Will 2015 be The Year for Pay-to-Play Reform in New Jersey?

New Jersey’s pay-to-play laws have been described as a “dizzyingly complex array of statutes, ordinances and executive orders.” New Jersey currently has different laws in effect that apply to State government contracts, State redevelopment agreements, county, municipal and legislative contracts, Board of Education contracts (where Boards of Education are receiving state aid) and a statewide disclosure law that applies on both a pre-contract and annual basis. This list of laws also does not include the hundreds of local ordinances that are currently in effect at the municipal and county levels of government in New Jersey, nor does it include municipal redevelopment ordinances, (which may regulate political activity by redevelopers and their consultants) and land use ordinances (which may cover those seeking land use approvals in connection with development projects).

Although ELEC has been pushing for reform for years, with the recent Atlantic County pay-to-play decision, 2015 may just be the year that existing laws are streamlined to eliminate the multifarious patchwork of ordinances, which currently vary from locality to locality. Until that time, however, government contractors need to stay on top of the varying (and sometimes conflicting) labyrinth of laws, including compliance with ELEC’s upcoming Pay-to-Play Annual Disclosure filing requirement.

Christie, Cowboys, and Conflicts: An Overview of New Jersey’s Ethics Rules

There’s a controversy brewing over Governor Chris Christie’s attendance at Sunday’s Dallas Cowboys game, which, according to published reports, was paid for by the Cowboys owner, Jerry Jones. Public officials are generally prohibited from accepting “gifts,” though the laws vary by state. And this isn’t a new issue – you may recall that back in 2010 then-Governor David Paterson was fined $62,000 by the New York Joint Commission on Public Ethics for accepting tickets from the New York Yankees to Game One of the 2009 World Series. So let’s take a look at New Jersey’s ethics rules.

The New Jersey Conflicts of Interest Law prohibits any State official, including any State officer, employee, special State officer and member of the Legislature, from soliciting or accepting anything of value, including a gift, “which he knows or has reason to believe is offered to him with intent to influence him in the performance of his public duties and responsibilities.” There are exceptions to this rule; for example, it permits State officers to receive compensation for published books and reimbursement of reasonable expenditures for travel or subsistence and allowable entertainment expenses associated with attending an event in New Jersey. The State Ethics Commission, which enforces the gift and conflicts-of-interest laws, enforces a zero-tolerance policy against a government official’s acceptance of gifts related in any way to the officer’s official duties.

But a different law applies to the New Jersey Governor. Under the State’s Code of Conduct for the Governor, adopted by Executive Order 77 (McGreevey), the Governor is prohibited from soliciting or receiving any gift intended to influence him in the conduct of his public duties. The Governor may, however, “accept gifts, favors, services, gratuities, meals, lodging or travel expenses from relatives or personal friends that are paid for with personal funds.” In other words, Governor Christie acted within the bounds of the Code of Conduct for the Governor if Jerry Jones is a personal friend and Jones personally paid for the expenses. The Governor may also attend “any function and accept food and beverages and related privileges if his attendance at the event furthers a public purpose.” Thus, because gift rules may vary (even within the same branch of government), whether a particular government official or employee complied with respective gift rules may not only depend upon applicable law, but may also depend upon all relevant facts and circumstances.

Pay-to-Play Ruling on Atlantic County Ordinance Turns on the Use of the Word “Any”

Atlantic County is one of three counties in the State of New Jersey with a stringent county pay-to-play ordinance in effect. Like many local pay-to-play ordinances, the Atlantic County ordinance covers contributions to candidates for or holders of county office. The goal is to limit political contributions made by “those seeking or currently performing business with the County,” so as to allay the “reasonable concerns on the part of taxpayers and residents as to their trust in government contracts.”

By its express terms, the Ordinance covers contributions made “to any campaign committee of any candidate for elective County office or to the current holders of any elective County office.” The use of the phrase “any campaign committee” raises the question of whether a contribution to a candidate committee for non-county office is covered by the ordinance when the candidate is also a holder of an Atlantic County office. Last week, a Superior Court judge ruled that the answer is “yes.” In his opinion, Judge Julio Mendez held that the use of the word “any” means that a contribution to the State Senate campaign committee for a sitting Atlantic County Sheriff is covered under the Ordinance even though the sitting County Sheriff plays no role in the award of county contracts and even though the office of State Senator is not an Atlantic County office.

Although the court’s ruling was specific to the Atlantic County Ordinance, the interpretation may spread to other counties and municipalities with local ordinances in effect. Thus, before a vendor makes a contribution to a sitting elected official seeking election to another office, the vendor must determine whether a local pay-to-play ordinance is in effect that may potentially cover the contributions to a candidate committee for that “other” office.

Only in New York, New York

Conventional wisdom holds that campaign finance reform is elusive.  At both the federal level and in many states, the pace of enactment tends to be measured in decades.

New York City is an exception.  For over 25 years, reforms have been enacted, amended, refined, bolstered, enhanced, re-worked and re-formed over and over, and then some more.    Recent developments again illustrate this remarkable dynamic.

Right on schedule, the New York City Campaign Finance Board (CFB) today issued its quadrennial report, “By the People: The New York City Campaign Finance Program in the 2013 Elections.”  The report contains more than a dozen legislative proposals.  Lo and behold, three of these were signed into law last week!

  • Local Law No. 40 requires public communications produced by NYC candidate committees to identify the authorizing candidate or committee.
  • Local Law No. 41 adds numerous public disclosure requirements for independent expenditures.  The new law requires independent spenders to disclose their owners, officers, and board members, as well as contributors of $25,000 or more to contributing entities from which they have received $50,000 or more.  Also, “paid for by” disclaimers on independent public communications will now include owners, CEOs, and top three donors, in addition to identification of the independent spender.
  • Local Law No. 43 trims requirements for the CFB’s printing and mailing of voter guides to NYC voters.

The CFB report details other proposals, which include:

  • Issuing a limited amount of public funds to candidates prior to their obtaining a place on the ballot
  • Streamlining criteria for lifting the public funds payment cap in competitive elections
  • Deeming contributions bundled by persons doing business with the City as ineligible for public matching funds
  • Banning candidates from accepting contributions from labor unions and political committees.

That last proposal is a decade-old warhorse and quite ambitious constitutionally for candidates not receiving public financing.

One issue the CFB kicks down the road for further study is possibly pairing an increase in spending limits for publicly financed candidates with reduced contribution limits (presumably for all candidates).  One might consider a study oriented toward the enactment of new limits on candidates as out-of-step with the trend toward limits-free independent spending.

Finally, today’s New York Times coverage reminds us again that New York City’s campaign finance system is “often viewed as a national model.”  While NYC’s reforms perhaps serve as a model of what can be done, its impulse for perpetual reform doesn’t actually seem to be catching on elsewhere.

Indeed, when it comes to campaign finance reform, that old Sinatra refrain falls flat: the fact that you can make it in New York, New York simply does not prove you can make it anywhere else.

District Judge Permanently Enjoins PA Law that Prohibited Corporate Contributions to IE Committees

On Wednesday, U.S. District Judge William Caldwell permanently enjoined enforcement of Pennsylvania’s prohibition on campaign expenditures by banks, corporations or unincorporated associations (such as labor unions) as against contributions these entities make to independent expenditure-only committees. See General Majority Pac v. Aichele,  No.: 1:14-CV-332 (M.D. Pa. Aug. 13, 2014). Thus, Pennsylvania now joins its sister states in removing all limits on corporate contributions to Super PACs.

The DISCLOSE Act: Fantasy or Future?

Following a wave of judicial decisions that have cleared the way for more soft money in politics, federal legislators have continued to press for the passage of laws creating more stringent regulations on donor disclosures and transparency in political contributions.

The Democracy Is Strengthened by Casting Light On Spending in Elections (DISCLOSE) Act was introduced in Congress in 2010 and 2012, but the legislation was twice defeated after falling short of overcoming a Republican-led filibuster.  A third attempt at passing disclosure legislation, the DISCLOSE Act of 2014, was introduced by Senator Sheldon Whitehouse of Rhode Island and is currently being considered in the Senate Rules Committee. A hearing was held last week.

“DISCLOSE 2014” would:

  • Broaden the definition of what is a reportable “independent expenditure,” by treating the functional equivalent of express advocacy as an independent expenditure ;
  • expand the time periods during which a communication would be considered a reportable “electioneering communication,”
  • require disclosure of donors underlying large transfers to political spenders,
  • require that covered organizations (including corporations, labor unions and 501(c)(4) and 501(c)(6) nonprofit organizations) that spend more than $10,000 or more on election ads publicly identify their donors, and
  • impose new required disclaimers for political advertisements.

The bill faces the hefty obstacle of garnering bipartisan support to become federal law.  Nonetheless, DISCLOSE 2014 could serve as a model for state and local jurisdictions. While the Supreme Court (in decisions such as Citizens United and McCutcheon) has made it easier to generously fund political and issue advocacy organizations, the Court has also emphasized that disclosure requirements are both constitutional and beneficial to a healthy democracy.  Accordingly, proponents of enhanced campaign finance transparency might find that the last bastion of reform lies in disclosure requirements like those introduced in DISCLOSE 2014.

A Legislative Scorecard for the New York City Campaign Finance Board

The World Cup is over.  Quadrennial hopes and dreams next turn to the post-election report (PER) the NYC Campaign Finance Board (CFB) must submit to the Mayor and City Council on or before September 1, as it has every four years since 1990.  The PER will include the CFB’s recommendations for legislative changes to the City’s campaign finance laws.  Over the decades these proposals have spurred many changes to those laws.  At the risk of mixing sports metaphors, below we offer a scorecard for the legislative proposals made in the last CFB PER, issued in 2010.

2010 Proposal Score Analysis
Mandatory disclosure of independentexpenditures Home Run Achieved through a 2010 City Charter referendum, the new law brought extensive CFB regulations and a new regulated community/public information resource.  In 2013 the NYC Council trimmed disclosure for intra-organization communications; new proposed legislation (proposed Int. No. 148-A) would expand public identification of owners, officers and funding sources of independent spending entities.
Require that campaign communications identify source of funding Double The same Charter referendum required independent spenders be identified on their public communications.  A 2014 NY State election law amendment includes a similar requirement.  New Council bills would go further, requiring that authorizing candidates be IDed on their communications (Int. No. 6) and that IE communications list their top five donors (proposed Int. No. 148-A).
Refine definition of “doing business” with NYC Whiff The CFB proposed extending the reduced “doing business” contribution limits to placement agents, permissible contribution source entities, associated political committees, unions engaged in collective bargaining with the City, and, possibly, also to family members of those listed in NYC’s Doing Business Database (DBDB).
Increase opponent financing thresholds to qualify for maximum public fundingand bonus public funding Called on Account of Weather In 2011, the U.S. Supreme Court struck down public financing triggers based on opponent spending levels.  Pursuant to a 2013 Second Circuit decision, the CFB no longer enforces these provisions.
Prohibit contributions by organizations (labor unions, political committees) Old Timers’ Day Not Scheduled The CFB has made similar proposals in each PER since 1998.  It hit a solid double back in 2007 when the City Council banned contributions by partnerships and LLCs.
Reduce public financing for special elections; require debates for borough president candidates; repeal requirement that publicly financed candidates submit receipts for personal financial disclosures; mandate candidates and treasurers attend CFB trainings Never Came to Bat Which, if any, will be in the 2014 PER lineup?

 

Vermont Right to Life, Inc. v. Sorrell: Independence Required

Since the Supreme Court found in Citizens United that “the absence of prearrangement and coordination . . .alleviates the danger that expenditures will be given as a quid pro quo for improper commitments from the candidate” – a premise that many would disagree with – commentators have bemoaned the lack of enforcement of coordination standards on the federal level.  The Court’s reasoning implicitly requires enforcement of coordination rules and without that, SuperPACs are having their cake and eating it too. But perhaps not on the state level.

A couple of days before Independence Day the Second Circuit issued a decision under Vermont law that may put some brakes on activity by Hybrid PACs –  a combination of an independent expenditure-only committee (SuperPAC) and a political action committee (PAC).  Hybrid PACs stem from Carey v. FEC,  which found that a committee could establish separate accounts to: 1) solicit and spend unlimited funds for independent expenditures; and 2) solicit and spend permissible funds on direct contributions to political candidates and/or political parties.  As a result, the independent committee could receive unlimited contributions.

The VRTL case involves three affiliated organizations – VRCL, a 501(c)(4), VRLC-FIPE, a SuperPAC and VRLC-PC, a PAC.   While the SuperPAC and the PAC had separate bank accounts, the 2d Circuit found that because the two were “enmeshed financially and organizationally” contribution limits applied to the SuperPAC. Specifically, the court found that:

  • It was insufficient to merely state in organizational documents that a group is an independent expenditure-only group – some “actual organizational separation” must exist; and
  • Whether a group is functionally distinct may depend on factors such as the “overlap of staff and resources, the lack of financial independence, coordination of activities and the flow of information between the entities”.

In other words there must be a firewall.  And firewalls are not a new concept – FEC rules allow for a safe harbor in a “common vendor” scenario where a firewall exists.  The decision is significant in that it raises questions:

If the SuperPAC and PAC had maintained a firewall or established a policy permitting “internal coordination” solely for the purpose of avoiding assistance to the same candidates, would the burden of proof shift to the state to demonstrate that such procedures had not been followed?

Would a different level of scrutiny apply if the question was not whether the facts required imposition of contribution limits on a SuperPAC’s receipts, but rather whether the SuperPAC’s spending would be treated as coordinated with candidates? In other words, could coordination between a PAC and a SuperPAC ever give rise to a presumption that the SuperPAC’s spending was coordinated with candidates the PAC is supporting?

These are questions that may have to be answered as states and localities define and enforce their coordination standards.

SEC Charges Private Equity Firm with Pay-to-Play Violations

For the first time since passing Rule 206(4)-5, the Securities and Exchange Commission (SEC) has charged a Philadelphia-area private equity firm with violations of the pay-to-play rule.  The case concerns contributions made to a Philadelphia mayoral candidate and to the governor of Pennsylvania.

The firm –TL Ventures Inc. – has been a limited partner with the Pennsylvania State Employees’ Retirement System since 1999 and the Philadelphia Board of Pensions and Retirement since 2000. In 2011, a “covered associate” made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania. According to the NY Times, the contributor was a co-founder of the firm.

Accordingly, the SEC found that the firm violated SEC Rule 206(4)-5, which prohibits investment advisers from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees (i.e. “covered associates”) make a campaign contribution to a “government entity”. As a result, TL Ventures, entered into an Order Instituting Administrative and Cease-and-Desist Proceedings which requires it to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000.

A couple of points to note:

  • Rule 206(4)-5 applies to investment advisers even if the government entity was already invested in the covered investment pool at the time of the contribution. As noted above, Rule 206(4)-5 was passed in 2010, ten years after the partnership began. There is no exemption for investments existing at the time of the passage of the rule.
  • The firm obviously did not receive exemptive relief from the SEC (which the SEC granted in 2013 to a different investment adviser). Rule 206(4)-5(e) provides that the SEC can exempt an investment adviser from the time-out provision upon consideration of several factors including, whether the exemption is in the public interest and whether the IA:
    • before the contribution was made, adopted and implemented policies and procedures reasonably designed to prevent violations of the rule;
    • prior to or at the time of the contribution had actual knowledge of the contribution;
    • has taken all available steps to cause a return of the contribution; and
    • has taken such other remedial or preventive measures as would be appropriate under the circumstances

The latter point in particular illuminates the value of an appropriate compliance program. The critical first question? Whether employees – including co-founders of the firm – are subject to the law.

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