Citizens United and the Surge of Political Non-Profits

It has been five years since the U.S. Supreme Court decided Citizens United v. FEC.

When the Supreme Court first decided the case, which allows individuals, corporations and special interest groups to spend unlimited amounts on independent expenditures, many thought that corporations would become more engaged in the political process. Although some corporations have done just that, for-profit corporations do not appear to be jumping on the independent-expenditure bandwagon. Perhaps they are afraid of offending their shareholders, customers and clients with their political message – an unknown risk that Target took within months of the Citizens United decision.

Despite the fact that for-profit corporations seem to be reluctant about engaging in the political process, in the five years since Citizens United was decided, certain non-profit corporations have become more engaged. Although the Internal Revenue Code prohibits 501(c)(3) organizations from participating in any political activity, the law does not prohibit other non-profit corporations from voicing their partisan political views. In fact, the law permits 501(c)(4) social-welfare groups, 501(c)(5) labor unions and 501(c)(6) trade groups to participate in the political process provided it is not their “primary activity.”

The IRS has yet to define “primary activity,” but has demonstrated an apparent tolerance for a 49% threshold, which means that certain non-profits may be spending as much as 49% of their time on political activity without being subject to the same disclosure requirements as true political organizations. This discrepancy has led to these groups being labeled as “shadow organizations” and calls upon the IRS to take action. The IRS issued its first report on 501(c)(4) political activity over a year ago, but little has been done in the way of reform. In fact, the IRS itself has revealed that “it has only begun auditing 26 organizations specifically for political activity since 2010 [which] represents a tiny fraction of the more than 1 million nonprofits regulated by the agency.”

While the IRS takes its time auditing “political” non-profits, many groups who want to become involved in the political process find that forming a 501(c)(4) is the best way to achieve their goals. Although the organization will be subject to tax on its political activity, the organization is not required to reveal its donors to the public and also can engage in issue advocacy, lobbying and other activity to benefit the “social welfare” of the community without that activity counting toward its “political activity” threshold.

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.

Contributions by New Jersey Government Contractors Increased Dramatically in 2013: Will Pay-to-Play Reform Follow?

Late last month, ELEC issued its 2013 Annual Report, which includes an analysis of the Pay-to-Play Annual Disclosures (Form BE) filed by New Jersey government contractors. Although New Jersey has stringent pay-to-play restrictions in effect at virtually all levels of government, ELEC reported that contributions by public contractors jumped to $10.1 million in 2013 (up more than $2 million from 2012). Despite this increase, ELEC advised in its May ELEC-Tronic Newsletter that “overall contributions still are down 39 percent from a peak of $16.4 million in 2007.”

Given that contributions by New Jersey government contractors increased significantly in 2013, it raises the question of whether pay-to-play restrictions are working. Although the law has not changed in nearly five (5) years, changes may be taking place on the local level to spur an increase in giving. Perhaps more local government entities are moving to a “fair and open process”, which allows vendors to contribute up to the full limits of New Jersey campaign finance law during the term of a contract. Perhaps more local government entities are adopting less stringent pay-to-play restrictions, which contain higher contribution limits during both the pre-contracting period and during the term of a contract itself. Perhaps the increase is simply due to the fact that contributions to legislative candidates generally fall outside the scope of pay-to-play restrictions and 2013 was a big legislative election year. Or, perhaps the increase is based on the fact that more government contractors have become aware of their filing obligations. No matter the reason, there is still a push for pay-to-play reform in the Garden State. Despite the fact that legislation was introduced in the New Jersey Senate over a year ago, New Jersey’s statewide pay-to-play restrictions have not changed since 2008.

Now that the 2013 legislative elections are over, will 2014 be the year for reform?

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.

McCutcheon v. FEC: the Potential Impact on Aggregate Contribution Limits Under Local Pay-to-Play Ordinances

Last week the United States Supreme Court heard arguments in McCutcheon v. FEC, a challenge to the constitutionality of aggregate contribution limits under federal campaign finance law.

In addition to imposing base contribution limits, federal campaign finance law imposes an aggregate individual biennial limit of $123,200.  Out of this $123,200, an individual may not contribute more than $48,600 to candidate committees or more than $74,600 to any other federal committees (out of this $74,600, no more than $48,600 may be given to committees that are not national party committees).

Last week’s oral argument centered around whether aggregate contribution limits are justified by the need to prevent undue influence in the political process or are contrary to First Amendment rulings constraining the government’s ability to impose restrictions aimed at equalizing participation in federal elections.

If the Supreme Court holds that aggregate contribution limits are unconstitutional, the ruling will likely also be felt at the state level.  Currently, eight (8) states, including New York, impose analogous aggregate contribution limits on a single contributor’s contributions to multiple recipients during a specified time period.  What is less clear is how the McCutcheon ruling might impact aggregate contribution limits under local pay-to-play ordinances in New Jersey.

Many New Jersey local pay-to-play ordinances place an aggregate limit on the amount that a “business entity” may contribute to a group of covered political recipients during a specified time period.  (The definition of business entity may encompass one or more contributors, depending on the complexity of the entity and specified relationships.)  Putting aside issues associated with subjecting multiple contributors to the same aggregate limit, the question posed by a potential McCutcheon holding is whether there is a significant constitutional distinction between an across-the-board aggregate limit and an aggregate limit imposed solely as a condition of eligibility for a government contract.

Given that these local aggregate contribution limits are designed solely to prevent corruption, or the appearance thereof, in the government procurement process, these aggregate limits may withstand constitutional scrutiny regardless of the outcome in McCutcheon.  In other words, the local pay-to-play aggregate limits may be constitutionally distinct because businesses and individuals have a choice between engaging in business with the government (thereby voluntarily subjecting themselves to additional limitations meant to ensure the integrity of those business dealings) or fully participating in local elections by making bigger contributions to more recipients up to higher contribution limits.

A different federal case, Wagner v. FEC, which challenges the federal ban on contributions by government contractors may, in the end, prove more relevant to the continuing viability of the local aggregate limits and other features of pay-to-play laws.

 

In Proposed Amendments to Pay-to-Play Rules, the New Jersey State Investment Council Explains Indirect Violations

Comments are due today on proposed amendments to the New Jersey State Investment Council (“SIC”) Pay-to-Play Rules.   One of the proposed changes addresses “indirect violations” of the rules.

Currently, the rules prohibit covered investment management firms, investment management professionals and third party solicitors from “directly or indirectly, through or by any other person or any means whatsoever, do[ing] any act” which would constitute a violation of the contribution restrictions set forth in the SIC rules.

The current rules do not define “indirect” violation.  The proposed amendments include a non-exclusive list of indirect violation examples:

  • Having a family member or other person make a political contribution to a covered recipient;
  • Making a contribution to a federal party committee or other political committee or organization “for the purpose of influencing State or local elections” governed by the SIC rules; and
  • A third party solicitor making political contributions in order to encourage the engagement of an investment management firm for which the lobbyist is not directly soliciting business from the Division of Investment.

Although the SIC has already addressed contributions by family members in a clarification statement, the coverage of contributions to federal committees as indirect violations appears to depart from prior SIC policy.

Perhaps the proposal is intended to cover federal contributions only when the intent to circumvent the SIC restriction is unambiguous.  In addition to potentially complex evidentiary issues, a government regulation of political activity that turns on an assessment of corporate intent poses a thorny set of constitutional issues.

 

ELEC Issues August Newsletter

The New Jersey Election Law Enforcement Commission has issued its August newsletter. The newsletter discusses the role of public financing in New Jersey’s gubernatorial election, trends on independent spending by outside groups and fundraising by the “Big Six” Committees in the second quarter of 2013. The newsletter also discusses the pending appeal in Wagner v. Federal Election Commission (a challenge to the long-standing federal contractor ban) and the impact that the ultimate decision in that case may have on New Jersey’s own pay-to-play laws.

The U.S. Court of Appeals for the District of Columbia (DC) is scheduled to hear oral arguments in Wagner v. FEC on Monday, September 30, 2013.

Potential Pitfalls of Volunteer Employee Political Activity

As the New Jersey 2013 gubernatorial and legislative general election season kicks into high gear and as the State is preparing for a special primary and general federal election, New Jersey employees may get caught up in the momentum and decide that they want to volunteer their time or services for a campaign.

True volunteer activity that takes place outside of working hours and without the use of company resources may not be of concern to an employer, but if an employee volunteers for a political campaign during working hours and uses company resources, the company could be making an in-kind contribution to a campaign.  This could be of particular concern on the federal level where corporate contributions are prohibited or in New Jersey where stringent pay-to-play restrictions are in effect and where certain companies (i.e., banks, utilities, insurance companies and casinos) are subject to the regulated industry ban.

For example, if an employee decides to host a fundraiser for a New Jersey gubernatorial candidate and uses company resources (email, letterhead, staff, copy machines, postage, etc.) in connection with his or her individual political activity, the company could be making an in-kind contribution in excess of the $300 per election limit applicable under New Jersey’s Executive Branch pay-to-play restrictions.  Similarly, if an employee decides to volunteer his or her time for a candidate for US Senate during working hours and spends more than 1 hour per week or 4 hours per month on his or her volunteer activities, the employer could be making a prohibited in-kind contribution to the US Senate campaign.  Further, if the employee decides to engage in fundraising activities and uses company resources in connection with his or her efforts, the employee could be subjecting his or her employer to financial liability in the form of civil penalties.

Although employers need to recognize that their employees have a First Amendment right to engage in political activity, employers should also be proactive during this election season to make sure their employees are properly educated on the potential pitfalls of their volunteer political activity.

New Bergen County Pay-to-Play Ordinance Requires County Vendors to File “REVUE 2” Form Today

Bergen County has now issued updated Political Contribution Disclosure Forms with which County vendors must comply. The “Sunshine” Form must be submitted with each proposal and the “REVUE 2” Form must be submitted to the County on January 1st and July 1st of each year. Bergen County vendors should, therefore, determine whether they are required to submit a “REVUE 2” Form today.

The new forms implement Bergen County’s new pay-to-play ordinance. Although the new Ordinance (#13-06) was passed 6-1, the ordinance had to overcome a number of vetoes by the County Executive in order to become law.

The new ordinance contains reduced contribution limits of $300.00 per election cycle only for candidates for and holders of Bergen County-wide office (i.e., Freeholder, Sheriff, Clerk, Surrogate and County Executive). The new ordinance applies a $2,600.00 aggregate annual limit only to contributions to candidates for and holders of Bergen County-wide office . It is not clear, however, under the ordinance whether the aggregate limit applies to pre-effective date contributions covered under the previous version of the Bergen County pay-to-play ordinance.

Some have criticized the new ordinance for allowing contributions of up to $5,200.00 per calendar year to a Bergen County party committee (the old ordinance contained a limit of $300.00 per calendar year). But this criticism ignores that many vendors will choose to contribute no more than $300.00 per calendar year to a Bergen County party committee in order to preserve their legal eligibility for state government contracts.

Although the County is currently requiring vendors to submit these new forms, questions remain about the content of the required disclosures, which relate back to interpretation of the ordinance.

IRS Goes Political?

Citizens United helped spur the formation of IRS 501(c)(4) social welfare organizations that became engaged in independent political activities.  Yesterday, the Treasury Inspector General for Tax Administration issued a report addressing the recent controversy regarding the review process for certain 501(c)(4) tax exemption applications.

An organization may qualify for 501(c)(4) status if its primary purpose is to engage in social welfare activity, which is broadly defined.  These organizations may engage in unlimited lobbying efforts, as well as political activity, provided political activity is not their primary purpose.  The report concludes that IRS employees used “inappropriate criteria” to screen political advocacy groups and those groups with keywords such as “tea party” or “patriot” in their names faced months of delays in getting their applications approved.

With this latest controversy, it would appear there are at least three major issues receiving considerable attention as the role of 501(c)(4) organizations in American politics continues to evolve:

  1. Should donations to entities be subject to public disclosure requirements when they engage in advocacy in relation to elections?
  2. Should standards for tax exempt status be clarified or revised with respect to the level of political activity that is permitted?
  3. What new safeguards are needed to ensure that IRS personnel do not bring politics into the administration of tax laws?