League Spotlights NYS "LLC Loophole"

This article was submitted for publication by Mary Beth Evans, Joan Taback Frankle, Joan Mazur and Deb Morel of the League of Women Voters of Scarsdale:

Why have New York campaign finance laws been called "some of the most porous" in the nation (New York Times, Nov. 4, 2014)?

In large part due to New York's infamous "LLC loophole," said Brent Ferguson, Counsel at the Brennan Center for Justice at New York University School of Law, a not-for-profit, non-partisan public policy and law institute that focuses on issues of democracy and justice.

Ferguson was the guest speaker at the League of Women Voters of the Rivertowns "Money in Politics" breakfast event held November 12th at Tarrytown's El Dorado Diner; and, while the audience ate scrambled eggs and toast that morning, he deftly unscrambled one of the more confounding quirks of New York campaign finance law.

State campaign finance law was already on the books when limited liability companies (LLCs) were first allowed to exist in New York in 1994, explained Ferguson. An LLC is hybrid business entity with the liability protection of a corporation and the "pass-through" income taxation of a partnership or sole proprietorship, which allows individual owners to avoid paying double income taxes. In 1996, the state Board of Elections (BOE) ruled that LLCs are the same as individuals for purposes of campaign finance laws.

Ever since, LLCs have become major players in New York state elections. As individuals they are allowed to contribute to statewide candidates in an amount greater than ten times that of corporations, which are limited by law to $5,000 per candidate per calendar year. In the current campaign cycle of primary and general elections, each LLC is now able to contribute to up to $65,000 per statewide candidate. Moreover, noted Ferguson, there is nothing to stop someone "controlling, say, ten LLCs from writing ten checks totaling $650,000 to the same candidate."

Contrary to federal and New York City regulators, who have either banned LLC contributions or now factor them in with individual donation limits, the bipartisan, 4-member (2 Democrat, 2 Republican) New York State BOE has not rescinded its 1996 decision. According to Ferguson, this past April the BOE had a chance to close the "LLC Loophole" by treating LLCs as corporations or partnerships but remained deadlocked 2-2, with the 2 Republicans opposing the change.

LLC Litigation

In July the Brennan Center for Justice and the law firm of Emery Celli Brinckerhoff & Abady LLP filed suit against the BOE on behalf of several former and current State legislators from both political parties. According to the suit, "An LLC is a classic 'legal fiction'" with "virtually none of the characteristics of individual people acting in the political arena."

The suit argues that the "LLC Loophole" violates "the purpose and spirit" of New York's Election Law, which is "to prevent the reality and appearance of quid pro quo corruption." Among the list of evidence that the "LLC Loophole" is "consistently abused" and helps "to facilitate the larger pay-to-play culture" in Albany, the petition cites the following:

• LLCs contributed more than $54.2 million to candidates, parties, and traditional political action committees between 2011 and 2014;

• In 2014 alone, LLCs gave over $19 million, a greater than 300% increase over the amount given by LLCs in 2002;"

• One real estate developer reportedly used 27 LLCs to contribute over $4.3million in 2013 and 2014; and

• A single telecommunications provider reportedly used eight LLCs to give $1.5 million between 2005 and 2013, including $190,000 to one candidate in a single day.

The true source of many contributions via LLCs can be difficult to ascertain. As the Brennan Center notes in its petition, many LLCs have "vague names with little connection to their actual operators" and "a significant number of LLC contributions appear to originate from a small number of wealthy individuals who contribute through multiple LLCs," whose members are "not subject to meaningful disclosure in many instances."

Effect on Democracy

Ferguson stated that "LLC Loophole" provides perspective on what's happening throughout the country at the national level. He compared the use of money in New York elections to the 2016 presidential race, citing a recent report that only 158 of the nation's roughly 120 million families have contributed nearly half the funds raised so far by the 2016 presidential candidates (New York Times, October 11, 2015). Just as the "LLC Loophole" in New York is being used to evade disclosure and exceed campaign funding limits, recent Supreme Court rulings, including Citizens United v. FEC (2010) and McCutcheon v. FEC (2014), have allowed outside groups to make unlimited contributions to national candidates via "SuperPacs" – much of it so-called "dark" money because the true source is not disclosed.

"Why is this a problem for our democracy?" Ferguson asked rhetorically.

Besides "turning the tide of elections by giving some candidates an unfair advantage," he stated that one of the biggest problems is "what happens after the election, with the wealthy few seeing their policy preferences enacted." According to Ferguson this problem also has to do with "the type of people getting elected." When the system "discourages people without connections to the wealthy, only a certain subset of people get elected, which means only a certain subset of policies get enacted."

Cause for Optimism

Ferguson said the press "does not pay enough attention" and faulted journalists for treating the flow of money in politics as "business as usual." He noted that cynicism is pervasive, citing national polling results indicating 80-90% of Americans want the system to change but "almost the same number think nothing can be done."

Nonetheless, Ferguson remains optimistic. He said there is cause for hope at the national level in "the groundswell of bipartisan support" for a Constitutional Amendment to address what the Brennan Center refers to as "the tidal wave of money threatening to swamp our political process."

The Brennan Center supports an amendment; however, Ferguson noted, even if an amendment were to pass, both state and federal lawmakers "still must pass laws to fill the void," and both the current Congress and the New York State Legislature "lack the political will" to make such changes. As Blair Horner, the legislative director for the New York Public Interest Research Group put it in a 2010 WNYC radio interview, "There's a lot of rhetoric for reform in Albany, but the reality is, political parties and many candidates are addicted to the mother lode of money that comes through the LLC."

Still, Ferguson asserted, "much can be done and historically has been done" to stop the unregulated flow of money in politics.

Promising Public Finance Programs

Ferguson pointed to New York City's successful public financing program, stating that the city's voluntary small-donor matching fund system has limited the size of campaign contributions and expenditures and improved disclosure. Moreover, it has allowed a "more diverse" array of candidates with a greater incentive to reach out to "a more diverse set of ordinary voters". Ferguson added that Brennan Center helped to write a bill last year that "almost passed" and would have enacted a public finance system statewide, which neighboring Connecticut already has in place.

Ferguson also touted Seattle's newly enacted alternative method of public financing in which city residents do not have to spend their own money. Instead, the city government will issue four $25 vouchers to each registered voter, who can then donate the funds to the candidates of their choice.

Finally, Ferguson expressed hope that the Brennan Center's LLC litigation will result in the closure of New York's "LLC Loophole," with "a new rule in place by the 2016 election."

Submitted by:
Mary Beth Evans: Money in Politics Chair
Joan Taback Frankle: Secretary
Joan Mazur: Money in Politics Committee member
Deb Morel: President of the League of Women Voters of Scarsdale.