Public Trust Act – A Public Financing Trial and Tribulation

The NY State Legislature and Governor Cuomo enacted a new State budget on April 1, and with it, enabling legislation that includes changes in NY’s campaign finance law. In addition to new independent expenditure disclosure requirements, which we discussed here, the new law includes a this-year-only public financing test program applicable only to the NYS Comptroller’s race.

The State Board of Elections (SBOE) is charged with implementing the new public financing scheme.  But with so little time in advance of this year’s election to adopt the necessary rules and regulations, disclosure forms and software, pre-election review and post-election auditing procedures, many are skeptical that the test program will actually take flight. Indeed, following the urging of public financing proponents,the State Comptroller has indicated that his campaign is opting-out and no other candidate has step forward to participate.

Yet, the new law marks the first time that public campaign financing has been adopted at the state level in New York.  Even with its December 31, 2014 sunset, these provisions offer a new point of departure for future public financing reforms in the Empire State.  Let’s take a look.

Like New York City’s public financing law, candidates for comptroller may “opt-in” to try to qualify for $6 for every $1 raised up to the first $175 from each New York State resident contributor (natural persons only).  Contributions deemed non-matchable include illegal contributions, contributions from minors, and, contributions from registered lobbyists.  The threshold for eligibility for “participating candidates” requires $200,000 in donations that qualify for the match from at least 2,000 donations of $10 to $175.  The maximum amount of public funds payable to each participating candidate is $4 million for the primary and another $4 million for the general.

The law requires reporting of every contribution, loan received and expenditure made and requires the Board of Elections to review each report and advise committees of “relevant questions” regarding compliance with the law and rules issued by the Board and qualifications for receiving matching funds. The law affords committees an opportunity to respond and correct potential violations.

Participating candidates may file more reports on a weekly basis on Fridays “so that their matching funds may be paid at the earliest allowable date.”  The law requires the SBOE to pay matching funds “as soon as practicable” and to verify eligibility for matching funds within four days of receiving a report and pay the committee within two days of eligibility (though no earlier than 30 days after ballot petitions have been filed and not less than 45 days before the primary).

The law requires public financing participants to disclose each “intermediary”, an individual, corporation or other entity which “bundles, causes to be delivered or otherwise delivers any contribution from another person or entity” to a candidate or his committee.  NY Election Law does not otherwise require disclosure of intermediaries.

Public financed campaigns are not subject to spending limits (unlike New York City law).  Restrictions apply to the use of public funds, however, such as prohibitions against use for illegal expenses, political contributions, gifts and legal fees to defend against a formal criminal charge.

The new law sets a limited time period for the SBOE to audit participating campaigns after the election.  Provisions require participants to maintain 3 percent of matching funds for expenditures needed to comply with the post-election audit.

The reform lowers contribution limits for donations to participating candidates to $6,000 per election, which is far below the current statewide election limits of $19,700 and $41,100 for the primary and general elections, respectively.  These current high limits are retained without change for non-publicly-financed candidates and for statewide offices other than comptroller.  A special provision for the retroactive application of the new $6,000 limit would require the segregation and non-use (or return) of contributions over $6,000 raised previously.  As with the reduced limits, the segregation/return requirements are not extended to non-participating candidates or to other state-wide offices.

The law establishes the New York State Campaign Finance Fund, which consists of revenues raised from the abandoned proper fund and names the State Comptroller and the Commissioner of Taxation and Finance as joint custodians.

Putting aside issues of feasibility this year, imagine the re-enactment of these very same provisions in time for the beginning of the next statewide election cycle in January 2015 and their extension to every statewide office, not just comptroller.  Just imagine.

New York’s New Public Trust Act Expands Independent Expenditure Disclosure

Effective June 1, 2014, the Public Trust Act included in this year’s State Budget legislation redefines “Independent Expenditures” (IEs) in state and local elections.  The new definition includes expenditures conveyed to 500 or more members of a general public audience in the form of an audio or video sent by broadcast, cable or satellite, a written communication via advertisements, pamphlets or the like, or other published statement that meets either the “magic words” test of expressly calling for the election or defeat of a clearly identified candidate at any time OR “refers to and advocates for or against” a clearly identified candidate or ballot proposal on or after January 1 of the relevant election year.

Exceptions are made for news and editorial publications, candidate debates, member-to-member communications within membership organizations of not more than 500 members, and Internet communications (other than paid ads).  Moreover, the definition of general public audience does not extend to an audience “solely comprised” of members, employees and other specified persons connected to a labor organization, corporation, unincorporated business entity, or trade association.

The new definition appears to both broaden and narrow current State Board of Elections (SBOE) section 6200.10 regulations.  For example, the current SBOE rules do not specify an audience threshold or format trigger for the definition.  Most significantly, the current SBOE rules extend only to communications that meet the magic words test; the election-year-communication-that-refers-to+advocates-for/against-a-candidate is a new trigger, as is the coverage of ballot proposal advocacy.

The new law (like current SBOE regs) requires all persons making IEs to first pre-register with the SBOE as a political committee.  If an IE costs more than $1,000 it must include a disclaimer clearly stating who paid for or otherwise published or distributed the communication and that the communication was “not expressly authorized” by any candidate.  These IE registrants must disclose to the SBOE on a weekly basis (each Friday) any contribution received of over $1,000 and expenditures made over $5,000.

Given the June 1 effective date, the first weekly IE disclosures would be due on Friday June 6.  That’s right, D-Day.  Within the last 30 days before the primary or general election, these disclosures are due within 24 hours.  Unlike current political committee disclosure requirements, an IE registrant’s report must include the occupation and employer of contributors, the name of the clearly identified candidate or ballot proposal referenced in the IE-paid ad, and a copy of that political communication.

The SBOE is directed to promulgate regulations and to provide suitable forms.  Presumably, the SBOE will now conform its existing IE rules to the new statutory standard.  It is less clear whether the State Attorney General or NYC Campaign Finance Board will see a need to adjust their separate IE definitions and disclosure provisions in light of this new Election Law definition.

One oddity is the new statute’s description of when communications are not treated as independent of a candidate.  After enumerating the content triggers as including a “call for … the defeat of the clearly identified candidate” or “advoca[cy] … against a clearly identified candidate”, the definition excludes “communications where such candidate… did authorize … or cooperate in such communication.”  (Emphasis added.)  This phrasing suggests that a negative ad against a clearly identified candidate may remain an IE,and therefore not be treated as an in-kind contribution to an opposing candidate who benefits, even if that opponent has authorized or cooperated in that ad.  In all likelihood, such a result is not what was intended.

 

 

Court Issues McCutcheon V. FEC; Strikes Down Aggregate Limits

Today the Supreme Court of the United States issued its decision in McCutcheon v. FEC.  The decision, which was 5-4 and authored by Chief Justice Roberts, struck down the aggregate limits under the Federal Election Campaign Act. Specifically, the Court found that 2 U.S.C. section 441a(a)(3)(A), which limits individual contributions to federal candidates and party committees over the course of a two-year election cycle (i.e. the biennial limit) was unconstitutional because “aggregate limits do little, if anything, to address [the permissible objective of combatting corruption], while seriously restricting participation in the democratic process.” Justices Scalia, Kennedy and Alito joined in the majority opinion.  Justice Breyer authored the dissent.  Justice Thomas authored a concurrence.

The Court found that while the Court in Buckley “in three sentences” provides “some guidance”, because statutory safeguards against circumvention have been “considerably strengthened since Buckley was decided. . .the indiscriminate aggregate limits under BCRA appear particularly heavy-handed.”  Particularly the Court noted: 1) the 1976 FECA amendments that capped limits on contributions to political committees; 2) 1976 amendment that added an antiproliferation rule prohibiting donors from creating or controlling multiple affiliated political committees; 3) FEC regulations on the earmarking provisions of the FECA. The Court also noted distinct legal arguments that Buckley did not consider, including that the Court never addressed an overbreadth challenge in the specific context of aggregate limits.

In addressing the government interest in the case the Court again emphasized that “while preventing corruption or its appearance is a legitimate objective, Congress may target only a specific type of corruption – ‘quid pro quo” corruption.”

The Court noted Citizens United, and seems to dig in its heels: “As an initial matter, there is not the same risk of quid pro quo corruption or its appearance when money flows through independent actors to a candidate, as when a donor contributes to a candidate directly.”

The Court notably offers Congress suggestions: 1) targeted restriction on transfers among candidates and political committees; 2) strengthening FEC regulations on defining how many candidates a PAC must support in order to ensure that ‘a substantial portion’ of a donors contribution is not rerouted to certain candidate; 3) modified version of aggregate limits, such as one that prohibits donors who have contributed the current maximum sums from further contributing to political committees that have indicated they will support candidate to whom the donor has already contributed.  Indeed, like in Citizens United, the Court emphasized the role of disclosure because “disclosure of contribution minimizes the potential for abuse of the campaign finance system.”

Currently, eight states impose comparable aggregate contribution limits on a single contributor’s contributions to multiple recipients during a specified time period.  All of these limits are now vulnerable to challenge under the Court’s decision, though with the Court’s suggestions for reform, there is much room for debate.  As we previously discussed here and here the Court’s decision may have an impact in New Jersey and certainly will in New York.

The Answers Depend on the Questions that are Asked

After each City-wide election, the NYC Campaign Finance Board is required to produce a post-election report to the Mayor and City Council.  Today intrepid politicos, reformers and observers braved a blizzard to participate in a public hearing that is a key component in this mandated review.

The hearing was scheduled to include four panel discussions, the first of which examined NYC’s “small-dollar matching program.”  The CFB’s upcoming evaluation of this program will also have resonance in Albany where the governor, legislators and reformers continue to forcefully advocate its replication at the state level.  

To assess how the matching funds program is working, what issues will the CFB choose to examine? Among other topics, the law directs the CFB to analyze “the effect of this chapter on political campaigns, including its effect on the sources and amounts of private financing, the level of campaign expenditures, voter participation, the number of candidates and the candidates’ ability to campaign effectively for public office”.  In addition, the law mandates “a review of the procedures utilized in providing public funds to candidates”.

      In thinking about the three mandated topics highlighted above, consider the kinds of questions the CFB could choose to examine:

      1)  Voter Participation.  Small donor matching has been hailed for broadening the number, geography, and demography of campaign contributors.  But is there any correlation between stimulating more local resident contributors and voter participation?  Is an effect on voter turnout relevant in evaluating the ultimate benefit of public financing for democracy?

      2)     Candidates’ Ability to Campaign Effectively.   The New York City Campaign Finance Act contains approximately 23,000 words.  CFB regulations on the matching funds program add another 45,000 words, give or take.  While reform-advocates might look to espouse new regulations and restrictions to govern campaign behavior, what might a bit of de-regulation achieve for candidates’ ability to campaign effectively?

      3)     Procedures Utilized in Providing Public Funds.  Self-assessments are always difficult.  For simplicity sake, our comment highlights just one area: the use of time.  A NYC-election cycle generally runs four years.  How well does the CFB use those 1461 days in administering the matching funds program and enforcing associated legal requirements?  For example, does the CFB work to enable candidates to resolve all compliance issues in a steady, even and timely manner throughout the four year cycle?  Or are the burdens on CFB staff and campaigns unduly deferred until the peak of campaign season?   And, returning to question 2, what effect did the timing of CFB actions in the 2013 election cycle have on the ability of candidates to campaign effectively?

Legislation Introduced to Require More Disclosure in NYC Campaign Ads

New York City Councilman Daniel Garodnick (Manhattan-D) introduced legislation this week that would require more disclosure in campaign ads. The local law proposes to amend the Administrative Code of the City of New York to require public-facing disclosure of campaign spending.

The law would require that whenever an authorized candidate committee pays for literature, advertisements, or other communications, the communication must disclose that it was funded by the candidate or committee. The law would also require the same disclosure when a candidate or authorized committee permits another individual or entity to pay for communications in support of, or in opposition to, that candidate.

If enacted, the law will take effect in six months and will permit the Campaign Finance Board to promulgate any necessary rules to enforce the provision. The text of the proposed law can be found here. It was referred by the City Council to the Committee on Governmental Operations for further review.

Independent Spending in NJ’s 2013 Elections Reaches a Record-Breaking High

Last week the New Jersey Election Law Enforcement Commission announced  “[a]n unprecedented explosion of independent special interest spending pushed the cost of the 2013 state elections to an all-time high . . .”  Although final numbers won’t be available until January, reports filed with ELEC indicate that spending on New Jersey’s 2013 elections reached a record $129 million.  Special interest groups are responsible for spending nearly $41 million independent of parties and candidates on state campaigns during the recent election cycle.  This constitutes approximately 32% of the total amount of money spent statewide (compared to .3% in the 2005 and 15% in 2009).  Thus, the numbers have doubled since New Jersey’s last gubernatorial election.

This year marks the first election in which the governor’s office and all 120 seats of the legislature were up for grabs since the 2010 U.S. Supreme Court decision in Citizens UnitedSome argue that decision spurred this dramatic growth in independent spending, although it is worth noting that, unlike federal law prior to Citizens United, New Jersey campaign finance law did not restrict independent spending by corporations.

Yet it is apparent that Citizens United marks at least a psychological sea change that has driven up spending by independent entities and dramatically changed election dynamics in the Garden State.

FEC Roundup

The Federal Election Commission (FEC) had a busy fall season, beginning with the announcement of two new appointments, and culminating in the consideration of several important matters. The following summary represents a few highlights:

New FEC Membership Announced

Lee E. Goodman and Ann M. Ravel assumed roles as Commissioners of the Federal Election Commission. President Obama nominated Commissioners Ravel and Goodman on June 21, 2013, and the United States Senate confirmed their nominations on September 23, 2013. Commissioner Goodman was also elected as Vice Chairman of the FEC.

No Opinion Issued on Whether Bitcoins are Considered a New Form of Political Campaign Currency

Following a request by the Conservative Action Fund (CAF) to issue guidance on the permissibility of using Bitcoins for political campaign contributions and expenditures, the FEC considered four separate draft Advisory Opinions but was unable to garner the requisite four affirmative votes to issue a final opinion.

Bitcoins are a form of virtual, peer-to-peer currency that can be exchanged online for goods and services anywhere in the world without using a bank or third party financial institution to host the transaction. Once a merchant or individual has received a transfer, the value is calculated by a constantly fluctuating currency conversion rate. Bitcoins differ from traditional online payments because they are regulated by software and user agreements and cannot be regulated by governments, banks or any other central authority. Instead, the transactions are managed collectively by the community of Bitcoin users.

While the Commissioners were unable to agree on official guidance, the Commission did discuss the possibility of developing an interim policy and commencing a rulemaking to address the issues raised in the Advisory Opinion request.

Draft Interpretive Rule on NY Primary Elections Announced

The Commission introduced a draft Interpretive Rule that clarifies the Commission’s interpretation of its rule for determining the date of a special primary election as the rules apply to nominations for federal office conducted under New York Election Law. Consistent with state law, which vests the power in party committees, the Commission clarified that the date of a special primary election is the date of the party committee’s nomination vote. The Commission directed the Office of General Counsel to make the draft available for solicitation of public comments before a vote by the Commission.

FEC Fails to Rule on Tea Party Request

The Commission considered two drafts responding to an Advisory Opinion request from the Tea Party Leadership Fund (TPLF), but it was unable to reach agreement by four affirmative votes in order to issue a formal Advisory Opinion. In its request, TPLF sought an exemption from the regulations requiring reporting to the Commission of contributors to the TPLF and of recipients of TPLF disbursements.

Important Reminder Regarding Holiday Greetings

The same disclaimer rules that apply to campaign-related mailings also apply to all holiday greeting cards, even if the communication does not solicit funds or contain express advocacy. If a federal campaign sends out more than 500 holiday greetings, (which constitutes a mass mailing) it must include a box on the card to inform recipients that it was paid for by the campaign committee. A PAC or party committee that sends a holiday mass mailing must also include a box on the card that lets recipients know the committee paid for it, identifies the committee’s full name and street address, phone number or web address, and states that the communication is not authorized by any candidate or candidate’s committee. For additional information, see the Commission’s brochure: Special Notices on Political Ads and Solicitations.

 

IRS Changes the Game?

On Wednesday November 26, 2013, the US Department of Treasury and Internal Revenue Service issued proposed guidance, subject to a comment period, that would limit the scope of permissible political activities of 501(c)(4) social welfare groups. Under the new guidance, the IRS will move away from the “facts and circumstances” test long-employed in evaluating 501(c)(4) political activity and instead use bright-line rules.

The Treasury and the IRS plan to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).

As there is a comment period, any new rules will not likely be in place until after the 2014 elections.

Contradictions Revealed: If New York’s Aggregate Contribution Limits Fall

Thanks to cases like McCutcheon and New York Progress and Protection PAC, time may be running short for New York’s $150,000 annual aggregate limit on contributions in connection with the nomination or election of candidates, certainly as applied to SuperPACs and perhaps altogether.  This $150,000 limit caps political contributions (but not independent expenditures) by “persons”, including individuals and, as interpreted by the State Board of Elections, limited liability companies (LLCs).  The annual aggregate limit for corporations is much lower, $5,000, a disparity that might be seen as offensive to Citizens United’s elevation of corporate political speech.

So if these aggregate caps are held unconstitutional, the sky is the limit for individuals, LLCs and corporations to spread contributions around New York.  Or is it?

It turns out that the answer isn’t all that clear in the case of corporations.  New York’s $5,000 aggregate limit for corporations is structured as an exception to what otherwise is a total ban on corporate contributions.  On its face, striking down the aggregate limit would appear to resurrect that total ban.  While a total ban would certainly be more extreme discrimination against corporate speech than the current $5,000 limit, this result is also precisely analogous to the current federal ban on corporate contributions.

This then brings us full circle back to an issue left unaddressed by Citizens United.  Is a total ban on corporate contributions – whether the current federal ban or New York’s currently dormant ban — vulnerable to a Citizens United-based alleging unconstitutional discrimination against corporate speech?  Will this question be the next domino in play after McCutcheon is decided?    

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