments. First, no member of an inspection department may have a financial interest or be employed by a business that furnishes labor, materials, or appliances for building construction or repair within the local government’s planning and development regulation jurisdiction. An inspection department member also cannot have a financial interest in the making of plans or specifications for any building within the local government’s planning and development regulation jurisdiction unless the member owns the building in question. All inspection department members are prohibited from engaging in any work that is inconsistent with their public duties. In addition to these general prohibitions, the statute requires local governments to find a conflict of interest if the individual, company, or employee of a company contracting to perform building inspections for the local government has a financial or business interest in the project being inspected or has a close relationship with or has previously worked within the past two years for the project’s owner, developer, contractor, or manager.⁵⁵

Project Designers

Architects and engineers performing work on public construction projects are prohibited from specifying any materials, equipment, or other items manufactured, sold, or distributed by a company in which the project designer has a financial interest.⁵⁶ Project designers are prohibited also from allowing manufacturers to draw specifications for public construction projects.⁵⁷ A violation of these restrictions is punishable as a Class 3 misdemeanor; violators lose their licenses for one year and pay a fine of up to $500.⁵⁸

Public Hospital Officials and Employees

Boards of directors and employees of public hospitals and hospital authorities and their spouses are prohibited from acquiring a direct or indirect interest in any hospital facility, property planned to be included within a hospital facility, or a contract or proposed contract for materials or services provided to a hospital facility. Limited exceptions to this prohibition apply; a contract entered into in violation of these prohibitions is void and unenforceable.⁵⁹

Local Management Entity (LME) Board Members

Local management entity (LME) board members cannot contract with their LME for the delivery of mental health, developmental disabilities, and substance abuse services while serving on the board (and are not eligible for board service so long as such a contract is in effect).⁶⁰ Nor can an individual who is a registered lobbyist serve on an LME board.

Housing Authorities

Commissioners and employees of a housing authority, or of a municipal or county when acting as a housing authority, are prohibited from having or acquiring any direct or indirect interest in any housing project, property included or planned to be included in any project, or a contract or proposed contract for materials or services to be furnished or used in connection with any housing project.⁶¹

Conflicts of Interest Applicable to Federal Grant Funds

When governmental units are using federal financial assistance, the Uniform Guidance imposes additional administrative requirements, including rules governing conflicts of interest and gifts in contracting.⁶² Additionally, the Uniform Guidance obligates federal awarding agencies (e.g., the Environmental Protection Agency) to establish conflict-of-interest policies for federal awards.⁶³ Thus, with any federal financial assistance, a governmental unit may need to look to both the Uniform Guidance and the federal granting agency’s conflict-of-interest rules to understand what is permissible.

To complicate matters, the rules about conflicts of interest and gifts found in the Uniform Guidance differ significantly from those found in state law. In order to comply with both state law and federal rules, local governments must have and use “documented procurement procedures, consistent with State, local, and tribal laws and regulations and the standards of [2 C.F.R. § 200.318.1], for the acquisition of property or services required under a Federal award or subaward.”⁶⁴ In other words, local governments must follow the “most restrictive” requirements of both federal and state law as well as their own local policies.

Maintaining Written Conflict-of-Interest Standards

2 C.F.R. § 200.318(c)(1) requires a non-federal entity⁶⁵ to maintain “written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award and administration of contracts.” While the Uniform Guidance does not prescribe any specific form for the written conflict-of-interest and contracting standards, the written standards must comply with 2 C.F.R. § 200.318 and include disciplinary actions for violations of such standards by officers, employees, or agents of the NFE. The following sections explain the federal rules governing conflicts of interests and contracting that are found in the Uniform Guidance.⁶⁶

Conflicts of Interest Related to the Selection, Award, and Administration of Contracts

Like state law, the Uniform Guidance prohibits an individual from participating in the selection, award, or administration of a contract supported by federal financial assistance if that person has a real or apparent conflict of interest.⁶⁷ Unlike state law, though, the applicability of this prohibition is much broader.

First, the individuals prohibited from participating in the contracting process when they have a conflict of interest include not only employees and officers of the NFE, but also agents of the NFE. The Uniform Guidance does not define the term “agent,” but the plain meaning of the term suggests that it probably encompasses individuals that are directly under contract with an NFE and that act on behalf of or provide advice to a unit.⁶⁸ Arguably, the term could also include individuals who have an ownership interest in a legal entity under contract with a unit.⁶⁹ Without specific guidance from a federal granting agency, an NFE may wish to extend this prohibition to the beneficial owners of a legal entity under contract with a unit.⁷⁰

Second, the language of the Uniform Guidance prohibiting “real or apparent” conflicts of interest is more expansive than the “direct benefit” language of G.S. 14-234, regarding both the scope of interpersonal relationships and the breadth of what is considered an “interest.” The Uniform Guidance instructs that a real conflict of interest arises when an employee, officer, or agent of an NFE, or any member of his or her immediate family,⁷¹ his or her partner, or an organization which employs or is about to employ any of the aforementioned parties, has a financial or other interest in or a tangible personal benefit from a firm considered for a contract. Hence, when federal financial assistance is involved, NFEs must evaluate many more relationships than state law requires. Instead of simply understanding benefits bestowed upon public officials and their spouses as G.S. 14-234 requires, NFEs must look at the interests of and benefits to its employees, officials, and agents and their immediate family members, business partners, employers, and future employers. Furthermore, an impermissible interest under the Uniform Guidance is broader than it is under state law; it includes any financial or other interest in or a tangible personal benefit from a firm considered for a contract. While the term “financial interest” is not defined in the Uniform Guidance, federal agencies have interpreted it to include the potential for gain or loss to any individual or entity covered by 2 C.F.R. § 200.318(c)(1).⁷² Likewise, “tangible personal benefit” is not defined in the Uniform Guidance, but federal agencies have opined that it is non-financial in nature and results in a personal benefit for an individual, such as improved employment opportunities, business referrals, or political influence.⁷³

Gifts and Favors from Contractors or Parties to Subcontracts

The Uniform Guidance prohibits the officers, employees, and agents of an NFE from soliciting or accepting gifts, favors, or anything of monetary value from contractors or parties to subcontracts.⁷⁴ This prohibition applies to all officers, employees, and agents of an NFE, not just those individuals involved in the contracting process. In this way, the Uniform Guidance prohibition on gifts and items of value is more far-reaching than state law, which applies only to public employees or officers who prepare plans, award or administer contracts, or inspect or supervise construction.

NFEs are authorized to set standards for situations where a financial interest is not substantial or a gift is an unsolicited item of nominal value. Of course, “the Uniform Guidance does not define when a financial interest is ‘not substantial,’ . . . and no other guidance from the Office of Management and Budget (“OMB”) . . . has directly addressed this question. . . . [Some] federal agencies have robust conflict-of-interest regulations that distinguish between ‘significant’ and ‘insignificant’ financial interests.”⁷⁵ Ultimately, unless dictated by a federal granting agency, an NFE has discretion to define financial interests that are “not substantial” and gifts of nominal value. In doing so, an NFE may consider consulting federal agency guidance or look to the standards applicable to employees of the executive branch.⁷⁶

Consequences of a Violation

If an NFE identifies a potential conflict of interest that may violate 2 C.F.R. § 200.318, the NFE must notify the federal granting agency in writing.⁷⁷ However, it is unclear whether there is a mechanism to resolve potential conflicts of interest other than avoiding the conflict altogether. The OMB has not addressed whether a prohibited “apparent” conflict of interest can be cured by a governing board member’s recusal from action on, or from the administration of, a contract with an entity in which the member has a financial interest under 2 C.F.R. § 200.318(c)(1). Some federal granting agencies allow recipients to disclose potential conflicts of interest to the agency, propose mitigation measures, and receive an agency determination on the effectiveness of those measures.⁷⁸ Unless explicit procedures allow for an NFE to proceed when a potential conflict of interest exists, NFEs should exercise caution because the consequences for violation can be severe. If an NFE violates the Uniform Guidance or any federal award conditions, the federal awarding agency may impose additional award conditions, such as requiring additional, more-detailed financial reports or additional project monitoring.⁷⁹ However, if additional conditions cannot remedy noncompliance, federal agencies are authorized to take more substantial action, ranging from withholding payments to the NFE to initiating suspension or debarment proceedings against the NFE or terminating the federal award.⁸⁰

Additional Resources

Bell, A. Fleming, II. Ethics, Conflicts, and Offices: A Guide for Local Officials. 2nd ed. Chapel Hill: UNC School of Government, 2010.

______. A Model Code of Ethics for North Carolina Local Elected Officials. Chapel Hill: UNC School of Government, 2010.

Bluestein, Frayda S. A Legal Guide to Purchasing and Contracting for North Carolina Local Governments. 2nd ed. with supplement. Chapel Hill: UNC School of Government, 2007.

Ethics for Local Government Officials, UNC School of Government microsite, www.sog.unc.edu/programs/ethics.

 “Ethics & Conflicts.” Coates’ Canons: NC Local Government Law blog, https://canons.sog.unc​.edu/ethics-and-conflicts.

Houston, Norma R. “State Government Ethics and Lobbying Laws: What Does and Does Not Apply to Local Governments.” Local Government Law Bulletin No. 135 (March 2014).

Owens, David W. Land Use Law in North Carolina. 4th ed. Chapel Hill, N.C.: UNC School of Government, 2023.

Wilson, Kristina M. “Conflicts of Interest for Public Officials on Nonprofit Boards: An Analysis for North Carolina G.S. 14-234.3.” Local Government Law Bulletin. No. 142 (Nov. 2022).