Recently, the IRS released a Private Letter Ruling on hospitals and political activity.  Although it seems almost nonsensical to link a 501(c)(3) with political activity, the Private Letter Ruling advises that a hospital’s indirect initiation of a PAC would not jeopardize the hospital’s tax-exempt status.

The Private Letter Ruling was based on the facts presented to the IRS and does not give hospitals and/or other 501(c)(3) organizations permission to engage in political activity and/or to directly establish a PAC.  Rather, as is common practice in the not-for-profit world (and as previously discuss here), the IRS Ruling advises that an exempt hospital may establish a 501(c)(4) social welfare organization, which may in turn establish a PAC.  The IRS Ruling also gives the PAC the ability to use a payroll deduction system for collecting contributions from hospital employees.

Perhaps what is most significant about the IRS Ruling is that hospitals may now look to form 501(c)(4) organizations to carry out their social welfare and lobbying agendas rather than relying upon the hospital itself to carry out that message.

As we previously discussed  here, recent press reports had indicated that the IRS was planning to enforce a gift tax against donors of IRC 501(c)(4) organizations.  Now comes word from the IRS that no “examination resources” should be expended on this issue until “further notice.”

Today, the U.S. Supreme Court, in a 5 – 4 decision, struck down Arizona’s supplemental public financing grants paid on the basis of an opponent’s level of spending. The majority reasoned that the constitutional problem is “the manner in which that funding is provided – in direct response to the political speech of privately financed candidates and independent groups.” The decision leaves Arizona’s initial “clean money” grant to candidates unmarked.

New York City’s law is analogous. Candidates initially receive public funds to match privately raised contributions at a 6:1 rate. Like the initial clean money grant in Arizona, these funds are not pegged to the level of an opponent’s spending. So the constitutionality of this provision is not currently in question.

But, separately, New York City makes additional matching funds available (by means of an increased aggregate payment and a higher matching rate – as much as 8.5:1 or more) only when a privately financed opponent raises or spends funds above a trigger level. When this occurs:

1. Eligibility for the increased public funds is based solely on the level of the opponent’s spending/fundraising.

2. The Campaign Finance Board pays an incremental grant equal to the difference between the higher matching rate and the regular 6:1 rate for previously matched contributions.

3. Additional payments match previously unmatched contributions at the higher rate triggered by the level of the opponent’s spending/fundraising.

Unlike the 6:1 matching rate for individual New York City resident contributions, which applies across the board regardless of an opponent’s actions, each of these three elements of supplemental funding is now constitutionally vulnerable as a burden on the opponent’s speech. The fact that the supplemental funding also matches individual contributions is likely a distinction without much difference.

Some maintain that the Court’s decision may strengthen the relative merits of public financing systems that match individual contributions, as opposed to the “clean money” lump sum model. That’s rather cold comfort, given the Court’s conclusion that freedom for a privately financed candidate’s speech trumps the state’s desire to be fair to the publicly financed opponent.

The New York City Campaign Finance Board is drawing distinctions and studying the decision to assess its impact.

The Supreme Court issued it’s decision in McComish (Arizona Free Enterprise Club’s Freedom Club PAC, et al. v. Bennett, Secretary of State of Arizona, et al.) today. The 5-4 majority struck down the Arizona provision with Chief Justice Roberts writing the majority decision and Justice Kagan writing the dissent.

More to follow.   In the meantime, see our previous post here for some background.

On Friday, Governor Andrew Cuomo announced an agreement reached with legislative leaders on ethics reform.  The Clean Up Albany Act of 2011, which has yet to be released, covers a number of areas including lobbying, financial disclosure and creates the Joint Commission on Public Ethics which will replace the Commission on Public Integrity.

More to follow!

Some stories about public campaign financing get a visceral response.  For example, how many public dollars are distributed to candidates during an election and how much of that money is not being recovered after the election is over?  The public’s investment in campaigns doesn’t end with the matching rates or provisions for “bonus” funding that yield payments to candidates.  Provisions for repayment, and the administrative tools and procedures used in securing repayment, are just as fundamental in making a reform cost-effective – and maintaining public support.

Earlier this year an appellate court ruling (Fields v. NYC Campaign Finance Board) diminished the New York City Campaign Finance Board’s ability to hold candidate’s personally liable for public funds repayments.   When this kind of constraint on recoveries at the “back-end” is coupled with limits on the government’s “front-end” ability to target public funds to candidates most in need (as the U.S. Supreme Court may soon decide), the visceral swing is against public financing.

How will reform advocates find a way forward?  In today’s New York Law Journal, we offer some navigational aids (at least for New York City).

Last week a decision issued by a US District Court in Virginia made headlines across the country.   The Court in U.S. v. Danielczyk struck down the 100-year old federal ban on corporate contributions.  One of the more eyebrow raising facts of the decision was that it never discussed or even cited to FEC v. Beaumont, the US Supreme Court decision issued in 2003 which upheld the ban on corporate contributions.  Indeed, nor did the Government cite to the case in its brief.

Now comes word (via the Election Law Blog) that the Judge has issued an order asking the parties to submit briefs on whether the Court should reconsider its ruling in light of FEC v. Beaumont.  The order also cites to Agostini v. Felton, 521 U.S. 203 (1997) which held that “if a precedent of [the Supreme Court] has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.”

Stay tuned.

As another New York state legislative session ticks down to the inevitable deal-making climax, campaign finance reform advocates may once again begin to echo that old Brooklyn Dodgers refrain: “wait until next year!” Despite earlier high hopes, inaction seems likely as has been true for decades.

But things may soon be different in New York City. While the Campaign Finance Board (CFB) currently has its hands full in crafting rules to implement independent expenditure disclosure requirements, another clock has been ticking. The Supreme Court will soon rule on the matching funds trigger under Arizona law. And while not likely on every New Yorker’s mind, the question being asked is whether the holding will be broad enough to undercut the bonus matching funds trigger provisions in New York City’s law.

For speculation sake, let’s posit that the Supreme Court holding casts serious doubt on the constitutionality of NYC’s bonus provisions. The additional public funding the law currently provides for participating candidates opposed by high-spending nonparticipants would evaporate. The remaining triggers for and levels of public financing would then need to be reexamined and potentially recalibrated. An overarching question looms: how to ensure that the NYC program remains effective and cost-effective.

No proposals have been made in specific anticipation of this possible problem. Rather, current legislative proposals would curb the cost of public financing more generally. Seven City Council members are currently sponsoring a bill to reduce the matching rate from 6:1 (up to $1,050 in public funds per contributor) to 2:1 (up to $350 in public funds per contributor), in election years in which the Mayor’s office has projected a budget deficit of $2 billion or more.

In its September 2010 report, the CFB made four different legislative proposals for adjusting public financing payouts, three of which would reduce payments:

• Making it more difficult for a candidate to qualify for maximum public funding against a “nominal” opponent

• Decreasing the maximum public funds payable in special elections

• Increasing the amount a non-participating candidate must raise or spend before a publicly financed opponent may qualify for an increased (“bonus”) matching rate (modifying the kind of provision now at issue now before the Supreme Court).

The fourth CFB proposal, potentially resulting in increased payments, would reduce the threshold of contributions candidates for mayor and other citywide offices would need to raise to be eligible for public funds.

A recalibration of payment formulas is only one element of changes that may be desirable to enhance cost-effectiveness. Attention also must be paid to provisions and administrative safeguards supporting the City’s recovery of matching funds. We’ll have more to say on that topic in the coming days.

Last week Chicago Mayor Rahm Emmanuel signed three Executive Orders creating new ethics restrictions applicable to Chicago City employees.  The Mayor also signed three Executive Orders originally issued by former Mayor Daley.

Executive Order 2011-1 prohibits new appointees from lobbying City government for two years after leaving their government position. Additionally, EO 2011-1 prohibits lower level employees from lobbying the departments or agencies in which they worked and prohibits appointees to boards and commissions from lobbying the board or commission on which they sat.

Executive Order 2011-2 prohibits registered City lobbyists from making political contributions to the Mayor.

And Executive Order 2011-3 protects City employees against pressure to give gifts or make political contributions to their superiors by prohibiting gifts and contributions from such employees.  The EO also prohibits any contributions from City employees or appointees to the Mayor or his political committee.

The three re-issued Executive Orders on ethics are: 1) Executive Order 2011-4, which bans political contributions to the Mayor from the owners of companies that do business with the City; 2) Executive Order 2011-5, which requires every City employee to report wrongdoing to the Inspector General; and 3) Executive Order 2011-6, which requires City employees to comply with the hiring oversight rules which prohibit political considerations in hiring decisions.

The City of Newark has had a contractor pay-to-play executive order in effect since 2007, which specifically excludes redevelopment contracts.  All that is about to change.  In one week, a new redeveloper pay-to-play ordinance will take effect in Newark. 

The Newark redeveloper pay-to-play ordinance has been under consideration for quite some time, but was not passed by the City Council until May 4, 2011. 

The ordinance will take effect on Thursday, June 2, 2011 and bars redevelopers from contracting with the City of Newark if the redeveloper has made or solicited a contribution greater than $300 to a covered recipient within the year period prior to the contract. 

The ordinance defines the term “redeveloper” to include: any person or entity entering into a contract with the city, or with another redeveloper, for the rehabilitation of any area in the City of Newark.  The definition includes: those with a 10% or greater ownership in the entity, partners, officers, subsidiaries, and the spouses and adult resident children of the 10% or greater shareholders, partners and officers.

Covered recipients include:   

• A holder of or candidate for Newark elective office;
• A Newark municipal political party committee;
• An Essex County political party committee; and
• Any PAC that regularly engages in the support of Newark municipal campaigns.

The ordinance also contains a $3,000 aggregate limit on contributions to covered recipients during the four-year municipal election cycle.

The Newark redeveloper ordinance permits covered persons and entities to make and solicit contributions up to the reduced limits set forth above both during the one-year period prior to entering into a contract with the City of Newark and during the term of any such contract.

Unlike many contractor pay-to-play ordinances, not only does the Newark redeveloper pay-to-play ordinance cover contributions by the persons and entities listed above, but the ordinance also covers contributions by certain professionals, consultants and lobbyists contracted or employed by the business entity ultimately designated as the redeveloper.