This is the second installment on the NYC Campaign Finance Board’s proposed rules on independent expenditure (IE) disclosure. The CFB has scheduled a public hearing for October 27.

The NYC Charter requires the reporting of expenditures made in support of or in opposition to a candidate in an election for municipal office or municipal ballot proposal, where no candidate cooperated in that activity.  In fleshing out the Charter requirement, the CFB’s proposed rules define ballot proposal but do not define candidate.

Candidate:  Presumably, “candidate” is limited to a candidate for one of the five covered municipal offices.  If so, political committees authorized by other candidates (e.g., for state or federal office) may be subject to the IE reporting requirements, as proposed.  This coverage may be unexceptional, except that candidates often authorize committees for unspecified offices and elections – or then change the office sought/election during the course of an election cycle.  Should a change in office sought occur between a covered and a non-covered election, how would this change affect the committee’s obligations under the IE reporting rules?

For example, a candidate’s authorized committee for City Council may make express advocacy expenditures attacking the incumbent.  What if that candidate then decides to run instead in a different election, such as for State Legislature, or decides not to run for office at all – are the IE reporting rules retroactively applicable to the authorized committee?  Conversely, what if a person makes and reports IEs, but then subsequently, in the same election cycle, becomes a candidate for a covered office?

Ballot proposal: The proposed rules define ballot proposal by reiterating the Charter language.  This leaves unresolved the question: when does a proposition become a municipal ballot proposal?  Here are some possibilities:

• Before an initiative petition is circulated?
• Upon the initial circulation of an initiative petition?
• Upon the filing of an initiative petition – but which filing in the event the Municipal Home Rule Law’s two-stage initiative procedure is used?
• Upon the City’s clearance of the petition for placement on the ballot?

Are the costs of circulating the initiative petition reportable as IEs?  Are litigation or other costs to place a question on the ballot (or to oppose its placement on the ballot) public communications reportable as IEs?

Candidates and Ballot Proposals: As noted above, the Charter (and the proposed rule) define IE to exclude expenditures cooperated in by a candidate.  But, as the NYC campaign finance law and the CFB recognize, candidates may make expenditures for or against ballot proposals.

Do any IE reporting requirements apply to candidate-authorized advocacy for or against ballot proposals?  If not, may disclosure of ballot proposal advocacy be avoided altogether simply by the spender discussing its planned public communication with a candidate?

During the next two weeks, we will share our thoughts on the NYC Campaign Finance Board’s proposed rules on independent expenditure (IE) disclosure.  The CFB has scheduled a public hearing for October 27.

Today, we look at two aspects of the proposed rules: registration and pre-clearance.

Registration.  Under the proposed rules, individuals and entities must first register with the CFB before reporting IEs.  The required registration is akin to the treatment of political committees under NY State and City law.

The purpose of the registration requirement is not explained, but it was probably designed to serve an administrative need to identify potential filers before the filing comes in (as the CFB does for candidate committee disclosure).  But the candidate model may not be optimal here, since for IEs registration is tantamount to giving the public (and potential opponents) advance notice of an intention to make IEs.

Given that the Supreme Court has recognized greater constitutional protection for making IEs than for making political contributions, it is odd – to say the least – to impose a potentially chilling registration requirement on IEs where no such requirement applies to the making of political contributions.  And the chill would be a deep freeze should the filing of an IE report without advance registration trigger a civil penalty.

Why can’t the CFB simply collect the registration information it seeks in the first IE report?

Pre-clearance. As with registration, the NYC Charter does not set forth a procedure for the CFB to pre-clear communications as against IE reporting requirements.  The proposed rules invite voluntary pre-clearance submissions to the CFB, which presumably would entail a CFB assessment of whether the proposed communication fits within its proposed definitions of express advocacy and electioneering communication.

But is pre-clearance an appropriate or wise function for the CFB?  Since the procedure would apply prior to the dissemination of the communication, might the CFB appear to be taking on the role of censor?

For example, what would the CFB do if presented with a proposed communication in the form of a t-shirt or website content containing the statement, “F__k  [Candidate Name]”, to be published or distributed in the time period covered by the electioneering communication definition?  (Since the CFB rules cover communications beyond the broadcast realm, the potential for inventive expression is limitless.)

Might an Independent Spender seize on a CFB “pre-clearance” as some kind of broader imprimatur for his message?  Since communications are often controversial, does it make sense for the CFB to place itself in the center of multiple potential controversies before each election?

Indeed, this element of the proposal almost reads like a “Kick Me” sign.

ELEC issued White Paper No. 22 today entitled “Trends in Legislative Campaign Financing: Fundraising in the Era of Pay-to-Play Reform, Self-Funders and Recession”. The White Paper was released just as the 2011 legislative election cycle kicks into high gear and focuses on fundraising in New Jersey from 1999-2009. 

According to the White Paper, fundraising for the 2005, 2007 and 2009 legislative elections was $1 million less than the previous three election cycles (1999, 2001 and 2003). The economy, wealthy candidates and pay-to-play restrictions may be to blame. Could the fact that the first three election cycles included only one gubernatorial election whereas the second three cycles included two gubernatorial elections also have had an impact on giving?

ELEC concluded that although state parties were hit hardest by statewide pay-to-play restrictions, “all state candidates suffered to some extent because many contractors simply stopped writing checks due to general fear over losing contracts.”  

Will the impact be the same for the 2011 legislative elections?  In spite of the economy, will vendors begin to write checks greater than $300 to legislative candidates? Will the fact that 2011 is not a gubernatorial election year have an impact on contributions to legislative candidates? Although vendors may be “afraid” of losing contracts, with a well executed compliance plan in place, vendors may be surprised to learn that they need not put their political giving on hold – particularly when it comes to legislative candidates.

Yesterday, ELEC Executive Director Jeffrey Brindle and State Comptroller Matthew Boxer appeared together at a press conference to discuss pay-to-play reform in New Jersey.

In conjunction with this press conference, the State Comptroller issued both a press release and a procurement report on “weaknesses” of the “fair and open process” applicable at the state and county level in New Jersey. According to the report, the “fair and open” system “presents few, if any, real obstacles to a government entity seeking to award a contract to a potentially favored vendor.”

Following yesterday’s press conference, ELEC also issued a press release  on pay-to-play reform, which sets forth a series of recommended changes to New Jersey’s statewide pay-to-play law applicable to county and municipal government contracts. ELEC recommends: (1) one state law that would apply across the board; (2) elimination of the “fair and open process” exception; (3) a change in the reporting threshold for ELEC’s Business Entity Annual Disclosure Report from a $50,000 aggregate annual threshold to a $17,500 per contract threshold; and (4) an increase in contribution limits for government contractors.

ELEC and the State Comptroller’s Office are hoping that “by joining forces”, they will bring about meaningful pay-to-play reform to the Garden State.

After 10 months gestation, the New York City Campaign Finance Board (CFB) has proposed rules to implement last year’s Charter revision requiring the disclosure of independent expenditures (i.e., IE) in NYC elections.  We have previously commented (here and, more recently, here) and testified on this subject, and may be providing additional commentary in the coming days.

The proposed rules mark the first time that non-candidate individuals, corporations, non-profit entities, and labor organizations must register with, report expenditures and contributions to, and retain records subject to review by the CFB – a regulated existence previously only experienced by candidates for NYC office.  The proposal defines the “express advocacy” and “electioneering” communication expenditures that trigger such obligations.  There’s an exemption for the news media and a limited exemption for certain “member” communications.

The CFB is inviting public comment and will soon schedule a public hearing.  In the interim, we offer one hypothetical question: Suppose Labor Union President A is a candidate for NYC office.  The Labor Union scrupulously avoids making any express advocacy or electioneering communication in support of Candidate A, but freely makes independent expenditures in support of other candidates, B through Z.  Assuming Candidate A participates in the Labor Union’s decision to make these expenditures, would the expenditures be reportable to the CFB as independent expenditures, as in-kind contributions to Candidate A(!), or not reportable at all?

Update:  NY Times coverage

Update 2: The proposed rules (reflecting technical corrections) are here.  The public hearing is scheduled for October 27.

The newly-enacted Public Integrity Reform Act of 2011 directs the NY State Board of Elections to issue regulations by January 1, 2012 setting forth and implementing the requirements under existing law for disclosure of independent expenditures (IE) for advertisements and other “advocacy that expressly identifies a political candidate or ballot proposal.”  These regulations shall require “disclosure to the fullest extent of the law.”

Curiously, the Act references requirements under existing law “for individuals, organizations, corporations, political committees, or any other entities to disclose independent expenditures.”  The existing requirements, however, apply only when the person or entity making the expenditure is a political committee.  Existing law defines a political committee as including “any corporation aiding or promoting and any committee, political club or combination or one or more persons operating or co-operating … to aid or to promote the success or defeat … of any ballot proposal; or to take part in the election or defeat of a candidate ….”  It stands to reason, therefore, that the coming regulations will clarify when an individual or a corporation making an IE must register and file disclosure reports as a political committee.

Come to think of it, hasn’t the New York City Campaign Finance Board (CFB) been working on regulations for a similar objective?  Indeed, the State and City regulations will overlap since both are applicable to IEs for candidates and ballot proposals in New York City.  This creates some potential for problems.

For example, the NYC Charter authorization for the CFB rulemaking does not limit the required disclosure to persons and entities that are subject to regulation as political committees.  Further, will there be differences in the State and City rules’ definitions of “independent expenditure”, such that the two disclosure regimes will not apply to precisely the same categories of spending?  Also, will the State parameters for contribution disclosure to political committees trump the narrower range of contribution disclosure by persons and entities subject to the CFB disclosure rules?

New York City lobbyists and candidates for NYC offices are familiar with similarly duplicative, but not identical, disclosure requirements.  As has generally been achieved for City candidates (but not City lobbyists, see the preliminary report of the NYC Lobbying Commission, at pp. 58 – 59), will the State and City work together to design and provide software that enables filers to meet their obligations under both IE disclosure regimes?

Yesterday Governor Cuomo signed into law the Public Integrity Reform Act of 2011.   The new law requires members of the legislature to accurately disclose any outside income, as well as the names of clients.   It also creates a new Joint Commission on Public Ethics, which will have the power to investigate lawmakers, their staff and members of the executive branch for legal and ethical violations.   Reports will be made public, with criminal offenses passed on to prosecutors. The law also touches on a variety of other issues including ethics, lobbying and campaign finance.  For example:

• Lobbyists will  be subject to disclosing their business relationships with officials.

• Any lawmaker convicted of a felony could be forced by a judge to give up their pension.

• The Board of Elections must issue regulations clarifying requirements for individuals, corporations, political committees and other entities to disclose independent spending for advertisements or any other type of advocacy that expressly identifies a political candidate or ballot proposal and that is not coordinated or approved by the candidate in question.

When the agreement was first reached in June, lawmakers and the Governor were quick to praise the agreement, though since then, questions have been raised as to its effectiveness.

The American Bar Association’s House of Delegates passed a resolution last week supporting a broader definition of the term “lobbyist,” a number of increased disclosure requirements, and a ban on lobbyists fundraising for members of Congress who they also lobby.  The resolution stems from a slew of recommendations contained in a report issued in January 2011 by the ABA’s Task Force on Federal Lobbying Laws.

After Citizens United v. FEC, the 2010 elections saw a marked increase in political spending by 501(c)(4) organizations. This development spurred calls for requiring public disclosure of donors financing this political spending.  Now this battle moves to another level, as advocacy groups challenge the IRS standard for recognizing tax exempt status for organizations engaged in political activities.

Democracy 21 and the Campaign Legal Center have filed a petition with the IRS challenging IRS regulations that define whether an organization that conducts campaign activity is entitled to obtain or maintain tax-exempt status.

Currently, to be tax-exempt as a social welfare organization under Internal Revenue Code Section 501(c)(4), an organization must not engage in political activity as its “primary” purpose.  The IRS has not defined “primary” for purposes of determining whether a 501(c)(4) is engaging in a permissible level of political activity.  Rather, under the current “facts and circumstances” analysis, a 501(c)(4) organization generally seeks to demonstrate that less than 50 percent of its expenditures are political in nature. Such efforts have apparently led to some non-political spending sprees where an organization may potentially be able to devote 49 percent of its time to political activity while still maintaining its 501(c)(4) status as a social welfare organization.

The petition proposes a “bright-line” test to limit political spending to no more than 5 to 10 percent of total activity as a condition for maintaining tax exempt status.  Clearly, such a standard would take a big bite out of a 501(c)(4) organization’s potential political bark.  Given the recent fracas occasioned by IRS steps toward gift tax enforcement, it does not appear likely that the IRS will be moving quickly to change the status quo.

The adoption of a stringent pay-to-play ordinance is at the top of the Christie Administration’s 2011 Best Practices Checklist.  A copy of the checklist can be found here.

The best practices check list is designed to provide standards by which local government officials can perform an assessment of municipal operations.  In order to receive 100% percent of permissible state aid, a municipality needs to satisfy certain criteria, including the adoption of a local pay-to-play ordinance.

As these ordinances begin to take effect, government contractors should take steps to ensure that they are in full compliance with varying local pay-to-play restrictions.