Lenders and Vendors Beware

09.15.2008

By: Laurence D. Laufer

A key issue under any campaign finance reform is whether the ground rules enable credible candidates to run competitive campaigns. At times the direction a reform will take is shown in the legislation. But more often there are twists and turns that are revealed only in the course of implementation. Thus, it can be instructive to probe a bit when reform takes a U-turn, when there is no legislative instruction to do so.

Since its inception, New York City’s campaign finance law has stated that loans received by participating candidates must be repaid by the date of election. Failure to repay means that the outstanding balance is treated as a contribution and subject to contribution limits. The advent of public financing gave participating candidates who qualified access to additional funds before the election. Campaigns initially financed in part with loans, or that had outstanding pre-election bills, used the public funds payments to extinguish these liabilities. In this way legalized access to public funds fostered campaign access to private credit. Some loans were taken in anticipation that these would be paid with public funds. What if the payment of public funds was delayed while qualification for the funding was under review, such that the loan balance was not repaid by election day as required? In the first election (1989) under the law, the Campaign Finance Board (CFB) authorized such “bridge loans” reasoning:

T]he loan functions as a mechanism through which a post-election public funds payment promotes voter education in the period when it matters most, before the election. … Candidates would be unfairly penalized and the voter education purposes of the [New York City law] significantly undermined, if the Board determined that the delay in payment necessitated by the Board’s review of matching funds claims compelled candidates to forego using loans for qualified campaign expenditures in the period immediately preceding the election.

For many years, this was the rule in New York City. In 2002, however, the CFB re-thought this interpretation and repealed the exemption it had codified for bridge loans. In other words, anticipation of a post-election public funds payment afforded no relief from the obligation to repay a loan by election day. None of this is new. What makes it relevant are recently proposed amendments to CFB rules that potentially would further tighten pre-election access to credit. Here’s how. The proposed rule states that candidates receiving public funds with outstanding liabilities after an election “may make post-election expenditures, after the date of the issuance of the participant’s final audit report, for the purpose of raising funds to repay such debt….” While CFB rules have long restricted post-election expenditures by public funds recipients, in order to preserve unspent funds for possible repayment to the CFB as required by law, those rules have never placed restrictions on fundraising activities by campaigns that find themselves “in the red” after the election. Until now, that is. The proposed rule portends a moratorium on post-election fundraising before the CFB issues a final audit report -- delaying payment of loans and bills during the months and years before the CFB issues a final audit report. Campaigns with large pre-election debts will suffer, even though they will likely have no “unspent funds” that would subject them to that repayment obligation. But we may not even reach that stage.  The proposed restriction would discourage the making of loans before the election.  Similarly, vendors would be less likely to extend credit to political campaigns, which traditionally have been seen as a bad credit risk.  As these sources of pre-election credit dry up, there will be fewer campaigns that incur large pre-election debts. The stakes therefore will be higher to qualify for maximum public funding before the election and to surmount any administrative impediments to receiving those funds at that time. Whatever the merits of the new policy, it marks a striking 180 degree turn from an approach that had once facilitated bridge loans and pre-election access to private credit. And so, we end where we began: if the new rule is adopted, will it help credible candidates run competitive campaigns?

Tag: New York City