FEDERAL ELECTION COMMISSION

WASHINCTON, 0 C 204&3

9

'1

•

o

7

•

o

2

5

•

2

3

2

8

July 17, 1998

MEMORANDUM

TO: RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

FROM: ROBERT 1. COSTA ... '-O'w tl Ji'.. 1-I 7 -'i :,

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

CHICAGO'S COMMITIEE FOR '96

Attached please find a copy ofthe final audit report and related documents on the

Chicago's Committee for '96 which was approved by the Commission on June 25, 1998

Inform&tional copies ofthe report have been received by ~11 parties involved and

the report may be released to the public.

Attachment as stated

cc: Commissioners

Office ofStaffDirector

Office ofGeneral Counsel

Office ofPublic Disclosure

FEe Library
C1

c;

it

o

7

•

8

2

5

•

2

3

2

C;

REPORT OF THE AUDIT DIVISIO~

ON

CHICAGO'S COMMITTEE FOR '96

Approved JUDe 15, 1998

FEDERAL ELECTION COMMISSION

999 E STREET. ~\\'

\\·.4SHINGTO~.DC
'1•o7•o25•233o

Table of CODtents

Chicago's Committee for '96

Executive Summary

Audit Report

Background

Findings

Legal Analysis

Transmittal to the Committee

Chronology

Page34

17

21

23
it

2

3

3

1

REPORT OF THE AUDIT DIVISION ON

CHICAGO'S COMMITTEE FOR '96

EXECUTIVE SUMMARY

Chicago~s Committee for '96 (Host Committee) registered \\'ith the Federal

Election Commission on August 16, 1994 as the Host Committee for the presidential

nominating convention for the Democratic Party.

The audit was conducted pursuant to Section 9008.54 ofTitle 11 ofthe Code of

Federal Regulations which directs the Commission to conduct an examination and audit

of each host committee registered under 11 CFR §9008.51.

The findings ofthe audit were presented to the Committee at an exit conference

held on July 25, 1997 and in the Exit Conference Memorandum (ECM). The

Committee s responses to the findings are contained in the audit repan.

The following is an overview ofthe findings contained in the audit report.

ApPAREl'll CONVENTION EXPENSES PAID B\' THE HOST COMMITTEE A~D

CIlY OF CHICAGO- 26 U.S.C. §9008(h), 11 CFR §9008.3(a)(4)(vii), 11 CFR

§9008.7(a)(4), 11 CFR §9008.12(b)(3) and (b)(7), 11 CFR §9008.52 (c), 11 CFR

§104.3(a). The Audit staffidentified payments totaling $2,580,742, made by the Host

Committee and the City ofChicago for certain production and telecommunications

expenses which did not appear to fall within the categories of permissible expenses

\vhich could be paid by the Host Committee or the City ofChicago. The production

payments, which totaled $1,455,407, were made to six vendors for services such as

providing a public address system., constructing camera platforms and lighting, providing

stagehands, riggers, projectionists, electricians, teamsters, etc. Based on the Democratic

National Convention Committee~s response to its ECM, the Audit staff conceded that

audio services, including a public address system, provided by one vendor could be

pennissibly paid. The Commission detennined that services provided by the remaining

five vendors were permissible Host Committee expenditures. Regarding the

telecommunications expenses, the Commission determined that payments totaling

$726,835 for the ONCC's local and long distance telephone charges could not be

permissibly paid by the Host Committee or City ofChicago.

IN-KIND CONTRIBUTIONS TO THE HOST COMMITTEE VIEWED As ApPARENT

COl'VEl'TIO~ EXPENSES-I) CFR §9008.(b)(3), 11 CFR §9008.7(a)(4)(ix). The Audit

staff identified an ""electronic voting system'" contributed by AT&T, valued at $150..000,

and a --credentials management system" contributed by the Polaroid Corporation.. valued

at S15,OOO't which appeared to be items which should have been paid for by the DNCC.

The Commission detennined however, that the use offunds for a voting tabulation

system \vas a permissible Host Committee expense. In addition, based on the Host

Committee's response to the ECM. the Audit staff concluded that the credentials

management system \\'as a security measure and, as such.. did not result in a prohibited

in-kind contribution.

Page)
C}

Cj •

(17•o25•23

Page2
FEDERAL ELECTION COMMISSION

\\'ASHI~GTOr-.. 0 C 204b\

REPORTOF THE ~UDJTDIVISION

ON

CHICAGO'S COMMITTEE FOR '96

q

4r

I. BACKGROUND

•

{1

7

•

o

2

c;

....

•

2

3

....

:3

A. AUDIT AUTHORITY

This report is based on an audit ofChicago's Committee for "96 (the

Committee or Chicago '96). The audit sought to determine whether there has been

compliance with the provisions ofthe Federal Election Campaign Act of 1971, as

amended (the Act). The audit was conducted pursuant to 11 CFR §9008.54 which states

that the Commission shall conduct an examination and audit of each host committee

registered under 11 CFR §9008.51.

B. AUDIT COVERAGE

The audit covered the period from August 11, 1994 through March 31,

1997. During this period, the Committee's reports reflect an opening cash balance of

$-0-, total receipts of$21,481,973, total disbursements of$20,960..388, and a closing

cash balance of$552,928.

C. COMMI1TEE ORGANIZATION

Chicago '96 incorporated as an Illinois not-for-profit corporation on

April 28, 1994, registered with the Federal Election Commission (FEC) on August 16,

1994, and applied for 501(c)(3) tax-exempt status during March.. 1995. The Treasurer of

the Committee is Walter K. Knorr. The Committee established and maintains its

headquaners in Chicago.

The Committee used ten bank accounts to handle its financial activity.

From these accounts, the Committee made approximately 1,600 disbursements. The

Committee received approximately 1,363 contributions from individuals and local

businesses, totaling about S14'1559.452. In addition. the Committee reponed receiving

348 in-kind contributions. totaling approximately S6.739..214.

Page 3
Q(

cy

it

o

7

..

o

2

5

it

2

3

3

4

2

D. AUDIT SCOPE AND PROCEDURES

The audit ofthe Committee included testing ofthe following general

categories:

1. The receipt ofcontributions from prohibited sources, those from outside of

the Chicago Metropolitan Area;

2. proper disclosure ofcontributions from individuals to include the itemization

ofcontributions when required, as well as, the completeness and accuracy of

the information disclosed;

3. proper disclosure ofdisbursements including the itemization ofdisbursements

when required, as well as, the completeness and accuracy ofthe information

disclosed;

4. review ofthe disbursements to determine compliance with the requirements

of 11 CFR §9008.52(c) (see Findings lI(A) and (B»;

5. proper disclosure ofcommittee debts and obligations;

6. the accuracy oftotal reported receipts, disbursements and cash balances as

compared to committee bank records;

7. adequate recordkeeping for committee transactions; and,

8. other audit procedures that were deemed necessary in the situation.

As part ofthe Commission's standard audit process, an inventory of committee

records is conducted prior to the audit fieldwork. This inventory is conducted to

detennine ifthe auditee's records are materially complete and in an auditable state.

Based on our review ofrecords presented, it was concluded that the records were

materially complete and fieldwork began immediately.

Unless specifically discussed belo\v, no material non-compliance was detected. It

should be noted that the Commission may pursue further any ofthe matters discussed in

this report in an enforcement action.

II. AlIDIT FINDINGS AND RECOMME~DATIONS

A. CO!'4VENTION-RELATED EXPE!'4DlTlJRES

Section 9008.52(c) ofTitle 1) ofthe Code ofFederal Regulations states,

in part, that contributions received by host committees may be used for the following: to

defray those expenses incurred for the purpose of promoting the suitability ofthe city as a

Page 4
q

I

q

l

it

e

7

it

{}

2

c;:

-i

3

convention site~ to defray those expenses incurred for welcoming the convention

attendees to the city, such as expenses for infonnation booths, receptions, and tours; to

defray those expenses incurred in facilitating commerce, such as providing the

convention and attendees with shopping and entertainment guides and distributing the

samples and promotional material specified in 11 CFR 9008.9{c): to defray the

administrative expenses incurred by the host committee, such as salaries, rent, travel, and

liability insurance~ and to provide the national committee use ofan auditorium or

convention center and to provide construction and convention related services for that

location such as: construction of podiums; press tables, false floors, camera platfonns:

additional seating; lighting, electrical, air conditioning and loudspeaker systems; offices~

office equipment; and decorations.

Further, contributions may be used to defray the cost of various local

transportation services, including the provision ofbuses and automobiles: to defray the

cost oflaw enforcement services necessary to assure orderly conventions; to defray the

cost of using convention bureau personnel to provide central housing and reservation

services; to provide hotel rooms at no charge or a reduced rate on the basis ofthe number

ofrooms actually booked for the convention: to provide accommodations and hospitality

for committees ofthe parties responsible for choosing the sites ofthe conventions; and to

provide other similar convention-related facilities and services.

Section 9OO8.7(a)(4) ofTitle 11 ofthe Code of Federal Regulations states

that "Convention expenses"· include all expenses incurred by or on behalfofa political

party's national committee or convention committee with respect to and for the purpose

of conducting a presidential nominating convention or convention-related activities.

On August 4, 1994, the City ofChicago (the City) and the Democratic

National Convention Committee., Inc. (ONCC) entered into an written agreement (the

Convention Contract or Contract). One section ofthis agreement provided for the

establishment of a host committee to serve, in part, as a separate fund to satisfy the

financial obligations ofthe City specified in the Contract, and, for securing cash and

in-kind contributions necessary to obtain goods and services needed for the Convention.

As mentioned previously, the Committee registered with the FEC shortly thereafter.

On August 19, 1996, the City and the ONCe amended the Contract.. in

part, with a budget revision entitled 4O~Chicago '96/City Budget." Each expense

classification in the revised budget was identified by line number, line item. total amount

budgeted, total cash spent, and total in-kind contributions allocated to that line item. The

Audit statTs review ofmanagement controls disclosed that the Comminee·s

disbursements records included memoranda which identified expenditures made on

behalf ofthe ONCC and the budget line number to \vhich each expense should be

allocated. The apparent objective ofthese controls \\'as to facilitate managerial reponing

and compliance with the budget.

Page 5
...

e

7

..

(1

2

5

..

"'!:

t.

3

b

4

During a review ofthe Committee·s disbursement records, the Audit stafT

identified payments to eight vendors totaling $2,055,732 which appear to be for

convention-related expenditures and not for items noted above at 11 CFR §9008.52(c).

Furthermore, the Committee obtained written concurrence from the ONCC for all ofthe

payments. Expenses defrayed fell into one oftwo major budgttary classifications.

production expenses or telecommunications costs.

The issue ofthe permissibility ofthese payments was addressed in Exit

Conference Memoranda resulting from the audits of both Chicago '96 and the ONCC.

Both committees, as well as the City ofChicago, were given an opportunity to respond to

the Memoranda, and, information provided by them is incorporated in the discussions

below.

In response to the respective Exit Conference Memoranda, both the

Committee and the ONCC argued that all ofthe expenses discussed' below are covered

by one ofthe categories ofpennissible host committee expenses at 11 CFR

§9008.52(c)( 1) or, referring to 11 CFR §9008.52(c)( 1)(xi), are ··similar.... to expenses

covered by one ofthe pennissible expense categories. To read 11 CFR §9008.52(c)( 1) as

broadly as both committees propose would effectively negate the limitation on

convention expenses at 26 U.S.C. §9008(d); the prohibition on contributions to a

convention committee that has received the full federal payment (11 CFR §9008.6(a»:

the prohibition on the use of corporate contributions in connection with federal elections

at 2 U.S.C. §441b; and the Commission·s clear statement in the eXplanalUJn and

.Ju~t~ficallon(E&J) supporting the provisions contained in II CFR §9008.52(c)(I) that

allowing the host committee to pay selected convention expenses is hintended to be a

very narrow exception to the statutory limitation on convention expenses." I

I. Production Expenses

Pursuant to the Contract, the City agreed to provide, among other

things, the follo\ving production hard\vare and related services to the DNCe: "·a lighting

system and the services oflighting consultants and a lighting designer to operate the

system:·" han audio system (including but not limited to microphones at each delegation

and all audio feeds) and the services ofaudio consultants and an audio designer to

operate the system:"" ....the broadcast on one ofthe City·s cable television stations gavel to

gavel coverage ofthe Convention and special programming directly related to the

Convention.... provided that the ....station shaH make available to the ONCe a tape ofsuch

coverage... without charge for rebroadcast, display, or other rights:'" and, ....aH necessary

production control personnel, including camera persons, grips, video control and tape

operators, audio and video maintenance engineers., chyron operators, video and utility

personnel. riggers. gaffers. property master and such other production assistants as may

be required...·

See 44 Fed Reg 63.038 ('o\' I. ,97Q)

Page 6
*(}

7

..

2

....

/

5

The Audit staff's review ofthe Committee's disbursements records

identified payments to six vendors totaling $1 ..455,407. Furthermore, documents

obtained by the Audit staffindicate that the City ofChicago paid an additional

5233,500.2 These payments were apparently made in execution ofthe Convention

Contract s provisions related to production, and, the Committ,e's expenditures are

discussed in detail below.

a. Audiotek Corporation

The Audit staffidentified one disbursement to Audiotek

Corporation dated August 19, 1996 in the amount of5113,5oo. Committee internal

memoranda allocated the payment to budget line item u32-Audio...- According to the

Committee's contract with Audiotek, the vendor was to provide public address systems,

press and media feed distribution systems, delegate microphone selection systems, and

on site technicians for the convention.

b. Automated Studio Lighting

The Audit staffidentified four payments to Automated

Studio Lighting totaling 5299,016 from July through October of 1996. Committee

records disclosed that all but one ofthe payments was allocated to budget line item

"431-Lighting.'" The remaining disbursement in the amount of$48,070 was allocated to

budget line "19-Production Personnel." Vendor invoices reviewed by the Audit staff

supported the Committee's expense classificatic'lDS.

c. Chicago Scenic Studios, Inc.

The Audit staffidentified two payments to·Chicago Scenic

Studios during August and November of 1996 totaling $615,083. The Audit staff's

revie\\' ofCommittee records disclosed that both disbursements were allocated to budget

line item '''19-Production Personnel." Vendor documentation confirmed that all charges

submitted were for production labor. A proposal from the vendor described labor

services to be provided as stagehands, riggers, teamsters, projectionists, broadcast

engineers, cameramen, carpenters, and decorators for the convention.

d. Theatrical Resources, Inc.

The Audit staffidentified one payment in the amount of

$132,808 to Theatrical Resources, Inc. made during July, 1996. A review ofCommittee

records disclosed that the disbursement covered payroll for riggers and electricians

working during July and August.. 1996 pursuant to a contract between the DNCe and the

2 These disbursements are outside ofthe scope ofthis audit repon. however. we do note that

pursuant to 11 erR *9008.53(b) expenditures made by a municipality or government agency

should also meet the requirements of 11 CFR *9008 S2(c) Additional details on payments by the

Cit~· are contained in the audit repon on the D'CC

Page 7
<]

..

{}

7

..

o

2

5

..

2

3

3

8

6

vendor. The expense was allocated to budget line ··19-Production Personnel.'" A

separate review ofthe convention committee s records disclosed that the DNCe

subsequently paid this vendor a total of$S9,848 with three additional checks written

during September, 1996 and February, 1997.

e. V.ANCO Lighting Services

The Audit staffidentified one payment in the amount of

SI 75,000 to VANCD lighting services during July, 1996. A review ofComminee

records disclosed that the expense was allocated to budget line "31-Lighting." Vendor

invoicing described the services provided during July and August 1996 as a Iol>rigging

package" and identified the Convention as the ushow" to be supported by VANCD.

f. Vari-Lite, Inc.

The Audit staffidentified one payment in the amount of

S120,000 to Vari-Lite, Inc. during August, 1996. A review ofComminee records

disclosed that the expense was allocated to budget line "'31 -Lighting.'I" Vendor invoicing

identified the Convention to be the loloproducer" using automated lighting and technical

support provided during July and August of 1996. The Audit staffalso reviewed City

memoranda asserting the equipment provided to be ··lighting instruments, border and

cyclorama striplights, follow spotlights, floodlights, special effects lighting, spotlights,

etc." for the Convention.

In the ECM, the Audit staffconcluded that payments to the

vendors described above are not expenses properly paid by a host comminee pursuant to

11 CFR §9008.52(c). Rather, they are convention expenses that should have been paid

by the ONCC pursuant to 11 CFR §9008.7(a) for reasons discussed below.

As noted previously, some ofthe aforementioned

disbursements relate to salaries for electricians and other individuals for labor such as

rigging cameras and lighting. Although 11 CFR §9008.52(c) allows a host committee to

defray salaries and convention related expenses such as construction ofcamera platforms

and lighting., the Audit staffbelieves that the expenses paid by the Committee related to

rigging cameras, automated lighting, and audio systems with the stated purpose of

providing media feeds or cable broadcasts are not the same as building a platform from

which cameras can be used for the television production. Furthennore.. the Comminee

defrayed ONCC contracted labor costs unrelated to rigging or construction, i.e.,

projectionists.. broadcast engineers, and cameramen. Whereas the Committee made

numerous other disbursements.. separate from the production expenditures, relating to

construction of podiums, platfonns and other facilities at the Convention center. the

disbursements in this case appear to be related to the overall processes oftelevision

production and broadcasting.

Page 8
..

o

7

•

o

2

5

7

Categories of pennissible host committee expenses

enumerated at 11 CFR §9008.51(cXI) deal with preparing the convention site to host the

convention and to promote the convention city. In contrast, production expenditures

made by the Committee directly facilitated television and other media coverage of

Convention proceedings through press feeds and cable broadcasts. Instead ofmerely

preparing the convention center premises or promoting the City ofChicago, these

expenditures aided the Democratic Party in bringing its message to the public in hope of

influencing support for the political party hosting the convention and its candidate for

President. Furthennore, expenditures related to putting on a stage "production.... to be

Seen by the country are clearly costs of conducting a convention as described at 11 CFR

§9008.7(a) and not the type ofdisbursement envisioned under the host comminee

regulations. Consequently, in the ECM, the Audit staffconcluded that the total amount

of51,455,407 paid by the Committee for production expenses results in an in-kind

contribution to the ONCC.

In the ECM, the Audit staffrecommended that the

Committee provide documentation to demonstrate that the payments described above

were allowable Committee expenses pursuant to 11 CFR §9008.S2(c) and did not result

in prohibited in-kind contributions to the DNCC. Also, for these specific items~ the

Committee was to address whether these disbursements would have been necessary for

the convention hall ifnot for the television production requirements. Ifthe Committee

elected to view any ofthe aforementioned expenses as allocable in part to pennissible

activities, then documentation supporting the Committee s basis for such allocation was

to be presented.

In its response to the ECM, Chicago '96 disagreed that the

payments described above resulted in a prohibited contribution to the DNCe. The

Committee asserted that 11 CFR §9008.S2(c)( 1) 6'is not intended to be ail-inclusive~ but

is intended instead to provide a general representation ofthe convention facilities and

services for which cash and in-kind contributions could be used." Noting that II CFR

§9008.52(cl< I Xxi) permits host committees to provide ''''other similar convention-related

facilities and services," the Committee asserts that all ofthe production expenditures

described above were directly related to work performed at the site ofthe Convention

and an adjacent media ..viIion, and therefore, in accordance with the regulations.

Additionally, the Committee contended that hthe host

committee necessarily must support the objectives ofa political party's convention

committee'~ in order to achieve its principal purposes of encouraging commerce and

projecting a favorable image ofthe convention city. From this, the Committee concludes

that -..he facilitation oftelevision and media coverage by a host committee is reasonable

and proper.~" Noting that the regulations pennit host committees to pa~' for television and

media-related items such as press stands and television platfonns. the Committee argued

that it would be ....illogical to propose that certain other items which accomplish the exact

same purpose·· are prohibited.

Page 9
a

0

·: .-

..,

/

ir

{}

?

l-.

5

8

The ONCC in its response also chaJJenged the Audit staWs

position, stating ~~it is clear that these expenses were of a type that the Commission"s

regulations explicitly and specifically provide may be paid for by the Host Committee or

the City."" The DNCe summarized payments to each vendor., assening that ~·[a]11 ofthe

expenses at issue were incurred for lighting or sound equipmelJt used within the

Convention Hall, or for services or equipment directly involved in constructing and

preparing the podium.'" Citing 11 CFR §9008.52(c)(1 )(v) and (xi)., the DNCC concluded

that "[i]t could not be clearer that the items for which these six vendors were paid are

within the scope ofthis subsection.'"

Furthennore, the DNCC asserts in its response that the

~~Audit Division has completely misperceived the purposes ofthese expenditures"....

adding that U[m]uch ofthe labor and equipment involved would have been required even

ifthe Convention had never been broadcast." The response goes on to say that ''''to the

extent that sound, lighting., and other electrical equipment was [emphasis added by

ONCC] needed or used to facilitate television, radio or cable broadcast ofthe Convention

proceedings, the expenses ofsuch equipment are manifestly a permissible expense under

section 9008.52(c)( 1)(v).....

According to the ONCC, U[n]othing in the language., prior

history or Explanation or Justification for the current regulations in any way suggests any

limitation on the Host Committee's ability" to defray expenses ....related to facilitating

broadcast or other press coverage ofthe Convention., as distinct from other expenses of

constructing and preparing the Convention H.all." The ONCe concludes that the Audit

staff had ~"no basis for such a distinction,"~ adding that there is h no possibility"" that any

committee "~could have been aware ofany such distinction by reading the regulations.'"

Ofspecial interest was a section ofthe DNCC"s response

providing details regarding the Host Committee's payment to Audiotek Corporation.

According to the ONCe, services provided by this vendor comprised "public address

systems, wiring and speakers so that people in all parts ofthe Hall could hear the

proceedings while they were taking place, delegate microphone selection systems., a

hearing impaired wireless system for the Hall (so that hearing-impaired persons within

the Hall could follow the proceedings), amplification for the orchestra playing within the

Hall, and labor to install and assist in the operation ofthis on-site sound equipment.·"

Based on these additional details" the Audit staff concluded Audiotek"s services were

essentially similar to hloudspeaker systems," and therefore permissible under 11 CFR

§9008.52(c)( 1)(v).

Regarding the remaining five vendors. ho\vever. other

statements in the ONCe" s response confirm that at least some ponion ofthe

disbursements at issue \vas used to facilitate television.. radio or cable broadcast ofthe

Convention proceedings. Funhermore. other than Audiotek, the responses from both the

DNCe and Chicago '96 failed to offer any new documentation or bases for allocation

\\'hich identify those pans ofthe expenses that \vould have been required even ifthe

Page 10
Cj

9

..

o

7

•

o

2

...f

..

2

3

4·

1

9

Convention had never been broadcast, as recommended in the ECM. The Audit staff

believes that the regulations~ together with explanatoty material published in the Federal

Register, fonn a reasonable basis for its position~ and therefore, concludes that

Chicago ~96 made a prohibited in-kind contribution to the ONCe in the amount of

$1,341~907[SI,455,407-5113,5oo).

On April 23, 1998 the Commission, during its consideration ofthe

audit report on the 1996 Committee on Arrangements for the Republican National

Convention, voted that the use offunds, for such services as provided by the remaining

five vendors discussed above, is a permissible host committee expense.

2. Telecommunications

Section 9008.7(a)(4Xx) ofTitle 11 ofthe Code ofFederal

Regulations states that ~'Convention Expenses" include all expenses incurred by or on

behalfofa political party's national committee or convention committee with respect to

and for the purpose ofconducting a presidential nominating convention or conventionrelated activities. Such expenses include administrative and office expenses for

conducting the conventio~ including stationery, office supplies, office machines, and

telephone charges; but exclude the cost ofany services supplied by the national

committee at its headquarters or principal office ifsuch services are incidental to the

convention and not utilized primarily for the convention.

As mentioned above, 11 CFR §9008.S2(c) pennits host

committees to provide the national committee use ofa convention center and convention

related services for that location such as offices and office equipment. Additionally, the

EclJ states, in part, that the revised rules at 11 CFR §9008.S2(c) do not permit host

committees or municipalities to pay the convention committee's or the national party~s

overhead and administrative expenses related to the convention.3

Pursuant to the Convention Contract the City agreed: to provide

the ONCC with a telecommunications system; to provide the ONCe with a cellular

phone system~ to pay for all long distance service charges incurred by the ONCe at

the Convention facilities. The Audit staff's review ofdisbursements disclosed that the

Committee and City made substantial payments on behalfofthe DNCe for telephone

installation and service. Because telephone installation costs are allocable to office

equipmen~ and therefore~ are permissible host committee expenses pursuant to 11 CFR

§9008.S2(c)( 1)(v), the following discussion focuses on telephone service charges.

Committee records documented payments totaling S6OO~325 for

local and long distance telephone service. Furthennore. documents obtained b~' the Audit

J See 59 Fed Reg. 33.614 (June 29, 1994)

Page 11
10

staffindicate that the City ofChicago paid an additional $126.,51O..a These payments

were apparently made in execution ofthe Contract s provisions related to

telecommunications~ and~ the Committee's expenditures are discussed in more detail

below.

a. Ameritech

The Audit staffidentified 10 paynlents to Ameritech~

which net ofrefunds to the Committee from the vendor~ totaled $512,637. A review of

the invoices disclosed that all ofthe billings were local telephone service charges for

Convention telephone numbers or accounts apparently assigned to the ONCe.

Furthermore, internal Committee memoranda attributed all ofthe expenses to the DNCC.

The Audit staffidentified 15 payments to AT&T totaling

$87,688. A review ofthe invoices disclosed that all ofthe billings were long distance

telephone service charges for Convention telephone numbers or accounts apparently

assigned to the DNCC. Furthennore, internal Committee memoranda attributed all ofthe

expenses to the ONCC.

In the ECM, the Audit staffconcluded that service charges

for telephone calls made by the ONCC in support ofits operations were a convention

overhead expense which did not contribute to preparation of convention center premises

or promotion ofthe City ofChicago. Therefore, the total amount of $600,325 paid by the

Committee for telephone service charges resulted in an in-kind contribution to the

DNCC. The Audit staff also recommended that the Committee provide documentation to

demonstrate that the payments for telephone service charges were allowable Committee

expenses pursuant to 11 CFR §9008.52(c) and did not result in prohibited in-kind

contributions to the DNCC.

b. AT&T ..

o

J

I

•

2

J

4

2

In its response to the ECM, the Committee stated that that

the telecommunications systems ....existed for the benefit ofChicago '96'" and that without

having provided these services~ it would have been impossible for the Committee to

fulfill its obligations under the Convention Contract. The Committee asserted that the

~~telecommunications system served to accomplish a wide variety oftasks directly related

to the Convention.... including construction as well as security. The Committee concludes

that expenditures for the phone charges ....fall within the parameters of 11 C.F.R.

Section 9008.52(c),,·· and therefore~ it was appropriate to pay for them.

These disbursements are outside ofthe scope ofthis audit repon. however. we do note that

pursuant to II CFR §9008.53(b) expenditures made by a municipality or government agency

should also meet the requirements of 11 CFR §9008.52(c) Additional details on payments by the

City are contained in the audit repa" on the D1'CC

Page 12

,
it

o

7

..

o

2

5

... ,.." l..

3

4·

3

11

The ONCC took a different approach in its response,

arguing that Ubyany reasonable readin& the regulation on its face [emphasis in original]

authorizes the host committee to pay for the costs oftelephone service for the

Convention." In the DNCC's opinio~ ~4[t]O say that the costs ofoffice telephones are not

an overhead or administrative expense but that the costs of using the telephones are such

an expense is to draw a distinction that no reasonable reading ofthe plain language ofthe

regulation would support." The ONCC then criticized the "language ofthe Explanation

and Justification (E&J):' declaring that it should "not be given precedence over the plain

language ofthe regulation,'" and that "the E&J language is itselfambiguous.··

Despite arguments presented above, the Audit staff

believes that the E&J offers a reasonable staning point for applying the regulations as

intended by the Commission. The Audit statTfurther concludes that charges for local and

long distance telephone calls made by the ONCC are most appropriately classified as

administrative and overhead expenses ofthe convention committee and not construction

or security expenses benefiting the host committee. Therefore, the total amount of

5600,325 paid by the Chicago '96 results in an in-kind contribution to the ONCC.

B. IMPERMISSIBLE USE OF IN-KIND CONTRIBUTIONS

Section 9008.52(c)(l) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, that local businesses (excluding banks), local labor organizations, and

other local organizations or individuals may donate funds or make in-kind donations to a

host committee to be used for the purposes described at the beginning ofFinding II.A.

In the Convention Contract, the City agree~ in part, to provide the ONCe

with "an electronic voting system for use in the Convention Hall" and ""a photo security

system to control access to the Convention Offices." During a review ofthe

Committee's donor records, the Audit staffidentified in-kind contributions from two

vendors totaling $165,000. In the ECM, the Audit statTstated that contributed equipment

appears to have been used for convention-related purposes pursuant to terms ofthe

Contract and not for items noted above at 11 CFR §9008.52(c)( 1) as discussed below.

1. AT&T

The Audit staffidentified an in-kind contribution from AT&T of

an ....electronic voting system·· valued at 5150,000 by the vendor which appears to have

been used for convention-related purposes and not for items noted above at 11 CFR

§9008.52(c)( 1). The donated voting system fulfilled Convention budget line number

·"70-Electronic Voting."

The Committee asserted that the electronic voting system ....enabled

state delegations to have interactive contact with leadership and other personnel on the

convention podium itself'" According to the Committee, the voting system was used in

the United Center as a pan ofthe actual convention services in accordance \\lith the

Page 13
..

ii, t'J

7

12

Convention Contract. A Democratic National Convention press release issued during

November, 1995 confirmed that AT&T was designated as an official technology

provider, and that delegates would be using AT&T integrated technology on the

Convention floor.

In the ECM, the Audit statTfound that the donation of a voting

system provided the ONCe with the same benefit as ifthe host committee had paid a

convention expense, and therefore, was an impermissible use ofhost committee

resources. Categories of permissible uses for contributions to host committees't expenses

enumerated at 11 CFR §9008.52(c)(1), involve preparing the convention site to host the

convention and promoting the convention city. In contrast, the equipment donated by

AT&T was used to provide Democratic Party leadership with rapid tabulation ofdelegate

voting. This enhancement to political operations at the Convention served a partisan

function in conflict with the host committee regulations. Therefore, the Audit staff

concluded that u~e ofthe vuiing system valued at S150,000 results in a prohibited in-kind

contribution to the ONCC. Also, the Audit statTrecommended in the ECM that the

Committee provide documentation to demonstrate that the electronic voting system \vas

put to permissible uses pursuant to 11 CFR §9008.52(c) and did not result in prohibited

in-kind contributions to the ONCC.

In response to the above, Chicago '96 described its obligation to

provide a delegate voting system under the Convention Contract as pan ofthe ....actual

convention services."" The Committee disagreed that the voting system's furtherance of a

panisan party function would prohibit its use by the ONCe, arguing that ""because a

convention naturally must serve one political party or another, it is implicitly understood

that the convention itselfis panisan while a host committee remains nonpanisan...· Also,

Chicago '96 stated its understanding that hsimilar Voting Systems have been donated for

past conventions and no regulatory problems have been raised..... As a result, the

Committee concluded that the delegate voting system hfalls squarely within the

parameters of 11 C.F.R. Section 9008.52(c)...·

In response to a conference held at the close of audit fieldwork, the

DNCC verified that h(t)he electronic system used to count the votes of delegates at the

Convention.... served as ""a core part ofthe physical systems needed to run the

convention.'" Later, in its response to the ECM't the ONCe pointed out that 11 CFR

§§9008.52(c)( 1)(v) and (vi) pennit the Host Committee to pay for office equipment in

the convention hall as well as similar convention-related facilities and services.

According to the ONCC., U[t]here is no logical difference between telephone receivers

used to communicate information to the podium and a computerized system that does the

same thing.'t' The DNCe finds it ""'difficult to imagine a "facility" more "related" to the

Convention than a system for counting delegate votes. ". The DNCe also rejects the Audit

stafTs position on the grounds that ....[t]o say that a voting system is an "enhancement to

political operations" contributes nothing to an analysis of permissibility of this

expenditure, since vinually every [emphasis added by DNCe] expenditure...specifically

allo\ved by section 9008.52<c)( 1)(v) could be said to ·enhance" political operations.··

Page 14
it

U

7

...

o

?

..I

...

2

"'"'" 4

5

13

The responses above do not demonstrate that the in-kind

contribution was pennissible under the regulations. Furthermore, they confirm that the

Audit staff correctly interpreted the basic purpose ofthe electronic voting system. In

light ofthis, the Audit staff concluded that use ofthe voting system, valued at $150.,000,

results in a prohibited in-kind contribution t~ the ONCe.

On January 22, 1998, the Commission, during its consideration of

the audit repon on the San Diego Host Comminee/Sail to Victory San Diego '96, voted

.that the use offunds for a voting tabulation system was a permissible host comminee

expense.

2. Polaroid Corporation

Section 9008.7(a)(4)(ix) ofTitle 11 ofthe Code ofFederal

Regulations states that "Convention expenses'" include all expenses incurred by or on

behalf of a political pany's national committee or convention comminee with respect to

and for the purpose ofconducting a presidential nominating convention or conventionrelated activities. Such expenses include expenses for printing convention programs, a

journal of proceedings, agendas, tickets, badges, passes, and other similar publications.

In the ECM, the Audit staffidentified an in-kind contribution from

Polaroid Corporation ofa ....credentials management system" assigned a value ofS15,OOO

by the vendor. According to Polaroid·s proposal, the system would capture and maintain

a text and image database of all ONCe and host comrnittee employees. Included in the

$15,000 valuation were six months rental ofthe system. labor, logo scanning, training,

shipping, and card design. According to ONCC training materials, the credentials were

to be worn by every attendee, and, the passes granted five levels of access, designated by

credential color, to different sections ofthe convention facility.

The Audit staff concluded that the donation ofthe credentials

management system provided the ONCC with the same benefit as ifthe host committee

had paid a convention expense, and consequently.. is not a pennissible use of host

committee resources as defined at 11 CFR §9008.52(c)( 1). As a result, the Committee

apparently made a prohibited in-kind contribution of S15,000 to the ONCC. Also, it was

recommended in the ECM that the Committee provide documentation to demonstrate

that the credentials management system was put to pennissible uses pursuant to 11 CFR

§9008.52(c) and did not result in prohibited in-kind contributions to the ONCC.

In its response to the ECM. the Committee disagreed that the use

ofthe credentials management system \\'8S not in compliance \\'ith 11 CFR 9008.52(c).

The Comminee assened that the system "related directly to the security sen'ices

necessary to ensure safety and orderly conduct for the convention staff and panicipants.··

and therefore. came under provision \vhich allo\\' host comminees to defray the costs of

la\\' enforcement services necessary to ensure orderly conventions, According to the

Page 15
9

C}

•

o

7

•

o

2

5

•

2

3

4

b

14

Conmlittee~ the system "provided photo identification passes for a variety of personnel

working at the 320 North Clark location (which housed both Chicago 996 and the DNCC,

as well as numerous other city and state offices and courtrooms) as well as at the United

Center," the.site ofthe convention. The DNCC's response addressed this issue in a

similar manner.

In order to clarify representations made above9 the Audit staff

contacted both committees. Statements made by representatives ofthe DNCe and

Chicago '96, along with documents contained in the audit workpapers, corroborate that

the credentials management system generated identification cards which were used

exclusively as a security measure for employees ofboth committees to gain access to the

320 North Clark Street office facility and United Center, but only during construction

and preparation phases leading up to the Convention. There was no evidence that the

credentials management system assisted the ONCC in managing the movement of

delegates or other personnel once inside the Convention. Accordingly, the Audit staff

concludes that the use ofthe donated credentials management system was within the

scope of 11 CFR §9008.S2(cXl )(vii) and did not result in a prohibited in-kind

Contribution to the ONCC.

Page 16
FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 20463

February 23, 1998

MEMORANDUM

(", ., .'

~~.

Robert J. Costa

Assistant StaffD·

Audit Division

THROUGH: John c. slbi StaffDir~

FROM: Lawrence Noble ~./.,;' General C.o·unsel ..;,,?//'

Kim L. Bright.Colcman~ I)L

Associate General Counsel,

.~,

Rhonda J. Vosdingh' .=.

Assistant General CouAsel

Delbert K. Rigsby \)I<K

Attorney

TO:

...

o

7

it

o

2

5

..

t:..

3

4

7

SUBJECT: Proposed Audit Report on the Chicago Committee for '96 (LRA #510)

1. INTRODUCTION

The Office ofGeneral Counsel has reviewed the proposed Audit Report on the Chicago

Committee for '96 ("Host Committee"), which was submitted to this Office on December 29,

1997.I This memorandum summarizes our comments on the proposed Audit Report.2 Some of

the issues discussed in the proposed Audit Report and herein overlap with issues in the proposed

Audit Report on the Democratic National Convention Committee, Inc. ("Convention

Comments from this Office are due on February 23, 1998.

Since the proposed Audit Repon concerns the audit of a host comminee, this Office recommends that the

Commission consider this document in open session in accordance with J1 C.F.R. §§ 9008.54, 9007.1(e)( I) and

9038. J(e)( 1).

Page 17
n· j

9

...

o

7

it

n

tf

2

t;

-r

Memorandum to Roben J. Costa

Proposed Audit Repon on Chicago Committee for '96

Page 2

Committee").) Many issues discussed herein also overlap with this Office~s comments on the

Audit Report for the San Diego Host Committee, which were submitted to the Audit Division on

November 19, 1997. This Office~s opinions remain the same as the opinions stated in the

comments on the San Diego Host Committee Audit Report in regard to the limitations on

pennissible host committee expenses. However, the analysis in the audit reports ofthe Host

Committee and the Convention Committee should be the same as the Commission's ultimate

decisions in the audits ofthe San Diego Host Committee and the Convention on Arrangements of

the Republican National Convention. This Office concm'S with the findings in the proposed

Audit Report for the Chicago Host Committee that are not discussed separately in this

memorandum. Ifyou have any questions, please contact Delbert K. Rigsby, the attorney

assigned to this review.

II. CONVENTION-RELATED EXPENDITURES (lI.A)4

The proposed Report states that the Host Committee appears to have made impennissible

expenses by paying five vendors for television production expenses in the amount of $1 ,341 ,907.

The proposed Report states that such television production expenses are not pennissible host

committee expenditures because they are not included in the expenses listed in 11 C.F.R.

§ 9008.52(c), and were not used to promote the city or prepare the convention site for the

convention. The principal objectives of a host committee are to encourage commerce in the

convention city, project a favorable image ofthe city for convention attendees and defray

convention expenses. 11 C.F.R. § 9008.52. Host committees may receive donations and in-kind

contributions from local businesses and organizations to defray convention expenses set forth in

11 C.F.R. § 9008.52(c). The national committee ofa political party may receive public funds to

pay for its convention and is limited in the amount which it may spend on the convention.

26 U.S.C. § 9008 and 11 C.F.R. § 9008.8. The Explanation and Justification (E & J) for

11 C.F.R. § 9008.7, which concerns the limitations on convention spending, states that the

payment of convention expenses by the host committee is "intended to be a nan-o,"' exception to

the statutory limitation on convention expenses." 44 Fed. Reg. 63038 (November 1, 1979).

This Office concurs with the proposed Report that the Commission intended for

11 C.F.R. § 9008.52(c) to be interpreted narrowly. A broad interpretation of 11 C.F.R.

§ 9008.52 would be inconsistent with the limitation on convention expenses in 11 C.F.R.

§ 9008. The proposed Report relies upon the E & J for 11 C.F.R. § 9008.S2(c)(I) in reaching its

conclusion that the Host Committee's payment ofthe television production expenses appear to

be impennissible and result in prohibited in-kind contributions to the Convention Committee.

The proposed Audit Repon for the Convention Comminee was submined to this Office on Janual) 7. 1998

and comments are due from this Office on March 4. 1998.

Parenthetical references are to the relevant section ofthe proposed Audit Repon.

Page 18
q

G;"

..

o

7

Memorandum to Robert J. Costa

Proposed Audit Report on Chicago Committee for '96

Page 3

Furthennore, in concluding that most ofthe television production expenses do not

appear to be permissible host committee expenses, the proposed Audit Report states that such

expenses are for lighting and personnel costs for the television production and broadcasting of

the convention and not for infrastructure costs to prepare the convention site to host the

convention. The proposed Report considers infrastructure costs to prepare the convention site as

permissible host committee expenses pursuant to 11 C.F.R. § 9008.52(c)(v). Production

personnel costs are considered impennissible host committee expenses. The Host Committee did

not submit additional documentation, as requested by the Audit staffin the Exit Conference

Memorandum, to demonstrate that the television production expenses were permissible host

committee expenses. S

The proposed Audit Report also states that the Host Committee appears to have made

impermissible expenses in the amount of 5600,325 for local and long distance telephone charges.

The proposed Report concludes that local and long distance telephone charges are administrative

and overhead expenses ofthe convention committee and not construction or security expenses

benefiting the Host Committee. In its response to the Exit Conference Memorandum, the Host

Comminee argued that the telecommunications system and the telephone charges are an integral

part of a constroction and convention-related service and should be considered a permissible host

committee expense. While office equipment is considered a permissible host committee

expense, 11 C.F.R. § 9008.S2(c)(v), telephone charges are considered administrative and office

expenses. 11 C.F.R. § 9008.7(a)(4)(x). Thus, the Audit stafffound that the telephone equipment

and installation ofthe telephone system were permissible host committee expenses, but the

service charges were not pennissible host committee expenses.

This Office concurs with the proposed Audit Report that the telephone charges appear to

be impennissible expenses. To support its conclusion that the telephone charges are overhead

expenses, the proposed Report cites the Explanation and Justification for 11 C.F.R. § 9008.52(c)~

which states that the regulation "does not pennit host committees .... to pay the convention

comminee's or the national party's overhead and administrative expenses related to the

convention." However, this Office believes that this section ofthe proposed Report should also

discuss 11 C.F.R, § 9008.7(a)(4), which defmes convention expenses that are pennined to be

paid with public funds received by the convention committee. Administrative and office

expenses, specifically telephone charges, are listed as such types of expenses. 11 C.F.R.

§ 9008.7(a)(4)(x).

The Host Comminee only submined additional documentation regarding Audiotek. one ofthe vendors.

After reviewing the additional documentation, the Audit staff concluded that the payment to Audiotck was a

pennissible host comminee expense because the equipment provided was essentially a loudspeaker system.

Page 19
q

I

Q

I

it

(}

7

it

{1

2

5

•

2

3

t;

{}

Memorandum to Robert J. Costa

Proposed Audit Report on Chicago Committee for '96

Page 4

III. IMPERMISSIBLE USE orIN-KIND CONTRIBUTIONS (II.B)

The proposed Report concludes that an electronic voting system provided by AT&T to

the Host Committee resulted in an apparent prohibited in-kind contribution to the convention

committee in the amount ofS150,000 because it is not an expense listed within 11 C.F.R.

§ 9008.52, and was not used to promote the city or prepare the convention site for the

convention. In its response to the Exit Conference Memorandum, the Host Committee stated

that this service was a part ofits obligation to provide convention services and should be

considered a permissible host committee expense.

This Office has discussed with the Audit staffwhether there is any documentation

indicating that the voting system was a part ofa larger computer system that performed other

functions, such as an electronic bulletin board for delegates to receive messages and the ability to

obtain information about restaurants and tourist sites in the city. Ifthe voting system was part of

a larger integrated system with multiple functions, an argument can be made that it should be

considered a permissible host expense and not an in-kind contribution to the Convention

Committee. In the audit ofthe San Diego Host Committee, the Audit staffwas able to specify

the amount offunds ($44,067) that were spent solely on the voting system even though it was a

part ofa larger computersystem. The Audit staffconcluded that the expense of $44,067 was an

impermissible host committee expense. During the Commission meeting on January 22, 1998,

the Commission voted to allow $44,067 spent on the voting tabulation system as a permissible

host committee expense.

The documentation provided by the Chicago Host Committee indicates that the sole

purpose ofthe electronic voting system was to tabulate votes. Ifthe electronic voting system

was a separate system whose sole function was to tabulate votes, it would seem that the voting

system was an impennissible bost committee expense. However, to be consistent with the

Commission's decision regarding the electronic voting system in the San Diego Host Committee

Audit Report, this Office recommends that the proposed Audit Report be revised to state that the

electronic voting system appears to be a permissible host committee expense.

Pagt: 20
.. FEDERAL ELECTION COMMISSION

WASHINeTON. 0 C 20463

July 7, 1998

c;

•

o

7

•

(1

2

5

•

2

3

5

1

Mr. Walter K Knorr, Treasurer

Chicago's Committee for '96

City Hall Room SO1

121 North laSalle Street

Chicago.1L 60602

Dear Mr. Knorr:

Attached please find the Audit Report on Chicago's Committee for '96. The

Commission approved the report on June 25, 1998.

The Commission approved Audit Report will be placed on the public record on

JUly 15, 1998. Should you have any questions regarding the public release ofthe report,

please contact Ron Harris ofthe Commission's Press Office at (202) 694-1220.

Any questions you may have related to matters covered during the audit or in the

audit report should be directed to Rick Halter or Wanda Thomas ofthe Audit Division at

(202) 694-1200 or toU free at (800) 424-9530.

. Costa

Assistant StaffDirector

Audit Division

cc: Kiplund Kolkmeier, Esq.

Don Davis

Attachment as stated

Page 21
c;

<7

..o7•

..2352

Page 22
c;

f.)

•

"

7

•

o

2

5

•

2

3

5

3

CbroDOIogy

Chic8CO's Committee for '96

Audit Fieldwork

Exit Conference Memorandum to the Committee

Response to Exit Conference Memorandum Received

Audit Report Approved

Page 23

4/14/97 - 5/7/97

7/25/97

10126/97

6/25/98
c;

Cf:

..o7•o25•235

't
it

o

7

it

{}

2

5

..

?

3

t;

5