Advisory Opinion 120

Opinion number: 
Date Adopted: 
Friday, April 7, 1989
Conflict of Interest
Requested by: 
Joe E. Hanna, Secretary, Board of Education, Omaha School District
A school board member who personally owns a school bond of his own district, has a contract with his governing body. He must follow the terms of Section 49-14,103.01 of the NPADA, including abstention from voting on the payment of interest and principal on the particular bond issue, or from voting on issues involving refunding or calling the bond. However, the said school board member may participate or vote on matters relating to the services of the district’s financial adviser as well as questions relating to future bonds.

REQUESTED BY: Joe E. Hanna, Secretary, Board of Education, Omaha School District.

QUESTION: Does ownership of a bond by a member of the school board issuing the bond constitute an interest in a contract with the school district?




You indicate that a member of the Board of Education of Douglas County School District #1 (Omaha Public Schools) purchased some of the construction bonds recently issued by the school district. The entire issue of bonds was initially sold at public auction to the highest bidder which was an investment banking firm. The investment banking firm, in turn, resold the bonds to investors which included the board member. The board inquires as to whether or not this board member has a prohibited interest in a contract with the school board under the provisions of Section 49-14,103.01. The board also inquires as to what effect the holding of these bonds would have on the board member with respect to his voting on the following matters: (1) the approval of periodic claims for payment of interest and principal on this bond issue; (2) any proposal to refund this bond issue pursuant to its terms by calling the bonds for payment prior to maturity; (3) any matter pertaining to the services of the district's financial advisory who provides advice and assistance to the board of education as to all aspects of this and other bond issues; and (4) any matter pertaining to future bond issues of the school district.

In addition to the foregoing you inquire as to whether Section 49-14,103.01(5) has any applicability to this situation. That section states in part that the "buying and selling of warrants and bonds of indebtedness of any such governing body by a financial institution shall not be considered a contract for purposes of this section."


Section 49-14,103.01(1) and (2) prohibit a member of a school board from having an interest in any contract to which his or her governing body, or anyone for its benefit, is a party. Initially, therefore, we need to determine if the holding of a school bond by a board member constitutes a contract between the school district and the board member. We believe that the answer is yes.

A bond of the type issued by the school district is simply a contract by the school district to pay the holder of the bond a specified amount of money on a particular date or upon the occurrence of certain conditions as well as to pay a specified amount of interest. See Municipal Corporations 64 CJS Section 1902. Black's Law Dictionary describes a bond as "any contractual funding device". Black's Law Dictionary, Revised Fourth Edition, 1968. We recognize that Section 49-14,103.01 is somewhat difficult to apply to bond situations. This raises the question as to whether or not this particular statute was meant to apply to the issuance and holding of bonds. A review of the predecessor statutes to Section 49-14,103.01 and the underlying principle of the predecessors is necessary.

Section 49-14,103.01 became part of Nebraska law as the result of the passage of LB548 in 1986. Prior to that time, provisions which prohibited various public officials from having an interest in a contract with the governmental body on which they served were scattered throughout the statutes. For example, in Chapter 2 there was a provision which applied to the Board of Directors of Natural Resource Districts. In Chapter 23 there was a provision that applied to elected county officials. Statutes of this type existed in the Nebraska Statutes prior to the turn of the century. Many of these statutes specifically mentioned a prohibition against an interest in the purchase of goods, services and supplies by the political subdivision. Certainly Section 49-14,103.01 is easier to apply to contracts involving goods and services. This is because it is clear who the parties to the contract are at the time the contract is entered into as opposed to the issuing of bonds when the ultimate parties to the contract are not known at the time of issuance. In addition, a typical contract for goods and services does not normally become available for participation by the general public as in the issuance of bonds. Section 49-14,103.01 does not, however, mention the terms goods or services. It simply refers to "contracts".

The prohibition against a public official having an interest in a contract with a political subdivision that he serves is based on common law. The common law principle was that no man could serve two masters and that a public official was prohibited from participating privately in matters concerning his public duties. The first Nebraska case in which this common law principle and a statute based upon the principle were considered was Grand Island Gas Company v. West 29 NEB 852 (1890). The Grand Island case involved a situation in which the City of Grand Island contracted to purchase electric service from Grand Island Gas Company. At the time of the contract one of the members of the City Council was a stockholder in and the Secretary/Treasurer of the company. The applicable statute read:

No officer of any city shall be interested, directly or indirectly, in any contract to which the corporation, or any one for its benefit is a party; and such interest in any such contract shall avoid the obligation thereof on the part of such corporation.

The Nebraska Supreme Court affirmed the decision of the District Court voiding the contract between the city and the company. In its decision the court recognized that the statute was well grounded in the common law principle. Fourteen years later the Supreme Court faced a similar question in Wilson v. Otoe County 71 NEB 435 (1904). In that case the court considered a statute which provided:

No county officer shall in any manner, directly or indirectly, be pecuniarily interested in or receive the benefit of any contracts executed by the county for the furnishing of supplies, or any other purpose.

The court held that the contract between Otoe County and its County Attorney was void. The Court stated "in view of the mischief aimed at by such provision, and its comprehensive language, there can be no doubt that it was intended to include every species of contract in which an officer of the county may have a pecuniary interest . . .". By this opinion the court manifested a policy of interpreting such statutes somewhat broadly so as to be more inclusive rather than less inclusive. That is, "it was intended to include every species of contract".

To our knowledge Nebraska has never considered the question of whether or not a public official holding a bond issued by the political subdivision which he or she serves is a prohibited or regulated contract. Unfortunately, few other jurisdictions have considered the question either. Illinois considered the question in 1871 in Sherlock v. Village of Winnetka 59 ILL 389. In that case a village sold bonds issued by the village to members of the village council. The Illinois Court stated that "the sale of the bonds of the village, by the council to its own members, was void . . . It was void, on the ground that no man can contract with himself". The Supreme Court of Arkansas considered a similar question in Davidson v. Sewer Improvement District 32 S.W. 2d 1063 (ARK 1930). In that case the bonds issued were purchased by a bank whose president was one of the Sewer Improvement District Commissioners. The court held that since the sale of the bonds was not made to the commissioner, but to the corporation, the commissioner did not have an interest in the bonds. Implied, but unsaid, was that if the bonds had been issued to the commissioner personally, there would have been a prohibited interest.

Given the fact that the issuing and holding of a bond is a contract; that Section 49-14,103.01 uses the generic term contract; and that the court in the Wilson case interpreted the term contract to apply to all contracts; we take the position that the holding of a bond by a school board member is a contract which is governed by the provisions of Section 49-14,103.01.

Two further matters must be addressed with regard to the matter of holding bonds and Section 49-14,103.01. The first is the application of Section 49-14,103.01(2). This section provides in part that the prohibition against an officer having an interest in a contract with his or her governmental body applies only if the officer will receive a direct pecuniary fee or commission as a result of the contract. A bondholder benefits from the bond holding arrangement by receiving interest. It is arguable that interest is not a fee or commission and therefore holding a bond does not constitute a contract as contemplated by Section 49-14,103.01. Strictly speaking it may be true that interest is not a fee or commission. The term commission generally denotes the compensation which an agent receives on a sale or other successful transaction handled by the agent. 22 Words and Phrases, Interest-on Money. The term fee has the connotation of compensation for services rendered, especially professional services. 7A Words and Phrases, Commission. Interest is compensation paid for the use of money. 16 Words and Phrases, Fees; Fees as a charge. If one strictly interprets the terms commissions and fees, they would probably not include the term interest. However, interpreting commissions and fees so strictly would also exclude the term profits. It is inconceivable that Section 49-14,103.01 does not apply to the sale and purchase of goods which result in profits rather than fees and commissions. We believe that the terms fees and commissions must be interpreted broadly to include any sort of financial benefit, including interest. And, at least to the extent that any principal is profit to a bondholder, the term principal is included in their terms "fees and commissions."

A second question is raised by the provisions of Section 49-14,103.01 which state that "the existence of such an interest in any contract shall render the contract voidable . . .".

Naturally a concern of any political subdivision is whether or not the acquisition by one of its officers of its bonds potentially renders the bond issue voidable. It is, however, axiomatic that properly issued bonds do not become void as the result of subsequent events. Municipal Corporations 64 CJS Section 1942. What may be voidable is the transaction in which the officer of the political subdivision acquires bonds if he or she does not comply with Section 49-14,103.01(3). The Commission takes no position as to what precisely occurs if the bond holding board member illegally acquires bonds. That is beyond the Commission's jurisdiction. We do, however, take the position that the transaction which is potentially voidable pursuant to the provisions of Section 49-14,103.01(2) refers to the transaction by which the municipal officer attempts to acquire title to the bonds and not to the issuance of the bonds by the political subdivision.

We next consider the provisions of Section 49-14,101(3) which generally prohibit a public official from using his or her public office for financial gain, other than compensation provided by law. This section is applicable since there may be occasions to vote upon matters which do not directly relate to the contract that exists between the school board and the bond holding school board member, but have an effect upon the bonds. By this section, the school board member holding the bonds may be prohibited from voting upon matters which would result in a financial gain to that school board member. In advisory opinion #69, we stated that a violation of this section ordinarily requires a government action or decision. Action taken which constitutes an abuse of power or use of public office which is the proximate if not the direct cause of obtaining ascertainable financial gain would be evidence of a violation of this section. The opinion goes on to state that a vote in such a situation where only the minimum votes necessary for action to be taken occurs, would constitute a violation of Section 49-14,101(3).

The Act does not qualify the term "financial gain" nor specify a certain amount of gain that is required to constitute a violation of Section 49-14,101(3). However, in Advisory Opinion #77 and #84, we noted that case law indicates that the Court will not prevent an official from participating in matters where his interest is remote, uncertain, contingent, speculative or de minimus.

A bondholder's security consists of the tax levying power of the issuing political subdivision as well as the physical and cash assets of the subdivision. In theory, any vote by the school board member to pay any claim made upon the school district diminishes the assets of the school district and thus diminishes the security of the bondholder. This would include the monthly payment of teacher's salaries or heating or electric bills. A vote by the bond holding member upon matters such as these does not constitute a violation Section 49-14,101(3) because any effect would be remote, speculative, or de minimus.

Finally, we do not believe that Section 49-14,102 which generally governs contracts between a public official and a governmental body is applicable in this situation because the more specific provisions of Section 49-14,103.01 govern.


In the present situation, we believe that there would have been no prohibition against the board member participating in the issuing of bonds since he or she was not a bondholder at that time and had no interest in the contract. However, an interest now exists and will continue to exist until either the board member divests himself or herself of the bonds or the bonds are paid off. The board member should make a declaration on the record regarding the nature and extent of his or her interest in the contract in compliance with Section 49-14,103.01(3). Such compliance renders the prohibition of an interest in the contract non-applicable.

The person normally charged with keeping records for the school district should prepare a written statement in compliance with Section 49-14,103.02. This record should identify the issue or series of bonds which are held by the board member. That is, there should be a description of the bonds sufficient to distinguish them from any other bond issues of the school district. The record should generally show the terms that appear on the face of the bond, including the face value of the bond. The statement need not show the actual amount that the school board member paid for the bonds since this amount is dictated by the market rather than by the school board.

We now proceed to respond to your specific inquiries as follows:

(1) The bond holding board member must abstain from voting on the payment of interest and principal on this particular bond issue. A vote by the school board member to pay interest or principal is a vote to take action on the contract in which he or she has an interest. This would be a violation of Section 49-14,103.01.

(2) The board member who hold the bonds should abstain from participating in or voting upon any proposal to refund this bond issue pursuant to its terms by calling the bonds for payment prior to maturity. Again, such a vote would be a vote on a contract in which the bond holding board member has an interest in violation of Section 49-14,103.01.

(3) The board member who holds the bonds need not abstain from participating or voting on those matters pertaining to the services of the district's financial advisor which relate to matters such as his or her retention or compensation. The role of the financial advisor is to provide advice and expertise. It is the school district board which actually makes the decisions.

However, the bond holding board member is cautioned that Section 49-14,101(3) prohibits the use of a public office for financial gain and also prohibits confidential information received through the holding of a public office to be used for financial gain. In Advisory Opinions #45 and #99, we took the position that confidential information includes that which is not generally available to others even though not necessarily confidential. If the financial advisor provides information and advice to the board under circumstances where the information is not generally available to others, it may well be that such information would be construed as confidential information.

(4) The board member who holds the bonds need not abstain from participating or voting on any matter pertaining to a future bond issue of the school district.

We note that the voters of School District #1 authorized the issue of fifty-six million dollars in bonds. Bonds representing the full fifty-six million dollars are not scheduled to be issued all at once but at intervals. However, the bonds issued initially are issued with the intent that there will be the eventual issuance of fifty-six million dollars in bonds. In the normal course of events, it is unlikely that subsequent issues of bonds up to the fifty-six million dollar mark would have any effect whatsoever upon the bonds held by the board member. Under such circumstances, we do not see that the bond holding board member would be prohibited from participating in and voting on the issuance of subsequent bonds up to the planned fifty-six million dollar level.

However, if the issuance of a new series of bonds or the early payment of a later series of bonds will result in a financial gain to the bond holding board member, he or she may be prohibited from voting or participating on the matter. As stated earlier, voting in favor of a matter which results in financial gain to the board member when only the minimum number of votes needed for passage of the motion are cast, would constitute a violation of Section 49-14,101(3).

Finally, we believe that Section 49-14,103.01(5) regarding the buying and selling of bonds of indebtedness by financial institutions, does not apply to this situation. The language contained in this section first appeared as an amendment to LB404 in 1975. During the floor debate Senator Loran Schmit stated:

We also provided, because there are a number of bankers who serve on Natural Resource District Boards, that any bank which is acting in a fiduciary capacity could still have a member of its board serving on the . . . or a stockholder serving on the Board of Directors of the Natural Resources District.

This section clearly means and was intended to mean that a financial institution does not have an interest in a contract with a governmental body by virtue of the cashing of checks, receiving of deposits or the buying and selling of warrants and bonds of the governmental body by the financial institution.

The Commission does feel obliged to call attention to the provisions of Section 79-1004.05 R.R.S., 1943 which state:

It shall be unlawful for any member of the board of education to have any pecuniary interest, either directly or indirectly, in any contract for the erection of schoolhouses, or for warming, ventilating, or repairing the same, or to be in any manner connected with the furnishing of supplies for the maintenance of the schools.

While it appears that the statute is aimed at the actual contractor and the supplier of materials rather than a holder of bonds, the Commission is without authority to interpret this section of the law. The School District may wish to seek other guidance in this area.