Most New Yorkers correctly assume that the state’s campaign finance system is a mess. New York has the highest campaign contribution limits of any state that has limits, the law is riddled with loopholes and enforcement is essentially nonexistent. One government-appointed commission described New York’s campaign finance law as a “disgrace.”
Not only is the State Board of Elections a toothless watchdog, it goes out of its way to make a bad campaign finance system worse. One example is how the State Board treats Limited Liability Companies.
Limited liability companies are a way for businesses to organize themselves. LLCs have become the state’s most popular form of limited liability business entity and are favored by small business owners because it affords them the “managerial flexibility and favorable tax benefits of the partnership, while also providing the conventional limited liability protection of the corporation.” LLCs are also quick, relatively simple and inexpensive to form, with “do-it-yourself” kits touting that organization papers may be drafted in a few hours.
New York’s Election Law does not specifically regulate political donations contributed by this new form of business entity.
In 1996, the New York State Board of Elections issued an opinion that said that, for the purposes of the campaign finance law, LLCs were not considered corporations and thus were not subject to the state’s corporate contribution limits. Instead, the Board decided to follow the lead of the Federal Election Commission and treat LLCs as individuals for the purposes of campaign contribution limits.
However, in 1999, the FEC reversed its position and decided that LLCs should be treated either as a corporation or a partnership for the purposes of campaign contribution limits – but not the limits set for human beings.
But New York State did not change its determination that LLCs be subject to the same campaign contribution limits as humans, not corporations.
Because of the Board’s decision, LLCs have now become one of the easiest ways to pump campaign dollars into the system. In the most recent election cycle, a single donor used the LLC loophole to contribute $1 million to Governor Cuomo’s reelection campaign, and over $3 million to other political committees. Last summer, it was reported that in the first three years of his first term, the Governor raised over $6 million in LLC contributions, which at that point amounted to about 19% of his total campaign fundraising.
During the same period, LLCs provided Attorney General Schneiderman with approximately $1 million and gave the Senate Republican Campaign Committee $851,000. A recent NYPIRG analysis found that in the first half of 2013, LLC contributions accounted for 14% of all money raised by statewide candidates and parties, more than three times the amount contributed by donors who gave $1,000 or less. Approximately 60% of the LLC contributions given to Governor Cuomo’s campaign exceeded the $5,000 limit for other forms of businesses -- corporations.
In addition, the LLC loophole makes it difficult, if not impossible, for the public to identify the actual donor behind many of these contributions since LLCs do not have to list the individual or entity that controls it.
Since the State Board of Elections chose to treat LLCs as humans, not corporations, that decision can be reversed by the Board. This week the State Board of Elections is meeting and it is possible that they will take up the question of whether to change its decision. Reformers are urging them to do so.
Governor Cuomo can play a role in forcing the Board to do the right thing. The Board members are appointed by the political parties, and the governor, given his immense political power, can force a debate to close the LLC loophole.
The governor has repeatedly stated that he wants to see the LLC loophole closed. This week he has an opportunity to match his rhetoric with political reality. Here’s hoping the governor takes that opportunity.
Blair Horner is the Legislative Director of the New York Public Interest Research Group.
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