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December 21, 2011

Governor Brown Signs New State Law Aimed to Curb Public Entity Financial Abuse


A new law, Assembly Bill 1344, is designed to increase transparency of executive compensation and contracts to avoid abuses of power exhibited by public officials in the recent City of Bell scandal. AB 1344, which the Legislature authored to protect “the fiscal integrity and stability of local government agencies,” takes effect on January 1, 2012.

Executive Contract Requirements:

An employment contract for a “local agency executive” is covered. A local agency executive is defined as “any person employed by a local agency who is not subject to the Meyers-Milias-Brown Act” and who is either the chief executive officer or “the head of a department.” “Head of a department” is unclear because supervisors can be in a unit covered by MMBA and thus subject to MMBA. If your entity’s “head of a department” is in a unit covered by the MMBA, then such a department head could be argued to be not covered by these new requirements. Such an MMBA-covered head of department would have employment terms governed by a MOU subject to ratification in a public meeting of the governing body of the public entity.

New Government Code Sections 3511.1 and 3511.2 provide that an employment contract for a local agency executive that is executed or renewed on or after January 1, 2012, may not include an automatic renewal provision with an automatic increase in compensation that exceeds a cost of living adjustment (COLA). COLA is defined to mean the California CPI for Urban Wage Earners and Clerical Workers as determined by the Department of Industrial Relations.

AB 1344 does not generally prohibit increases in compensation for these employees and allows for an automatic increase of the COLA amount, but it prevents employment contracts from providing for automatic salary increases above the COLA or salary increases without board approval at a publicly noticed regular meeting.

Brown Act Requirements:

A special meeting is now prohibited on salary or other compensation paid in the form of fringe benefits for a local agency executive. (Gov. Code § 54956(b).) Salary and compensation changes must occur at a regular meeting.

If the public entity has a website, you must post on the website the agenda for regular meetings 72 hours in advance and special meetings 24 hours in advance. (Gov. Code § 54954.2(a)(1) and 54956(a).)

Requirements for All Employees:

AB 1344 adds a number of Government Code provisions that apply to employment contracts for an officer or employee. A key feature requires the repayment of compensation by any employee convicted of crimes “involving an abuse of his or her office or position.” (Gov. Code § 53243.) All contracts executed or renewed on or after January 1, 2012, must now provide that an officer or employee shall reimburse any compensation received if he or she has been placed on paid leave pending an investigation into alleged misconduct if the misconduct results in the conviction of a crime constituting “an abuse of public authority” (including waste, fraud, or a violation of law under color of authority) or a “crime against public justice” (including bribery, corruption, forgery, perjury, and money laundering). (Gov. Code § 53243 and 53243.4.) AB 1344 also requires contract provisions that the officer or employee would reimburse any costs provided for his or her legal defense, and that the officer or employee would reimburse any cash settlement for the termination of an employment contract, in the event he or she is convicted of a qualifying crime. (Gov. Code § 53243.1 and 53243.2.) These reimbursement provisions also apply to any contract existing as of January 1, 2012, if the public entity makes such payments in the absence of a contractual obligation. (Gov. Code § 53243.3.)

Significance

AB 1344’s key provisions address the Legislature’s desire for maximum transparency in executive compensation. Beginning January 1, 2012, all new and renewed employment contracts for certain executive employees, most notably the chief executive and heads of departments not subject to the MMBA, must contain special repayment provisions that are triggered upon conviction of certain crimes, and can no longer include automatic renewals that provide for increases in pay beyond the designated COLA.

Best practices for executive compensation provisions would be either: (1) a contract with an automatic renewal with an increase set at or below the rate of COLA determined by the DIR, with the increase to be effective the month following the month in which the DIR determines the COLA; or (2) an annual contract that goes to the entity’s governing body each year with a compensation increase that is justified by market changes or other defendable criteria supporting an increase beyond the DIR-determined COLA, with a public presentation in an open, regular meeting to justify the increase recommended.

Compensation increases require approval at a publicly noticed regular and open meeting of the governing body, and no matters related to executive compensation can be addressed in a special meeting. Further, all meeting agendas must now be posted online for any agency maintaining a website, providing another potential trap for a Brown Act violation.

As with many new laws, AB 1344 creates some confusion. For example, contracts for employees serving as the “head of a department” fall within AB 1344’s reach, but not contracts for heads of departments subject to the MMBA. As another example, if an executive contract was entered into before 2012 but provides for an annual automatic increase above the specified COLA determined by the DIR, the increase that will occur in or after 2012 might be considered a renewal and thus subject to these requirements. Because of such ambiguities, legal counsel should always be consulted when drafting, renewing, or reviewing employment contracts for executives or heads of departments.

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