Pay to Play Law Blog : Pay to Play Lawyer & Attorney : Bribery, Campaign Contributions

In a much anticipated opinion (attached), the United States Court of Appeals for the Second Circuit has upheld significant portions of Connecticut’s pay-to-play law. Interestingly, while the Court upheld the state’s very strict prohibition against contractors from contributing to the campaigns of state candidates, it invalidated a similar provision as applied to state lobbyists. The opinion also rejected a provision of the law which prohibited contractors and lobbyists from soliciting campaign contributions from others.

The ruling is quite significant when one considers the breadth of the existing Connecticut law as compared with pay-to-play restrictions in other states. Like many states, lobbyists, state contractors and prospective state contractors are prohibited from making contributions to certain state candidates, candidate-affiliated political action committees and party committees. What makes the law noteworthy, and a special little compliance nightmare for those seeking to adhere to it, is that the solicitation restrictions apply not just to principals of state contractors, but also to their families.

In upholding the portion of the law pertaining to contributions by state contractors, the Court noted Connecticut’s sordid (but hardly unique) history with political scandal that fostered the law. Because of this past history with corruption, and the State’s recognized interest in preventing even the appearance of future such corruption, the Second Circuit determined that the contractor contribution ban survived First Amendment scrutiny. (See Green Party of Ct. v. Garfield, 09-0599-cv(L) at p.15-16 & 18-19). That analysis, as far as it goes, seems sensibly grounded and well rooted in Constitutional precedent.

Where the Court’s opinion could be argued to deviate from the terra firma of reality, and where compliance officers throughout the country can be forgiven for muttering to themselves in disbelief, is with respect to the analysis upholding the prohibition on contributions by spouses and children of contractors. Without even identifying past evidence that malevolent contractors have ever used their immediate families to circumvent any laws, the Court nonetheless upheld the ban:

In light of the recent corruption scandals, [the Connecticut] General Assembly must be given “room to anticipate and respond to concerns about” the “circumvention” of the bans on contractor contributions. Indeed, were we to affirm the ban on contributions by contractors but strike down the ban on contributions by their family members, we would invite the very circumvention that the General Assembly was trying to prevent.

Id. at 22.

What may appear logical in judicial chambers can take on an entirely new light when confronted from the perspective of a compliance officer tasked with ensuring that the CEO’s spouse complies with the ban and then periodically inquiring about ongoing compliance. I know I wouldn’t want to be put in the position of telling my own wife who she could make a campaign contribution to. It is especially difficult counseling clients that this conversation has to take place with the CEO. And equally as troubling when weighed against the First Amendment privileges it infringes upon.

Nonetheless, the law and constitutional analysis are clearly here to stay. Look for more states to follow Connecticut’s lead and impose pay-to-play restrictions on extended families.

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Reacting to investigations that have followed the administration of former Governor Mike Easley, the North Carolina legislature recently passed a sweeping package of ethics reform. The text of the bill, which was passed in the waning hours of the General Assembly, can be found here.

Specifically, the new legislation strengthens fines for illegal campaign contributions, which were reportedly not uncommon in the Tarheel state due to weak penalties.  Additionally, the legislation subjects board and commission members, as well as state employees, to more robust disclosure requirements. As is typical in the area of ethics reform, all areas have been subjects of contention in recent North Carolina ethics investigations.

Notably, the legislation did not include "pay to play" provisions, which were advocated for by some in North Carolina. Rather, the legislation establishes a commission to study whether pay-to-play legislation is needed in North Carolina, as well as the scope of any such provisions.

Given the political climate in North Carolina at this juncture, and the likelihood that investigations will continue in the ethics realm, it is likely that the North Carolina legislature will readdress the issue in 2011. Of course, we at the pay-to-play law blog will continue to monitor the developments on the ground in Raleigh.

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Several efforts are underway at the state and local levels to re-examine New Jersey’s stringent pay-to-play laws. This is probably a good development. Without question, New Jersey’s pay-to-play laws, put into effect in 2006, are considered by most in the regulated community to be among the most intrusive and confusing in the country. That is not a good combination for those doing business in the state or the lawyers seeking to advise them. Fortunately, it appears that the New Jersey Election Law Enforcement Commission (ELEC) agrees with that assessment and has announced its intention to support revisions to the law.

In its July newsletter, ELEC’s Commission Chair Jerry Fitzgerald English announced ELEC’s plans “to prioritize proposals for legislative reforms that are designed to improve the regulation of campaign financing, lobbying, and pay-to-play.” While recognizing that legal challenges pending nationally will have an influence on New Jersey’s actions, ELEC proposes significant changes to the State’s pay-to-play law.

ELEC’s first proposal, which almost makes too much sense to originate from government, is to revise the state’s pay-to-play laws to ensure that a single law applies at both the State and municipal level. Currently, local municipalities are free to pass a quilt-like patchwork of ordinances; all most none of which bear any relationship to the others. As ELEC points out, in addition to state law, over 50 local ordinances and executive orders also control local contracting and contribution rules. Such a regulatory scheme not only makes compliance exceedingly difficult for major vendors, but fosters costly and discouraging legal challenges with the passage of each new ordinance (this reaction to the Borough of Dumont’s new pay-to-play ordinance being only the most recent example).

Of the various changes proposed, probably the most significant is ELEC’s proposal is to remove the authority of county and municipal governments to circumvent state procurement laws by publicly advertising bids (referred to as the State’s “Fair and Open” provision). These changes, in addition to the ubiquitous calls for increased “transparency” through lower filing thresholds combined with a sensible call for increased contribution limits to provide defense against inevitable First Amendment challenge, appear to indicate that New Jersey is on the road toward common sense reforms.

Consider this blog among those supporting ELEC’s proposals.

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In early June 2010, Greene County, Ohio filed suit against the Ohio Secretary of State in an effort to ensure that Ohio’s pay to play statue can not be enforced anywhere in the state. The Statute in question, referred to as “HB 694”, purported to ban the award of public contracts to those who had contributed $1,000 or more to those with the power to award the contract.

In April of 2009, the Tenth Appellate District of the Ohio Court of Appeals issued an order finding Ohio’s pay to play law to be invalid due to the procedure used to enact it. Because that opinion was never appealed to the Ohio Supreme Court, the enforceability of HB 694 remained in question in every appellate district of Ohio other than the Tenth. It is this uncertainty which has led to the filing of this most recent lawsuit by the Greene County Board of County Commissioners.

While unlikely to reach the constitutional merits of HB 694, this most recent litigation can be added to a growing list of jurisdictions that have seen their legislative efforts to impose restrictions on contributions fail on the courthouse steps.

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It just wouldn’t be right to have a pay to play blog and not post a comment about recent developments in the grand daddy of all pay to play trials: United States v. Blagojevich. According to recent AP reports, the Governor’s former top aid testified today that it was concern over Illinois’ recent pay to play legislation that compelled Governor Blagojevich to make a deal to sell President Obama’s Senate seat. As we reported here, Governor Blagojevich had vetoed Illinois legislation banning state contractors from making campaign contributions to the politicians who controlled those contracts and had an interest in ensuring that the Illinois State Senate did not override his veto.

According to the testimony of Alonzo Monk yesterday, Governor Blagojevich was so sufficiently concerned about the impact the new legislation would have on his fundraising efforts that he reached a deal with former state Senate President Emil Jones to let the veto stand in exchange for his agreement to appoint a state legislator to the US Senate seat. Ultimately, as we know, the deal fell apart when then President Obama urged Jones to action on the veto and US Attorney Fitzgerald revealed that he had been listening in on Blagojevich’s dealings.

And they said pay to play law was boring!

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As we have previously analyzed on the blog, the recent U.S. Supreme Court decision in Citizens United v. FEC has sparked both election law commentary over the limits of government efforts to restrict political speech as well as a much celebrated one-way fight between branches of government at the State of the Union Address. Now, the third branch of government is about to get in on the act as Senator Charles Schumer (D-N.Y.) and Congressman Chris Van Hollen (D-Md.) are set to unveil “responsive” federal legislation containing federal pay-to-play prohibitions with the apparent support of at least one Republican, Rep. Mike Castle (R-Del.). This legislation was recently released and is called the "DISCLOSE ACT". Please click here to view the summary.

The Citizens United opinion expressly recognized the First Amendment rights of corporations and labor unions to participate in the political process through the funding of independent communications expressly advocating the election or defeat of clearly identified candidates. Couched as it was in Constitutional principles, there are limits to what Congress can do to overturn the opinion. The Senate and House Democratic leadership appears to have concluded that if the prohibition of such speech is unconstitutional, the preferred response will be to require disclosure of corporate and union independent expenditures to the FEC and to shareholders and further to require corporate CEOs to appear on expenditures with the same “stand by your ad” messages we have learned to love in campaign advertising. The bill will also seek to impose additional limitations on the abilities of foreign individuals and companies to influence political speech by U.S. corporations.

Of significance for corporations doing business with the federal government, it is expected that the Schumer/Van Hollen legislation will contain significant federal pay-to-play limitations. Under draft versions of the legislation currently circulating on Capitol Hill, Schumer/Van Hollen is expected to entirely bar federal government contractors from using corporate funds to finance independent expenditures advocating the election or defeat of a federal candidate. Such contractors are already barred by federal law from making campaign contributions (11 CFR 115.2) but the proposed legislation is expected to seek in addition to preclude such contractors from financing independent speech about federal candidates. Whether such a prohibition could withstand constitutional scrutiny is, at best, an open question.

Another class of citizens expected to have their right to finance independent expressions of support or opposition of federal candidates muzzled under the proposed Schumer/Van Hollen legislation are all recipients of federal TARP (bailout) funds. Again, the constitutionality of such a prohibition remains open to debate, but considering the degree to which Members of Congress on both sides of the aisle have been scoring political points by demonizing TARP recipients, one can certainly understand why Congress would try.

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A new report issued by the New Jersey Election Law Enforcement Commission (ELEC) is being cited as evidence that New Jersey's pay-to-play laws, which are undoubtedly amongst the most robust in the nation, are reducing the amount of money entering New Jersey politics.

Specifically, ELEC's analysis of contributions to candidates participating in the upcoming May 11 municipal elections in New Jersey indicate that total contributions are down 19% from fundraising totals at the same point four years ago. While current economic conditions would undoubtedly seem to have had some impact on these figures, a close examination of all campaign contributions in New Jersey indicates that pay-to-play laws are playing a significant factor in the reduced fundraising totals.

For example, ELEC is reporting that gross receipts for New Jersey state political parties, and House and Senate Leadership PACs, are down 36% from 2006 levels. Similarly, ELEC states that county party committees have reported 28% reductions in gross receipts over the same period.

Though municipal pay-to-play limits in New Jersey are generally very stringent by national standards, municipal candidates generally have more flexibility to accept contributions from municipal contractors than New Jersey state candidates do from state contractors. As the ELEC's Executive Director states, this flexibility may be a significant factor as to why the reductions in municipal contributions are less dramatic than those that are being seen statewide.

In any case, pay-to-play laws are clearly having an impact on the political playing field in New Jersey. Click here for more insight on this trend.

We at the pay-to-play law blog will continue to monitor such developments nationwide.
 

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The below Colorado update was written and circulated today by Government Contracts attorneys C. Richard Pennington and Tyson Bareis out of McKenna Long & Aldridge LLP’s Colorado office.

The Colorado Supreme Court recently struck down a law that prohibited holders of sole-source state and local government contracts from making contributions to elected officials in Colorado. As we previously reported, this case is the latest episode in the continuing tension between a public that is increasingly skeptical of government contractors’ campaign contributions and the First Amendment rights, including the right to participate in the political process, that are afforded to all individuals and organizations. While the Colorado Supreme Court’s decision should rightfully be viewed as a victory for contractors and the First Amendment, the decision will not be the end of this tension or such laws.

 

In November 2008, Colorado voters narrowly passed Colorado’s Pay-to-Play law, which took the form of Amendment 54 to the Colorado Constitution. Citing a "presumption of impropriety between contributions to any campaign and sole source government contracts, "Amendment 54 prohibits holders of sole source state and local contracts from contributing to any political party or any candidate for elected office in the state. The law defines a sole source contract as “any government contract that does not use a public and competitive bidding process soliciting at least three bids prior to awarding the contract.”

The Colorado Supreme Court held that the Pay-to-Play law was unconstitutional in its entirety because, among other things, the law was not drafted narrowly enough to achieve its goal of eliminating the appearance of impropriety in the award of sole source contracts without significantly limiting constitutionally protected activity. The Court also noted that the cross-jurisdictional nature of the Amendment meant that fundraising in local governments would be limited by a donating entity’s contractual relationships with other, unrelated jurisdictions, like state government.

For contractors doing business in Colorado, the state’s Supreme Court decision means that they are no longer subject to the Pay-to-Play law’s prohibitions on political contributions. Importantly, however, the decision does not eliminate the possibility that Colorado may seek to enact laws similar to the “Pay-to-Play” law that was found to be unconstitutional. Instead, the Court’s decision implied that similar laws, even if they specifically target contractors, may be constitutional as long as the laws are drafted narrowly enough to address the laws’ stated concerns without significantly limiting constitutionally protected speech.

While it is impossible to predict future legislation, in light of the current anti-contractor sentiment and the political gains that can be had by proposing sweeping legislation to eliminate perceived “corruption,” contractors in Colorado and elsewhere should not expect the Colorado Supreme Court’s decision to prevent attempts to enact similar “Pay-to-Play” laws. MLA will continue to follow efforts to enact such laws, and contractors may wish to involve themselves in responding to such proposed laws by educating lawmakers and the public as to the ineffective and counterproductive nature of such laws.

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In a move that avoids an inevitable constitutional challenge, the Indiana House yesterday unanimously passed House Bill 1001, authored by House Speaker Patrick Bauer and co-sponsored by Minority Leader Brian Bosma, without the original pay-to-play language which was struck from the bill by the Senate.

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Last Thursday, the Indiana State Senate passed a comprehensive piece of ethics legislation by an impressive 50-0 vote. Conspicuously absent from the Senate bill was previously-included language containing "pay-to-play" language, including a provision that would bar vendors holding or seeking state contracts worth $100,000 or more per year from donating to the campaigns of candidates seeking state office. At issue now is whether a House-Senate conference committee will reinstate the stricken language before sending the bill to Governor Mitch Daniels for signature.

Even without the pay-to-play language, the proposed legislation has teeth, in that it imposes a one year “cooling off period” on lawmakers seeking to become lobbyists, a requirement that lobbyists report conflicts of interest involving more than one of their clients, and a ban on incumbents or candidates for statewide office raising campaign funds during budget-writing legislative sessions.

The once on again, now off again, perhaps on again, pay-to-play language is notable for its breadth as well as in the sanctions it imposes for non-compliance. The proposed pay to play language requires all entities whose business with the state aggregates more than $100,000 to maintain registration information in an online, downloadable format, for four years from the award of the contract or for a year after the termination of the contract, whichever is longer, and prohibits the company , its “executives”, their spouses, and their minor children, from making any contributions to any state officeholder or candidate.

We’re watching this one. If the proposed pay-to-play language is reinserted and signed by (purported dark horse presidential candidate) Governor Daniels, Indiana will join the ranks of those states imposing extremely stringent contribution limitations that the regulated community will struggle to comply with. Indiana will also join the ranks of states in possession of a statute likely to encounter significant difficulty in overcoming First Amendment challenge in the courts.

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Despite the numerous "pay-to-play" scandals that have rocked Sante Fe in recent years, numerous pieces of major ethics reform died on the floor of the New Mexico State Senate during the waning hours of the 2010 regular legislative session.

Specifically, HB 118, which would have placed significant restrictions on the activities of lobbyists and certain state contractors, passed the House less than 48 hours before the end of the session. Despite hope from supporters of HB 118 that it would find its way through the Senate, the legislation stalled in the upper chamber.

Had it passed, HB 118 would have arguably made New Mexico one of the toughest "pay-to-play" jurisdictions in the country. The legislation, which passed the House 46-24, broadly prohibited contributions from lobbyists, state contractors and principals of state contractors. Indeed, HB 118 placed total prohibitions on contributions from lobbyists, state contractors, principals of state contractors, and even "seekers of targeted subsidies" to any "candidate for nomination or election to a state public office or political committee established the candidate." Contributions to certain political committees would have been similarly prohibited.

Notably, legislation which would have allowed for the creation of an Ethics Commission in New Mexico, as well as a series of other open government initiatives that were lauded by advocates of transparency also failed to pass the Senate.

Due to the failure to adopt any reforms, there is speculation that some package of legislation will be addressed during an upcoming Special Session.

Given the upcoming election season, it would seem as if New Mexico legislators would try to adopt some sort of legislation that can be sold to constituents as "good government reform" during the Special Session. We at the Pay-to-Play to Law Blog will continue to monitor this situation for any new developments.

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As we previously reported in our blog entry  “SEC Bans Third Party Solicitations of Municipal Investors,”  the investment industry has been in an uproar over the SEC’s proposed ban on the use of third party intermediaries (such as placement agents registered as broker-dealers with the SEC) by advisors in the government arena. In what appears to be a response to numerous comment letters the SEC received urging alternatives to the outright ban, the SEC is contemplating exemptions to its pay-to-play proposal. As reported in Reuters, “the agency appears to be willing to allow broker-dealers to act as legitimate placement agents if the Financial Industry Regulatory Authority (FINRA) the broker-dealer watchdog, implements strict pay-to-play rules.”

In a December letter to FINRA, an SEC official was quoted as saying “It occurs to us that an exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA were to implement rules that would prohibit pay-to-play activities by those persons.” Herb Perone, a spokesman for FINRA acknowledged that FINRA had received letters from the SEC and that the proposal was under discussion.

The SEC proposal must be put to a final commission vote before the proposal becomes a rule. The SEC is still evaluating public comments and has not yet made a final recommendation to the commission.

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Last week, the State of New York provided a graphic illustration of the perils confronting legislators as they attempt to balance public calls for dramatic reform against their own natural self-interest in blunting the impact of the restrictions they are imposing upon themselves.

Responding to public concerns over several high-profile scandals to plague the state, the New York State Assembly recently passed, by a significant margin, what it had advertised to be a comprehensive ethics, lobbying and campaign finance package. On February 2, 2010, New York Governor David Paterson vetoed that legislation on the grounds that the Assembly had effectively neutered the reform package called for by the public. The Assembly had touted the proposed legislation as delivering significant ethics reform by granting the legislature authority to appoint a commission designed to permit the legislature to police itself.

Despite the fact that the measures had garnered widespread support and had originally passed both chambers of the state legislature by wide margins, Governor Paterson vetoed the legislation saying it failed to provide solutions in multiple areas, including campaign limits and the establishment of an independent ethics body to oversee the Assembly.

Gov. David Paterson further stated he is preparing a different, harsher version of the bill, and that he is planning to release new draft legislation containing tighter external controls on local politicians and stricter campaign contribution limits. With concerns that such proposed legislation would be forthcoming, the New York State Senate last week attempted, but failed, to gain the two-thirds majority needed to override the Governor's veto. As is typical, the parties traded barbs over responsibility for the failure with New York's Democratic Majority Leader accusing Senate Republicans of having killed ethics reform in Albany and the Senate Minority Leader accusing Democrats of trying to ram through an override even if it meant a weaker bill was enacted.

Common Cause New York released a statement urging the governor and both houses to stop the political grand-standing and work together to negotiate a compromise that means a strong ethics bill for the State of New York.

Ultimately, for now, the State of New York is left with no reform at all and the setback serves as a cautionary tale for other state legislatures as they attempt to balance public outcry for "reform" against restrictions they can live with.

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New legislation in California, if passed, would prohibit a person acting as a placement agent in connection with any political investment made by a state public retirement system, unless the person is registered as a lobbyist and is in full compliance with California’s Political Reform Act of 1974 as that act applies to lobbyists. California’s law would not be as restrictive as New York, which has an outright ban on placement agents in this area.

The bill defines a placement agent as: “any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California, directly or indirectly, including, without limitation, through an investment vehicle.”

There is an exemption for employees of external managers who spends at least one-third of their time managing the assets of their employer.

The bill is sponsored by the California Public Employees’ Retirement System (CalPERS), state Controller John Chiang and Treasurer Bill Lockyer. Mr. Lockyer says “This legislation will help protect the integrity of those decisions by increasing transparency and reducing the ability of high-paid middlemen to use money and gifts to win favorable treatment,” he says. “And it will help make sure the interests of workers, retirees and taxpayers remain paramount.”

“Our legislation puts the interests of taxpayers, public pension fund members, and retirees first,” Chiang said. “Subjecting placement agents to the same ethics rules as lobbyists will help safeguard public pension fund investments from individuals seeking questionable influence.”

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I received an email from a law student who posed a question about the impact of the recent Supreme Court decision in Citizens United v. FEC. The student asked:

"After the recent Supreme Court decision in Citizens United v. Federal Election Commission, it seems to me that pay-to-play laws across the nation will now serve even more of a purpose as corporations are now free to contribute to the political process (although not directly to candidates).

In saying that, I was wondering about your take on the matter. Am I missing something, or does Citizens really mean what I think it does?"

It’s a very good question because, while Citizens United doesn’t directly affect state pay-to-play issues, its impact is certain to be felt this legislative session. States and municipalities have already been struggling to respond to voter angst about the political process - and recent election results combined with breathless media reporting is certain to exacerbate that angst.

In a nutshell, Citizens United is a landmark ruling for corporations, unions and groups of individuals interested in participating in any aspect of the federal political debate. The ruling is particularly relevant because it is predicated upon a recognition that corporations, tax exempt groups and unions have a First Amendment right to use unlimited corporate funds for independent expenditures that expressly advocate the election or defeat of federal candidates. For those interested in reading more about the decision, a link to our firm’s client alert is attached here.

The ruling does not directly impact state pay-to-play laws because it expressly left intact existing federal and state limitations on campaign contributions and upon the ability of federal candidates to “coordinate” their activities with outside groups. It would be an error, however, to conclude that the Supreme Court’s ruling will not affect state legislative action on pay-to-play simply because the ruling doesn't affect contributions, coordination or any of the quid pro quo issues that pay-to-play laws are generally looking to capture. If anything, it is more likely that Citizens United is going to cause a number of state legislatures and municipal bodies to feel they need to pass tougher pay-to-play laws to counter the perceived invitation for corporations and unions to overwhelm the political process.

It is likely that such concerns are somewhat exaggerated. Rather than being incentivized by this enhanced recognition of rights to engage in pay-to-play politics, if anything, corporations and unions now have the opportunity to exert much more leverage with politicians simply by threatening to fund independent expenditures either for or against candidates depending on how responsive they are to the corporate or union cause. These groups no longer have to make contributions to exert leverage - they can do just fine on their own, thank you. As was seen just last week when a group of 40 corporate executives notified congressional leaders that they were tired of being solicited for campaign contributions, the ruling has already begun to change the political landscape away from the candidates and parties and towards the “independent expenditure”.

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As we mentioned in our previous blog entry, New Jersey is giving even further attention to its pay-to-play laws. Yesterday, to show the seriousness of his promises of reform, Governor Chris Christie issued an executive order that curbs political donations by labor unions and is intended to prevent pay-to-play politics from this donor group. Specifically, unions are now included in the group of donors who are barred from having state contracts worth more than $17,500 if they had donated more than $300 to a campaign for Governor or county political committee in the previous 18 months.

Democrats are voicing their opposition saying it is "over the top", as an important portion of their base is made up of labor unions. They do not believe the order will stay in place, denouncing it as an unconstitutional violation of free speech. Governor Christie claims that this simply applies the same rules as other similar types of businesses must comply with such as law and engineering firms.

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For those that interact with this area of the law, it is well known that New Jersey has some of the most robust pay-to-play laws in the nation, at both the state and local levels. Perhaps not surprisingly, due to the numerous recent political scandals in New Jersey, the pay-to-play heat in the Garden State has been turned up even further.

At the state level, newly elected Governor Chris Christie made strengthening pay-to-play laws a central issue in his November 2009 campaign against John Corzine. Additional pay-to-play legislation at the state level seems likely, and the issue has already come up for the Governor personally during the short time after his victory.

Despite the fact that New Jersey's statewide pay-to-play statute applies in part to municipalities, local jurisdictions have joined in the rush to act. With the coming of the new year, New Jersey's media has been abuzz about pay-to-play in recent weeks in towns and cities across the state:
South Bergen
Seaside Park
Morristown

We at the Pay to Play Law Blog will continue to monitor the developments in New Jersey closely, as 2010 is sure to bring more complexity to an already difficult procurement environment. Stay tuned.

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New York Governor David A. Paterson has announced extensive ethics and campaign finance reform legislation, the "Reform Albany Act", which will be a focus of his second State of the State address.

The proposed legislation calls for the creation of a single, independent State Government Ethics Commission with advisory and enforcement powers regarding campaign finance, ethics and lobbying; and which would replace the New York State Commission on Public Integrity. It also provides for increased oversight and enhanced reporting by state officers of outside business activities, and enhanced reporting requirements for lobbyists. And, it would replace the State Comptroller as sole trustee of the New York State Common Retirement Fund (one of the largest pension funds in the U.S.) with a 5-member Board of Trustees.

The legislation also includes sweeping campaign finance reform: drastically reducing maximum contribution limits, limiting contributions to housekeeping accounts, and banning corporate contributions; as well as providing for a new system for the public financing of campaigns. The Governor has also proposed term limits for members of the Legislature and statewide officials (which would require a State Constitutional amendment).

The sweeping ethics reform initiative follows the recent trial and conviction former Senate Majority Leader Joseph L. Bruno on corruption charges, which exposed weaknesses in State ethics laws; as well as Attorney General Andrew Cuomo's investigation of Pay to Play activity involving the administration of the Common Retirement Fund under the former State Comptroller.

While several of the concepts in the legislation have been the subject of prior proposals, the reform package faces an uphill battle in the State Legislature. The State Senate and State Assembly are developing their own ethics initiatives. And, the estimated 30 million dollar price tag for public financing of campaigns comes at a time of financial crisis in the State, with the budget deficit in 2010 estimated at between 7 and 9 billion dollars.

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With the opening of legislative sessions nationwide, 2010 is sure to be one of the busiest years ever for pay-to-play legislation. As the Kansas City Star reports, numerous pieces of ethics reform legislation have already been filed in advance of Missouri's 2010 legislative session, which begins on January 6.

According to published reports, the most notable legislation is a bipartisan proposal aimed at overhauling Missouri's campaign finance system. Among other things, the legislation proposes to stop the common practice in Missouri of transferring funds between campaign committees, which can obscure the original donor of such funds. Additionally, the legislation would institute a mandatory online filing system for Missouri filing entities, and would require registration of some political consultants as "de facto lobbyists."

Notably, such legislation also has significant pay-to-play ramifications. Specifically, the new Missouri legislation would codify a prohibition on exchanging campaign contributions for legislative action. The Pay-to-Play blog will monitor this legislation as it goes through the legislative process, as well as similar legislation that is sure to be at issue nationwide in 2010.

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A bill has recently been introduced in the Michigan State Senate to curtail a new element of “pay to play” politics. Michigan State Senator Cameron Brown (R-Fawn River Township, MI), has introduced a bill to prohibit candidates from paying others to endorse their candidacy. Like virtually all new restrictive pieces of pay to play legislation (especially those of dubious constitutionality), this legislation arises from recent significant media attention paid in Detroit to an alleged practice by city council candidates to pay unions, community organizations and other organizations to endorse their candidacy.

Senate Bill 984, which has been referred to the Michigan Senate Committee on Campaign and Election Oversight, provides that “A person shall not make a contribution to another person with the agreement or arrangement that the person receiving the contribution will then endorse a particular candidate”. The bill contemplates that violation of this new prohibition shall be a criminal misdemeanor.

Senator Brown is quoted as saying that he introduced this criminal prohibition because the practice of paying others to endorse one’s candidacy “raises questions of political corruption and pay to play. The support of respected community organizations should not be up for sale to the highest bidder.”

While this is surely true, one has to wonder whether criminal prohibitions on speech serve as the best means available to accomplish this worthy objective. One would assume that mere disclosure of such payments, similar to those now required of federal lobbyists through Form LD-203, combined with the desire of respected community organizations not to be revealed as up for sale, would serve to squelch such “corruption” as surely as the proposed legislation.

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Trends regarding the enactment of pay-to-play legislation remain remarkably consistent and robust nationwide. Typically, pay-to-play legislation is passed in the wake of a corruption scandal that befalls a high-ranking public official. In such an instance, the political pressure on governing bodies is so tremendous to act, that pay-to-play reform is inevitable.

This trend has just played itself out once again in Dallas, where the Dallas City Council just yesterday passed a series of Ethics reform measures in the wake of the corruption conviction of former Mayor Pro Tem Don Hill. The entirety of the legislation, which exceeds some 1300 pages, can be found here.

The ethics package contains numerous changes to existing lobbyist registration and disclosure requirements, City Council zoning powers and the disclosure of gifts to Council members. Most relevant to the pay-to-play space is that anyone bidding on a city contract is now prohibited from making donations during the bid period. Additionally, "major" zoning applicants can no longer make contributions to Council members during the window which begins on the date of public notice of the zoning case, and which ends 60 days after the zoning case is resolved. Such changes are not too surprising in this instance, given that the scandal involving Hill revolved around favorable treatment for developers.

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We at the Pay to Play Law Blog have received the following from Georgia Common Cause concerning their proposal for a Pay to Play ordinance for the City of Atlanta. We appreciate the submission and attach it herein in its entirety and unedited. The positions taken here are entirely those of Georgia Common Cause.

While we salute Mayor Franklin for her leadership in establishing a more ethical climate in City government, one of the things we see as little changed from past administrations is well-connected insiders continuing to show up in disproportionate numbers of the chosen few who are selected for work contracted by the City of Atlanta, and by the Atlanta airport.

While we can’t – and don’t want to try to - change human nature, we do believe in taking steps to increase trust that those whom we elect and employ to administer our procurement policies will not allow personal preferences to steer contracts to less qualified companies, and that our tax dollars will not be wasted. One reform we can implement, if we want to raise the level of confidence in how our tax money is spent, is to separate the offering up of campaign contributions from the awarding of contracts. That is what Pay-to-play reform is all about.

Pay-to-play has been at the heart of numerous news stories around the country within the past year: Alaska Senator Ted Stevens, Illinois Governor, Rod Blagojevich, The withdrawal of New Mexico Gov. Bill Richardson’s Cabinet nomination, and the collapse of the mortgage giants after Congress – which reaped millions from Wall Street in campaign cash – deregulated the industry and ignored repeated warnings of disaster. In August, New Jersey Governor Jon Corzine issued an order freezing the development approval process in cities and towns whose mayors have refused to resign despite being charged in a federal corruption probe involving bribes paid to local officials to speed up development projects.

Atlanta has had its share of scandals around pay-to-play. The Ronnie Thornton airport runway dirt deal dominated the headlines a few years ago. Airport advertiser Billy Corey and his Airport Services company continue to this day their five year court battle over alleged cronyism in the awarding of the 2002 advertising contract to Clear Channel Communications and their DBE partner Barbara Fouch, a close friend of Former Mayor Maynard Jackson, who has had a piece of the airport advertising business since 1981.

Rather than wait for a local scandal to prompt us, why not take steps to discourage practices that can lead to scandals? Let’s work together to find a way to make it work in the City of Atlanta, then make it work elsewhere in the state as well. Let’s start the process.

How does Pay to play reform work?
Common Cause has offered a model ordinance for consideration in the current Atlanta Mayoral and Council races. Our proposal is not structured as a campaign finance law change, but as a new condition of contracting. It’s quite a simple concept. People can either contribute freely to the campaigns of candidates, or they can qualify to receive contract work with the City of Atlanta. They cannot do both. All companies submitting bids and continuing contracting arrangements with the City would be asked to certify that they had not contributed more than a minimal amount to candidates for Mayor of City Council in the previous 12 months. Enforcement would rest with the contracting office. Companies or individuals violating the statute would be disqualified from further business with the City. To see a summary of the proposed reforms for Atlanta, click here. To read the model ordinance, click here.

We believe it’s time to take Atlanta to the next level of ethical government. No more inferences that those who play should pay. Let’s create a system where we are making sure that City contracts go to the best cost-effective service provider, not the best-connected company.

Bill Bozarth
Common Cause Georgia

We are grateful to Georgia Common Cause for their submission, and invite any interested commentary on the topic. Our personal views on Georgia Common Cause’s proposal were originally posted here.

In addition to the concerns addressed in our previous post, the regulated community should take notice - and contemplate the impact - of the proposed amendment to the City of Atlanta Procurement and Contracting Code. To be sure, the specter of campaign contributions to procurement officials from those seeking city contracts can be unseemly; but so can the prospect of a system in which only individuals wealthy enough to self-fund their campaigns have the means to seek elected office. In our view, public disclosure of contributions and transparency far better balance the competing ideals of democracy and procurement fraud prevention than outright contribution bans.

Moreover, the proposed City of Atlanta Procurement and Contracting Code as offered imposes considerably greater restriction than simply offering one a choice between contributing “freely to the campaigns of candidates, or [qualifying] to receive contract work with the City of Atlanta” as advertised by Georgia Common Cause. Rather, the proposal proffered seeks to disqualify any person or entity from obtaining - or keeping - a city contract, if that person or entity has

             made, directly or indirectly, any payment, gift or other contribution to or for the benefit 
             of any holder of elective office of the City of Atlanta or to any employee;

It is easy to contemplate how that language - crafted as broadly and vaguely as it is - could capture a great deal of seemingly innocent behavior with dire consequences. Imagine being the compliance office who has to tell your boss the CEO that her company’s life-blood contract with the City of Atlanta has been terminated for cause, and the company is liable to the City of Atlanta for all damages resulting from the termination, because the aggregate of all the contributions to a City of Atlanta politician by all of the company’s officers, directors, partners and salaried employees of the company exceeded $250, or because a competitor alleged that the company made a single “indirect” gift “for the benefit” of an employee of the City of Atlanta.

One can envision that birthday parties for City of Atlanta employees would be lonely places indeed.

Stefan Passantino, Esq.
Partner, McKenna Long & Aldridge LLP

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As media reports of criminal misconduct by legislators hit the airwaves and the public is inundated with tales of various unseemly financial relationships between politicians and their campaign contributors, state legislatures have worked anxiously to show action - any action - by passing “Campaign Transparency” legislation at a fever pitch. While most actors in the regulated community have recognized some virtue to increased disclosure of campaign activities, a companion effort by several states to permit unlimited contributions along with that disclosure remains controversial - it certainly is in Illinois on the last day of the Fall Veto Session. Clearly, the unintended pitfalls inherent to unlimited contributions can manifest easily. Nonetheless, there is a growing trend afoot at the state level (although decidedly not within the Congress or the SEC) to address “pay to play” scandals with transparency rather than limited contributions. One example of this phenomenon can be found in a state earning one disclosure advocacy group’s “Most Improved” award: the State of Missouri.

The Campaign Disclosure Project (CDP) recently ranked Missouri’s campaign disclosure law  among its “top five” in 2008 and gave the state’s disclosure laws an “A-”. In so doing, the CDP pointed out several positive components of the Missouri campaign disclosure law: Candidates must disclose detailed information on contributions and expenditures in excess of $100; a reporting requirement of late contributions and independent expenditures before Election Day; and the requirement of detailed loan disclosures.

On the other hand, Missouri is among the growing number of states to repeal virtually all contribution limits to candidates. This has generated controversy as recent bribery cases, as they always do, have prompted calls to address past criminal behavior with increased “ethics reform” legislation. There is little doubt that some form of ethics reform legislation is on the docket for Missouri’s General Assembly in 2010 but Missouri’s Speaker of the House recently has indicated any ethics reform proposed in 2010 will focus on closing disclosure loopholes in the current law rather than revisiting the rights of individuals, corporations, unions, PACs, or associations to make unlimited contributions to candidates. An article dated October 26th in the Joplin Globe has quoted Speaker Ron Richard as saying “. . . people should be able to give what they want. It should be transparent and direct, to the campaign and not through committees.”

Should Missouri decide to broach ethics reform, and continue with its perfectly acceptable policy decision not to re-impose contribution limits, Missouri’s legislators will probably be well served in the current “pay to play” environment to examine the transparency of their own personal financial disclosures. This is because, while Missouri scores relatively well in campaign disclosure requirements, the Center for Public Integrity (CPI) awarded Missouri’s personal financial disclosure requirements with 70.5 out 100 points and a letter grade of “C”. Missouri’s personal financial disclosure laws were identified as failing to require the disclosure of: the legislator’s job titles; income amount from each employment interest; amount from each investment interest; identifying clients associated with filer’s outside interests; income amount for each client; spouses’ client information; and value amount of each real property interest. Further, the CPI identified the state as not publishing a list of delinquent filers on the Web or in printed document as well not making public a list of lawmakers who failed to file reports by the required deadline, or filed incomplete or inaccurate reports.

The public mood, if such a thing can ever be gleaned, is most distraught by concerns of “too cozy” relationships between legislators and donors in their financial activities outside the public system. Increased disclosure in that regard is likely to be perceived as a true “reform” more necessary than contribution limits.

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On September 23, 2009, New York State Comptroller Thomas P. DiNapoli announced a ban on pay-to-play practices related to the $116.5 billion dollar New York State Common Retirement Fund (the “CRF”). The Comptroller issued an Executive Order and Interim Policy that prohibits the CRF from doing business with any outside Investment Adviser within two years after the Investment Adviser, or any senior officers or executives of the Investment Adviser, has made a contribution to the State Comptroller, or to a candidate for State Comptroller. An “Investment Adviser” is any Investment Adviser required to be registered with the SEC, and those Investment Advisers exempt from registration under section 203 of the Federal Advisers Act.

The Interim Policy does not apply to contributions made by senior officers and executives (specifically defined in the Policy as “Covered Associates”) to the Comptroller or a candidate for Comptroller, provided that the individual was entitled to vote at the time of the contribution, and the aggregate amount of the contribution does not exceed $250 to any one candidate per election.

The Interim Policy goes into effect on November 7, 2009, and will remain in effect until the SEC adopts a final rule pertaining to political contributions.

The New York State Comptroller is a statewide elected official, and is the sole trustee of the CRF, which is the third largest pension plan in the United States. Two different retirement systems receive benefits from the CRF: the Police and Fire Retirement System and the Employees Retirement System, which include both State and local employees. Together, these systems have over one million members, retirees and beneficiaries.

Ban on Placement Agents

The ban on political contributions from Investment Advisers follows the Comptroller’s recent prohibition of the use of “placement agents”.

On April 22, 2009, Comptroller DiNapoli announced a ban on the use of third-party placement agents and other paid intermediaries and lobbyists (herein, “placement agents”) with respect to investments with the CRF. The ban precludes placement agents from accepting any type of fee for providing access to the CRF and its investments.

The ban on placement agents followed an investigation by New York State Attorney General Andrew Cuomo, which in March of 2009 resulted in a 123-count indictment against two aides of former State Comptroller Alan Hevesi, on charges that they brokered deals between the CRF and politically-connected outside investment funds, earning millions of dollars in fees in the process. That case is awaiting trial. Comptroller Hevesi resigned in 2006, and subsequently plead guilty to charges of defrauding the government, which arose out of his use of state employees for personal purposes.

Attorney General Cuomo’s ongoing investigation of public pension fund corruption has involved several private equity and investment firms. Many firms have settled with the Attorney General’s Office in recent months, and while generally not admitting wrong doing, have agreed to: (i) make a significant settlement payment, which will be submitted to the CRF, and (ii) sign a “Public Pension Fund Reform Code of Conduct”, which prohibits the use of placement agents with respect to public pension funds, and bans campaign contributions to officials at public pension funds.

Ban on Placement Agents - New York City

In April and May of 2009, the trustees of the City of New York’s five municipal pension funds each voted to suspend the use of placement agents.

The five pension funds are the City Employees Retirement System (“NYCERS”), which is the largest municipal public employee retirement system in the U.S.; the City Fire Department Pension Fund; the City Police Pension Fund; the New York City Teachers Retirement System and the City Board of Education Retirement System. The funds have combined assets of approximately 80 billion dollars. 

Contributed by Kelly Lamendola, Esq.
Albany, NY
McKenna Long & Aldridge LLP

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While most agree the SEC’s proposed new pay-to-play rules are a necessary development, there has been controversy around a proposal that would ban placement agents from representing clients before state and local persons. Unlike the MSRB pay-to-play rules, the SEC would prohibit investment advisers from using any third party intermediary, including placement agents registered as broker-dealers with the SEC, to solicit municipal investors on their behalf. In several comment letters filed with the SEC, participants in the private equity and venture capital industry argue that the SEC’s proposal to ban investment advisers’ use of third-party placement agents is overreaching and will put small and new funds out of business. London-based private equity research firm Preqin said in a comment letter that 85% of public pension funds and other institutions handling public money felt larger managers would be the main beneficiaries of the proposed ban.

Industry leaders such as Blackstone (which has a proprietary placement agent) have been urging the SEC to reconsider its proposed outright ban because they believe that third-party placement agents play a vital role for investment advisers. Blackstone’s Chief Executive Officer, Stephen Schwartzman, said in a comment letter that he agrees with getting rid of political fixers, but taking the “drastic step” of eliminating the function of legitimate placement agents would unfairly burden firms just starting out. For many first-time funds, a placement agent is often utilized to introduce the general partner to potential investors, including large institutional investors such as public pension funds. The ban on using placement agents is seen as harmful to an emerging industry just at the time the agent business is growing; Preqin reported that of the private equity firms that raised funds in 2008, 54 percent used a placement agent, up from 45 percent in 2007 and 40 percent in 2006.

The ban on placement agents has been compared to steroid usage in Major League Baseball. As Schwartzman wrote in his comment letter: “Recently, there have been reports of a few high profile baseball players using illegal steroids to unfairly enhance their performance. Their illegal and unethical behavior has unquestionably challenged professional baseball and yet no one is suggesting banning baseball.” In contrast, others support the ban. For example, one private equity executive said the danger of corruption is a big issue that needs to be regulated. “How do you decide who is legitimate and who isn’t?” the person asked.

As opposed to an outright ban of placement agents, smaller funds are asking the SEC to consider alternative approaches, such as implementing more stringent licensing, oversight and disclosure regulations equally on all participants in the investment process. The California Public Employees’ Retirement System (Calpers), the biggest U.S. public pension fund, said in May it adopted a new policy requiring external managers to disclose fees about placement agents they hire to seek Calpers business.

Given the controversy over this issue, the SEC has a challenging task at hand.

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Common Cause Georgia has entered the fray of the upcoming Atlanta Mayoral election by challenging all candidates to support "pay-to-play" reform. Under Common Cause's proposed legislation, no person or entity who made a contribution of over $250 to the campaign of a Mayoral or City Council candidate would be eligible to submit a bid or perform a contract for the City of Atlanta for the next year. Further, the proposed legislation would restrict contributions of any amount by a City contractor to a City official or candidate during the term of the contract. The proposal places similar restrictions on gifts to City officials or employees.

While few would argue that the procurement process in Atlanta doesn't need more sunshine, the Common Cause proposal appears to go a few steps to far. Most troublesome is the proposal to prohibit persons who make contributions of over $250 from bidding on any City of Atlanta contracts for the next year, as the prohibition applies even if the contract in question was not in existence at the time of the contribution. Restricting contribution amounts in this manner would undoubtedly chill the making of political contributions for City of Atlanta elections altogether, as any person or entity with any potential interest in any City contract in the future could not make contributions without the fear of being locked out of all future business. This is the sort of broad restriction that has proven to be problematic in jurisdictions such as Colorado. Similarly problematic is the apparent willingness to consider contributions by spouses and children of contributors in making prohibition determinations. Again, Colorado should serve as a cautionary tale here.

In sum, real ethics reform for the City of Atlanta needs to be seriously contemplated. However, the current Common Cause proposal is far too broad in its current state to warrant further consideration.

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