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Big money flows to politicians through state’s ‘LLC loophole’

Each year, good-government groups hope the governor and state lawmakers rid New York of a sinister influence. But the “LLC loophole” lets those very officeholders bathe in a river of money given by business interests seeking favorable treatment. So each year the loophole lives on as a widely loathed fixture in the campaign finance law.

The state Board of Elections created the LLC loophole in 1996 by agreeing that limited liability companies are not corporations, trusts or partnerships but “individuals” allowed to give state candidates tens of thousands of dollars more than corporations in a year.

Since then, LLCs have multiplied as the conduits through which developers, pro-gambling forces and the telecommunications industry, among others, today give nearly $5 million to legislative candidates in an election cycle and almost $10 million to those running for governor.

Donors with “LLC” in their names gave more than $20 million to state and local political causes in the 2014 election year. Of that, nearly $15 million moved in hard-to-miss gifts of at least $5,000. That’s the maximum amount corporations – but not LLCs – can directly give to candidates and political committees annually.

Big-money givers usually expect something in return.

“Follow the money of any of the top LLC donors,” Common Cause/New York said in 2013, “and you are likely to find a trail of special favors won and bills unfavorable to the donor killed on arrival in the Legislature.”

For example: A bill to strip tax breaks and state grants from companies that move their call centers abroad died in the State Senate. Select developers enjoyed special tax breaks for their New York City condominium projects. The Legislature and Gov. Andrew M. Cuomo agreed to expand casino gambling then turned to voters with a referendum implying that only good tidings would come: lower taxes, richer schools and more jobs. There was no mention of addictions, bankruptcies or embezzlements.

Though huge sums from LLCs corrode the legislative process, they also buoy lawmakers, governors and their political parties.

But closing the loophole need not be up to them. There is another way, and it requires the cooperation of only one person, a commissioner on the Republican side of the State Board of Elections. With one more backer, the Elections Board would have the majority needed to stem the steady fortune pouring in from LLCs.

But talk to people closer to the scene, and the solution appears remote. When it comes to the LLC loophole, the Board of Elections is as immobile as the Legislature.

“Frankly, the commissioners are partisan,” said Douglas A. Kellner, a lawyer in Manhattan.

He’s not the director of a nonprofit government watchdog. He’s a state elections commissioner himself, a Democrat and the board’s longest-serving member.

Refusing to budge

Kellner in 2008 was one of two board chairmen, as he is now, when Common Cause, the New York League of Women Voters, the New York Public Interest Research Group and Citizens Union of New York City asked the commissioners to rethink “the legal fiction that LLCs are individuals for purposes of the contribution limits.”

The good-government groups viewed the State Board of Elections as a simpler approach for sealing off the loophole. The Elections Board does not have more than 200 lawmakers populating two chambers with myriad committees serving as graves for unpopular bills. The Elections Board has just four “commissioners,” two Democrats and two Republicans. A majority of three decides an issue.

The groups noted that the commissioners of 1996 were following the lead of the Federal Elections Commission when they opened the loophole. But when the FEC reversed course in 1999, declaring that any LLC treating itself as a corporation for federal tax purposes would be a corporation under federal election law, New York’s commissioners preserved New York’s status quo.

It was now time for the elections commissioners to do the right thing, the groups said in 2008.

Even with those arguments, the Elections Board held fast. With Kellner in agreement, the commissioners had one of their lawyers write back to say it would be better for the Legislature to undo the loophole.

NYPIRG’s Blair Horner, who has long been amused by the self-protective behavior seen in Albany’s corridors of power, called the stance “bizarro.”

“There is no law that says LLCs have to be treated like humans,” Horner said. “That’s an interpretation cooked up by the Board of Elections. It’s a great game of pointing at the other guy.”

If the board wanted to kill the loophole it could do so, he added.

“They don’t even have to pass a bill.”

New climate, old story

With Albany again focused on ethics reforms, The Buffalo News asked Kellner if the Board of Elections would now close the LLC loophole.

He did not return to the line that only the Legislature and governor can fix the problem, though he said legislative action would be better – to avoid the lawsuits likely to follow an Elections Board vote. Instead, Kellner said the board’s Republicans are the sticking point.

He said he is willing to vote to undo the loophole and knows the other Democratic commissioner would, too. After all, the Democrats who control the Assembly have passed bills which would do just that. The Republicans who control the Senate have not.

“You have got two Democratic votes for changing it,” Kellner said, “and two Republican votes against it. And it’s never going to change until the Republicans agree to change it.”

He said the commissioners have not discussed the issue in years. Given their clear philosophical divide, “there’s no point.”

Gregory P. Peterson, an attorney and former officeholder on Long Island, is one of the two Republican commissioners. (Efforts to reach the other, James A. Walsh of Rensselaer County, were unsuccessful.)

“It’s a murky area,” Peterson said, “because how do you coordinate the intended difference between an LLC and a corporation? You look at it, and you go, wait a minute – is that within the purview of an administrative agency? Or should it really be a legislative decision? In my opinion, it really should be a legislative decision.”

The board each year sends off a wish list of new elections-related laws it would like the Legislature to adopt. Closing the LLC loophole isn’t on it.

The Moreland Commission to Investigate Public Corruption, before it was disbanded by a backroom deal between Cuomo and state lawmakers, longed for a new truly independent agency to police the gritty streets of campaign finance. The Moreland Commission wrote that the state elections commissioners have a “tacit, bipartisan agreement to do nothing.”

Rewarded by status quo

Some $19.7 million flowed from LLCs just to state legislative candidates over their past five campaign seasons, according to data reported to the Elections Board.

Most of that – $15 million – went to candidates running for the Senate. There are far fewer seats in the Senate than the Assembly – 63 compared to 150. But Republican control in the Senate has been teetering, and the Republican lawmakers have proven more inclined than Democrats to protect private-sector business needs.

While Cuomo urges that the loophole be closed, he takes plenty of money from LLCs – more than $9 million in the four years leading up to his re-election in 2014.

LLCs over the past two years also wrote some of their biggest checks to the State Democratic Committee and the Democratic Committee’s “housekeeping account,” which paid for advertising flattering to the governor and his agenda.

In his recent budget proposal, Cuomo again calls for closing the loophole. But he doesn’t include that demand in his five top-priority ethics reforms: Fuller disclosure of all outside income; stripping pensions from public officials convicted of corruption no matter when they entered the retirement system; preventing abuse of per diem compensation; arranging public financing for state elections; and reining in the use of campaign dollars for nonpolitical purposes.

For years, vague rules have allowed lawmakers to spend campaign cash on personal items – trips, meals, cars – as long as the expenses relate, somehow, to the holding of an office. NYPIRG found that in a typical year, legislators spend around half a million dollars on golf, $200,000 on new cars, $70,000 on flowers and $30,000 on cigars – all from accounts fattened by LLCs.

Cuomo and Assembly Speaker Carl Heastie last week shook hands on a few ethics reforms: requiring lawyer-legislators to list their business and law clients, policing the use of per diems and clamping down on the plundering of campaign money for many personal needs. The Senate has yet to sign on, and the agreement does not address LLCs.

Considering how well the LLC loophole serves incumbents, will Albany politicians ever close it?

“Certainly this is a game where you are asking the winners to change the rules,” said NYPIRG’s Horner. “Usually the winners of games don’t like to do that. The only way that they would want to do it is under duress.”

In other words, he said, when the public is just fed up.