Wednesday, January 21, 2009, 12:20 PM

Political GPS: Want Contracts Under The Federal Stimulus Plan? Better Prepare Now For State and Local Pay-to-Play Laws

Federal stimulus money will start flowing soon, and a lot of it will be distributed through state and local governments. Any company seeking a piece of this action – IT, energy, construction firms and more – should prepare now for a confusing array of “pay-to-play" laws. These laws, found in a growing number of states, counties, and municipalities, prohibit campaign contributions from anyone doing business with a governmental agency, including the companies themselves, executives, and in some places, executives’ spouses and children. Some laws also impose registration and reporting obligations.

Just a small campaign contribution by a covered executive or spouse can cause a company to forfeit millions of dollars in contracts. These bans also apply to prospective contractors - one prohibited campaign contribution can disqualify a company from a contract award.

This week, we highlight news concerning two of the strictest pay-to-play laws in the country: New Jersey and Illinois.

New Jersey Supreme Court Upholds Pay-to-Play Law

The New Jersey Supreme Court last week rejected a constitutional challenge to the state’s pay-to-play law and upheld the disqualification of a state contractor. The ruling is notable for its narrow view of a provision that allows persons who make prohibited contributions to cure their violations by obtaining a refund.

In a nutshell, New Jersey prohibits businesses with government contacts in excess of $17,500 from contributing amounts to covered officials or committees in excess of $300. The bar also applies to subsidiaries, PACs, 10% owners or shareholders, and, where an individual is the business entity, the individual’s spouses and minor children. In addition, businesses that receive state and local contracts exceeding $50,000 in a calendar year must file an annual disclosure report, listing their political contributions.

The New Jersey ruling involved a contractor who submitted the lowest bid ($6.2 million) on a highway construction project, but was disqualified when it was discovered he had made a $1500 campaign contribution to a county party committee. The contractor had actually discovered the violation on his own and asked for a refund within the 30-day statutory period for remedying a violation. But he didn’t get his money back until 41 days after making the contribution – 11 days too late in the view of the Court.

Illinois Contractors and Bidders Face January 31, 2009 Deadline

A new Illinois pay-to-play law and companion executive order became effective on January 1. The new law prohibits existing and prospective state contractors whose bids and/or contracts total more than $50,000/year from making campaign contributions to officeholders and candidates for statewide and legislative offices. The contribution ban applies not just to the contractor, but also to its affiliates, principal owners, PACs, company executives (broadly defined), and executives' spouses and minor children.

Violations of the contribution ban – even if they are not intentional or material – give agency procurement officers discretion to void a state contract. Multiple violations will automatically void all of a company’s state contracts and disqualify it from bidding or contracting with the State for three years.

A major deadline looms on January 31, 2009. By that date, contractors must register with the Illinois State Board of Elections and disclose the identity of “affiliated persons” (executives and others) and “affiliated entities” (parents, subs, etc.). Within short deadlines, the contractor must then give copies of its registration certificate to all persons and entities named on the registration, and to the relevant procurement officer. In addition, affiliated persons and entities must notify PACs and other political committees to which they contribute of their affiliation with the state contractor. State contractors’ failure to register or update registrations can result in fines.

FEC’s New Bundling Rules: Bound Loosely, It Turns Out

When the Federal Election Commission approved new bundling rules at the end of 2008, the Commission promised to have a written explanation of the regulations in a couple of weeks – a necessary step for the rules to take effect. The Commission scheduled a vote on the explanation for its January 15 meeting – but a day before the scheduled vote, the Commission announced that the document wasn’t ready. It may take until the end of January, the Chairman has suggested.

This delay appears to be further evidence that the six-member panel - three of whom joined the agency in July - are struggling to achieve the required four or more votes on key issues. It’s especially troubling here. The inability to produce an explanation that at least four Commissioners can agree on reveals that when the Commission voted to approve the bundling rules, there was no common understanding about what the rules actually mean.

As a practical matter, this delay means that new bundling rules won't be effective until late May 2009. The Honest Leadership and Open Government Act of 2007, which directed the FEC to adopt bundling rules, provides that the rules will take effect three months after final Commission action.
back to top