April 27, 1989
Maurice C. Christiansen, CPA
Auditor General
435 South Chapelle
Pierre, South Dakota 57501-3292
OFFICIAL OPINION NO. 89-11
Legality of county purchases from county commissioners
Dear Mr. Christiansen:
You have requested an official opinion from this Office in regard to the following:
FACTS:
The Department of Legislative Audit is currently performing a routine audit of a county. The county being audited has no adopted policy regarding the purchases of materials, supplies or equipment when the contemplated expenditure will not exceed the bid limit. In addition, the county does not use a central purchasing committee as permitted by SDCL 7-28-1. Instead, each department head is responsible for purchasing those supplies and minor equipment items necessary to operate his or her department, and to pick and choose the appropriate vendor.
In reviewing the county's records, it was revealed that during the audit periods, the county had entered into contracts with businesses that county commissioners had a direct interest. First, there was a contract entered into with a corporation in the amount of $72 in which a county commissioner was a shareholder and officer. Second, there were four contracts entered into with a corporation which another county commissioner was an officer and shareholder. Two of the contracts were the result of competitive bids where more than one bid was obtained. The other two contracts totaling $486.53 represented minor repairs on equipment and rentals which the corporation is reported to be the only source of supply within the county. Finally, the records indicate significant dealings with another corporation and a partnership where a county commissioner was a shareholder, director or officer of the corporation and a general partner in the partnership. County records indicate approximately $11,000 of claims were paid during calendar year 1987 and approximately $19,500 in calendar year 1988 to the corporation. The largest single claim in the two calendar years was for approximately $1,800. County records finally indicate that the county paid approximately $7,500 in claims during calendar year 1986, $9,500 in 1987, and $3,919 in 1988, to the partnership. The largest dollar amount for a claim was $6,700 which involved the purchase of computer hardware and software for the county auditor's office. None of these claims were the result of contracts through competitive bids and there are no records that indicate the county purchases were based upon state or other local government bids in accordance with SDCL 5-18-18.
Based upon the foregoing facts, you have asked the following questions:
QUESTIONS:
1. What constitutes a contract for purposes of applying SDCL 6-1-2? Does each individual invoice constitute a separate contract, provided the purchases were made on different dates? Should purchases of identical or similar items be aggregated over a period of time such as one calendar month or one calendar (or fiscal) year? Are purchases of dissimilar items on the same invoice considered purchases under separate contracts?
2. Must a competitor, or potential competitor, maintain a sales room or warehouse within the physical boundaries of the county in order to be considered a source of supply, under SDCL 6-1-2, or does another source of supply exist when a competitor maintains a sales person's office with no inventory or merely a sales person's route which includes the county?
3. Should SDCL 6-1-2(3) be read as prohibiting any contract up to the amount requiring bids from being entered into between the county and any firm, association, corporation, or cooperative when the county officer is also an officer of the firm, association, corporation or cooperative? Does the term "firm" in this subdivision include sole proprietorships and partnerships? Is this subdivision modified by SDCL 6-1-2(1), which allows contracts of less than $100 be entered into?
IN RE QUESTION NO. 1:
Whether a county can purchase personal property or services from a business entity in which a county commissioner is directly interested is governed by SDCL 6-1-1 and 6-1-2. SDCL 6-1-1 contains a blanket prohibition for local governmental officials to be interested directly or indirectly in any contract entered into by the local governmental entity for which they serve. In enacting SDCL 6-1-2, the Legislature has ameliorated the harshness of this blanket prohibition by creating five exceptions under which public officers may enter into contracts with their public bodies. SDCL 6-1-2 provides:
The provisions of 6-1-1 are not applicable when the contract is made pursuant to any one of the conditions set forth in the following subdivisions hereof, without fraud or deceit; but, the contract is voidable if the provisions of the applicable subdivision were not fully satisfied or present at the time the contract was entered into:
(1) Any contract involving one hundred dollars or less regardless of whether other sources of supply or services are available within the county, municipality, township or school district, provided that the consideration therefor is reasonable and just;
(2) Any contract involving more than one hundred dollars but less than the amount for which competitive bidding is required, and there is no other source of supply or services available within the county, municipality, township or school district provided that the consideration therefor is reasonable and just and further provided that the accumulated total of such contracts paid during any given fiscal year shall not exceed five thousand dollars;
(3) Any contract with any firm, association, corporation, or cooperative association for which competitive bidding is not required and where other sources of supply and services are available within the county, municipality, township or school district, and the consideration therefor is reasonable and just, unless the majority of the governing body are members or stockholders who collectively have controlling interest, or any one of them is an officer or manager of any such firm, association, corporation, or cooperative association then any such contract shall be null and void;
(4) Any contract with any firm, association, corporation, or cooperative association for which competitive bidding is required by law, and where more than one such competitive bid is submitted;
(5) Any contract for professional services with any individual, firm, association, corporation or cooperative, if the individual or any member of the firm, association, corporation or cooperative is an elected or appointed officer of a county, municipality, township or school district, whether or not other sources of such services are available within the county, municipality, township or school district, provided the consideration therefor is reasonable and just.
The above stated exceptions to the blanket prohibition under SDCL 6-1-1 have been strictly construed by my predecessors in order to uphold the legislative intent. See, e.g., AGR 79-1 and AGR 82-22. In my opinion, strict construction of the exceptions is appropriate.
Given the legislative intent to restrict proprietary dealings between a governmental body and its public officials, it is my opinion that contracts entered into between a governing body and its public officers must be viewed in the aggregate to determine the applicability of the exceptions in the first four subdivisions of SDCL 6-1-2. In order to determine the applicability of these subdivisions, the anticipated need of a good or service over a fiscal year by the entire public body must be viewed.
This interpretation is consistent with the aggregation language contained in SDCL 6-1-2(2), as well as the South Dakota Supreme Court's decision in Fonder v. City of South Sioux Falls, 76 S.D. 31, 71 N.W.2d 618 (1955). In Fonder, the South Dakota Supreme Court considered the dollar limit exception to the statutory competitive bidding requirement, now contained in SDCL ch. 5-18 as applied to the recognized continuing need for a particular good or service over an extended period of time. The Supreme Court determined that to interpret the "contract" language in the bid statute to apply to only a particular contract for the purchase of goods or services would allow a governing body to circumvent the intent of the Legislature by entering into multiple small open-market purchases that separately are less than the amount required for bidding but in aggregate were over the limit. The public policy considerations behind the competitive bidding statutes, to guard against favoritism, improvidence, extravagance, fraud and corruption, are identical to the policy considerations that prompted the Legislature to enact SDCL 6-1-1 and 6-1-2. In addition, the focus of the entire statute is the seller, not the goods, thus supporting the notion that the relationship over time should be scrutinized.
In aggregating purchases of goods to determine whether an exception stated in the first four subdivisions under SDCL 6-1-2 is applicable, a public body should not be allowed to circumvent the provisions of SDCL 6-1-1 and 6-1-2 by narrowly viewing the types of goods and services involved. Based upon the same rationale set out above that the Fonder opinion looked at the total amount under the bid law and that the language of 6-1-2 looks to the character of the seller, I am of the opinion all purchases from a seller for one year should be considered in determining whether an exception applies. Because there has been no clear guidance on this question in the past, I advise you to apply this strict rule only to future actions of governing bodies and follow your prior practice for purchases made prior to the date of this opinion.
IN RE QUESTION NO. 2:
The dollar limitations contained in SDCL 6-1-2(1) through (3), concern the legality of a governmental body entering into contracts with one of its public officials and are based upon whether other sources of supplies or services are available within the geographic boundaries of the governmental entity. In my opinion, the phrase "other sources of supply or services are available" as used in subdivisions (1) through (3) means a business that offers for sale the particular good or service sought and is physically located within the geographical boundaries of the particular governmental entity. Any other business, however, is not required to have in inventory the desired amount of a good or service at the time of a request to be considered another source. It is sufficient that the other business offers for sale or lease the desired product or service or its equivalent.
In my opinion, the term "other sources" as used within the relevant subdivisions does not include a sales person whose route traverses the physical boundaries of the governmental entity. Nor does the term "other sources" apply to businesses that only do business within the governmental entity's physical confines through the use of the mail, telecommunication services, or mass communication.
IN RE QUESTION NO. 3:
You have requested an interpretation of SDCL 6-1-2(3). Subdivision (3) must be read in light of the other subdivisions. In my opinion, subdivision (3) must be construed as allowing a public body to contract with a firm, association, corporation or cooperative association involving more than $100 worth of goods and services but less than the amount for which competitive bidding is required where the consideration thereof is reasonable and just, unless a public officer of the governing body is officer or manager of the business entity or where a majority of the members of the governing body have controlling interest in the business entity. This result allows the employer of an elected official to do business with the governmental entity even though the elected official indirectly benefits. To interpret subdivision (3) any differently would negate the provisions of subdivisions (1) and (2).
Finally, it is my opinion that the term "firm" as contained in SDCL 6-1-2(3) includes sole proprietorships and partnerships. In construing terms used in statutes that are not defined, the common usage of the term controls. Black's Law Dictionary 5th Ed. 1979 defines "firm" as "Business entity or enterprise. Unincorporated business. Partnership of two or more persons." Sole proprietorships and general partnerships clearly fall within the term "firm."
Given the above legal opinion and a review of the material provided, the county's contracts involving the $72 claim and the $486.53 claim are valid since they fall within the provisions of SDCL 6-1-2(1) and (2), respectively. The remainder of the claims may violate South Dakota law. In order to make this determination, the application of the criteria I have set forth above should be performed. In addition, the county commission and the county should be given an opportunity to explain why the purchases are legal. If this cannot be shown, the contracts involving the purchases are void under SDCL 6-1-1 and the county is entitled to be fully reimbursed. See e.g. Robert L. Can Co. v. City of Sioux Falls, 416 N.W.2d 602 (S.D. 1987).
Respectfully submitted,
ROGER A. TELLINGHUISEN
ATTORNEY GENERAL
RAT:do
