Why Legal Structure Matters

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Why Problems Matter

I really enjoyed this piece by Shannon Ellis for CompassPoint on why it is essential in strategic planning to ask the question “what is the problem we are trying to solve?” Ellis makes the point that looking at the problem you are trying to solve allows you to take a “more profound look” at the organization’s “programming in the context of the specific results [it is] trying to achieve.”

Had we asked ourselves this question—How are we currently thinking about this problem?—we may have surfaced several insights of strategic significance. First, I suspect we would have identified a wide variety in thinking among staff and board about the issue of domestic violence, which could have had a profound impact on program cohesion, communication, and overall execution of organizational strategy. If we’re not all thinking similarly about the problem, how can we act together in alignment toward its solution? Second, by not asking this question we missed an opportunity to review and assess our programming in light of our current analysis of the problem: Are we doing the most impactful work possible to address this issue given the current environment?

Why Structure Matters

The problem an organization is trying to solve is also critical from a lawyer’s perspective because the solution to that problem may indicate whether the organization has the right legal structure to solve the problem it wants to solve.

A few examples of some problems an organization might identify:

  • If the organization determines the problem it is trying to address (which I borrowed from the CompassPoint piece) is: “Societal responses to domestic violence do not reflect the realities of survivors’ experiences.” The solution to this problem might be a public education campaign or advocacy campaign that helps to educate the public. This type of educational campaign is perfectly legal for a 501(c)(3) public charity.
  • If the organization instead framed the problem (again borrowed from the CompassPoint piece): “Serious inequalities and obstacles continue to hinder the ability to obtain justice for survivors of domestic violence,” the solution to that problem might be to lobby the legislature to remove the public policy obstacles that hinder access to justice. This type of lobbying work is permissible by both 501(c)(3) public charities and 501(c)(4) social welfare organizations.
  • But, what if instead the organization had identified this as being the problem: “While the Legislature routinely approves legislation to help victims overcome obstacles to justice, the Governor routinely vetoes this legislation.” In this example, the solutions might be best accomplished by a 501(c)(4) social welfare organization (which can engage in some activities that oppose candidates for public office) or a political organization or PAC, organized under Section 527 of the tax code. The organization may want to fill its board of directors with people who are close to the Governor, may want to hire a lobbying firm or make lobbying communications in excess of the charity’s lobbying limits, make contributions to candidates for Governor, or attack the Governor in the press, social media or through public communications. But, the organization must have the correct legal structure for engaging in this type of action. The good news is that if the organization is a 501(c)(3) public charity, it is possible for the organization to open its umbrella and create an additional entity that is better positioned to solve the problem the organization has identified.

Helping candidates help themselves (with campaign finance compliance)

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I’ve had some conversations in recent months with a number of candidates who are exploring a run for California state or local office, and even one candidate considering running for congress. Many of these candidates advise it is difficult to find inexpensive legal campaign compliance assistance — since most firms offer only full-service compliance.

To help respond to this need, I’ve developed a package of legal services geared toward candidates who either have volunteer treasurers or are doing their own campaign filings.

These services include:

  •  A short primer on the importance campaign finance compliance. Let’s be honest, nobody wants to hear a lawyer drone on and on about campaign compliance, but it really is important for all candidates to embrace campaign finance compliance.
  •  A two-hour training curriculum for candidates and treasurers covering how to review California state campaign reports or Congressional campaign reports,
  • Tips on the biggest faux pas candidates make in filing campaign reports, and
  • A summary on what California state auditors are looking for when they review campaign filings.

Please let me know if I can help you (or a candidate you know), help yourself!

Top 10 Tips for Post-Election Debts

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In the last push to contact voters before the election, many California state and local candidates and ballot measure campaigns go into debt and end up owing money to campaign consultants and other vendors after the election. Since the Fair Political Practices Commission is pursuing an enforcement action against one California consultant for failing to take appropriate steps to pursue payment from candidate campaign committees after the election, it seemed like a good time for a refresher on campaign debts.

Here are my Top 10 Tips for consultants, and their clients, for dealing with campaign debt:

1. If possible, campaigns should avoid going into debt. It is difficult to raise money after the election, especially for campaigns that are not successful.

2. Consultants should include a term in their contracts detailing what happens if the client fails to promptly pay for services. For example, the contract could include a penalty or fee if the client fails to pay the money owed in a timely fashion.

3. Unpaid bill owed to a consultant can become contributions if the consultant is not careful. Technically an outstanding invoice can become a contribution to the campaign if it is not paid within 45 days, except as noted below.

4. Consultants should clarify to the client that she is offering services to the campaign committee on the same terms as are offered to the general public, and is not giving a campaign committee any special deals because of the committee’s status as a campaign.

Here is some sample language that can be included in client contracts:

CONSULTANT provides the goods or services to the COMMITTEE under this AGREEMENT in the ordinary course of its business on the same terms and conditions offered to customers generally.  Consultant enters into this agreement with the intent that the committee be required to pay in accordance with terms of the agreement.  CONSULTANT does not have actual knowledge that COMMITTEE would not be able to pay in accordance with those terms.

CONSULTANT will make reasonable efforts to collect the full amount of the payment owed for goods or services provided under this AGREEMENT.

5. The consultant should make reasonable efforts to recoup the fees owed, including sending routine invoices, and adding interest charges (if any were detailed in the contract), onto the invoice. The law does not dictate what is considered a reasonable step for recouping the fee, thought the regulations do state that a consultant can show they are acting reasonably even if they do not exhaust all available legal options and even if they accept less than the full amount of the payment owed by the candidate or committee.

However, in a recent FPPC enforcement action, the Commission noted the consultant was “exercising business judgment in making the decision not to engage in legal action against the clients because, in his experience, clients are honorable people who always do their best to meet their obligations.” The Commission goes on to say:

While [the consultant] may have believed his business practices did not violate the Act, that belief was ultimately incorrect.

It is not clear whether the FPPC believes all consultants must initiate legal action or accept something less than full payment in order for their actions to be considered “reasonable” or whether the FPPC simply imposes a higher standard on consultants that are also registered lobbyists, as noted below.

6. Consultants that are also registered lobbyists need to be even more cautious in extending credit to clients and ensuring repayments. In a recent FPPC enforcement action, the consultant had been paid 92% of the time during the relevant period of time, but was still found to have violated the law.

7. Debts must be reported as an accrued expense on campaign reports until the debt has been repaid. If a debt is settled for less than the full amount, that settlement will need to be reflected on the campaign’s reports.

8. Candidates covered by contribution limits may need to abide by state or local rules regulating how money can be raised after the election to pay “net debts outstanding” at the time of the election. Often candidates must raise money to repay a debt within a specified time.

9. Before a candidate or ballot measure campaign committee can terminate, it is required to give at least 60 days’ notice of its impending termination to any creditors.

10. Candidates are personally responsible for debts of the committee.

Proposed penalties for little-known charitable registry

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The California Attorney General’s Office is considering imposing penalties for failure to comply with the state’s little-known charitable registration rules.

As Gene Takagi wrote on his blog:

Note that it is very common for charities to be delinquent on their registration renewals, particularly for smaller charities that are volunteer-run whose address on record may be tied to a volunteer leader’s address and not a facility occupied by the charity.

The proposed regulations, if adopted, will mean such charities will need to suspend activities and fundraising if they are delinquent in their registration, and if suspended or revoked, their board members will be subject to personal liability and their assets subject to forced divestiture.

While the comment period for the proposed regulations has closed, you can contact Gene Takagi if you are interested in endorsing the comments his firm submitted in partnership with Barbara Rosen of Evans & Rosen LLP. I signed on to endorse these comments because they helpfully point out serious flaws in the regulations and urge the Attorney General to extend the comment period.

Guv Vetoes Pay-To-Play Regulations — Seeks More Comprehensive Approach

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Today the Governor vetoed AB 1728, a bill which would have regulated campaign donors who pay-to-play with local water board officials. In his veto message the Governor said:

Expanding the Act to one subset of special districts, namely water boards, would add more complexity without advancing the goals of the Political Reform Act.

This veto message suggests the Governor might be open to a broader regulation of pay-to-play next year.

Pay-to-Play Regulations on the Rise in California

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With limited exception, California state’s campaign finance laws have typically emphasized the disclosure of campaign contributions rather than requiring officials to disqualify themselves from decisions involving their campaign donors. However, after a recent scandal involving board members on the Central Basin Municipal Water District receiving large contributions from contractors for the district, the California legislature recently approved legislation to require water board members to disqualify themselves in some circumstances.

Recently approved A.B. 1728, which is currently waiting for the Governor’s signature, would ban water board members from voting on contracts where the contractor has given the board member a contribution of more than $250. The bill exempts contracts that are competitively bid.

What Does Paying to Play Look Like?

As the Whittier Daily News reported:

Nearly half of all campaign money raised by Central Basin Municipal Water District board members came from contractors doing business with the district, according to campaign financial documents and district records.

Since 2007 about $166,000 of the more than $330,000 in campaign contributions received by board members came from contractors doing business with the district.

The Board Members receiving these large campaign contributions subsequently voted to approve lucrative contracts for the contributors.

But, the Central Basin Water District is by no means the only pay to play scandal in California’s past. Some political nerds may recall that in 2004, then-Governor Gray Davis was investigated for a no-bid software contract for $95 million awarded Oracle Corp just days before Oracle made a campaign contribution totaling $25,000.

How California Regulates Pay to Play

One prominent campaign finance attorney has opined that as a result of the Supreme Court’s decision in Citizens United, regulations and legislation limiting “pay-to-play” are on the rise. California has a patchwork of local and recently-strengthened state-level pay-to-play laws. The following is a summary of some of the more prominent pay-to-play regulations in California.

Appointed board members and commissioners who run for elective public office are required to disqualify themselves from making decisions involving a party, participant or their agents who have contributed $250 or more to the official’s campaign within the 12 months preceding the decision. It also requires disclosure on the record of the proceeding of all campaign contributions received from these persons during that period. In addition, California prohibits solicitation or receipt of campaign contributions in excess of $250 during such proceedings, or for three months after the decision, from parties, participants or their agents.

California Education Code provides that the State Teachers Retirement System Board may not consider any matter that involves a government contractor during an executive session and the failure to make the required disclosures could result in disqualification. The Government Code also

California State Lottery contractors must disclose all campaign contributions “to any local, state, or federal political candidate or political committee in [California] for the past five years.”

The Board of Equalization has also implemented disclosure and disqualification rules for decisions involving certain contributors.

State law also prohibits board members of the Los Angeles County Transportation Authority, who have received campaign contributions in excess of $10 from contractors or prospective contractors within the previous four years, from participating in contract decisions that involve those donors.

Patchwork of Local Laws

Additionally, some local jurisdictions have adopted local regulations prohibiting or restricting pay to play, including BerkeleySan Francisco, and Los Angeles. Each of these jurisdictions takes a slightly different approach to how they regulate pay to play. As Kathay Feng from California Common Cause has pointed out, Los Angeles regulates even contracts approved through the competitive bidding process and San Francisco extends its ban to contributions from the contractor, as well any member of that party’s board of directors, its chairperson, chief executive officer, chief financial officer, chief operating officer, any person with an ownership interest of more than 20 percent in the party, any subcontractor listed in a bid or contract, and any PAC controlled by the contractor.

Related Articles

Campaigning for Re-Election: Legal and Ethical Red Flags by the Institute for Local Government

And my previous post: Everything you need to know about running for public office…you learned in kindergarten

 

Materials from August 12 AFJ Webinar on SB 27

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Rules of Thumb

During a recent webinar hosted by AFJ’s Bolder Advocacy Initiative, I mentioned a couple of good Rules of Thumb about ballot measure reporting. So, in addition to my PowerPoint on the subject (Presentation for 8.12 webinar), I wanted to summarize a couple of my main points here:

  1. Raising money will always require the disclosure of donors – assuming you raise over a very low threshold.
  2. The thresholds are a little confusing, we went through some Mad Libs (Ballot Measure Reporting Worksheet) to cover them. A couple of highlights: if you’re doing independent expenditure activities, you’re going to report at a lower threshold, and if you never spend over $50,000 in a 12-month period or $100,000 over 4 consecutive calendar years on ballot measure activities, you have a lot more flexibility.
  3. Not all types of committees require you to disclose donors. If the entity can spend only non-donor funds (like business income, interest income, or the proceeds from the sale of goods or services), it can avoid needing to disclose donors.
  4. If you spend over $50,000, there is an advantage to spending money from business or interest income because you will not report donors. If you spend over $50,000 from “donor funds” (including gifts, general support grants, dues, bequests, or other similar payments that are not earmarked for ballot measure work), you will likely need to report some donors. The law dictates which donors get reported and how.
  5. You should take advantage of non-reportable activities that are considered “exempt” from reporting – see AFJ’s fact sheet

Menu of Options

You can use the Mad Libs worksheet (Ballot Measure Reporting Worksheet) I referenced to learn more about the thresholds for reporting, but you may also want some information on how to pick which reporting option on the menu works best for you. When selecting from the menu of reporting options you have available to you, here is a good approach to deciding how to structure your activities.

  1. If you’re a 501(c)(3), start with your tax law lobbying limit and determine whether the budget is for the campaign you’re planning to run for the measure is within that limit — ask AFJ if you need to know what this is! If what you plan to spend is above your lobbying limit, you may need to explore opening a 501(c)(4), or partnering with an existing 501(c)(4) or labor union, to fiscally sponsor the ballot measure campaign.
  2. Decide if you will need to raise money to support your campaign. If the answer is yes, then you will likely need to become a Recipient Committee.
  3. Determine whether you will spend more than $50,000 on your organization’s portion of the ballot measure campaign (including contributions to multiple ballot measure campaigns).
  4. If you plan to spend more than $50,000, determine whether you have sufficient non-donor funds (i.e., business income, interest income, proceeds from the sale of goods or services) to pay for your portion of the campaign.
  5. If you plan to spend less than $50,000 on all of your political activities (including contributions to multiple ballot measure campaigns) in a 12-month period, it is typically easier to make “contributions” to ballot measure campaign committees than to make “independent expenditures,” because the reporting is much easier and you file reports at a much higher threshold.
  6. If you plan to spend over $50,000 and you do not have sufficient non-donor funds to support your involvement, you can either explore becoming a “Calendar Year Recipient Committee,” which will require the disclosure of some donors; or, you can raise money to support your organization’s involvement, which will also require the disclosure of donors giving earmarked gifts.