Pay-to-Play Lessons from New Jersey’s State Investment Council Rules

New Jersey is often thought of as the “pay-to-play” state – primarily because we have five separate statewide pay-to-play prohibition laws in effect (covering state procurement, county procurement,  local procurement, state redevelopment projects and the investment of state funds). We also have one statewide disclosure law (applying on both a pre-contract and an annual basis) and hundreds of local pay-to-play ordinances (covering local government contracts, local redevelopment contracts, land use approvals and board of education contracts).

Until recently, most of the discussion on pay-to-play restrictions in New Jersey focused on state, county and local restrictions applicable to procurement contracts. Now, the focus seems to be shifting to New Jersey’s State Investment Council Rules.

Yesterday, the State of New Jersey Department of Treasury issued an audit confirming that whether a particular individual is covered under the State Investment Council rules may very well depend on whether the individual falls within the definition of an “investment management professional.” The results of the audit also raise the question of whether pay-to-play rules serve their intended purpose of preventing undue influence in the award of government contracts when many of the rules primarily rely on self-disclosure by the company or firm seeking government businesses.

Unlike other pay-to-play rules, the State Investment Council rules provide limited exemptions when the investment management firm demonstrates in writing that the violation of the rule was unintentional and inadvertent. The SIC has the discretion to grant the exemption if it determines that the beneficiaries of the Pension and Annuity Funds, the State taxpayers and the public are best served by such an exception.

The discretion afforded to the SIC under its pay-to-play rules raises the question of whether New Jersey’s other pay-to-play restrictions should be amended to include similar exceptions. The exception should not be a blanket “get of jail free card”; rather, the exception should allow the contracting government entity to exercise sound business judgment to evaluate whether the taxpayers are better served by terminating a contract with a particular vendor or whether the taxpayers would be better served by allowing that vendor to complete the contract at issue.

ELEC Lobbying Deadlines Approach

On Monday, February 16, 2015, businesses, non-profits and special interest groups that paid more than $2,500 in 2014 to make lobbying communications to New Jersey State government officials, directly or indirectly (i.e. “grassroots”), will be required to file Annual Reports with the Election Law Enforcement Commission (“ELEC”). Lobbying activities in New Jersey have been becoming more extensive with over 2,000 entities reporting more than $62 million in lobbying communication expenditures in 2013.

An understandably sensitive disclosure area is the category of salaries of “in-house” government affairs agents. Employers therefore should be aware that only the portion of an agent’s salary attributable to making lobbying communications to New Jersey State (not local) government officials is reportable. Thus, the figures reported as salaries typically reflect only a portion of an entire salary and, because the fraction or percent used to arrive at that portion is not disclosed, the report does not result in public disclosure of an agent’s full salary but only the portion specifically attributed to lobbying in New Jersey. However, it is important to maintain good records of the agent’s time spent undertaking lobbying activity so that in the event of an ELEC inquiry the reported salary figure can be defended.

A separate requirement is the reporting of “benefit passing” activity, which is typically gifts or reimbursements made to State officials by lobbying entities. If a lobbying entity provided more than $200 during 2014 to a State government official, or more than $25 in a day, written notice that the recipient will be reported on the lobbying entity’s Annual Report must be provided to that recipient by Monday, February 2, 2015. “Benefit passing” activity has sharply declined from a peak totaling over $163,000 in 1992 to only $4,168 reported in 2013.

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.

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?

Court Issues McCutcheon V. FEC; Strikes Down Aggregate Limits

Today the Supreme Court of the United States issued its decision in McCutcheon v. FEC.  The decision, which was 5-4 and authored by Chief Justice Roberts, struck down the aggregate limits under the Federal Election Campaign Act. Specifically, the Court found that 2 U.S.C. section 441a(a)(3)(A), which limits individual contributions to federal candidates and party committees over the course of a two-year election cycle (i.e. the biennial limit) was unconstitutional because “aggregate limits do little, if anything, to address [the permissible objective of combatting corruption], while seriously restricting participation in the democratic process.” Justices Scalia, Kennedy and Alito joined in the majority opinion.  Justice Breyer authored the dissent.  Justice Thomas authored a concurrence.

The Court found that while the Court in Buckley “in three sentences” provides “some guidance”, because statutory safeguards against circumvention have been “considerably strengthened since Buckley was decided. . .the indiscriminate aggregate limits under BCRA appear particularly heavy-handed.”  Particularly the Court noted: 1) the 1976 FECA amendments that capped limits on contributions to political committees; 2) 1976 amendment that added an antiproliferation rule prohibiting donors from creating or controlling multiple affiliated political committees; 3) FEC regulations on the earmarking provisions of the FECA. The Court also noted distinct legal arguments that Buckley did not consider, including that the Court never addressed an overbreadth challenge in the specific context of aggregate limits.

In addressing the government interest in the case the Court again emphasized that “while preventing corruption or its appearance is a legitimate objective, Congress may target only a specific type of corruption – ‘quid pro quo” corruption.”

The Court noted Citizens United, and seems to dig in its heels: “As an initial matter, there is not the same risk of quid pro quo corruption or its appearance when money flows through independent actors to a candidate, as when a donor contributes to a candidate directly.”

The Court notably offers Congress suggestions: 1) targeted restriction on transfers among candidates and political committees; 2) strengthening FEC regulations on defining how many candidates a PAC must support in order to ensure that ‘a substantial portion’ of a donors contribution is not rerouted to certain candidate; 3) modified version of aggregate limits, such as one that prohibits donors who have contributed the current maximum sums from further contributing to political committees that have indicated they will support candidate to whom the donor has already contributed.  Indeed, like in Citizens United, the Court emphasized the role of disclosure because “disclosure of contribution minimizes the potential for abuse of the campaign finance system.”

Currently, eight states impose comparable aggregate contribution limits on a single contributor’s contributions to multiple recipients during a specified time period.  All of these limits are now vulnerable to challenge under the Court’s decision, though with the Court’s suggestions for reform, there is much room for debate.  As we previously discussed here and here the Court’s decision may have an impact in New Jersey and certainly will in New York.

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.