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Considered by the Board sua sponte: Exempt expenditures for post-election audit

Thursday, 04/10/2008
Thursday, April 10, 2008

Re: Administrative Code §§ 3-703, 3-706(1), 3-706(2), 3-706(4), 3-710, 3-710.5, 3-711, 3-718(1)(b), 3-719(1)(b); Local Law 34 (July 3, 2007); Local Law 67 (Dec. 31, 2007); Campaign Finance Board Rule Nos. 1-08(d)(1), 1-08(l), 3-01, 3-02, 3-03, 3-04, 3-05, 3-06, 3-07, 3-08, 3-09, 3-10, 3-11, 4-01, 4-03, 4-04, 4-05; Advisory Opinion Nos. 2005-3 (Sep. 6, 2005), 2001-5 (May 17, 2001), 1996-1 (April 4, 1996); Op. No. 2008-4 (April 10, 2008).

The New York City Campaign Finance Board (the "Board") is issuing this Advisory Opinion to set forth its interpretation of a recent amendment ("the Amendment") to the New York City Campaign Finance Act ("the Act")1 concerning "exempt expenditures."2 The City Council amended the Act to eliminate the exemption for compliance costs (such as "legal fees, accounting fees, the cost of record creation and retention") from the expenditure limit imposed on participants in the Campaign Finance Program ("the Program").3 The reason for this change, which was recommended by the Board, was to "eliminate a confusing gray area for campaigns and greatly simplify the Program."4 To compensate for the elimination of the compliance exemption, the City Council increased expenditure limits by 7.5%. The Amendment also added an exemption for "expenses related to the post-election audit."5 What do these changes mean for participants who are trying to stay within the expenditure limits, yet who also are entitled, under the Act, to spend beyond the limit in approved exempt categories?

The plain language of the Amendment, the public records of the City Council (the legislative history of the Amendment), and the accepted historical meanings of the terms, "compliance," "exempt expenditures," and "post-election audit," require that the new exemption for expenses related to the "post-election audit" be construed narrowly. The exemption will be strictly limited to pre-election expenses for organizing existing records, in preparation for submission during the post-election audit, and copying them.

Background - The Post-Election Audit

The post-election audit is the audit that is conducted of all campaigns after an election.6 The purpose of the post-election audit is to ensure that campaigns have complied with the contribution and spending limits, as well as other Program requirements. Post-election audits commence approximately 30 days after the relevant election with a request for documentation supporting the Campaign's reported transactions. During the post-election audit, the Audit Unit reviews all transactions to ensure that financial activity has been accurately reported.7 By definition, most expenses for the post-election audit occur after the election and are already not subject to the expenditure limits for the preceding election under the Act,8 so this Advisory Opinion does not constrain a campaign's ability to spend reasonable, nominal amounts to respond to that audit.9

Because the post-election audit is an examination of campaign transactions and documents, every compliance activity can be seen literally as preparation for the post-election audit. It would be incorrect and contrary to the stated purpose of the Amendment, however, to treat all compliance activities, including internal campaign reviews to address and correct compliance issues, as exempt under the Amendment. The Board's reasoning for its narrow interpretation of the "post-election audit exemption" follows.

The Words of the Amendment Dictate a Narrow Construction of the Exemption for "Expenses Related to the Post-Election Audit"

The plain language of the Amendment indicates that the phrase "related to the post-election audit" must be interpreted narrowly. The Amendment has explicitly stricken the exemption for compliance (including, but not limited to, "legal fees, accounting fees, the cost of record creation and retention, and other necessary compliance expenditures") from the Act.10 The exemption for "expenses related to the post-election audit," therefore, must be interpreted as different from the broad category of compliance activities that the Amendment explicitly eliminated.

The Legislative History Dictates a Narrow Construction of the Exemption for "Expenses Related to the Post-Election Audit"

In adopting the Amendment, the Council intended to strengthen and clarify campaign expenditure limits and to eliminate a mechanism used by some participants to spend beyond those limits.11 The Council found that the broad exemption for compliance in the prior law12 "caused a lack of clarity for campaigns"13 about whether certain expenditures were exempt:

The proposed bill would take a different approach by eliminating exempt expenditures altogether (except for those specified above) and increasing the applicable expenditure limits by the current safe-harbor amount of seven and a half percent.

It is not intended that by keeping exempt "bringing or defending any action" or "expenses related to the post-election audit," however, would permit campaigns to continue to include all compliance related expenditures as exempt sic. Instead campaigns would be permitted to exempt solely those expenditures related directly to a campaign's preparation for a post-election Board audit14

The Council also found that the broad exemption for compliance costs caused unfairness because "it has allowed some candidates with an ability to raise additional funds outside the cap to do so, and claim as exempt, expenditures their opponent, who may not have the same ability to raise outside the expenditure limit, cannot make sic."15 To compensate for reducing the categories of what could be claimed as exempt expenditures, the Council increased expenditure limits for participants:

Since the bill would severely reduce permissible exempt expenditures, it is important to ensure that campaigns would be able to pay for all expenditures that were previously, but will no longer be, considered exempt, for example general petitioning costs. Section twenty of the bill would amend subdivisions one and two of section 3-706 to increase the applicable expenditure limits by the safe-harbor amount16

Accordingly, a narrow interpretation of the exemption for expenditures "related to the post-election audit" supports the Council's stated purpose to clarify for participants which types of expenditures are exempt, and to strengthen expenditure limits by reducing the categories of exempt expenditures. The Amendment and its narrow interpretation do not adversely affect the ability of participants to comply with the Program, because the Council explicitly compensated for the narrowing of exempt expenditures by raising the expenditure limits by 7.5%.

The Board's Prior Interpretations of the Terms "Compliance," "Exempt Expenditures," and "Post-Election Audit" Dictate a Bright Line Construction of the Exemption for "Expenses Related to the Post-Election Audit"

The Council formulated the Amendment in the context of the accepted prior interpretations and understanding of the terms "exempt," "compliance," and "post-election audit" developed over years of interpretation and enforcement of the Act. Because the Council has explicitly stated that that the Amendment does not "permit campaigns to continue to include all compliance related expenditures as exempt,"17 the Amendment may not be interpreted to allow exemptions for costs for (a) standard practices that have consistently been considered non-exempt or (b) general compliance activities that are excluded under the Amendment.

Expenses for Standard Practices Are Not Exempt

The costs of standard practices, that would occur with or without the existence of the Act or State law, have never been considered exempt. Standard practices are those activities required to run any office or business, such as standard bookkeeping, maintaining checkbook registers, petty cash journals, bank records, and loan records, bookkeeping for payroll or vendor payments. Standard practices also include "other practices that political committees routinely perform as entities that raise and spend funds."18 Accordingly, it is not logical for the exemption for "expenses related to the post-election audit" to include expenditures for standard practices, which are activities which the Board has always previously explicitly identified as non-exempt.

Expenses for Compliance Are Not Exempt

Compliance activities are those activities performed as part of a campaign's responsibilities to meet its obligations under the Act and New York State Election Law19 as set forth in the Act, Rules, and explained in the Campaign Finance Handbook. All candidates are required to keep records,20 file financial disclosure statements21 and submit to the post-election audit.22

Candidates must keep, and be able to produce, copies of documents to verify reported receipts and expenditures so that Board staff may review them easily at any time before, during, or after the election. It is common sense that if a candidate keeps campaign records in an organized manner during the election, his or her task in preparing for the post-election audit will be much simpler.23

Exempt compliance formerly included the cost of preparing the disclosure statements, the cost of creating and retaining records, the costs of activities solely for the purpose of gathering contributors' employment and occupation information or information about contributor intermediaries, and expenditures for goods and services if incurred solely for these activities.24 Exempt compliance costs also formerly included the costs related to identifying, preventing and/or correcting any potential violation of the Act, including reviewing documents to ensure that they were prepared in compliance with Board standards.25

Because the new exemption for "expenses related to the post-election audit" is not to be the same as the former exemption for "compliance costs," it cannot encompass expenses for the above activities which historically have been understood to represent compliance activities, and which were explicitly removed from exempt status by the Council.

Conclusion: The Exemption for "Expenses Related to the Post-Election Audit" Will Be Construed Narrowly

Historically, compliance, like all exemptions, was narrowly construed by the Board,26 yet it had a fairly broad meaning that encompassed most pre-election accounting activities. In contrast, the post-election audit is a discrete post-election activity. The words of the Amendment of Local Law 34, its legislative history, and the accepted meanings of the terms "compliance," "exempt expenditures," and the "post-election audit," all dictate a bright line narrow interpretation of the new exemption for "expenses related to the post-election audit."

The exemption from the expenditure limits for "expenses related to the post-election audit" will be limited, therefore, to pre-election costs for organizing existing records in preparation for submission during the post-election audit, and copying them. This does not include reviewing activities to identify missing documents, to evaluate whether documents meet Board standards, or to prevent and/or correct potential violations, because these are ordinary compliance activities which are no longer exempt. Pre-election billing for post-election work is also not exempt. We recognize that the interpretation of this exemption is very narrow. It includes merely copying costs and an extremely low, concrete, documented dollar figure for organizing costs. It will be unacceptable, for example, for a candidate to allege that a certain percentage of a person's salary or time was devoted to exempt activity covered by the Amendment. Salaries or other payments to campaign managers, finance chairpersons, treasurers, accountants, advisors, or other consultants will not be accepted as exempt post-election audit expenditures. It is understood that pre-election activities in preparation for the post-election audit necessarily represent a very small amount of time and expense. To opine otherwise would allow what was meant to be a narrowing simplification to expand to such an extent as to swallow the plain meaning of the words of the Amendment, the historical meaning of these terms, and the Council's stated purposes in amending the law. This interpretation, however, should not prevent campaigns from fully undertaking necessary activities to meet their obligations under the Act because the Council raised the expenditure limits by 7.5% to compensate for the loss of these exemptions.


1 Admin. Code §§ 3-701 et seq.

2 The Amendment to Administrative Code Section 3-706(4) was contained in Local Law 34 of 2007 (July 3, 2007) ("Local Law 34"). Below are the provisions of the Amendment. The portions deleted by the Council are shown in brackets ( ), and the portions added by the Council are underlined:

4. (a) Expenditures made for the purpose of complying with the provisions of this chapter or the election law, including legal fees, accounting fees, the cost of record creation and retention, and other necessary compliance expenditures,: (i) bringing or responding to any action, proceeding, claim or suit before any court or arbitrator or administrative agency to determine a candidate's or political committee's compliance with the requirements of this chapter, including eligibility for public funds payments, or pursuant to or with respect to election law or other law or regulation governing candidate or political committee activity or ballot status, (ii) expenses to challenge or defend the validity of petitions of designation or nomination or certificates of nomination, acceptance, authorization, declination or substitution, and expenses related to the canvassing or re-canvassing of election results, and (iii) expenses related to the post-election audit shall not be limited by the expenditure limitations of this section.

(b) In reviewing claims that expenditures are exempt from expenditure limitations by reason of paragraph (a) of this subdivision, the board shall not require the participating candidate or principal committee to provide detailed documentation substantiating such exempt expenditure claims unless the board has reason to believe that expenditures have been erroneously or falsely claimed to be exempt in disclosure reports.

(c) Notwithstanding paragraph (b) above, a A participating candidate shall be required to provide detailed documentation substantiating all exempt expenditure claims made pursuant to this subdivision if the aggregate exempt expenditure claims made by the participating candidate exceed an amount equal to seven and one-half percent of the participating candidate's applicable expenditure limitation.

Local Law 34 § 23. The Act, but not this section, was further amended by Local Law 67 (Dec. 31, 2007) and both amendments became effective on January 1, 2008 to apply to elections held on or after that date.


4 New York City-ampaign Finance Board, Public Dollars for the Public Good: A Report on the 2005 Elections at 129 (2006).

5 The Amendment added and/or changed other exemptions. The other remaining exemptions are beyond the scope of this Advisory Opinion.

6 2005 New York City Campaign Finance Handbook ("Campaign Finance Handbook 2005") at 13-3 to 13-5; 2005 New York City Campaign Finance Handbook (for Non-Participants) at 11-2 to 11-4.

7 Campaign Finance Handbook 2005 at 13-3.

8 Admin. Code §3-706(1), Rule 1-08(d)(1). Rule 1-08(d) states in relevant part, "Expenditures made after the last election in an election year in which the participant or limited participant is a candidate, or a special election, are not subject to the expenditure limits for that election."

9 This Opinion does not change the existing restrictions on post-election spending set forth in Rule 5-03(e)(2).

10See n.2 supra.

11 City Council Committee on Governmental Operations Report on Int. No. 586-A § IV.E. (June 21, 2007) ("Gov. Ops. Report 6/21/07"); Gov. Ops. Report 6/12/07 at § III.E.

12 Admin. Code § 3-706(4) (2005).

13 Gov. Ops. Report 6/21/07 at § IV.E.; see Gov. Ops. Report 6/12/07at § III.E.

14 Gov. Ops. Report 6/21/07 at § IV.E. (emphasis added); see Gov. Ops. Report 6/12/07 at § III.E.

15 Gov. Ops. Report 6/12/07 at § III.E.

16Id. (emphasis added). See also Admin. Code § 3-706(4)(b); Amendment to § 3-706(4) in Local Law 34, supra at n.2.

17 Gov. Ops. Report 6/21/07 at § IV.E.

18 Advisory Opinion No. 1996-1 (April 4, 1996); see Advisory Opinion No. 2001-5 (May 17, 2001) (stating that because payment of taxes on income earned on campaign contributions is a "standard practice" of a political committee, it is subject to the expenditure limitations and not exempt); Campaign Finance Handbook 2005 at 3-4. Further, Advisory Opinion No. 1996-1 states that "the expenditures described in this advisory opinion as exempt compliance costs are the only expenditures that may be claimed as such, except to the extent that Board interpretation may be extended by subsequent advisory opinions."

19 Compliance with the State Election Law also included petitioning costs, the exemption for which has clearly been eliminated and is not discussed here.

20 Admin. Code. §§ 3-703(1)(d)(g), 3-718(1)(b), 3-719(1)(b); Rules 4-01 to 4-05; Campaign Finance Handbook 2005 at 2-21 to 2-30, 3-17 to 3-19, ch. 6.

21 Admin. Code. §§ 3-703(1)(d)(g), 3-718(1)(b), 3-719(1)(b); Rules 3-01 to 3-11; Campaign Finance Handbook 2005 ch. 5, 6.

22 Admin. Code § 3-710; Rule No. 4-05; Campaign Finance Handbook 2005 at xiii-xiv, 13-3 to 13-5; Campaign Finance Handbook 2005 (for non-participants) at 11-2 to 11-4.

2 3 Campaign Finance Handbook 2005 at 13-3 to 13-4.

24 Advisory Opinion No. 1996-1 (April 4, 1996), explicitly overruling prior opinions on the compliance cost portion of exempt expenditures.

25 Advisory Opinion No. 1996-1 (April 4, 1996); Admin. Code § 3-711(4). The Board is empowered to audit all matters relating to the administration of the Act, including the power to examine documentation pertaining to all candidates, whether or not they are participants in the Program. Admin. Code § 3-710; Rule 4-05. The Board may assess penalties against any candidate, his or her committee, and the treasurer or other agent of a candidate who violates any provision of the Act or fails to file in a timely manner any record or report the Act requires. Admin. Code §§ 3-710.5, 3-711.

26 Advisory Opinion No. 2005-3 (Sep. 6, 2005).