Complying with New Jersey’s Pay-to-Play Laws

Complying with New Jersey’s “Pay-to-Play” Laws

— Background —

Complying with New Jersey’s “Pay-to-Play” laws restricting the award of government contracts in relation to political contributions is challenging.  This Fast Facts document is designed to make the process easier by highlighting the different laws and setting forth basic suggestions for compliance.

State Contracting Restrictions

P.L.2005, c.51 (codified as N.J.S.A. 19:44A-20.13 et seq.) and Executive Order 117

Since October 14, 2004, pursuant to P.L.2005, c.51, the state (or any of its purchasing agents, agencies or independent authorities) is generally prohibited from awarding a contract for goods, services or for the sale, acquisition or lease of land or buildings worth more than $17,500 to a “business entity” that has made certain “reportable” political contributions. Election law defines a reportable contribution as a contribution greater than $300 per election in the case of a contribution to a candidate committee (e.g. greater than $300 for a primary election and greater than $300 for a general election) and greater than $300 per calendar year in the case of a contribution to a party committee, legislative leadership committee or continuing political committee.

EO 117 significantly expands Chapter 51’s definition of a “business entity.”  Effective November 15, 2008, the persons and entities covered by statewide pay-to-play restrictions include:

• The bidder entity itself;
• If the bidder entity is a for-profit entity organized as:
  1. A corporation, the definition also includes any officer of the corporation and any person or entity that owns or controls 10 percent or more of the profits, assets or stock of the bidder entity;
  2. A partnership, the definition also includes any equity partner;
  3. A limited liability company, the definition also includes any equity member;
  4. A professional corporation, the definition also includes any shareholder (regardless of percentage of ownership interest) or officer;
  5. Any other type of entity, the definition also includes any principal, partner or officer.
• Any subsidiary “directly or indirectly controlled” by the business entity;
• Any continuing political committee “directly or indirectly controlled” by the business entity;
• Sole proprietors; and
• The spouse, civil union partner or resident child of any individual listed above.

The definition of a “business entity” is significantly broader than the previous definition contained in the law in that EO 117 covers principals with a 10 percent or greater interest (rather than an interest of greater than 10 percent), officers, equity partners, and equity members of a business entity as well as the spouses, civil union partners and resident children of any of these individuals.

In addition to expanding the group of persons subject to statewide pay-to-play restrictions, EO 117 also expanded the group of political recipients covered by the law.  Under these restrictions, the following entities are subject to lower limits:

• Gubernatorial/Lieutenant Governor candidate committees;
• State political party committees;
• County political party committees;
• Municipal political party committees; and
• Legislative leadership committees.

Vendors are required to submit a pre-contract disclosure form to the contracting government entity certifying compliance with Chapter 51/EO 117 and disclosing reportable contributions to CPCs/PACs made during the previous four (4) calendar years.  The Department of Treasury has developed a mechanism by which a vendor may complete a certification that is valid for a two (2) year period.  The vendor may have additional disclosure obligations that continue during the term of the contract.

Violations of the law may be cured if the business entity receives a refund for the contribution within 30 days of making the contribution; however, if a contribution is made within 60 days of a gubernatorial primary or general election, the violation cannot be cured with a refund.

A contribution in excess of the $300 reportable limit to a covered recipient by a covered contributor may not only lead to a breach of current State government contracts, but may also jeopardize eligibility for future contracting opportunities with the State of New Jersey and its Executive Branch Departments, Agencies and Independent Authorities (including State Universities and State Hospitals) for a period ranging from 18 months to 5 ½ years depending on the recipient committee and the timing of the contribution.

Executive Order 118

Executive Order 118 (“EO 118”) extends statewide pay-to-play restrictions to redevelopment contracts with the State of New Jersey.  EO 118 covers post-November 14, 2008 contracts or agreements with a State redevelopment entity for the redevelopment or rehabilitation of an area or other work forming a part of a redevelopment or rehabilitation project.

Under EO 118, a “business entity” is defined to include:

• The redeveloper itself;
• If the redeveloper is a for-profit entity, organized as:
  1. A corporation, the definition also includes any officer of the corporation and any person or entity that owns or controls 10 percent or more of the profits, assets or stock of the redeveloper;
  2. A partnership, the definition also includes any equity partner;
  3. A limited liability company, the definition also includes any equity member;
  4. A professional corporation, the definition also includes any shareholder or officer;
  5. Any other type of entity, the definition also includes any principal, partner or officer.
• Any subsidiary “directly or indirectly controlled” by the redeveloper;
• Any continuing political committee “directly or indirectly controlled” by the redeveloper;
• Sole proprietors; and
• The spouse, civil union partner or resident child of any individual listed above.

The group of persons and entities subject to EO 118’s restrictions is broader than the group of covered persons and entities under any other New Jersey State pay-to-play law.  Perhaps the most expansive aspect of EO 118 is that the term “redeveloper” is defined to include a business entity that contracts with a party to an agreement with a State redevelopment entity to perform professional, consulting or lobbying services in connection with the project.  Thus, under EO 118, the possibility exists that a contribution by a redeveloper’s professional, consulting or lobbying firm could impact that redeveloper’s eligibility for a post-November 14, 2008 State redevelopment contract.

In addition to creating a broad group of persons and entities subject to EO 118’s restrictions, EO 118 also establishes a wide group of political recipients subject to the law.  Under EO 118, a contribution greater than $300 to any of the following recipients may constitute a violation of the order:

• Gubernatorial/Lieutenant Governor candidate committee;
• State political party committee;
• County political party committee;
• Municipal political party committee;
• Legislative leadership committee; and
• Candidate committee of candidate for state legislative, county or municipal elective office in the jurisdiction in which the property subject to the redevelopment agreement is situated.

The New Jersey Department of Treasury has issued guidance advising that the following entities are state redevelopment entities subject to EO118:

• New Jersey Meadowlands Commission
• New Jersey Redevelopment Authority
• Capital City Redevelopment Corporation

Redevelopers are required to submit a pre-contract disclosure form to the redevelopment entity certifying compliance with EO 118 and disclosing reportable contributions to CPCs/PACs made during the previous four (4) calendar years.  The redeveloper may have additional disclosure obligations that continue during the term of the redevelopment agreement.

Violations of the law may be cured if the business entity receives a refund for the contribution within 30 days of making the contribution; however, if a contribution is made within 60 days of a gubernatorial primary or general election, the violation cannot be cured with a refund.

County, Municipal and Legislative Contracting Restrictions

P.L.2004, c.19 (codified as N.J.S.A. 19:44A-20.3 et seq.)  (“Chapter 19”)

As of January 1, 2006, the State Legislature, a county or a municipality is generally prohibited from awarding a contract, which is not awarded pursuant to the “fair and open process” for goods or services worth more than $17,500 to a “business entity” that made a “reportable” contribution to the official’s candidate committee or to certain party committees.

Specifically, the law covers a business entity contributing to the elected official candidate committee with the ultimate responsibility for awarding the contract and/or to a state, county, or municipal political party committee (depending on the level of government awarding the contract) of the party of which the elected official is a member during a specified period of time. In the case of contracts with the State Legislature, only reportable contributions to the State party committee of the party of the presiding officer and to the presiding officer’s candidate committees and legislative leadership committee disqualify a business entity from being awarded a contract.

Under this law, the definition of a “business entity” includes the bidder and all principals who own or control more than 10 percent of the profits, assets or stock in the bidder, and, where the bidder is a natural person (i.e., a sole proprietor), that person’s resident spouse and children. But, unlike the law on state contracting, the definition of “business entity” under P.L.2004, c.19 does not include subsidiaries and/or political action committees “directly or indirectly controlled” by the bidder or the spouses, civil union partners and resident children of principals (as defined above).

Additionally, unlike the pay-to-play law governing state contracts, Chapter 19 makes an exception for contracts awarded pursuant to a “fair and open process.”  The law defines “fair and open process” as a contract that was, at a minimum, (1) awarded under a process that provides for public solicitation of proposals or qualifications and awarded and disclosed under criteria established in writing by the public entity prior to the solicitation of proposals or qualifications, (2) publicized in a newspaper or on a website maintained by the public entity 10 days prior to opening the contract, or (3) opened at a public meeting where the governing body reviewed the proposals and announced the award.  Under Chapter 19, reportable political contributions do not disqualify a business entity from any contract awarded pursuant to a fair and open process.

Like the law governing state contracts, a business entity has a pre-contract award reporting obligation to the contracting entity. Vendors may have additional disclosure obligations that continue during the term of the contract.

Violations of the law may be cured if the business entity receives a refund for the contribution within 60 days of making the contribution.

A contribution in excess of the $300 reportable limit to a covered recipient by a covered contributor may not only be considered a breach of a current non-fair-and-open process contract but may also jeopardize eligibility for contracts with a particular county or municipality that is awarded by a process that is not fair-and-open for a period of 12 months after the contribution is made.

— General Disclosure Requirements —

P.L.2005, c.271 & N.J.A.C. 19:20-26.1 et seq.

For contracts awarded by the Executive Branch, the State Legislature, a county, a municipality, an independent authority, a board of education or a 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 not 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 has received an aggregate of $50,000 or more in payments as a result of government contracts in a calendar year also has an annual disclosure obligation to the New Jersey Election Law Enforcement Commission (ELEC). Business entities must complete Form BE, and file it with ELEC online. The annual report is due no later than March 30^th of each calendar year. The annual report must include the name of the business entity, the name of each public entity from which the business received a contract, the amount of the contract, the date of the contract and a description of the goods, services, equipment or property sold to the public entity.  In addition, the annual report must also provide a list of the campaign contributions attributed to the business.

The definition of a “business entity” is broadest under P.L.2005, c.271.  It includes the bidder, principals, partners, officers or directors of the bidder (regardless of their percentage interest), and their spouses, subsidiaries “directly or indirectly” controlled by the bidder and political action committees or continuing political committees “directly or indirectly” controlled by the bidder. Where the bidder is a natural person (i.e., a sole proprietor), the definition also includes that person’s resident spouse and children.

— Local Ordinances (Laws) —

Currently, approximately 150 municipalities and counties throughout the State of New Jersey have their own “pay-to-play” ordinances in effect. P.L.2005, c.271 upholds these ordinances and any other local ordinances enacted in the future. Although the provisions of these local “pay-to-play” ordinances vary from locality to locality, many of the ordinances are more stringent than P.L.2004, c.19 in that they contain a broader definition of the term “business entity,” include aggregate limits on contributions and may contain longer periods of time during which contributions by a “business entity” (and associated persons and entities) may disqualify the business entity from eligibility for a local government contract. For example, some local ordinances cover individuals who earn more than $100,000 a year (regardless of whether the individual is an officer or principal of the vendor business entity). Other local ordinances contain an absolute ban on contributions, in any amount once a proposal has been submitted or communications/negotiations have commenced for a particular contract. Other local ordinances may cover contributions by a vendor’s consultants and subcontractors.

— General Suggestions for Compliance —

• Identify Who Is Covered. Identify persons in your company and entities subject to the requirements of each law and alert relevant individuals of the restrictions, prohibitions and disclosure requirements of the relevant law(s).
• Track Contributions by Covered Persons and Entities. Track and review all contributions by covered persons and entities to prevent inadvertent violations. If an inadvertent violation occurs, request an immediate refund in writing.
• Use Contribution Cover Letters. Use contribution cover letters with protective language, which advises all recipient committees that the contributor is a business entity subject to “pay-to-play” restrictions.
• Adopt a Policy. Adopt a company policy governing the making and solicitation of political contributions.  Distribute the policy to all officers, members, directors, stockholders, and employees.
• Conduct Training. After adopting a company policy, train all relevant individuals on the policy and on the scope of New Jersey’s “Pay-to-Play” restrictions. Education and awareness are key for maintaining compliance.
• Make Compliance a Term of Contract. If your company is a redeveloper, consider including compliance with EO 118 as a term of contract or agreement for professional, consulting or lobbying services in connection with redevelopment projects.

— Resources —

Genova Burns LLC, Corporate Political Activity Law Group
Attn: Rebecca Moll Freed, Esq.
Address: 494 Broad Street
Newark, NJ 07102
Phone: 973-230-2075
Email: rfreed@genovaburns.com
Website: www.genovaburns.com
Blog: www.corporatepoliticalactivitylaw.com

Election Law Enforcement Commission (ELEC)
Please click here to access the ELEC website.

— For More Information —

If you need additional information, please contact NJBIA’s Member Action Center at 1-800-499-4419, ext. 3 or member411@njbia.org.

This information should not be construed as constituting specific legal advice. It is intended to provide general information about this subject and general compliance strategies. For specific legal advice, NJBIA strongly recommends members consult with their attorney.