By Mary Kay Roberts and Scott L. Carlson
Since 2004, so many laws placing controls on campaign contributions have come out of Trenton that it has become hard for members of the business community to keep track of them. These laws take aim at eliminating the practice of rewarding political contributions with government contracts.
Commonly called “pay-to-play” laws, these reforms are a topic with which anyone doing business in New Jersey must be familiar. Despite their uninspiring titles (i.e. Public Law 2005, chapter 271) and their oppressively lengthy definition sections, ignoring these laws can result in debarment from conducting business with the government entities, loss of government contracts and civil penalties. Business people must be aware of the restrictions and reporting requirements these laws place on New Jersey and state businesses.
There are two types of “pay-to-play” laws in New Jersey: (1) contracting restrictions (prohibit a government body or agency from entering into contract with businesses to which certain political contributions are attributable); and (2) disclosure requirements (require business entities to report or disclose certain contributions attributable to them).
The first contracting restrictions were enacted by executive order of Gov. James McGreevey in 2004 and, in 2005, were adopted by the Legislature and signed into law by Gov. Richard Codey. Simply, but significantly, this law prohibits the state from awarding contracts worth more than $17,500 to a “business entity” that has made “reportable” campaign contributions. The key to understanding and complying with these contracting restrictions is knowing the terms “business entity” and “reportable” contribution. A business entity is:
The bidder for a state contract;
All principles who own or control more than 10 percent of the bidder’s profits, assets or stock;
All subsidiaries directly or indirectly controlled by the bidder; and
Any political action committee (PAC) or continuing political committee directly or indirectly controlled by the bidder.
A contribution is reportable if it is greater than $300 and made to a gubernatorial candidate committee; state political party committee (PPC); or county PPC.
Reading these provisions together, a business will not be able to enter into a contract with the state if it, its principles, subsidiaries or PACs, have made a donation of $300 or more to a candidate for governor, or a state or county PPC. These reporting obligations accrue prior to the contract award and continue throughout the contract term. Businesses that have contracts with the state, or that anticipate they may want to procure state contracts, should seek legal guidance if the business, its principles, subsidiaries or PACs wish to contribute to a state or county candidate or committee.
A similar law was adopted in 2006 prohibiting a county or a municipality from awarding a contract worth more than $17,500 to a business entity that made a reportable contribution to either the candidate committee of the elected official entrusted with the responsibility for awarding the contract or to that official’s PPC. The law also prohibits the state Legislature from awarding contracts to a business entity that has made a reportable contribution to the legislative leadership committee established by the presiding officer of the legislative body.
Under this law, which regulates local governments and the Legislature, a business entity does not include subsidiaries or political committees controlled by the bidder; it does, however, include a bidder’s resident spouse and children if the bidder is a natural person (i.e. sole proprietor).
Additionally, unlike the pay-to-play law governing state contracts, the law governing the state Legislature, counties and municipalities permits a business entity to make contributions and still be eligible for contracts, provided it is awarded pursuant to a “fair and open process.”
The law defines “fair and open process” as the issuance of a contract under (1) draft criteria for the award of the contract that are (2) publicized in a paper or on a Web site 10 days prior to opening the contract and which is (3) opened at a public meeting where the governing body reviewed the proposals and announce the award.
The recent amendments also authorized municipalities to adopt their own pay-to-play ordinances. Contributors are cautioned that, prior to contributing to a candidate for local office, an inquiry should be made with a municipality to ascertain if there are local laws that may effect a contributor’s ability to conduct business with the municipality, its agencies or officials. The New Jersey secretary of state has begun to publish a list of municipalities that have adopted pay-to-play ordinances (http://www.nj.gov/state/secretary/ordinance.html).
For contracts awarded by the executive branch, the state Legislature, a county, municipality, independent authority, board of education or fire district, and worth more than $17,500, the business entity must disclose to the contracting government entity reportable contributions made during the preceding 12 months no later than 10 days prior to entering into the contract. The contributions subject to disclosure vary according to the level of government at which a contract is awarded.
In addition, a business entity that received an aggregate of $50,000 or more through government contracts in a calendar year also has an annual disclosure obligation to the New Jersey Election Law Enforcement Commission (ELEC). These businesses must file the Business Entity Annual Statement electronically with ELEC to report contract information and reportable contributions.
Business entity (BE) annual disclosure statements (Form BE) are due on March 31, 2008 for calendar year 2007 activity. In future years, Form BE will be due March 30. Form BE and filing instructions are available on ELEC’s Web site (https://wwwnet1.state.nj.us/lpd/elec/ptp/Form.aspx), which directs requests for further information to the Pay-to-Play Section on the commission’s Web site (www.elec.state.nj.us) or to contact the commission’s Special Programs Staff at (609) 292-8700 or (888) 313-3532.
In the wake of the 2006 BE filings in fall 2006, ELEC began to post the lists of campaign donations in excess of $300 made by business entities with $50,000 or more in public contracts with the state, municipalities, counties, school districts and various authorities.
ELEC informally advised that banks with deposit account relationships with public entities would be covered by Form BE disclosure requirements even if the bank received no fees from the public entity for the deposit account relationship. Consequently, banks were forced to review their relationships and political contributions made by their officers, directors, principals, partners and respective spouses.
The State Investment Council (SIC) in the Division of Investment has also promulgated its own regulations for investment management firms seeking to be engaged in provider investment management services to the state. These regulations require a separate disclosure report by investment management firms and are in several ways stricter than the other pay-to-play provisions. However, the SIC recently clarified the applicability of its regulations to certain political contributions to trade association PACs. It stated:
We believe that an employee PAC is subject to the same restriction that would apply to the relevant investment management firm. However, contributions by an employee PAC to a PAC controlled by a trade association that in turn makes political contributions do not violate the council’s regulations, as long as the investment management firm, its parent company or any other entity that controls the investment management firm or its investment management professionals, do not control the trade association PAC.
As a result of a substantial number of comments submitted to ELEC in spring 2007 questioning the extension of the state’s pay-to-play laws to nonprofit entities and their directors and officers, the Legislature moved a measure quickly during the lame duck session to clarify that the pay-to-play disclosure laws do not apply to nonprofit entities. Public Law 2007, chapter 304 was signed by the governor on Jan. 13 and took effect immediately. ELEC promptly notified impacted parties by posting the following notice on its Web site (https://wwwnet1.state.nj.us/lpd/elec/ptp/p2p.html):
On Jan. 13, 2008, P.L.2007, c.304 was signed into law by Gov. Corzine to clarify that the pay-to-play disclosure laws do not apply to nonprofit entities. As a result, nonprofits that contract with government entities are no longer required to file the Business Entity Annual Statement with the commission. Nonprofits are also no longer required to file similar disclosure documents with a government contracting entity prior to the award of a contract.
A number of hospitals and social service organizations raised the issue, given that their directors and officers, as well as their spouses, would have to disclose political contributions as a result of service to the organization, which is often voluntary in nature.
Given the Legislature’s recognition of confusion regarding pay-to-play and further public outcry for even more “reform,” it is likely that there will be future changes in this area of the law.
Businesses, as well as those who serve as directors and officers of their companies, should be aware of the new pay-to-play laws and regulations. These businesses and individuals, as well as their spouses and children, should exercise caution in giving political contributions. Donations made without consideration of these laws can result in the loss of government contracts, future inability to contract with government entities, as well as civil penalties and public relations difficulties. In the event that you are unsure of the consequences of a political contribution by you or your company, you should seek the advice of legal counsel.
Mary Kay Roberts is a partner at Riker Danzig Scherer Hyland & Perretti (www.riker.com), in the governmental affairs group. She can be reached at (609) 396-2121 or firstname.lastname@example.org.
Scott Carlson is an associate at Riker Danzig, in the governmental affairs and public utilities groups. He can be reached at (973) 451-8590 or email@example.com.