2007-3: Clarification of Process for Determining Non-Campaign-Related Expenditures

Re: New York City Administrative Code ("Admin. Code") §§ 3-704(1), 3-710(2)(c) and New York City Campaign Finance Board Rules 1-03(a), 1-08(g), and 5-03(e); Advisory Opinion 2003-2; Op. No. 2007-3.

Because of the need to ensure that campaign funds - and public funds in particular - are spent properly, the New York City Campaign Finance Act (the "Act") (Admin. Code §§ 3-701, et seq. (the "Act")) and New York City Campaign Finance Board Rules (the "Rules") provide that a candidate's principal committee may make expenditures only to further a candidate's nomination or election. Making an expenditure for a non-campaign-related purpose is considered a violation of the Act and Rules that may result in a penalty being assessed by the New York City Campaign Finance Board (the "Board"). See Admin. Code §§ 3-702(8), 3-704(1), 3-710(2)(c) and Rules 1-03(a), 1-08(g), and 5-03(e); Advisory Opinion 2003-2. In addition, where the Board finds that expenditures have been made for a non-campaign-related purpose, the non-campaign-related expenditures may be treated as unspent campaign funds, thereby creating a repayment obligation for the candidate. See Admin. Code § 3-710(2)(c) and Rule 5-03(e)(1).

The Board has received inquiries from candidates asking for clarification regarding how the Board determines what types of expenditures are non-campaign-related, both during and after the election. Because the inquiry raises a matter of general public interest, the Board has determined to issue an advisory opinion.

The Act and Rules provide that campaign funds may be used only to further a candidate's nomination or election. See Admin. Code §§ 3-704(1), 3-710(2)(c) and Rules 1-03(a), 1-08(g), and 5-03(e). This requirement ensures that public funds, which are distributed for a particular purpose, are used only to further that objective, and not for personal or other types of uses. Similarly, the requirement ensures that private campaign funds, which are contributed for a particular purpose, are used only for that purpose.¹ When these expenditures occurred before or during the election, and the Board finds that such expenditures were not made in furtherance of the candidate's nomination or election, such expenditures are deemed "non-campaign-related."

For expenditures made after the election by participants who received public funds, the standard is even more stringent. See Admin. Code § 3-710(2)(c) and Rule 5-03(e)(2). In such cases, participants must demonstrate through very detailed documentation that expenditures reported after the election were either incurred before the election (and reported in a timely manner as outstanding liabilities), or were for modest post-election expenditures for routine activities involving nominal costs associated with winding up a campaign and responding to the post-election audit. Id. As Rule 5-03(e)(2)(ii) provides:

Such expenditures may include: payment of utility bills and rent; reasonable staff salaries and consultancy fees for responding to a post-election audit; reasonable moving expenses related to closing the campaign office; a holiday card mailing to contributors, campaign volunteers and staff; thank you notes for contributors, campaign volunteers, and staff; payment of taxes and other reasonable expenses for compliance with applicable tax laws; and interest expense. Routine post-election expenditures that may be paid for with unspent campaign funds do not include such items as post-election mailings other than as specifically provided for in this subparagraph; making contributions; making bonus payments or gifts to staff or volunteers, or holding any post-election day event, including, but not limited to, any meal or any party.

The strict requirements of Rule 5-03(e) ensure that campaigns do not use unspent funds after the election, except for very limited expenditures, before reimbursing the taxpayers.

Although the Board seeks to ensure that campaign funds are used only for campaign-related purposes, the Board does not tell candidates how to run their campaigns. Indeed, the Board recognizes that campaigns are run in many different ways. Further, the determination whether specific expenditures are non-campaign-related is contextual and fact-specific. An expenditure may be perfectly legitimate in one context and problematic in another. Thus, enumerating exactly what types of expenditures are non-campaign-related in the form of an itemized list is not possible or even practicable. Candidates should use common sense to determine whether expenditures are campaign-related, and should contact the Board's Candidate Services Unit before making expenditures if they have any questions.

The quality of documentation provided by the campaign plays a critical role in the Board's determination whether an expenditure is non-campaign-related. In order to demonstrate that an expenditure is campaign-related, the candidate must maintain contemporaneous² documentation for the goods and services provided, showing the date the vendor was retained, the vendor's name and address, and a detailed description of the goods and services that the vendor provided. See Rule 4-01(a), (d), (l). Oral agreements do not suffice. For wages, salaries, and consulting fees, the candidate must maintain contemporaneous, signed/dated, detailed documentation showing what services were provided at what cost, including the number of hours worked. See 2005 New York City Campaign Finance Handbook at 3-18.³

The Board cannot stress enough the need for all documentation to be contemporaneous with, or in advance of, the initial date on which the relevant goods and services were provided. Because of this absolute requirement for contemporaneity, there is no way to rectify, after the fact, the failure of a campaign to maintain satisfactory, detailed documentation. Thus, a campaign that fails to adequately maintain contemporaneous documentation will necessarily expose itself to liability for penalties or public funds repayment obligations.

When a candidate retains a vendor to provide goods or services in excess of $1,000, the candidate is required to keep a copy of the contemporaneously written contract with the vendor (or if no contract is provided, a contemporaneously written record of the transaction including the date the vendor is retained, the vendor's name and address, and a description of the goods or services the vendor is expected to provide). See Rule 4-01(l). Such records must contain a signature and provide some indication that the terms of payment were agreed to in advance. When a payment for services rendered before the election is not made until after the election, it is especially important that the campaign contemporaneously report the unpaid expenditure as an outstanding liability. See Admin. Code § 3-703(6) and Rules 1-04(g)(7), 1-08(b), and 3-03(e)(1). Otherwise, the Board may treat the payment as a post-election expenditure, which, as discussed above, is subject to a narrower definition and a more stringent standard than a pre-election expenditure.

Further, as noted above, whether the Board will consider an expenditure "non-campaign-related" greatly depends on the context in which the expenditure is made. The standard is one of reasonableness as demonstrated by the facts and underlying documentation. In making this determination, the Board will consider several factors,⁴ including, but not limited to:

1. The timing of the purchase. How close to the upcoming election was the expenditure made? When a candidate makes an expenditure close to the election, the Board may question whether the expenditure was actually made for personal use or to benefit a future campaign. This is particularly true when the expenditure is for a durable good. For instance, the purchase of a flat-screen television the week before the election could indicate that the campaign was making such a purchase primarily for personal use or for another race. (See "durable goods" discussion, infra, at 5.)

   At the same time, however, an expenditure made a long time in advance of the election could, under certain circumstances, cause the Board to scrutinize the purchase more carefully. For example, an expenditure for storage space or rent one year before the election when the campaign had little or no activity might raise questions about whether such a purchase was truly necessary and in furtherance of the candidate's election. Similarly, a payment for services at a time when it appears there would be little or no need for those services, such as payments for working on the post-election audit when the audit has not yet begun, may also give rise to greater scrutiny.

2. The necessity of the expenditure. Has the campaign already purchased similar or duplicative services or equipment during that election cycle? Do the goods or services purchased actually serve a legitimate, campaign-related purpose? When a campaign has already purchased similar goods or services, the Board is more likely to question whether those goods or services are for the campaign. For example, when a campaign pays several people to advise the campaign on literature writing and design, it seems more likely that the second or third person is being paid for some other reason. In such an instance, detailed documentation becomes critical. It might be the case that person number one wrote the text, person number two did the layout, and person number three took the photographs. But if the Board is presented with three invoices with the single line item "Literature Design" as the only description of what these people did, it would be impossible for the Board to discern these differences.

   Similarly, a campaign's spending thousands of dollars on a second digital camera and a second printer would incur scrutiny from the Board and require the campaign to substantiate that it needed such equipment for a campaign-related purpose. In addition, factors such as the size of the campaign, the candidate's lack of opposition in the race, and the amount of spending by the candidate's opponent may affect the Board's view of the necessity of a particular expenditure.

3. An unusually high proportion of spending on a specific category of expenditure. When a specific category of expenditure represents an unusually high percentage of the total expenditures made by that candidate, it may receive particular scrutiny from the Board, particularly if the campaign's other expenditures are not commensurate with such a spending pattern. For example, the Board might closely analyze a campaign's expenditures where that campaign spent 60% of its total expenditures on payments to dozens of individuals primarily for wages, consulting, and vehicle rentals, but spent little on campaign literature.
4. A high total dollar amount or proportion of payments to individuals instead of to entities. See discussion at (3), supra. A high number of payments to individuals rather than to business entities may trigger greater scrutiny by the Board because it raises the possibility that a candidate has given money away to his friends or associates.
5. A pattern of making other non-campaign-related or improper post-election expenditures. Where a candidate appears to have a pattern of making non-campaign- related or improper post-election expenditures, the Board is likely to examine the rest of the candidate's expenditures more closely and determine whether these were actually campaign-related.
6. The reporting of the expenditure. Payments made either late in the election cycle, or after the election for work performed during the election, without the reporting of a corresponding outstanding liability, will give rise to the question whether the campaign is giving an improper bonus or paying for services that were actually volunteered. See Rules 1-04(g)(7), 3-03(e)(1), and 5-03(e)(2)(ii).

Historically, the following types of expenditures have raised particular concern for the Board and are more likely to get "flagged" as non-campaign-related:

Durable goods:

Costly durable goods such as computer equipment, digital cameras, office furniture, and flat-screen monitors and/or televisions may be scrutinized more carefully than other types of expenditures because these goods tend to be expensive and long-lasting, and therefore are more likely to be retained for personal use (or subsequent unrelated campaigns). When purchasing a durable good, the campaign must be able to demonstrate that the item was purchased in furtherance of the campaign. In determining whether a campaign's expenditure of durable goods was campaign-related, the Board will look closely at the documentation provided to ensure that the description of the good(s) in the invoice or receipt matches the campaign's description. Again, the date of the purchase and the previous purchase of similar equipment is particularly important when the Board is analyzing expenditures for these types of goods.

Wages, Salaries, and Bonus Payments:

(a) Election Day Wages and Petitioning: Problems can arise when a candidate makes a large payment to a consultant for Election Day operations or petitioning, pursuant to a consulting agreement, and the consultant agrees to use the payment to pay wages to campaign workers. While the candidate is required to maintain a contemporaneous, detailed consulting agreement for such services, the candidate (or consultant) also must maintain contemporaneous, detailed documentation showing what services the underlying campaign workers actually provided, at what cost, including what tasks they actually performed and the number of hours worked for all these underlying wages. See Admin. Code § 3-703(1)(d), (g), Rule 4-01; see also 2005 New York City Campaign Finance Handbook at 3-18. To substantiate that the expenditure for the consultant was campaign-related, the Board may also request samples of work product produced, such as copies of the literature created or the petitions circulated.

(b) Cash Payments: Candidates have also encountered problems when they make cash payments to campaign workers. While making cash payments of $100 or less is permitted under the Act (see Rule 4-01(e)(2)), the Board will carefully scrutinize such transactions to ensure that the campaign actually has reported all of these underlying payments.⁵

(c) Post-election Payments: The Board examines payments made to workers or consultants after the election particularly carefully, in order to ensure that these payments are not post-election bonuses or payments for services that were actually volunteered. Detailed pre-election documentation must be provided to demonstrate that the terms of payment were agreed to in advance and show the precise hours and dates that the employee worked and the tasks he performed. In addition, the expenditures should be contemporaneously reported as outstanding liabilities when the debts are first incurred. (See discussion at 3 and 4, supra.)

Constituent Services/Community Outreach:

When a candidate who is also an elected official uses campaign funds to conduct community outreach activities or constituent services, the Board will closely look at such expenditures to ensure that these funds were used only for a campaign-related purpose. For example, an elected official may not use public funds for "community events" that are not directly in furtherance of his campaign. Similarly, an elected official could not distribute an invitation for a holiday party containing the official's district office address and crest.⁶ Candidates who are elected officials should be particularly careful that any expenditures by their principal committees are strictly in furtherance of their campaign, and are not constituent services that may provide some ancillary or tenuous campaign benefit.

Charitable donations:

In the last election cycle, several candidates used campaign funds to make contributions to charitable organizations or causes. The Board has found that such expenditures were non-campaign-related because the money was not used to further the candidates' elections.⁷ A candidate is not permitted to take public funds that he has received for a specific public purpose, and re-direct them toward an entirely different and non-campaign-related purpose. Some candidates have argued that such expenditures are indirectly campaign-related because they generate good will and favorable publicity among voters in their districts. However, such benefits are too tenuous to be considered "in furtherance of" a campaign.

Ballot Expenditures:

Candidates may not use their principal committees to make expenditures in connection with any ballot proposal, nor may they use public funds for this purpose, unless "that activity is in the context of and incidental to promoting the participant's candidacy." See Advisory Opinion 2003-2 (July 14, 2003).

Subsequent Races:

Candidates are not permitted to use their principal committee for one election cycle to make expenditures in connection with a future election cycle or race. See, e.g, Rule 1-08(c)(3). For example, a City Council candidate's use of campaign funds for campaign literature urging voters to elect him "Mayor" would clearly constitute an impermissible, non-campaign-related purpose. Similarly, a candidate for City Council in Brooklyn who distributed campaign literature supporting his candidacy in Manhattan would be making a non-campaign-related expenditure. Further, if a candidate purchased office furniture toward the end of the election cycle, and then ran several months later for a federal or statewide office, the Board might ask the candidate to demonstrate that the office furniture was not purchased for the benefit of the subsequent race.

Excessive Spending on Refreshments:

The Board may also question whether significant expenditures for food and beverages are campaign-related. Once again, whether the Board deems the expenditure non-campaign-related greatly depends on the context of the activity, including the number of volunteers involved (if the food is for volunteers working at a campaign event), the cost of the food, and whether the documentation is sufficiently detailed to elucidate these first two factors. When the underlying documentation only describes the total cost of the food provided without a breakdown of the per person cost, the items ordered, and the cost of gratuities and tax, the expenditure is more likely to get flagged as non-campaign-related.

Travel/Rent/Personal Expenses:

Large expenditures for travel, such as car rental fees, gas, train and plane fare and lodging tend to be closely scrutinized by the Board, particularly when such expenditures appear to be related to the candidate's work as an elected official. (See discussion of Constituent Services/Community Outreach, supra, at 6.) Further, the Board will closely examine a campaign's reported expenditure for rent to ensure that the rental space was in fact used as a campaign office. To make this evaluation, the Board will look at a number of factors concerning the rental space, including the existence of more than one lease; the location; and the square footage. Finally, expenditures for personal items, such as clothing or toiletries are not permissible campaign expenditures, even if they arguably have some ancillary campaign-related benefit.

Embezzlement/Fraud:

In certain cases, the Board may find that campaign funds were misappropriated. In addition to being clearly non-campaign-related, such an improper use of campaign funds could also subject the campaign to more serious civil and criminal liability, depending on the facts surrounding the misappropriation. See, e.g, Admin. Code §§ 3-711(1), (3), and Rule 2-02.

Conclusion

When a candidate fails to demonstrate that a particular expenditure has been made in furtherance of the candidate's nomination or election, the Board may find that the expenditure was non-campaign-related. Moreover, when expenditures are incurred after the election by a participant who received public funds, the participant must demonstrate through detailed documentation that these expenditures were only for "routine activities involving nominal cost associated with winding up a campaign and responding to the post-election audit." Rule 5-03(e)(2)(ii). Otherwise, the Board will treat such expenditures as "improper post-election expenditures."

The Board's assessment of whether an expenditure is campaign-related is extremely contextual and fact-specific. To determine whether expenditures are campaign-related, the Board will analyze factors including the quality of the documentation provided, the timing of the expenditure, the necessity of the expenditure, the proportion of the expenditure compared to the total amount of expenditures by the campaign, a pattern of payments to individuals (as opposed to entities), and a pattern of making other non-campaign-related or improper post-election expenditures.

If candidates have questions about whether expenditures are campaign-related, they should contact the Board's Candidate Services Unit (CSU) before making the expenditures. However, please be advised that, absent a full and complete picture of the campaign, CSU may not be able to provide guidance on a per-item basis.

NEW YORK CITY CAMPAIGN FINANCE BOARD

¹ The Act and Rules cover three classes of candidates – participants, limited participants, and non-participants. There is also a sub-class of participants – participants who have not received public funds either because they have not met the eligibility requirements or have elected not to accept public funds. In addressing the issues presented here, the Board finds that there is no reason to treat these classes of candidates differently. Obviously, the Board must rigorously protect public funds from potential uses for which they were not intended. Further, the Board's audit of all disclosure statements gives candidates' filings an overall seal of approval. In fact, when adopting Local Law No. 59 of 2004 which extended the Act's disclosure and audit requirements to non-participants, the Council stated:

The Council finds that amendments to the New York City Campaign Finance Act and the charter of the City of New York, will further the goals of this landmark legislation. By imposing many of the same disclosure and audit provisions of the Campaign Finance Act to those candidates for municipal office who elect not to participate in the Campaign Finance Program, without extending to such candidates the public financing provisions or the provisions limiting expenditures, the Council seeks to further strengthen the reform program that has been recognized as a national model. ... The absence of comparable public disclosure from the Board of Elections deprives the voting public of relevant comparative information... In addition, the Council finds that the Board of Elections does not monitor the completeness and accuracy of the campaign finance disclosure reports submitted on behalf of non-participating candidates in the same detailed manner that the Campaign Finance Board does with public disclosure reports filed on behalf of participating candidates.

Therefore, it is appropriate that the same standards apply to all classes of candidates in determining what expenditures are campaign related because the Act makes no such distinction. Of course, the Board can require the repayment of public funds when it determines that the use of those public funds has not been adequately documented. On the other hand, the Board may take into account a candidate's classification when determining whether and how much of a penalty to assess for the improper use of campaign funds.

² This requires that campaigns and vendors document the provision of goods or services at the time the campaign and vendor enter into their agreement.

³ Again, the standard for documenting post-election expenditures is even stricter than for non-campaign related expenditures. See discussion, supra, at 1-2; Rules 1-03(a), 1-08(b), 4-01(a), and 5-03(e)(2).

⁴ These factors overlap and inform each other and should not be viewed as a series of unrelated tests.

⁵ Public funds, however, may not be used for any cash payments. Cash payments are not considered "qualified campaign expenditures," and making such cash payments could result in having to repay public funds to the Board. In addition, campaigns are not permitted to maintain a petty cash fund of more than $500. See Rule 4-01(e)(2).

⁶ At the same time, an elected official's use of governmental funds or resources for campaign purposes may also be a violation of Chapter 68 of the New York City Charter, which the Conflicts of Interest Board interprets and enforces.

⁷ The Act also discourages candidates from making contributions to other political committees. See Rule 5-01(n)(1); but see Admin. Code § 3-705(8).