On Monday, Governor Chris Christie conditionally vetoed Senate Bill No. 2430, which sought to expand New Jersey’s pay-to-play laws governing State investments. The current law requires external investment managers of State funds to disclose political contributions made to New Jersey candidates and committees. The now-vetoed bill would have required disclosure of political contributions to federal and non-New Jersey candidates and committees.
As the law currently stands, external investment advisors may contribute to federal groups such as the Republican Governors Associations, the Democratic Governors Association, and federal political action committees without having to disclose those contributions in connection with an investment by the State of New Jersey. If the bill had become law, managers of New Jersey investments would not only have been required to disclose contributions to these federal recipients if they wanted to remain eligible for State-investment opportunities, but their contributions to those federal recipients could have impacted the State’s inability to invest in their funds.
To illustrate the potential for a conflict of interests in the current state of the law, the press has pointed to the example of the State’s decision to invest $100 million with a firm whose managing director contributed $2.5 million to the Republican Governors Association, which was chaired by Governor Christie in 2014. But even if the bill had been signed into law, questions of its legality may have persisted. Under principles of federal preemption, the states may not impose limits on contributions to federal candidates and committees, as federal law was intended to occupy the field of federal elections. With the Governor’s conditional veto, the federal-preemption question will likely have to wait for another day.
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.
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.