Introduction
James Gennaro was a candidate for City Council in the 2003 elections. He participated in the New York City Campaign Finance Program (the "Program") in connection with his candidacy, and received $103,125 in public funds. The November 12, 2004 final audit report (the "Final Audit Report") for the Gennaro campaign (the "Campaign") indicated that it must return $4,057 in unspent campaign funds. The Campaign filed a Rule 5-02(a) petition1 on December 24, 20042 (the "Petition"), challenging this unspent funds repayment obligation.
In the Petition, the Campaign argues that its unspent funds repayment obligation should be offset by the $4,923 in "additional liabilities" that the Campaign incurred "in responding to the post-election audit." These liabilities consist of legal fees that the Campaign paid to its legal counsel, Genova, Burns & Vernoia ("Genova Burns"), for services provided from October 4, 2004 through November 17, 2004 in responding to a Notice of Recommended Penalties, dated August 13, 2004 (the "NRP"); a follow-up letter regarding penalties, dated October 25, 2004 (the "follow-up letter to the NRP" and collectively with the NRP, the "penalty notices"); and for preparing the Rule 5-02(a) Petition giving rise to this Determination.3
Rule 5-02(a)(2)
A participant seeking Board review of a determination pursuant to Rule 5-02(a) is precluded from submitting "documentation or factual information not submitted to the Board prior to the determination under review" unless he or she can demonstrate "good cause for the previous failure to submit such documentation or information and for any failures to communicate on a timely basis with the Board." Rule 5-02(a)(2) (emphasis added). The campaign fails to make any argument, however, that "good cause" as required by Rule 5-02(a) exists for the Board to consider the documentation and information submitted in connection with the Petition. As a threshold issue, the Board must determine whether it should consider the expenditures referred to in the Petition (and the invoices attached to it) at all, given the Campaign's failure to submit these invoices, or to notify the Board that it had incurred, and would continue to incur, additional liabilities for legal fees, prior to the issuance of the Final Audit Report.
The Campaign should have timely apprised the Board of existing additional liabilities before the Final Audit Report was issued. The Campaign had been notified of a possible unspent campaign funds repayment obligation in the May 7, 2004 draft audit report. Neither the Campaign nor Genova Burns, however, provided the Board with the documentation and factual information contained in the instant Petition prior to the issuance of the Final Audit Report, even though both the Campaign and Genova Burns were aware since September that liabilities were being incurred that had not and were not being brought to the Board's attention.4
Among the reasons for the requirements of Rule 5-02(a)(2) are to preserve the finality of final audit reports and to prevent a candidate from reopening the final audit to submit documentation or facts that it should have provided to the Board before the final audit report was issued.5 The Rule 5-02(a) petition process was intended to provide a mechanism for review of a Board determination that has been rendered erroneously notwithstanding information previously provided, and in rare cases and for good cause shown, to permit the submission of facts or documentation that the Campaign was not able to provide previously, possibly due, for example, to extraordinary circumstances.
The Campaign may be arguing (although it does so at best only implicitly) that "good cause" exists for its failure to provide this documentation previously because the invoices were not issued until after the date of the Final Audit Report. Even without an invoice, however, Genova Burns and the Campaign could have and should have notified the Board of the approximate amount of legal fees that the Campaign was incurring – and certainly of the existence of such legal fees – well in advance of the November 12, 2004 Final Audit Report, given that the Campaign began incurring legal fees on September 17, 2004, nearly two months earlier. This situation is precisely what Rule 5-02(a)(2) is intended to guard against when it states that a "failure[] to communicate on a timely basis with the Board" must be overcome by "good cause."
The Board finds that the Campaign has not demonstrated that good cause exists. This is a sufficient basis to dismiss the Petition. For the purpose of providing guidance to future campaigns, however, the Board will address the question whether legal fees incurred in responding to a penalty notice are a permissible post-election expenditure under Rule 5-03(e)(2)(ii).
The Campaign's Post-Election Expenditures
Under the Program, participants receive public funds subject to the express condition, inter alia, that any unspent campaign funds left over at the end of the election will be returned to the Board (up to the amount of public funds received).6 SeeAdmin. Code § 3-710(2)(c). Unspent campaign funds are calculated by subtracting all the campaign's expenditures from all its receipts. Id. The requirement that unspent campaign funds must be returned to the City ensures that public taxpayer funds, which were issued for a specific public purpose, are used only for that purpose. Otherwise, the City would be subsidizing whatever that candidate chooses to do with the unspent campaign funds, even though the funds (which must be returned to the public) are not being used for the specific public purpose for which they were distributed. This would, among other things, encourage candidates to amass war chests. The issue, therefore, is not whether a campaign may make a particular post-election expenditure, but whether that expenditure may be subsidized with public funds in cases in which remaining funds are due back to the Board.7
Although Admin. Code § 3-710(2)(c) requires that any unspent campaign funds left over at the end of the election be returned to the Board (up to the amount of public funds received), the Board enacted a rule which allows participants to make post-election expenditures before repaying unspent funds, but only for "routine activities involving nominal cost associated with…responding to the post-election audit." Rule 5-03(e)(2)(ii) (emphasis added). The burden is on the campaign to establish that a post-election expenditure meets the narrow requirements of this rule. See Advisory Opinion No. 1997-14 (December 9, 1997) at 2. The rule provides that permissible post-election expenditures may include "reasonable staff salaries and consultancy fees for responding to a post-election audit." See Rule 5-03(e)(2)(ii) (emphasis added).8
Legal fees incurred either in response to the penalty notices (as opposed to audit questions), or in preparing this post-final audit report petition, are not the types of "routine activities" or "nominal" fees that Rule 5-03(e)(2)(ii) contemplates. Public funds should not be distributed to participants for the purpose of paying legal fees in response to a penalty notice, because contesting a public agency's penalty recommendations for alleged violations of the Act does not further the purposes of the Program, such as by assisting a candidate's quest for public office. Were it otherwise, only candidates with unspent funds – funds they did not by definition need for their election campaign – would be able to hire legal counsel to contest recommended penalties out of their campaign resources. Other candidates who used all the money they received (including all their public funds) for its intended purpose – campaigning – by definition do not have any unspent campaign funds, and must turn to other resources.
There are also compelling policy reasons to deny the proposed offset of unspent funds by legal fees. If the Campaign is permitted to deduct legal fees from its unspent funds repayment obligation in this case, future campaigns will be encouraged to challenge repayment determinations contained in the final audit reports based on post-election expenditures that they simply failed to apprise the Board of earlier, as happened here. Then, after campaigns receive their final audit reports, including the final unspent funds calculations, future candidates and consultants could make unnecessary, inflated, and possibly even fraudulent post-election expenditures for legal and other consultant fees, thereby diverting money from the City to consultants, by running up and then offsetting the consultants' fees up to the amount of any remaining unspent funds, avoiding repayments owed to the Public Fund. Such an outcome would seriously jeopardize the finality of Board determinations and final audit reports, an essential component of Program administration, and would seriously undermine the provisions of the Act that call for public funds to be returned to the public when those funds have not been used for a candidate's election to office.
Conclusion
After weighing the various arguments, the Board determines that (1) "good cause" to review this documentation under Rule 5-02(a)(2) does not exist, and (2) even if good cause did exist, the expenditures would not meet the requirements of Rule 5-03(e)(2)(ii). For these reasons, the Petition is denied.
1 Rule 5-02(a) provides that " [a]fter the Board determines that a participant is ineligible for public funds, matchable contribution claims are invalid, or public funds must be repaid, the participant.may submit to the Board a written petition for review of the determination..Upon such determination, the Board shall issue written notice to the petitioner of the Board's determination, including the reason(s) for the determination."
2 The time period for filing a Rule 5-02(a) petition was due to expire on December 12, 2004. Due to a death in Mr. Gennaro's family, the Board gave the Campaign additional time to file its petition.
3 The Campaign paid Genova Burns a retainer of $2,500, a portion of which was applied to $1,800 worth of legal services billed during the month of September. Thus Genova Burns provided the Campaign with a total of approximately $7,500 in legal services from September through November 2004. The Campaign did not include the September legal fees as part of the proposed offset, and did not include the invoice for the September legal fees in the Petition. The invoice for September was provided to the Board at its request.
4 The Campaign has not directly addressed this issue in its Petition, although in a footnote it states that:
Pursuant to [Genova Burns's] standard firm practice, the invoice dated October 31, 2004 was not issued to the Campaign until November 16, 2004, and the invoice dated November 30, 2004 was not issued to the Campaign until December 7, 2004.
Petition at 2, n. 1. The invoice is dated October 31, 2004, yet, consistent with the above footnoted statement, the invoice refers to a transaction that occurred on November 16, 2004, when it was "issued." Another invoice, dated November 30, 2004, was issued on December 7, 2004, or seven days after the November billing cycle ended.
5 In promulgating this rule, the Board explained that:
In the 2001 and 2003 elections.rather than treating the Rule 5-02(a) process as an opportunity to obtain reconsideration of a prior determination, a number of candidates sought to use the rule to submit documentation or information not submitted to the Board prior to the determination sought to be reviewed. In this manner, candidates have sought to employ the rule to obtain an additional opportunity to present new facts despite repeated requests and opportunities to submit the information, up to and including issuance of the final audit report. They have thus sought to avoid the consequences of failing to submit documentation of campaign records and related information in a timely manner and to obtain Board review of a late submission despite missed deadlines.
See Notice of Final Rules at 3, effective September 19, 2004. The Board also noted that:
The rule is intended to discourage poor record-keeping and creation or dating of records after the fact, and to reinforce the importance of timely submission of documentation in response to deadlines set by the Board. Also, the rule should help maintain an even playing field among candidates.
Id.
6 Because the Campaign did not actually have excess cash on hand, it used money from a different account to pay the legal fees to Genova Burns. The Campaign did not have excess cash, however, only because it had made $4,107 worth of improper post-election expenditures. Thus, an additional $4,107 in improper expenditures was deducted from the Campaign's expenditures, thereby increasing the Campaign's unspent campaign funds repayment obligation.
7 What is at issue here is the return of unspent funds remaining after the election; campaigns have greater flexibility in how they use all funds during the election period. They also have much greater flexibility in how they use excess campaign funds for post-election campaign expenditures once they have satisfied any repayment obligation to the Board.
8 The Board may inquire about and make determinations whether particular expenditures are "routine," "nominal," and "reasonable." See, e.g., Advisory Opinion No. 1997-13 (November 25, 1997) (noting that [i]ntent by a campaign to use unspent campaign funds.beyond the scope of what is reasonable would be contrary to Administrative Code § 3-710(2)(c)); Advisory Opinion No. 1997-14 (December 9, 1997) (determining that a campaign was not permitted to use unspent funds to pay the costs of a party for the purpose of thanking contributors, volunteers, and others because such costs were neither "nominal" nor "reasonable").