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Pay-to-Play Ban Hits Redevelopers

May 29, 2009

Globe St.com

Pay-to-play is the vernacular associated with the practice of making campaign contributions to individuals seeking elected office or the various political committees that support and advance the interests of political candidates; and thereafter, receiving a lucrative, usually no-bid, government contract. Despite the musings of cynics, pay-to-play is probably not unique to New Jersey.

However, over the course of the last five year's, there has been an increase in the concern about this practice and in that same time frame; it has been significantly curtailed, both by gubernatorial executive order and statute.

The newest pay-to-play ban applies to those operating in the redevelopment arena. Executive Order 118 ("EO 118"), signed by Gov. Corzine on Sept. 24, 2008 and effective since Nov. 15, 2008, specifically addresses political contributions made by a redeveloper that seeks to be awarded or already has entered into a redevelopment agreement with a state redevelopment entity.

EO 118 provides that a state redevelopment entity cannot enter into a redevelopment agreement with any redeveloper, if after the solicitation for a redevelopment agreement has been issued, the prospective redeveloper has made a contribution of more than $300 to: (1) a candidate committee or election fund of any candidate for the office of Governor or Lieutenant Governor; (2) a state, county or municipal political party committee or a legislative leadership committee; or (3) a candidate committee or election fund of any candidate for or holder of a state legislative, county, or municipal elective public office in a state legislative district, county, or municipality in which any property subject to the redevelopment agreement is situated.

Furthermore, once a redeveloper enters into a redevelopment agreement with a state redevelopment entity it is not permitted to make a contribution to any of the aforementioned candidates or committees during the term of the redevelopment agreement as such a contribution is deemed a "material breach" of the agreement and presumably could result in the agreement being voided.

While contributions to county and local candidates and committees are implicated by the Order, it only applies to redevelopment projects sponsored by a state entity - county and local government redevelopment projects and entities are not affected by this ban.

This new Executive Order has a broad reach. Virtually all forms of business entities (i.e. corporations, LLCs, partnerships) are covered by the definition of "redeveloper" as well as natural persons or other business entities that own 10% or more of the stock of the redeveloper. Partner's, LLC members and shareholders, regardless of their percentage of ownership, and officers of professional corporations are all covered by the ban.

Importantly, for any individual included within the definition of redeveloper, the political contributions made by their spouse, civil union partner, or adult children residing at home will disqualify the redeveloper from receiving or maintaining a state redeveloper designation or being a party to a redevelopment agreement with any state redevelopment entity. There is an exception: an otherwise prohibited contribution made by a spouse/civil union partner/child will not result in either disqualification or breach if the contribution was made to a candidate for whom the contributor was entitled to vote or to a political committee located in the jurisdiction where the contributor resides.

Finally, contributions made by any subsidiary business entity or political organization organized under Section 527 of the Internal Revenue Code (other than a candidate committee, election fund, or political party committee) directly or indirectly controlled by the redeveloper; or business entity that contracts with the redeveloper to perform professional, consulting, or lobbying services in connection with the redevelopment project, will disqualify a redeveloper from a state redevelopment contract.

Thus, if a law firm or engineering firm makes a prohibited contribution, the redeveloper employing that firm will either be disqualified from obtaining a redevelopment designation or be in breach of an agreement already in place.

Is EO 118 enforceable? Probably. Although it is new and has yet to be tested in court, the New Jersey Supreme Court recently reached and decided that a related statute, P.L. 2005, Chapter 51 ("Chapter 51") - restricting contributions by a natural person proprietor, corporations, LLCs, partnerships, professional corporations and principals who own or control more than 10% of the profits, assets, or stocks of such entities, subsidiaries directly or indirectly controlled by such entities, and a qualified natural person's spouse, civil union partner, or adult child living in their home--is enforceable as it applies to a business entity's eligibility to receive and retain government contracts.

In January 2009, the New Jersey Supreme Court in In re Earle Asphalt Co., No.A-37-09, 2009 WL 137165, at *1 (N.J. Jan. 15, 2009), upheld the New Jersey Department of Treasury's decision declaring a paving company ineligible to receive a state contract because it had made certain prohibited political contributions and declared Chapter 51 valid.

The New Jersey Supreme Court upheld the lower court's decision on the matter in its entirety, finding that (1) New Jersey's interest in insulating the negotiation and award of state contracts from political contributions that pose the risk of improper influence, purchase of access, or the appearance thereof, was a sufficiently important interest to justify a statutory limitation on political contribution; and (2) the $300 limitation on contributions to gubernatorial candidates and political committees by businesses that enter into substantial contracts constitutes a valid means of protecting this interest that is sufficiently closely drawn so as to avoid violations of the freedom of association, a constitutionally protected right. Earle, 401 N.J. Super. at 325.

Having just reached this decision in January 2009, it seems likely that if and when asked, the New Jersey Supreme Court also will uphold EO 118, which is very similar to Chapter 51 and was enacted to protect the very same public interest.

Going forward, redevelopers and those that want to be so designated should assume that they have been eliminated from the ranks of the "substantial" campaign contributors and will be subjected to the $300 contribution limit. It is certainly possible that the New Jersey Supreme Court, when ultimately asked to review the Order, will modify it. However, the length of time before such a review is undertaken as well as the ultimate result is uncertain.

In the meantime, perhaps the better interim and future practice for designated and aspiring redeveloper's, along with their owners, officers, shareholders, members, spouses, adult children and the professionals serving them, is to limit campaign contributions to no more than $300 to any candidate for any state, county or municipal government. In this way, the redeveloper will remain eligible to obtain a redeveloper designation and avoid breaching any redevelopment agreement already in place. (Caveat: This approach may not protect the redeveloper at the county or local level where, remarkably enough, even more resttictive rules may be in place.)

Any professionals hired by a designated or aspiring redeveloper, particularly lawyers, planners and engineers, should be vetted in advance to determine if their entity has made a prohibited contribution that would result in the redeveloper being declared ineligible to receive a designation or inadvertently breaching a redevelopment agreement already in place.

While the Order provides a small window to cure the offense caused by making a prohibited contribution by returning the same, it is probably best to avoid the situation entirely by exercising diligence and caution with respect to any political contribution.

Patrick B. O'Reilly is an associate. The views expressed here are the author's own.

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