The Impact of Pay-to-Play Reform on NJ Legislative Elections

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.

Is Pay-to-Play Still Alive and Well in New Jersey?

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.

A Challenge to 501(c)(4) Organizations’ Political Activities

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.

Pay-to-Play Reform at Top of Christie Administration’s 2011 Best Practices Checklist for Municipalities

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.

IRS Issues Guidance on Hospitals and Political Activity

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.

Redeveloper Pay-to-Play is Coming to Newark

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.

Donations to Not-for-Profits and the Gift Tax

In today’s world, many not-for-profits work together in a web of different connected organizations to help achieve overarching objectives. Typically, these efforts may be serviced by a 501(c)(3) organization for education and training, a 501(c)(4) organization for social welfare/issue advocacy and a 527 organization for political activity.

Many not-for-profit organizations develop a name as a brand to help gain attention for their message and enthusiasm for their efforts. The brand helps attract support (i.e., raise money). But a brand name may also unintentionally create confusion for potential donors. Hypothetically speaking, a group that aims to “Build a Better World” may set up various connected not-for-profit organizations, beneficially labeled with the brand they share: a To Build a Better World Education and Training Fund (a (c)(3)), a To Build a Better World Action Fund (a (c)(4)) and a To Build a Better World Political Action Committee (a 527).

Confusion is a leading cause of inadvertent non-compliance. As the IRS begins to enforce the gift tax for donations to certain not-for-profit groups, donors will want to be sure of the implications of their donations. Donors need to be aware that, in contrast with donations to (c)(3) charitable organizations and 527 political organizations, donations to (c)(4) social welfare organizations may result in gift tax liability.

Thus, while branding may be a useful tool for carrying forward the organization’s message, clear distinctions should be drawn for potential donors. After all, it’s hard to build a better world, if unwelcome surprises from the IRS are sapping the enthusiasm of your strongest supporters.

2011 New Jersey Local Government Financial Disclosure Statements Due April 30th

New Jersey local government officials are required to file a Financial Disclosure Statement (“FDS”) by April 30th of each year.   Forms are filed at the local level of government and are subsequently forwarded to the New Jersey Department of Community Affairs.

Local government officials include: mayors, council members, county constitutional officers, freeholders, county prosecutors, members of local government boards and authorities and municipal attorneys. A roster of 2011 local government officials can be found on the New Jersey Department of Community Affairs’ website

The FDS requires disclosure of all sources of income, fees, honorariums, sources of gifts, reimbursements or prepaid expenses received by the local government official and/or his/her immediate family members during the previous calendar year. 

All sources of gifts, reimbursements and prepaid expenses with an aggregate value of $400 or more from any single source, excluding relatives, received by the local government official and/or his/her immediate family members must be disclosed. So, before offering to take a local government official and/or the official’s immediate family members out to a high priced ball game, a government vendor should decide whether the peanuts and crackerjacks are worth the public scrutiny.

New Jersey School Board Elections are Around the Corner

Most New Jersey school districts will be holding their annual school board elections on Wednesday, April 27th. The New Jersey Election Law Enforcement Commission reports in White Paper #21 that overall spending on school board elections has doubled during the past decade to $9.6 million.

Without regard to pay-to-play restrictions, an individual or corporation may contribute up to $2,600 per election to a candidate running for school board in New Jersey.  Vendors are required to disclose contributions greater than $300 per election to a school board candidate on certain pay-to-play disclosure forms. 

Although contributions to school board candidates are generally beyond the scope of New Jersey’s statewide pay-to-play prohibition laws, school boards are authorized to adopt local pay-to-play ordinances.  Thus, before writing a check (in any amount) to a school board candidate, vendors should determine whether a local ordinance is in effect.

ELEC Business Entity Annual Disclosures Due Today Will Be Publicly Available on April 6

As discussed here, today is the filing deadline for ELEC’s 2010 Business Entity Annual Report.  Forms must be filed electronically on ELEC’s website

In a press advisory issued today, ELEC advised that 2010 reports will be publicly available on ELEC’s website on Wednesday, April 6.  

ELEC’s website provides the public with the opportunity to manually search the 2010 Form BEs by entering business information, contract information, contribution information or recipient information into a series of fields.  ELEC also provides the public with the opportuntity to view and search all records by using the quick data download option.