Amendment 41 to the Colorado Constitution: Serious Implications to Scholarship Providers & Recipients

Colorado voters overwhelmingly passed Amendment 41 to the Colorado Constitution – a measure referred to as "ethics in government" - in November 2006. Although the measure was intended to ban the use of gifts to influence public action, it potentially casts a far wider net. Amendment 41 has serious implications for all charities and private foundations that provide service or assistance to government employees, their spouses, and their children, including scholarship providers. If Amendment 41 is found to apply to scholarships, granting scholarships to Colorado government employees and their children could result in severe penalties to both the scholarship provider and the recipient.

This article summarizes the key provisions of Amendment 41, its possible interpretation with respect to scholarship programs, and the risks and options scholarship providers must consider in developing their response to Amendment 41.

Key Provisions of Amendment 41

Section 1 of the Amendment clearly expresses the intent:

• Government officials and employees must conduct themselves in a manner that holds the "respect and confidence of the people" ;


• They must carry out their duties "for the benefit of the people" rather than for private gain;


• They must avoid conduct that "breaches the public trust" ;


• They violate the "public trust" by any effort to obtain "personal gain through public office"; and


• They must be guided by standards to "ensure propriety and preserve public confidence" in their conduct.

Section 3(a) of the Amendment, known as the "gift ban," states:

No [covered person], either directly or indirectly as the beneficiary of a gift or thing of value given to such person's spouse or dependent child, shall solicit, accept or receive any gift or other thing of value [worth more than $50] …, including but not limited to gifts, loans, rewards … from a person, without the person receiving lawful consideration of equal or greater value in return from the [covered person].

Section 6 of the Amendment imposes significant penalties on those that "breach the trust for private gain" and those that induce such a breach. The penalties are double the amount of the gift.

Two Possible Interpretations of the Gift Ban

The intent provision of Amendment 41 clearly targets the public trust, and the penalty provision only applies to breaches of the public trust. The gift ban, on the other hand, does not reference the public trust. This apparent internal inconsistency within the Amendment will need to be resolved to fully evaluate how Amendment 41 will play out in the context of scholarships.

There are two equally plausible interpretations, which lead to dramatically different outcomes for scholarships providers and recipients:

a) The gift ban must be interpreted in the context of the entire amendment, whose intent was to prevent the use of gifts to influence public action. Very seldom would the award of a scholarship fall within this category.

b) Violation of the gift ban would, in itself, constitute a breach of the public trust. Under this interpretation, the gift ban casts a very wide net, and scholarships have a far greater potential to fall within the ban.

Although interpretation a) leads to a more pragmatic outcome for scholarship providers and recipients, it is important to understand that interpretation b), the "strict constructionist" approach, could well prevail. While there is a lively debate about potential legislative and judicial action to resolve these issues, at this time, it is important to note that the Colorado Attorney General has issued an advisory letter, in which he leans toward interpretation b).

Therefore, boards of scholarship providers must proceed with an awareness of the ramifications of interpretation b). Even if interpretation b) prevails, however, all is not lost. The gift ban, itself, has many ambiguous terms and missing definitions, which leave room for another reasonable interpretation of Amendment 41 that would exclude many, if not most, scholarships.

Key Terms Needing Interpretation that Could Limit Scholarships Covered

The gift ban does not apply if the person making the gift receives "lawful consideration of equal or greater value" in return for the gift. It is unclear what "lawful consideration" and "equal or greater value" means, particularly in the context of charity (it is well understood that charity is not typically based on traditional quid pro quo standards). That said, scholarships are generally conditioned upon some sort of future performance by the recipient (e.g., enrollment in school, maintaining certain grades or credit hours, etc.), which could be argued is lawful consideration. One could also argue that the value received by the scholarship provider is the value to society of the student's enhanced education and productivity over her lifetime. The Attorney General clearly acknowledges this possible interpretation in his advisory letter, and scholarship providers should seize this opportunity in designing their response.

In addition, the gift ban does not apply to gifts made to the spouse or children of a covered individual unless the covered individual "solicit[s], accept[s] or "receive[s]" the gift as an "indirect beneficiary." Again, it is unclear what the term "beneficiary" or "receipt" means in this context. However, one could argue that a covered individual is not the beneficiary of scholarship awarded to his child, or has not accepted or received the gift, because he is under no legal obligation to provide a private elementary or secondary education to his child or to send his child to college. It is important to note, however, that the Attorney General broadly interpreted the term beneficiary in his advisory letter. Also, even a narrow interpretation of the term would not help a scholarship recipient who is, herself, the covered employee (and possibly her spouse).

Strict constructionists could also challenge these interpretations of the gift ban. Should they be successful, scholarship providers would be presented with the real dilemma of determining who are the potential recipients covered by the ban, and what is the potential exposure to penalties for violating the ban. In evaluating these questions, once again, there are ambiguous terms and missing definitions within Amendment 41, which provide some opportunities to limit its scope and impact on scholarships.

Key Terms Needing Interpretation that Could Limit the Scholarship Pool Affected

The gift ban covers the following categories of individuals, and their "spouses and dependent children":

• Members of the General Assembly;


• "Public officers," defined by the Amendment to include elected officers, state department heads, elected and appointed members of state boards and commissions, but not members of the judiciary or volunteer members of a board, commission, council or committee;


• "Local government officials," defined by the Amendment to include elected or appointed officials of a county or municipality; and


• "Government employees," defined by the Amendment to include any employee or independent contractor of the State Executive Branch, the State Legislative Branch, a State Agency, a Public Institution of Higher Education and any county or municipality.

Although Amendment 41 defines the basic category of covered individuals, several key terms within those categories are not defined, or need clarification. This lack of definitions creates some difficulties in understanding the Amendment, but also creates opportunities to limit the pool of scholarship recipients potentially affected.

Some of the key terms that need definition or clarification include:

• dependent child (minor? claimed as dependent on tax return? custody?)


• elected officers (elected by whom? federal, state and local?)


• appointed officials (appointed by whom?)


• employee (part-time? full-time? temporary?)


• independent contractor (individual? firm?)


• county and municipality (their agencies and instrumentalities?)

Key Terms Needing Interpretation that Could Limit Exposure to Penalties

As noted above, the penalty provision of Amendment 41 imposes a penalty on any covered person who breaches the public trust and any "person or entity" who "induces" a breach of the public trust. The Amendment broadly defines "person" to include "any individual, corporation. . .trust,. . .or other legal entity." On its face, this would appear to cover virtually all scholarship providers (nonprofit, for-profit, governmental, foreign or domestic).

It is unclear what it means to "induce" a breach of the public trust. One could argue that merely accepting applications for scholarships and awarding scholarships on a competitive basis, using objective and nondiscriminatory selection criteria (as required under federal income tax rules for 501(c)(3) scholarship providers), does not rise to the level of inducement. Although this interpretation might provide some protection from penalties to the scholarship provider, it would not help the scholarship recipient.

Now What? What are the Options for Scholarship Providers?

Amendment 41 does not represent the first example of ambiguous or internally inconsistent law passed in Colorado or elsewhere. These things eventually get worked out, either through judicial, legislative or administrative processes, or a combination of all. This will happen with Amendment 41 as well, and the process will take time. Scholarship providers have several options to participate in those efforts, and those are discussed below.

The dilemma for scholarship providers is what to do now. As the wheels of process grind slowly, scholarship providers are in the middle of award decisions, and students are waiting anxiously to find out whether they will have the funds to attend school this Fall. How to proceed in the face of this uncertainty is a major decision that boards must make, and their decisions should take into account the potential scope risk, their risk tolerance and the extent to which they can mitigate those risks.

The short term options for scholarship providers include:

1. Conduct business as usual (understanding that scholarship recipients could also face penalties);

2. Suspend scholarship awards to covered persons until the issues are clarified by legislative, judicial or administrative action (understanding that the lives of many students will forever be impacted by the decision); or

3. Craft some sort of middle ground based on a reasonable interpretation of Amendment 41 and the board's risk tolerance.

In assessing the risk, some of the questions that the board should consider include:

• How many scholarships are awarded, how much are the scholarships, and what is the size of the scholarship pool potentially affected under the scholarship provider's program? In other words, what is the potential size of the penalty?


• What is the profile of the scholarship provider and its recipients? How likely is the scholarship program to attract private complaints from hostile members of the public or disgruntled rejected applicants?


• Does the provider have any moral or legal obligation to inform covered recipients that they or their parents may face penalties if they accept the scholarship?


• What would be the cost of defending or losing an Amendment 41 challenge (e.g., legal costs, the amount of the penalty and any potential excise tax for private foundation providers)?


• What would it take to adapt the scholarship program to various possible interpretations of Amendment 41?


• Is there safety in numbers? Would it help to have the scholarship providers proceed on a consensus?

The longer term options for scholarship providers include:

1. Support implementing legislation that interprets Amendment 41 under the various approaches described above (being mindful of the lobbying constraints imposed on private foundations and charities);

2. Support or take judicial action, which could range from seeking to set aside Amendment 41 entirely, seeking to set aside portions of Amendment 41, or interpreting Amendment 41; and/or

3. Support implementing regulations or seek an advisory opinion from the Independent Ethics Commission, once it is established.

In evaluating these options, some of the questions the boards of scholarship providers should consider include:

• Do they want to go it alone, do they want to join with other scholarship providers, or do they want to join a broader effort?


• Will legislative or administrative interpretations inevitably result in litigation?


• What would be the cost involved in pursuing the options? Could those be shared?


• If litigation is pursued, would they be interested in providing the "test case"? Can they seek a declaratory judgment immediately? Should they wait until implementing legislation or regulations have been adopted?

Conclusion

The inescapable conclusion is that Amendment 41 impacts scholarship providers and recipients, right now. The extent of the impact is yet to be determined, and unfortunately, there are no quick solutions or easy answers. Options and proposals will begin to emerge in the coming months, but that may be too late for many students, who are making decisions now that will affect the rest of their lives. Therefore, providers who award scholarships to Colorado students must decide, now, how to proceed in the face of such uncertainty. They must get their arms around the provisions of Amendment 41 and its application to scholarships, they must conduct a risk assessment and develop a risk management strategy that takes into account their individual circumstances, and they must consider all of their potential options, both long-term and short-term.