Thursday, February 12, 2009, 12:03 PM

Political GPS: New York City Pay-to-Play Law Gains Court Approval

A federal judge last Friday upheld New York City’s “pay-to-play” law that sets lower contribution limits for government contractors and lobbyists. This follows recent court decisions in New Jersey and Connecticut, rejecting challenges to similar laws.

New York City imposes a lower contribution limit on companies doing business with the City, as well as their owners (10% and above), officers, and senior managers. These reduced limits also apply to lobbyists. Relatives and associates of lobbyists may contribute in city elections at the usual levels, but their contributions are ineligible for public matching funds. This matching-fund prohibition applies to contributions by the spouse or domestic partner of a lobbyist, and if the lobbyist is an organization, all officers and employees in any division that engages in lobbying activity.

With these three recent court decisions, the pay-to-play movement is gaining steam. At least 13 states and numerous municipalities currently impose restrictions on campaign contributions by contractors, their owners and senior employees, and in some cases, their spouses and dependent children. More states, including Pennsylvania and Alabama, are considering similar laws.

It’s Not Just Campaign Contributions: Delaware Bans Contractor Gifts

In his first executive order, Delaware Governor Jack A. Markell banned cabinet officials, division heads, and the Governor’s professional staff from accepting gifts from registered lobbyists, contractors with state agencies, and bidders on state contracts. The gift ban excludes drinks, snacks, or meals with a value of $39 or less consumed on the premises, complimentary attendance at public events hosted by non-profit groups, and items of nominal value, such as cards and framed certificates.

The Delaware order follows a trend in states and local governments of cracking down not just on campaign contributions by lobbyists and public contractors, but also on meals, entertainment, and other benefits paid for by lobbyists and contractors.

Colorado Gift Ban Applies Only to Lobbyists

In late January, the Colorado Independent Ethics Commission ruled that the ban on gifts by lobbyists to public officials does not apply to organizations or groups “represented” by a professional lobbyist.

Colorado’s sweeping 2007 ethics law bars state and local government officials and their family members from accepting gifts or other things of value from any one source worth more than $50 in a calendar year, including favors, services, travel and entertainment. The law allows for limited exceptions – for example, items of trivial value, awards of appreciation, and food or beverages consumed at certain receptions or meetings. A “professional lobbyist,” however, may not give a public official a gift of any value, or pay for any meals or beverages to be consumed by a public official.

The IEC’s ruling means that organizations and groups represented by a lobbyist can take advantage of the $50 rule. The IEC acknowledged that attempts by a lobbyist to evade the gift ban, such as by funneling a gift through a client, would have to be handled through complaints or advisory opinions.

CRS Report Reveals Fuzzy Rules, Spotty Enforcement for 501(c)(4)’s

The non-partisan Congressional Research Service published a report on January 29 that assesses the murky rules applying to 501(c)(4) groups engaged in political activity. Media reports during the last couple of elections suggest that 501(c)(4) organizations have raised and spent millions of dollars to influence elections, all done outside the contribution limits and reporting requirements of federal campaign finance law.

Among CRS’s findings:

  • While the primary activity of a 501(c)(4) must be to promote social welfare, and not campaign activity, “the tax code and regulations do not provide much insight into what constitutes campaign activity.”
  • IRS rules also do not address how to determine what activity is a group’s “primary activity.” Is campaign activity measured by expenditures, statements about purpose, the number of volunteers doing campaign activity?
  • The IRS takes the position that the gift tax applies to 501(c)(4) donations. However, an ABA task force found that for at least a decade the IRS has failed to pursue gift taxes from donors to 501(c)(4) organizations, and has even overlooked very large, publicly-disclosed donations to 501(c)(4) ballot committees.
  • The new Form 990 requires for the first time that filing organizations report information regarding their political activities (new Schedule C). But the identity of donors over $5,000, while disclosed to the IRS, remains unavailable to the public.

Watchdog groups have complained in recent years that the FEC is not pursuing politically-active 501(c)(4) groups that arguably make electoral politics their primary purpose. Such groups, the argument goes, should be reporting to the FEC as political committees and abiding by contribution limits and source prohibitions. Others criticize the FEC for pursuing non-profits too aggressively, noting that FEC standards fail to provide the bright lines required to regulate First Amendment activity. In the meantime, as the FEC is buffeted by its critics, there is comparatively little complaint with the vague IRS rules and lax enforcement described in the CRS study.

PAC Reporting Tip: Mind the Details

PAC treasurers should know that they need to “itemize” contributions that exceed $200. This means that the PAC must report the amount of the contribution, the date the contribution was received, the donor’s name and address, and the donor’s occupation and employer. What if you don’t have all of that identifying information. Is that really a big deal?

Yes it is, and the Americans Against Illegal Immigration PAC learned that lesson the hard way. An FEC audit report issued this week reflects that the PAC failed to obtain sufficient information about the occupations and employers of 665 contributors. Even when the committee subsequently obtained the information, the treasurer failed to amend the committee’s reports.

PAC treasurers are required by federal law to follow-up with contributors to obtain information about their occupation and employer. Failure to use “best efforts,” as described in FEC rules, can lead to intrusive audits, damaging publicity, and fines.

If you have any questions, comments or would like to schedule a consultation, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429), or Jim (JKahl@wcsr.com, (202) 857-4417).

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