Summary of Recent Executive Orders Pertaining to Pay-to-Play Statutes

Title:
Summary of Recent Executive Orders Pertaining to Pay-to-Play Statutes
Publication:
Governmental Affairs Update
Attorneys:
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The practice of making political contributions in order to secure government contracts, commonly known as “pay-to-play,” has been the target of both the Governor’s Office and the State Legislature over the past several years.1

On September 24, 2008, Governor Corzine added to New Jersey’s array of pay-to-play laws by issuing two Executive Orders that will have an effect on businesses and individuals who contract with the State. A business entity may be disqualified from a contract with State government if it has made a prohibited contribution prior to the award of the contract. Further, the business entity cannot make certain contributions during the term of that contract. 2

Because the Executive Orders are independent Gubernatorial acts and have the force and effect of law, they currently only apply to contracts entered into at the State level by an Executive Branch department, agency, authority or independent State authority. The Executive Orders do not apply to contracts executed at the county or municipal levels.

Executive Order # 117

Executive Order Number 117 (EO 117) changes the pay-to-play laws in three important ways. First, it expands and revises the term "business entity" as used in the 2005 pay-to-play law "Chapter 51" (N.J.S.A. 19:44A 20.13 et seq.), thereby increasing the number and types of organizations and individuals whose contributions are restricted. Second, it regulates contributions to legislative leadership committees and municipal political party committees. Third, it prohibits contributions to the candidate committees and election funds of candidates for the newly created office of Lieutenant Governor. EO 117 takes effect on November 15, 2008 and applies prospectively only to contributions made on or after that date.

1. Expansion of the definition of "business entities."

The pay-to-play laws prohibit the State from awarding contracts worth more than $17,500 to a "business entity" that has made reportable campaign contributions. The definition of the term "business entity" is key to understanding and complying with these contracting restrictions.

Chapter 51 uses the catch all term "business entity" to describe all organizations and persons who must report contributions. Under Chapter 51, a "business entity" includes any business organization (Corporation, Professional Services Corporation, LLC, Partnership, LP, Business Trust, etc.), any principal who owns or controls more than ten percent of the profits or assets of a business entity or more than ten percent of a for-profit-corporation’s stock, any subsidiary that is controlled directly or indirectly by the business entity, any 527 organization (other than a candidate committee, election fund or political party committee) that is controlled by the business entity and, if the business entity is a natural person (i.e. sole proprietor), that person's spouse or child if they reside with her.

EO 117 closes some loopholes in the Chapter 51 definition of "business entity." Under EO 117, the following are now also considered "business entities" and their contributions are limited.

a. Officers of corporations and any person or business entity that owns or controls ten percent or more of the stock of the corporation. (This is a substantial change to Chapter 51's approach to corporations. Under Chapter 51, officers were not included and the ten percent stock ownership provision applied only to principals. It now applies to all persons, officer and business entities.);

b. Partners of General Partnerships and Limited Partnerships, Shareholders and Officers of Professional Services Corporations, Members of Limited Liability Companies, Partners of Limited Liability Partnerships and Sole Proprietors. (Chapter 51 confined contributions only on behalf of the Entities (i.e., the LLCs or PCs) themselves, not the individuals who are listed above. Under EO 117, these individuals are now constrained from making contributions.);

c. The term "business entity" now also applies to the spouses or civil union partners and any children who reside with the officers and partners included in the new definition. Importantly though, this restriction does not apply to contributions made by spouses, civil union partners or children if they are made to candidates for whom the spouse, civil union partner or child is entitled to vote. This provision allows these individuals to continue to make contributions to their local candidates, but prevents them from making a contribution to a non-local candidate who might have influence over a contracting decision. (Under Chapter 51, only the contributions of the spouses and children of Sole Proprietors were regulated. Now the contributions of the spouses, civil union partners and children of most important participants in a business entity will be regulated.)

The Executive Order specifically applies to for-profit business entities thus maintaining the 2007 clarification that the play-to-play laws do not apply to nonprofit entities.

2. Contractors prohibited from making contributions to legislative leadership committees and municipal political party committees.

Under Chapter 51, state contractors were able to make contributions to legislative leadership committees and municipal political party committees. EO 117 also attempts to reign in the practice known as “wheeling” where contributions are passed from one committee to another to avoid contribution limits. However, those changes will necessitate legislative action. Under its provisions, state contractors may no longer make contributions to legislative leadership committees or municipal party committees. (Chapter 51 already operated as a bar to contributions by State contractors to gubernational candidates, as well as State and County political party committees.)

3. Lieutenant Governor

EO 117 regulates contributions to the newly created office of Lieutenant Governor. With this addition and the addition of leadership committees and municipal committees as discussed above, contributions to the following organizations are now limited.

Contractors are still permitted to make contributions not in excess of $300 per election to a candidate or per year to the various committees as such contributions are not reportable by the candidate or committee at issue. Donations made without consideration of these changes in the law can result in the loss of government contracts, a future inability to contract with government entities, as well as civil penalties, in addition to public relations difficulties. In the event that you are unsure of the consequences of a political contribution, by you, your spouse or your company, you should seek the advice of legal counsel.

Executive Order # 118

Executive Order Number 118 addresses the "redeveloper loophole." Under New Jersey's existing pay-to-play laws, state redevelopers and their consultants were able to make contributions both directly and indirectly to candidates and elected officials who were responsible for the awarding of redevelopment projects.

EO 118 bans such contributions across the board by mimicking EO 117 in adopting the same definition of "business entity" and by prohibiting contributions to municipal political party committees and legislative leadership committees in addition to the political organizations already regulated by Chapter 51.

In addition, EO 118 prohibits state redevelopers from making contributions through intermediaries in the form of lobbyists, governmental affairs agents, consultants, attorneys, family members, employees or other conceivable third-parties.

EO 118 prohibits nearly every possible contribution that a state redeveloper might make to any candidate or elected official at any level of State or local government.

EO 118 does offer state redevelopers an opportunity to retract contributions so long as they are not made within 60 days of a June primary election or general election. The redeveloper is required to request a full reimbursement and to receive that reimbursement within 30 days. If the redeveloper is successfully reimbursed, the violation is excused and the redeveloper may once again contract with the State.

EO 118 applies to all redevelopment agreements entered into after November 15, 2008, but does not affect any contributions that were made before that date.

Prior to making any contributions, state redevelopers should seek the advice of legal counsel. Failing to do so can result in the loss of government contracts, a future inability to contract with government entities, as well as civil penalties, and potential public relations difficulties.

Future Predictions

EO’s 117 and 118 may well be adopted by the Legislature and written into law. The original pay-to-play restrictions began as Governor McGreevey’s Executive Order Number 134, but was quickly adopted by the Legislature and signed into law as Chapter 51.

Governor Corzine has called for the legislative enactment of EO’s 117 and 118 and, given the anti-corruption nature of these EOs, it is unlikely that many members of the New Jersey Legislature will oppose converting them into law. Once converted, their provisions will apply to contracts at the county and municipal level, as well as contracts at the State level.

It is also quite possible that, prior to any action by the Legislature, some counties and municipalities will independently incorporate the terms of EO’s 117 and 118 into their local Codes.

1 See prior discussions of the pay-to-play provisions on Riker Danzig’s governmental affairs website at http://www.riker.com/practice/index.php?id=2009.
2 On September 24th, Governor Corzine also issued Executive Order 119 (creating an Ethics Task Force charged with studying and making recommendations regarding the need for amendments to local government ethics laws) and Executive Order 120 (adding to the list of Government Employees subjected to the financial disclosure process).