FEDERAL ELECTION COMMISSION

WASHINGTON. DC 20403

April 21, 2000

MEMORANDUM

TO:

FROM:

RON M. HARRIS

PRESS OFFICER

:::R::~~:STA /fJ'I!LjJ/fi ASSISTANT STAFF wlj';;R

AUDIT DNISION

SUBJECT: PUBLIC ISSUANCE OF THE AUDIT REPORT ON

MICHIGAN STATE REPUBLICAN PARTY

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

Michigan State Republican Party for which was approved by the Commission on

April 13, 2000.

Informational copies ofthe report have been received by all parties involved and

the report may be released to the public on April 21, 2000.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library

Information Division
REPORT OF THE AUDIT DIVISION

ON

Michigan Republican State Committee

Approved April 13, 2000

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

MICHIGAN STATE REPUBLICAN PARTY

Page

Executive Summary

Final Audit Report

Background

Findings

Legal Analysis

Transmittal to Committee

Chronology

5

5

7

29

35

37
FEDERAL ELECTION COMMISSION

WASHINGTON. D.C. 204&3

REPORT OF THE AUDIT DIVISION

ON THE

MICHIGAN REPUBLICAN STATE COMMITTEE

EXECUTIVE SUMMARY

The Michigan Republican State Committee (MRSC) registered with the

Comptroller General ofthe United States on April 17, 1972.

The audit was conducted pursuant to Section 438(b) ofTitle 2 of the United States

Code which states, in part, that the Commission may conduct audits of any political

committee whose reports fail to meet the threshold level of compliance set by the

Commission.

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

later, in an Interim Audit Report. The MRSC's responses to those findings are included

in the Final Audit Report.

The following is an overview ofthe findings contained in the Final Audit Report.

POSSIBLE IMPERMISSIBLE EXPENDITURES ON BEHALF OF FEDERAL

CANDIDATES - PHONE BANKS - 2 U.S.C. §441a(d), 11 CFR §§110.7(a)(4),

IOO.8(b)(l8)(i).

The MRSC operated a get-out-the-vote phone bank on behalfofthe Presidential

and Vice Presidential nominees, and three non-federal candidates. The project involved

124 salal1ed persons. The use of a salaried staff for the phone bank voids the contribution

exemption at II CFR §IOO.8(b)(18)(v). The Audit concludes that MRSC made a $5,794

contribution to or independent expenditure on behalf ofDole/Kemp '96. The Interim

Audit Report recommended that MRSC demonstrate that the exemption was not voided.

In response to the report the MRSC neither provided any additional documentation; nor

did it accept or refute the finding.

SHARED EXPENSES PAID FROM NON-FEDERAL ACCOUNTS - 11 CFR

§§IOO.8(a)(1), I04.10(b)(4), l06.5(a), (d), (e), (f) and (g), and l06.6(e)

The MRSC maintains an account entitled "Michigan Republican State Comm

Administrative Account" (the Account). According to the MRSC, funds expended from

the Account do not impact federal, state, or local elections, therefore, it considers such

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2

transactions to be non-campaign related. Receipt and disbursement transactions are not

included in its federal or state disclosure reports. Approximately $413,573 in expenses

were identified that are subject to allocation between the federal and non-federal

accounts. These expenses were administrative in nature and associated with a State

Convention, State Committee Meetings, RNC Meetings/Conferences, as well as, the day

to day operations ofthe MRSC.

A review of a second non-federal account, "Republican National Convention"

(Convention Account) identified $78,538 in apparent allocable expenses associated with

activities during the Republican National Convention in San Diego, CA.

Finally, from the non-federal operating account (Operating Account) the MRSC

disbursed $10,951 for allocable GOTV activity.

The Interim Audit Report recommended that the MRSC reimburse the non-federal

account for its share of allocable expenses ($183,353) paid from these three accounts and

file memo Schedules H4 disclosing the shared expenses.

In response, the MRSC made a reimbursement of $21 ,402 for the federal share of

expenses it acknowledged were allocable. The MRSC also demonstrated that $7,173

represents solely non-federal expenses paid from the Account. The MRSC contends that

the disbursements from the Convention Account were for social functions and did not

impact on a federal election. The MRSC did not respond to the review ofthe Operating

Account.

The Audit concluded that the MRSC should reimburse the non-federal account

$154,778 ($183,353 - $21,402 - $7,173) for shared federal and non-federal activity.

REpORTING AND ITEMIZATION OF RECEIPTS AND DISBURSEMENTS2 USC §434(b), 11 CFR §§ 104.10(b)(4), 106.5(g)(I) and (3), & 102.17(iii)(8)(B).

Reports filed by the MRSC contained errors or omissions for which amending

action was recommended in the Interim Audit Report.

The MRSC did not disclose on Schedule H3 $284,919 in transfers from its nonfederal checking account to its federal payroll account nor did it report the related payroll

disbursements totaling $284,919 on Schedule H4. In addition, the MRSC did not itemize

on Schedule H3 transfers totaling $634,239 from the non-federal operating account to the

federal allocation account for the non-federal share of disbursements to vendors. Finally,

the non-federal share ($12,745) of in-kind transfers from the Republican National

Committee were not reported on H3 Schedules.

The MRSC failed to itemize and report contributions from political committees

totaling $4,440, the federal share ofin-kind transfers from the Republican National

Committee for $7,647, and interest receipts totaling $12,271.

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3

The review of disbursements determined that the MRSC failed to report and

itemize bank charges and disbursements to vendors totaling $756,462, and transfers to the

non-federal account totaling $13,500. The MRSC reported but failed to itemize as an

Independent Expenditure a disbursement for $80,842 on behalf of a federal candidate.

In response to the Interim Audit Report the MRSC filed all schedules as

recommended.

MISSTATEMENT OF FINANCIAL ACTIVITY - 2 U.S.C. §434(b)(1), (2) and (4).

A comparison ofthe Committee's reported activity to its bank account records

revealed misstatements in beginning cash, ending cash, total receipts and total

disbursements disclosed outhe MRSC's 1995 and 1996 reports.

In response to the Interim Audit Report recommendations the MRSC filed

amended reports which corrected the misstatements.

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FEDERAL ELECTION COMMISSION

WASHINGTON. D.C 20463

I. BACKGROUND

A.

REPORT OF THE AUDITDIVISION

ON THE

MICHIGAN REPUBLICANSTATE COMMITTEE

AUDIT AUTHORITY

~--....

This report is based on an audit ofthe Michigan Republican State

Committee (MRSC), undertaken by the Audit Division ofthe Federal Election

Commission (the Commission) in accordance with the provisions ofthe Federal Election

Campaign Act of 1971, as amended (the Act). The audit was conducted pursuant to

Section 438(b) ofTitle 2 ofthe United States Code which states, in part, that the

Commission may conduct audits and field investigations of any political committee

required to file a report under Section 434 ofthis title. Prior to conducting any audit

under this subsection, the Commission shall perform an internal review ofreports filed by

selected committees to detennine ifthe reports filed by a particular committee meet the

threshold requirements for substantial compliance with the Act.

B. AUDIT COVERAGE

The audit covered the period January 1, 1995 through December 31, 1996.

During this period, the MRSC reported a beginning cash balance of$175,858; total

receipts for the period of $8,750,815; total disbursements for the period of $8,706,933;

and an ending cash balance of$219,740. 1

C. CAMPAIGN ORGANIZATION

The MRSC registered with the Comptroller General ofthe United States

as the Michigan Republican State Committee on April 17, 1972. The Treasurer ofthe

MRSC for the period covered by the audit is William H. Gnodtke. The MRSC maintains

its headquarters in Lansing, Michigan.

To manage its financial activity, the MRSC maintained nine checking and

savings accounts and held several certificates of deposits. The MRSC's receipts were

composed of approximately 112,500 contributions totaling $4,391,000 from individuals,

All figures in report are rounded to the nearest dollar.

Page 5 of 38 Approved 04/13/00
2

contributions from political committees ($74,300) and other party committees

($909,00 I), refunds/rebates, interest and transfers from its non-federal account.

D. AUDIT SCOPE AND PROCEDURES

The Audit staff was unable to verify the allocation between the federal and

non-federal accounts of$535,503 in media expenditures. The MRSC made two

payments to Strategic Media Services on October 15, 1996 and October 30,1996 totaling

$535,503 which it reported as "Production & Development," and categorized the purpose

as AdministrativeNoter Drive. The MRSC allocated these disbursements at the ballot

composition (Administrative) ratio of 62.5% non-federal; 37.5% federal. The invoices

supporting this activity describe the incurred costs as "TV Buys 10/16-10/23 - Detroit"

and "TV Buys 10/28-11/4 - Michigan (Detroit, MD." The Audit staffrepeatedly

requested the tapes ofthese broadcasts so that the generic voter drive aspect (as reported)

could be verified. When these requests did not result in the production ofthe requested

information, the Commission issued subpoenas to both the vendor and MRSC to obtain

all documentation relating to these media products but neither entity was able to provide

the documentation (video tapes, storyboards or scripts) necessary to verifY the reported

allocation.

The audit included testing ofthe following general categories:

1. The receipt of contributions or loans in excess ofthe statutory limitations;

2. The receipt of contributions from prohibited sources;

3. Proper disclosure of contributions from individuals, political committees

and other entities, to include the itemization of contributions when

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

disclosed (see Finding II.C.);

4. Proper disclosure ofdisbursements including the itemization of

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

the information disclosed (see Finding II.C.);

5. Proper disclosure of campaign debts and obligations;

6. The accuracy oftotal reported receipts, disbursements and cash balances

as compared to bank records (see Finding n.D.);

7. Adequate recordkeeping of campaign transactions;

8. Proper reporting and funding of allocable expenses (see Findings II.B. and

C.); and,

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9. Other audit procedures that were deemed necessary in the situation.

In the Audit report on Dole For President, Inc. (DFP), a media program

sponsored by the Republican National Committee (RNC) was discussed. The program

was used to air a number of television commercials between April and August of 1996

that featured Senator Dole in a positive light, President Clinton in a negative light, or

both. The DFP Audit report placed the cost ofthis program at $18,453,619. It was also

explained that much ofthe media placement was done through the state party committees.

As was explained in an internal RNC memorandum, the reason for using the state party

committees for the placement was to take advantage oftheir more favorable federal/nonfederal allocation ratios. The RNC would have been required to use 65% federal funds

and 35% non-federal funds to pay for the program. Conversely, the average ratio for the

state party committees that were intended to be used to place the ads was, according to

the RNC memorandum, 37% federal and 63% non-federal. MRSC was one of eighteen

states through which media was placed in connection with the RNC program. The

amount placed through MRSC was $1,101,936.

Unless specifically discussed below, no material non-compliance was

detected. It should be noted that the Commission may pursue any ofthe matters

discussed in this report in an enforcement action.

II. AUDIT FINDINGS AND RECOMMENDATIONS

A. POSSIBLE IMPERMISSIBLE EXPENDITURES ON BEHALF OF FEDERAL

CANDIDATES - PHONE BANKS

In the case ofthe general election campaign of any candidate for President

of the United States who is affiliated with such party, the national committee of a political

party may make expenditures on behalf ofthe candidate subject to certain limitations

pursuant to 2 U.S.C. §441a(d)(2). Section 110.7(a)(4) Title 11 ofthe Code of Federal

Regulations allows the national committee of a political party to make expenditures under

2 U.S.C §441a(d) and 11 CFR §110.7(a)(4) through a designated agent, such as a state

party committee. The Regulations at 11 CFR § II O. 7(a)(4) do not provide a state party

committee any other mechanism for making an expenditure on behalfof a presidential

candidate in excess ofthe contribution limitations that apply to political committees.

Section 100.8(b)(18)(i) ofTitle 11 ofthe Code of Federal Regulations

explains the restrictions placed on get-out-the-vote or voter registration activities by state

party committees on behalf of party nominees. Ifsuch an activity is conducted on behalf

ofthe Presidential and Vice Presidential nominee(s), the costs incurred are not an

expenditure for thc purpose ofinfluencing the election ofthese candidates provided that

sllch costs are not incurred in connection with any broadcasting or specified other fonns

of public political advertising. Subsection (iv) within this regulation explains that if the

activities include references to any candidate(s) for the House or Senate, the costs ofsuch

activities which are allocable to that candidate(s) shall be an expenditure on behalf of

Page 7 of 38 Approved 04113/00
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such candidate(s) unless the mention ofsuch candidate(s) is merely incidental to the

overall get-out-the-vote and voter registration activity. Subsection (v) makes it clear that

payment ofthe costs incurred in the use of phone banks in connection with votcr

registration and get-out-the-vote activities is not an expenditure on behalf of a federal

candidate provided such phone banks are operated by volunteers. The use of paid

professionals to design the phone bank system, develop calling instructions and train

supervisors is pcrmissible.

Disburscments for a Salaried Get-Out-the-Vote_Progmm

The MRSC reported disbursements for a shared exempt activity

totaling $23,174 in November and December, 1996. The expenditures, allocated 25%

federal and 75% non-federal, were for telephone service ($3,706) and for salaries and

payroll taxes ($19,468). The MRSC provided a script ("MIGOP Turnout Script #2")

which urged the persons called to vote for Bob Dole, Jack Kemp and for three nonfederal candidates. The MRSC annotated the script as "Part ofGOTV Program."

Although a MRSC official stated that the phone bank was operated by volunteers, the

MRSC has failed to provide any documentation to explain the role ofthe 124 salaried

persons involved with the project. The use of a salaried phone bank for get-out-the-vote

activity on behalf of the Presidential and Vice Presidential nominees voids the exemption

at II CFR §100.8(b)(18)(v). Absent documentation the Audit staffis ofthe opinion that

this project reflects a $5,794 ($23,174 x 25%) contribution to, or independent expenditure

on behalf of, Dole/Kemp '96.

In the Interim Audit Report, the Audit staffrecommended that the

MRSC provide documentation to demonstrate that the exemption at II CFR §100.8(b)(v)

was not voided by the use of paid staffwith respect to the MIGOP phone program and as

a result the costs associated with the program are not contributions to DolelKemp '96.

In response to the report MRSC did not provide any additional

documentation, but stated they were investigating the matter and were unable to accept or

refute the findings.

B. SHARED EXPENSES PAID FROM NON-FEDERAL ACCOUNTS

Section 106.5(a)(2) ofTitle II ofthe Code ofFederal Regulations requires

committees that make disbursements in connection with both federal and non-federal

elections to allocate expenses in the following categories:

Administrative expenses;

The direct costs of fundraising programs and events;

Activities exempt from the definition of contribution and expenditure at

II CFR §§ 100.7(b) and 100.8(b); and,

Page 8 of 38 Approved 04/13/00
5

Generic voter drives.

Section 106.5(g)(I) ofTitle 11 ofthe Code of Federal Regulations states,

in part, committees that have established separate federal and non-federal accounts under

II CFR 102.5(a)(l)(i) shall pay the expenses ofjoint federal and non-federal activities as

follows: (i) pay the entire amount of an allocable expense from its federal account and

transfer funds from its non-federal account to its federal account solely to cover the nonfederal share of that allocable expense; or (ii) establish a separate allocation account into

which funds from its federal and non-federal accounts shall be deposited solely for the

purpose of paying allocable expenses. Once a Committee has established a separate

allocation account for this purpose, all allocable expenses shall be paid from that account

for as long as the account is maintained.

Section 104.10(b)(4) ofTitle 11 ofthe Code of Federal Regulations states,

in part, a political committee that pays allocable expenses in accordance with 11 CFR

106.5(g) or 106.6(e) shall also report each disbursement from its federal account or its

separate allocation account in payment for a joint federal and non-federal expense or

activity.

The rules regarding the percentages to be used in the allocation ofshared

expenses for administrative and generic voter drives; exempt activities; and direct

fundraising costs are described respectively under sections 106.5(d), (e) and (f) ofTitle

11 ofthe Code of Federal Regulations. Administrative and voter drive percentages are

calculated on the ratio ofthe federal offices expected on the ballot to total federal and

non-federal offices expected on the ballot in the next general election to be held in the

committee's state. State and local party committees in states that do not hold federal and

non-federal elections in the same year shall allocate the costs of generic voter drives

according to the ballot composition method based on a ratio for that calendar year.

Exempt activities are allocated according to the proportion oftime or space devoted in a

communication to federal candidates or elections as compared to the total time or space

devoted in a communication to all federal or non-federal candidates or elections.

Fundraising costs shall be allocated based on the ratio of funds received into a federal

account to its total receipts from each fundraising program or event.

BACKGROUND

The Audit staffreviewed disbursements fTOm both the federal and nonfederal accounts during the audit period to evaluate compliance with 106.5(g) and to

determine ifthe federal account paid its share of allocable expenses. From the federal

accounts the MRSC expended funds for shared administrative, fundraising, and exempt

activities, and in support offederal candidates. For the non-federal activity, 100%

reviews of disbursements were performed on three separate accounts. One account was

used by the MRSC as the non-federal operating account. This account supported nonfederal candidates, transferred funds to the federal allocation account for shared activities,

Page 9 of 38 Approved 04/13/00
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and expended funds for a 1994 GOTV phone bank (see Shared Expenses Paid from the

Non-federal Operating Account). The remaining two non-federal accounts were

considered by the MRSC to be non-campaign accounts, composed mainly of corporate

contributions. It is the opinion ofthe Audit staffthat all three accounts were used to pay

expenses which were, at least in part, shared expenses with the federal account. Thus it is

clear that the MRSC makes disbursements in connection with both federal and non·

federal elections and must allocate its administrative expenses pursuant to 11 CFR

§I 06.5(a)(2).

1. Michigan Republican State Committee Administrative Account

The MRSC maintains an account entitled "Michigan Republican

State Committee Administrative Account" (Administrative Accountf According to the

MRSC, funds expended from the Administrative Account do not impact federal, state, or

local elections. Therefore, it considers such transactions to be non-campaign related.

Further, receipt and disbursement transactions are not included in its federal or state

disclosure reports. The Administrative Account was open during the entire audit period

(1995-1996).

The State ofMichigan does not permit corporate or labor union

contributions to be used for non-federal elections. However, on August 21, 1979, the

Michigan Secretary of State issued a declaratory ruling concerning corporate expenditures

at a state political party convention. A corporation proposed spending funds for expenses

related to a state convention. The expenses included but were not limited to hotel rooms,

food, beverages, telephone and travel, and were to be made for the purpose ofinfluencing

the decisions ofthe delegates to the convention with respect to the adoption of certain

resolutions and the election ofindividuals to office within the state party. In part, the

declaratory ruling stated that since none ofthe offices at stake at this particular

convention were public offices and none ofthe resolutions to be adopted were ballot

questions, the expenditures in question were not prohibited and also did not need to be

reported or recorded as expenditures under the Act (reference to the state ofMichigan

law).

A Manual For Political Party Committees published by the

Michigan Department of State Bureau ofElections, April 1990, commonly referred to as

the "green book," at page 14 states political party committees may accept funds from an

incorporated source ifthe corporation clearly designates the funds for the committee's

administrative expenses. These funds must be deposited in a separate account maintained

by the committee solely for administrative purposes. Finally, another manual published

by the Michigan Department of State Bureau ofElections in February 1990, for

independent political and ballot question committees, at page 8, states a Ballot Question

Committee may receive corporate funds or be entirely funded by a corporation. At page

40 of this manual, it states a corporation is allowed to spend corporate funds to support or

This account was open during the previous election cycle (93/94) and was reviewed during the

FEe's audit ofthat period. Problems noted in that audit arc similar (0 the problems noted herein.

Page 10 of 38 Approved 04113100
7

oppose ballot questions. The corporation must register a Ballot Question Committee

within 10 calendar days after it spends $500 or more in a calendar year to support or

oppose ballot issues.

a. Overview of Expenditures

According to MRSC records, during the 1995-96 election

cycle, as well as the previous cycle, expenses paid from the Administrative Account

related to the annual Michigan Republican State Convention, Michigan Republican State

Committee Meetings, conferences, and Republican National Committee State Chair

Conferences. Such expenses included but were not limited to air travel, reimbursements

for mileage, hotel costs, food, beverage, entertainment, supplies and invitations. During

1995 and 1996, a total of 625 checks amounting to $1,059,348 were written from the

Administrative Account.

From the Administrative Account the MRSC also paid for

expenses such as legal fees to its general counsel for an unsuccessful defense ofthe

MRSC in a libel suit brought against it by a former elected state official. Upon losing its

case, the Administrative Account also posted the required bond for the amount ofthe

settlement. Throughout 1995 and 1996, the Administrative Account paid the legal

expenses related to Michigan Ballot Proposition A, an amendment to Michigan's Bingo

Act, and paid the interest, fees and principle on non-federal loans. During 1995 and 1996

the Administrative Account also made transfers to the MRSC's building fund for

mortgage payments, and sponsored receptions at the Governor's Mansion for high dollar

donors and for a previous MRSC chairman. Certain other good will gestures and gifts

were also not considered shared expenses. In all, the MRSC paid a total of225 checks in

the amount of$626,703 for expenses which the Audit staff has deemed to be for solely

non-federal activities.

b. Expenditures Apparently Related to Shared Federal and

Non-Federal Activities

During the 1993-1994 election cycle, many ofthe

disbursements from the Administrative Account were deemed to be for allocable

expenses. A similar review of 1995-1996 disbursements produced a similar result. It is

the Audit staffs opinion that during 1995 and 1996 the MRSC spent a total of$271,150

for administrative expenses that require allocation between the federal and non-federal

accounts. Included in this amount are payments for federal tax preparation and the annual

audits of all MRSC accounts, monthly legal expenses incurred by the MRSC's legal

counsel for items such as courier services and photocopying not directly related to any

specific non-federal case and compensation in 1995 and 1996 to Gary Reed or Reed

Governmental Consulting.3 Other expenditures included in this amount total

Based upon the audit ofthe 1993-1994 election cycle, Gary Reed was the fundraiser for the

Account. In that audit, payments made to Gary Reed were considered shared activity.

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approximately $100,000 paid for such items as hotel bills, catering, and festivities costs

related to the 1996 Republican National Convention in San Diego, California.

In addition to these administrative expenses, the Audit staff

determined that funds from the Administrative Account were used to pay administrative

expenses such as costs incurred for the annual state convention,4 various state committee

and RNC chair meetings, and other conferences held in 1995 and 1996. The MRSC also

paid administrative expenses related to its 1995 Mackinaw Conference. In all, the

Administrative Account paid a total of$142,423 ($123,413 in 1995 and $19,010 in 1996)

in costs related to these events such as mileage reimbursements, banquet and lodging

expenses, badge holders, supplies, and sound and lighting.

With respect to the state conventions, RNC chair meetings,

conferences and state committee meetings it appears that campaign-related components

(federal and non-federal) existed. For example, with respect to the 1995 annual state

convention, an article in the Detroit Free Press notes:

The attack began on Feb 4th, the day Heintz was elected

state chair at a GOP convention at Cobo Hall. In an

alliterative burst that brought cheers from delegates, she

labeled Bonior "a whiney, wacky, wimpy, wasteful, wornout, washed-up, windbag wimp" and promised that he'll

"take the biggest fall."

Although the MRSC apparently considers this convention

to be non-campaign related, according to this article, federal election activity was of

major interest during the Convention. In May of 1996, Susan Heintz would resign her

position as the Chairman ofthe MRSC and run against Bonior in the election for the 10th

District Congressional seat. As concerns the 1995 Mackinaw conference, other articles

reviewed stated that then Speaker ofthe House Newt Gingrich was a speaker and the

conference was attended by then-Republican Presidential Primary candidates Bob Dole,

Pete Wilson, Phil Gramm and Arlen Spector. At a minimum it appears that these

administrative expenses were in connection with both federal and non-federal elections.

As a result, the costs must be allocated between the federal and non-federal accounts.

The proper allocation ratio is the ballot composition method specified at 11 CFR

§106.5(d).

Based upon our review, the expenses noted above (general

operating expenses - $271,150; state conventions and committee meeting/conferences-

$142,423) relate to shared federal and non-federal activities and are allocable as

administrative expenses. The Audit staff calculated that $155,090 [($271,150 +

It should be noted that the Audit staffrequested agendas for State committee meetings on two

occasions, but to date, the agendas have not been forthcoming.

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$142,423) X 37.5%5] represents the federal share and requires repayment to the nonfederal account. At the Exit Conference the Audit staff provided MRSC officials with

schedules that detailed the review ofthis account. A MRSC official stated that the

Mackinaw conference consists of a State meeting on Friday night and that the rest ofthe

weekend is typically social. The representatives had no other comments with regard to

the other categories of expenditures.

2. Shared Expenses Paid from the Non-Federal Operating Account

The Audit staffs review ofthe non-federal operating account

(Operating Account) disclosed 86 payments totaling $10,951 made to various businesses

on June 5, 1995. These payments were reimbursements for the use oftelephones for getout-the-vote (GOTV) activities during 1994. During a previous election cycle, the MRSC

operated a similar GOTV phone bank, but at that time had reimbursed the businesses

from both the federal and non-federal accounts.

At the time of the review and at the Exit Conference, the Audit

staffrequested a copy ofthe script for this phone bank so that a detennination could be

made as to possible allocable activity. To date, the MRSC has not provided the requested

documentation.6 Absent documentation to prove otherwise, the Audit staff considers the

payments to be for shared activity benefiting both federal and non-federal candidates.

The federal share ofthis activity would be $2,431 ($10,951 x 22.2% 7).

3. Shared Expenses Paid from the Non-Federal Account, Republican

National Convention

The MRSC opened a non-federal account, Republican National

Convention (Convention Account), on February 16, 1996. During 1996 the Convention

Account received $90,300 and made disbursements totaling $78,538 for expenses

associated with activities during the Republican National Convention in San Diego, CA.

Although some receipts were designated as deposits for hotel

rooms during the convention, and some receipts were from individuals, the bulk ofthe

receipts were from corporate entities. Contributions from one ofthe corporate sponsors

were made under the specific conditions that the donations would support functions held

solely for social purposes, no attempt would be made to influence the outcome ofthe

convention or to advocate the election or defeat of any candidate, and would not be used

to defray any delegate's subsistence expenses. Correspondence and annotations

The allocation percentage for administrative expenses is 37.5%. The percentage is the ratio of

federal offices to total fedetal and non-federal offices on the ballot in the 1996 general election.

The script provided for the 1992 GOTV activity urged voters to support, among other

Republicans, President George Bush.

Since these disbursements relate to the 1993-1994 election cycle, the 22.2% administrative

allocation ratio for that period is applied here.

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associated with other contributions included phrases such as "House Republican event at

the National Convention," "RNC Michigan House Reception," "Michigan delegation

luncheon," "toward the activities at the National Republican convention" or "for San

Diego Convention." Many contributions included no discernible purpose; these receipts

were generally payable to "Republican National Convention Michigan Account."

Expenses paid from this account included consultant fees, room

deposits, travel reimbursements, entertainment and reception expenses, printing costs,

radio rentals, teleprompter, supplies, and bus transportation. Invoice and receipt

documentation indicate that the Convention Account funded catering and entertainment

expenses for at least three events between August I 1 and August 13. Transportation for

the Michigan delegation was funded by the account for a fourth event on August 11.

Souvenirs or gifts paid for from this account included 550 picture frames with engraved

plaques reading "1996 Republican National Convention," 550 printed items described as

"96 Convention Program," 550 printed T-shirts, and printed beach towels. The

Convention Account also paid for the design of a national eonvention logo. Other

printing costs included invitations to four events/receptions. Included within travel

reimbursements was a $968 payment for hotel expense to a person listed as a delegate to

the Republican National Convention. Finally, the Convention Account paid shipping

costs for material sent from MRSC to "1996 Rep[ublican] Nat[iona]1 Conv[ention]-

Youth Programs."

The Audit staff provided the MRSC with a schedule of

disbursements from this account at the Exit Conference and requested that the MRSC

justify the non-federal nature ofthe expenditures. The MRSC official had no comment at

that time.

In response to the Exit Conference, the MRSC asserted that the

funetions were sponsored by corporations " ...to meet with Republican National

Convention delegates, federal and state elected officials, Republican Party officials, and

the press. No part of any function paid for from the Republican National Convention

Account was used to attempt to influence the outcome ofthe Convention, for official

Convention events, for soliciting contributions, or for expressly advocating the election

or defeat of a candidate for Federal office. Further, none ofthe functions sponsored by

the corporations contributing to the Republican National Convention Account had as its

purpose the defrayal of any delegate's subsistence expenses during the Convention."

As with some ofthe expenses discussed above, these costs, at a

minimum, represent general party activity and/or party building. Although there is no

evidence that specific disbursements are related solely to State and local elections, solely

to Federal elections, or that any candidate's election or defeat was advocated, the

expenditures were made for party sponsored events held in conjunction with a National

Nominating Convention which selected a federal candidate. Therefore, at a minimum,

these expenses must be allocated between the federal and the non-federal accounts as

Page 14 of 38 Approved 04/13/00
•

11

party administrative expenses. The Audit staff calculated the federal share ofthis activity

to be $29,452 ($78,538 x 37.5%), based on the allocation ratio for administrative activity.

In the Interim Audit Report, the Audit staff recommended that the

MRSC:

• Demonstrate that the disbursements originating from the Administrative

Account ($413,572), the Operating Account ($10,951), and the Convention

Account ($78,538) are not expenditures as defined at 11 CFR §100.8(a); or,

• file Schedules H4 disclosing as memo entries the shared expenditures which

originated from these accounts ($503,061); and

• using funds from its federal account(s) reimburse the non-federal account

$183,353 [($413,572 x 37.5%)+($78,538 x 37.5%)+($10,951 x 22.2%)-

$3,6198

] and provide evidence ofsuch reimbursement.

• lfthe MRSC lacks the funds to reimburse the non-federal account, then

disclose the amount owed on Schedule D as a debt.

As part ofits response to the recommendations contained in the

Interim Audit Report, the MRSC explains that the Michigan Campaign law excludes

party administrative expenses from its coverage, and suggests that the same is true under

Federal law. Included in the MRSC response is a discussion of various Advisory

Opinions issued by the Commission. The MRSC correctly pointed out that in Advisory

Opinion 1982-14, the Commission concluded that the influencing of the reapportionment

decisions of a state legislature, although a political process, is not considered electioninfluencing activity subject to the requirements ofthe Act. Also referenced was Advisory

Opinion 1993-9 which addressed the proposal to establish a building fund, maintained as

a "separate segregated" account into which only designated contributions would be

deposited. Also, included was a reference to Advisory Opinion 1983-37 in which the

Commission determined that the Massachusetts Democratic State Committee could

establish a fund that would not be subject to the Act's limitations, prohibitions, or

disclosure requirements. The monies in this fund could be used only for the purpose of

defraying legal costs of defending legal actions brought by candidates against the

Massachusetts Democratic State Committee and would have to be maintained separately

from funds used for federal elections. Finally, the MRSC cited Advisory Opinion 1996-

39 in which the Commission determined that a legal fund could defer expenses of

defending the legal sufficiency ofthe nominating petitions qualifying a candidate for the

primary election ballot.

This amount represents a net under reimbursement by the non-federal accounts for other

administrative and fundraising expenses.

Page 15 of 38 Approved 04/13/00
12

Using the above cited opinions, and the analogy to Michigan law,

MRSC concludes that the FEC has determined that such activities do not influence any

Federal election to trigger compliance with the FECA. Therefore the above cited activity

is beyond the scope ofthe FECA. The MRSC contends that, with the exception of certain

items, "the disbursements from the Account are not made for the purpose ofinfluencing

any election for Federal office."

Allhough MRSC may be correct with respect to Michigan law,

Federal law takes a different view. The Act, Commission regulations, and past Advisory

Opinions exclude from coverage specific types of expenses, and only those. Coverage of

the Act goes beyond those things that meet the definition of an "expenditure". Section

434(b)(4) ofTitle 2 ofthe United States Code states that political committees are required

to report for the reporting period and for the calendar year the total amount of all

disbursements and all disbursements in a number of categories. Likewise, the

requirement that certain transactions be individually itemized on the disclosure reports of

committees such as MRSC speaks in terms of disbursements. Most relevant to this

situation, Commission regulations also use the tem1 disbursement when speaking about

the need to allocate expenses between federal and non-federal accounts for those

committees that, as MRSC does, fund activity in connection with both federal and nonfederal elections. Section 106.5 ofTitle 11 ofthe Code of Fcderal Regulations,

Allocation of expenses between federal and non-federal activities by party committees,

uses the terms disbursements, costs, and expenses rather than expenditure. Therefore, the

fact that many ofthe disbursements discussed above do not, in the opinion ofMRSC,

meet the definition of expenditure, is not relevant to the need for allocation between the

federal and non-federal accounts.

The response then addressed specific types of expenses paid from

the Administrative Account in an effort to demonstrate that the payments questioned in

the Interim Audit Report were not subject to the requirements ofthe Act.

Conventions, Meetings, And Conferences

The Audit staffidentified $142,423 in expenses associated with the

annual state convention, various committee meetings and conferences which appeared to

require allocation between the MRSC's federal and non-federal accounts as

administrative expenses. In addition, evidence gathered establishes that there was at least

some federal content at many ofthe events. The MRSC, in its response, asserted that the

Audit Division preliminarily determined that these expenses were made for the purpose

ofinfluencing an election for federal office based on newspaper articles. Citing Common

Cause v FEC9 and various Michigan campaign finance law cases, the MRSC argues that

the FEC should ignore second hand accounts in newspaper articles as reliable evidence

that the MRSC conducted electioneering activity during the conventions, meetings, and

conferences. Clearly, newspaper articles are not the evidentialY material of choice.

9 No. 85-968, Slip Op. (D.D.C. June 25,1986) reprinted in Federal Election Campaign Finance Guide

(CCI-l), '9235.

Page 16 of 38 Approved 04/13/00
13

However, requests for materials from the MRSC produced nothing and the newspaper

accounts ofthe proceedings at some of the meetings and events were the only available

information. It is significant that the MRSC response did not dispute any ofthe

newspaper accounts referenced in the Interim Audit Report. Finally, the newspaper

accounts were used only to establish that the events were not entirely focused on nonfederal efforts. In many cases the costs of the events are allocable as administrative

expenses.

The MRSC cited numerous court cases establishing the "express

advocacy" test. It also refers to the interim report where the audit staff cites "federal

election activity was ofmajor interest during the Convention" and the activities benefit

the Party as a whole and therefore have both federal and non-federal components. The

MRSC suggests that the "major interest" and the "benefit the Party as a whole" standard

does not replace the "express advocacy" test. The relevant requirements are in 11

CFR 106.5 that require committees that make disbursements in connection with both

federal and non-federal elections to allocate expenses in various categories including

administrative expenses.

Next MRSC contended, based on its reading ofthe Advisory

Opinion 1978-46, that unless there is fundraising related to a campaign for Federal office

or any communication expressly advocating the election or defeat of a clearly identified

candidate for Federal office, the activity and attendant expenses cannot be regarded as for

the purpose ofinfluencing a Federal election. MRSC concludes that the lack of

fundraising and electioneering at internal political party gatherings, the expenses

associated with the State Convention, MRSC meetings, and conferences, are not

"expenditures" for the purpose ofthe FECA.

The test that MRSC references may be relevant to the

determination ofwhether certain expenditures are contributions to specific candidates for

Federal office, but not to whether a disbursement is an administrative expense or a

generic voter drive expense which includes activities that urge the general public to

register to vote, vote or support candidates of a particular party, or associated with a

particular issue without mentioning a specific candidate. These types of expenses require

reporting and allocation between the federal and non-federal accounts without the express

advocacy and clearly identified candidate test having been met.

MRSC also cites Advisory Opinions 1986-6, 1982-35, 1983-37, to

support the proposition that internal political party gatherings, even though they may

directly influence Federal elections, are not subject to the FECA. According to MRSC, in

the present situation, there is no allegation, nor can there be, that the State Convention,

MRSC meetings, and conferences, all of which are internal political patty gatherings,

somehow influenced Federal elections.

Most ofthe advisory opinions cited by the MRSC were issued by

thc Commission prior to the effective date (January I, 1991) of the Commission's

Page 17 of 38 Approved 04/13/00
14

regulations for allocating expenses that jointly benefit both federal and non-federal

candidates and elections. lo As noted above, these regulations provide for the allocation

of expenses by political party committees that make disbursements in connection with

both federal and non-federal elections. The allocable expense categories include

administrative expenses, fundraising costs, exempt activities expenses, and the cost of

generic voter drives. More specifically, party committees that make disbursements in

connection with federal and non-federal elections shall allocate expenses for

administrative expenses not attributable to a clearly identified candidate, including rent,

utilities, supplies, and salaries. Advisory Opinion 1993-21. The Commission's

Explanation and Justification for 11 CFR § l06.5 contains the following guidance

regarding administrative expenses:

"Please note that aU administrative expenses must be allocated

between federal and non-federal accounts, ifincurred by a

committee that makes disbursements in connection with both

federal and non-federal elections, and that chooses to pay any

portion ofsuch disbursements from its non-federal account."

The $142,423 in expenses for various meeting and conferences

questioned in the Interim Audit Report do faU into the general category of administrative

expenses and therefore are subject to the requirements ofthe Act. Further as explained

above, based on the information available, the events had federal as weU as non-federal

components. These types of expenses were also allocated by the Commission in the audit

report covering the 1993 and 1994 election cycle.

Audit And Legal Expenses

With respect to the audit expenses questioned in the Interim Audit

Report ($30,167), the MRSC contended that payment ofsuch expenses are subject to the

Act only in the case where they (1) directly further the election of any designated

candidate for Federal office, or (2) assist the political committee in its compliance with

the Act. According to the Committee, "the purpose ofthe audits is ... to verify to the

officers and members ofthe MRSC that the financial statements are appropriately stated

and that the MRSC staffis conforming with generaUy accepted accounting principles."

The Committee then concluded, there is no basis to designate payments from the Account

for these audit expenses as subject to the Act.

Expenses related to an audit of Committee accounts, both federal

and non-federal, faU clearly into the administrative expense category, and pursuant to 11

CFR §106.5 (a)(2)(i) are allocable between the federal and non-federal accounts.

10 Advisory Opinions 1992-5 (candidate's participation in a series of public affairs forums), 1993-9

(preemption of Michigan State law with respect to the prohibitions on corporate donations to the Michigan

Republican State Committee's building fund), 1996-39 (legal fund could defer expenses in defending legal

sufficiency of nominating petitions) were issned after 1/1/91.

Page 18 of 38 Approved 04/13/00
15

Regarding legal expenses questioned by the Audit staff($8,123),

the Committee restated the two factors cited with respect to audit expenses and added a

third - are associated with compliance or audit matters under the Act. The Committee

cited examples oflegal expenses which the Commission determined as not subject to the

requirements ofthe Act, such as legal defense: (I) to a charge ofslander; (2) civil action

alleging violation ofthe Appropriations Act, Hatch Act, an infringement of constitutional

rights; (3) and a congressman charged with both criminal conduct and violations ofrules

ofthe House of Representatives.! I In addition, according to MRSC the FEC in Advisory

Opinion 1990-6 acknowledged that state laws conceming manner of qualification of

candidates, dates and places of elections, voter registration, voting fraud and candidates'

personal financial disclosure arc outside the scope ofthe FECA.

The MRSC's General Counsel states that he reviewed the

reimbursed legal expenses questioned by the Audit staff and to the best of his knowledge

an insignificant amount ofreimbursed expenses could qualify as 'expenditures,' which he

estimated to have been, at most, 5% or $406 which should be reimbursed from the federal

account. The remainder, $7,717, in reimbursed expenses did not concern federal

candidates or the Act. No documentation beyond an affidavit signed by the Committee's

General Counsel was provided.

While it is true the Commission, in advisory opinions, has

concluded that certain types of activity and the legal expenses related thereto are not

subject to the Act's recordkeeping, reporting and other requirements, the type of activity

was clearly defined (e.g., a possible denial of access to the primary ballot ofthe state of

Massachusetts involving a party rule, AO 1982-35). Moreover, for such activity a

segregated fund would have to be established and maintained apart from other political

committee funds. For example in Advisory Opinion 1983-37, the Commission

concluded that "[t]o the extent monies in the fund will be used only for the purposes

described, and will be maintained separately from funds used for Federal elections, the

Party's legal expense fund would not be subject to the Act's limitations ..."

Given the expenses at issue, totaling $38,290, are not identified or

documented as being for a purpose indistinguishable from any approved by the

Commission, the Audit staff views the expenses as administrative expenses, and like the

audit expenses discussed above, subject to the requirements ofthe Act and Commission

regulations.

The MRSC presented almost identical explanations for these types

of expenses when questioned in the audit report covering the 1993 and 1994 election

cycle. The Commission determined that those expenses were allocable between the

federal and non-federal accounts.

II The Conmlittee cited Advisory Opinions 1981-13. 1980-4, and 1979-37.

Page 19 of 38 Approved 04/13/00
16

Fundraising For The Administrative Account

The Committee conceded that since certain disbursements from the

Administrative Account wcre mistakenly made and constitute expenditures under the Act,

a certain percentage ofthe fundraiser's salary should be reimbursed from the

Committee's federal account to the Administrative Account. The MRSC made payments

for the fundraiser's salary of$2,675 and calculated that 5.3% or $142 should be

reimbursed from the federal account. MRSC used the ratio ofthe fundraiser's salary to

the total expenditures made from the Administrative Account to detennine this

percentage.

The fundraiser's salary should not be allocated based on a ratio of

federal expenditures to all expenditures from the Administrative Account. As a result,

the Audit staffs considers the entire amount of the fundraiser's salaly ($2,675) a shared

administrative expense. These fundraising expenses, as well as all other allocable

expenses discussed above should not have been paid from the Administrative Account.

Again, the MRSC presented the same explanation for these

expenses in the audit report covering the 1993 and 1994 election cycle, which were also

detcm1incd allocable by the Commission.

Lobbying

MRSC paid Reed Governmental Consulting, Inc. $20,904 in 1995

and $25,000 in 1996. According to MRSC the compensation for Gary Reed's fundraising

efforts was different than the compensation paid to Reed Governmental Consulting, Inc..

The payments to Reed Governmental Consulting, Inc. were for lobbying and not

electioneering. MRSC cites Advisory Opinions 1978-36 and 1983-4, to support that the

FEC recognizes that lobbying expenses are not expenditures under the FECA.

Again, the advisory opinions cited by the MRSC were issued by

the Commission prior to the effective date (January 1, 1991) ofthe Commission's

regulations for allocating expenses that jointly benefit both federal and non-federal

candidates and elections.

Holiday Cards, Gifts, And Miscellaneous

The MRSC asserted that 42 expenses for holiday cards, gifts,

charities, State committee meetings, social events at the 1996 National Convention, staff

social functions, and similar types of expenses, totaling $164,472 do not constitute

expenditures under the Act. Thc reasoning for this position apparcntly is that thcse

expenses were not campaign related.

Page 20 of 38 Approved 04/13/00
17

The Audit staffreviewed the MRSC's specific explanations and

documentation relating to these disbursements and allowed that seven items totaling

$19,129 were disbursements for transfers to the non-federal Republican National

Committee ($10,I00), the non-federal Victory Council ($5,500), payments for nonfederal legal issues ($1,989), a cancellation fee for an event ($900), and payment for the

non-federal Campaign Managers Academy ($640). The disbursements to charitable

organizations were in payment for ads. The other expenses, in the Audit staffs opinion,

are also classified properly as administrative expenses. The adjustment to the amount

owed the federal committee is thus reduced by $7,173 ($19,129 x 37.5%), leaving

$394,443 ($413,572 - $19,129) as administrative expenses paid from the Administrative

Account and a reimbursable amount of $147,917 ($155,090 - $7,173) for disbursements

from this account.

As explained above, party committees that make disbursements in

connection with federal and non-federal elections shall allocate expenses for

administrative expenses not attributable to a clearly identified candidate, including rent,

utilities, supplies, and salaries. Advisory Opinion 1993-21. The types of administrative

expenses cited are illustrative and cannot be viewed as inclusive.

As stated, it is the opinion ofthe Audit staffthat expenditures for

activities such as independent reviews of committee accounts, staffsalaries, staff outings,

holiday cards, gifts, etc., clearly fall within the general category of "administrative

expenses" as noted at II CFR §106.5 (a)(2)(i).

Expenditures Not Being Challenged by MRSC

MRSC acknowledged that there were additional expenditures

totaling $55,612 which relate to shared federal and non-federal activities at the

administrative ratio (37.5%). The MRSC also acknowledged the previously mentioned

$406 in legal expenses and $142 in fundraising expenses from Mr. Reed's salary that

should be reimbursed from the federal account. The MRSC calculated the total amount

owed by the federal account as $21,402 «$55,612 x 37.5%) + $406 + $142). As an act of

good faith MRSC's federal account reimbursed this amount to the Administrative

Account. A copy ofthe check and deposit receipt was included with the response.

Shared Expenses Paid from the Non-Federal Operating Account

MRSC did not respond to section II.B.l.b.2. ofthe Interim Audit

Report, which discussed expenses for telephone bank expenses related to the 1994

election. It also did not provide the copy ofthe requested telephone script. Therefore, the

Audit staffis still ofthe opinion that the federal share ofthis activity is $2,431.

Payments from the Republican National Convention Account

Page 21 of 38 Approved 04/13/00
18

MRSC reasserted most of what was stated in the response to the

Exit Conference. It argues that the receptions or hospitality suites were held solely as

social functions for individuals in the San Diego area attending the Convention and were

not an attempt to influence the outcome ofthe Convention, or to solicit contributions, or

to advocate the election or defeat of any candidate. At each function the corporate

sponsor was prominently listed and not the MRSC. The MRSC also disagreed with the

reference to these activities as "party sponsored events". According to MRSC these

events were not general party-building, but were social functions sponsored by "named

corporations" and the events are substantially similar to the circumstances addressed by

the Conunission in Advisory Opinion 1983-23.

Again, the advisory opinions citcd by the MRSC were issued by

the Commission prior to the effective date (January I, 1991) of the Commission's

regulations for allocating expenses by committees that make disbursements in connection

with both federal and non-federal candidates and elections. The National Nominating

Convention selects a federal candidate, and therefore any general party sponsored

function in connection with that federal election must, at a minimum, be allocated

between the federal and non-federal accounts at the administrative (ballot composition)

ratio. The MRSC's contention that the events at the Convention were social functions is

not revelant to the requirement that the associated expenses be allocated. It is still the

Audit staffs opinion that the federal share ofthis activity is $29,452 ($78,538 x 37.5%),

based on the allocation ratio for administrative expenses.

In conclusion the MRSC did not comply with the

recommendations in the Interim Audit Report. It did make a partial reimbursement to the

non-federal account of $21 ,402, and the Audit staff agrees that $7,173 represents solely

non-federal expenses and are not allocable. MRSC should still reimburse the non-federal

account $154,778 ($183,353 - $21,402 - $7,173).

c. REpORTING AND ITEMIZAnON OF RECEIPTS AND DISBURSEMENTS

1. Transfers from Non-Federal to Federal Account and Related

Disbursements

Sections 106.5(g)(l)(i), (ii)(A), and (3) ofTitle II ofthe Code of

Federal Regulations state, in part, committees that have established separate federal and

non-federal accounts under II CFR 102.5(a)(I) or (b)(I)(i) shall pay the entire amount of

an allocable expense from its federal account and transfer funds from its non-federal

account to its federal account solely to cover the non-federal share ofthat allocable

expense; or shall establish a separate allocation account into which funds from its federal

and non-federal accounts shall be deposited solely for the purpose of paying the allocable

expenses ofjoint federal and non-federal activities. A political committee that transfers

funds between accounts and pays allocable expenses acconling to this section shall report

each such transfer and disbursement pursuant to II CFR 104.1 O(b).

Page 22 of 38 Approved 04/13/00
19

The MRSC did not disclose on Schedule H3 (Transfers from NonFederal Accounts) transfers from its non-federal checking account to its federal payroll

account for non-federal payroll. These transfers totaled $284,919 ($88,291 in 1995 and

$196,628 in 1996). In addition, the MRSC did not report the related payroll

disbursements totaling $284,919 on Schedule H4 (Joint FederallNon-Federal Activity

Schedule). Although these payments were for non-federal payroll, because the payments

were made from a MRSC federal account they require disclosure. During fieldwork the

MRSC was unable to provide a complete list ofthe non-federal personnel and could not

detail their duties for the 1995-1996 election cycle.

In addition, the MRSC did not itemize on Schedule H3 transfers

from the non-federal operating account to the federal allocation account for the nonfederal share ofseveral disbursements to vendors. These under-reported transfers totaled

$520 in 1995 and $633,719 in 1996. The 1996 disbursements were payments to Multi

Media Services and Strategic Media Services. Finally, the MRSC failed to report on

Schedule H3 the non-federal share ofin-kind transfers received from the Republican

National Committee in 1996. The non-federal share ofthese transfers totaled $12,745.

2. Receipts from Political Committees and Interest

Section 434(b)(2)(D), (F) and (J) ofTitle 2 ofthe United States

Code states, in part, that each report under this section shall disclose for the reporting

period and calendar year the total amount of all contributions from other political

committees, transfers from other political party committees, and interest.

Section 434(b)(3)(A) and (B) ofTitle 2 ofthe United States Code

states that each report shall disclose the identification of each person (other than a

political committee) who makes a contribution to the reporting committee during the

reporting period, whose contribution or contributions have an aggregate amount or value

in excess of $200 within the calendar year, or in any lesser amount ifthe reporting

committee should so elect, together with the date and amount of any such contribution.

Each report shall also disclose any political committee which makes a contribution to the

reporting committee during the reporting period, together with the date and amount of any

such contribution.

The Audit staffreviewed receipts and determined that the MRSC

failed to report and itemize, as required, four contributions from political committees in

1995 totaling $3,240 and two contributions from political committees in 1996 totaling

$1,200. In 1996 the MRSC also failed to report and itemize the federal share ofin-kind

transfers from the Republican National Committee totaling $7,647. Finally, the MRSC

failed to report and itemize interest receipts totaling $12,271.

3. Disbursements - Operating Expenditures, In-Kind Contributions,

Transfers, and Independent Expenditures

Page 23 of 38 Approved 04/13/00
20

Sections 434(b)(4)(A) and (C) and (5)(A) and (C) ofTitle 2 ofthe

United States Code state, in part, that each report shall disclose for the reporting period

and the calendar year: the total amount of all expenditures made to meet candidate or

committee operating expenses; the total amount of all transfers to affiliated committees;

the name and address of each person to whom an expenditure in an aggregate amount or

value in excess of $200 within the calendar year is made by the reporting committee to

meet a candidate or committee operating expense, together with the date, amount and

purpose ofsuch operating expenditure; and the name and address of each affiliated

committee to which a transfer is made, together with the date and amount ofsuch

transfers.

Section 104.IO(b)(4) ofTitle 11 ofthe Code of Federal

Regulations states, in part, that a political committee that pays allocable expenses shall

also report each disbursement from its federal account or its separate allocation account in

payment for a joint federal and non-federal expense or activity. In the report covering the

period in which the disbursement occurred, the committee shall state the full name and

address of each person to whom the disbursement was made, and the date, amount and

purpose of each such disbursement.

The Audit staffreview of disbursements detetmined that, in

addition to the non-federal payroll discussed above, the MRSC failed to report and

itemize bank charges and disbursements to vendors totaling $13,601 in 1995 and

$742,861 in 1996. The disbursements in 1996 included two payments to Multi Media

Services ($722,470) for which the H3 transfers were underreported by $451,657. The

other disbursements in 1996 (seven totaling $20,391) represent the required disclosure of

disbursements relating to in-kind contributions by the Republican National Committee.

The MRSC failed to report and itemize one transfer for $3,300 in

1995 and three transfers totaling $10,20012 in 1996 to the non-federal account. Finally, a

transfer for $36,000 to the Republican National Committee was not reported or itemized

as required in 1995.

Lastly, the MRSC failed to itemize on Schedule E (Itemized

Independent Expenditures) a disbursement for $80,842 on behalf of a federal candidate.

The Schedule E also requires notarization.

At the Exit Conference the Audit staffprovidcd to the MRSC

schedules which detailed the reporting omissions discussed above for each line number of

the disclosure reports. The MRSC officials agreed to amend the 1995 and 1996 reports to

disclose correctly the receipts and disbursements noted above.

In the Interim Audit Report it was recommended that the MRSC

file amended Schedules A, B, E, H3, and H4 for the calendar years 1995 and 1996

12 One $5,000 transfer was related to a $5,000 receipt from an individual which was deposited by

mistake into the Federal account. Neither the receipt nor the transfer was reported.

Page 24 of 38 Approved 04/13/00
21

disclosing the contributors, transferors, payees, transferees, dates and amounts for the

receipts, payments and transfers discussed above.

In response to the Interim Audit Report, the MRSC filed all

Schedules as recommended.

D. MISSTATEMENT OF FINANCIAL ACTIVITY

Section 434(b)(I)(2) and (4) ofTitJe 2 of the United States Code states, in

part, that a political committee shall disclose the amount of cash on hand at the beginning

ofthe reporting period and the total amount of all receipts and all disbursements for the

reporting period and calendar year.

The Audit staffs reconciliation ofreported financial activity to bank

records for the calendar years 1995 and 1996 revealed the following misstatements:

1. 1995 Misstatement

Beginning cash on hand was overstated by $72,858, the result of

reporting discrepancies in prior periods. 13

Receipts were understated by $91,495. The components ofthe

misstatement are as follows:

Reported Receipts

Contributions from Political Committees not reported

Transfers from non-federal account to federal payroll

account not reported

Transfer from non-federal account to federal allocation

account not reported

Reconciling item

Total Adjustments

Correct reportable receipts

$ 3,240

$88,291

$ 520

$ (556)

$3,064,747

$ 91,495

$3,156,242

Disbursements were understated by $127,162,06, The

components ofthe misstatement are as follows:

Reported disbursements

Non-federal salaries paid from allocation account

Transfer to RNC not reported

Transfer to non-federal account not reported

Payments to vendors and bank charges not reported

Payments to Ameritech over-reported (net)

$ 88,291

$ 36,000

$ 3,300

$ 10,695

$ (11,201)

$2,724,634

lJ The overstatement of beginning cash is the combined effect ofreporting errors within beginning

cash in 1993 and receipts and disbursements in 1993 and 1994.

Page 25 of 38 Approved 04/13/00
Reconciling item

Total Adjustments

Correct reportable

22

$ 77

$ 127,162

$2,851,796

Ending cash on hand was overstated by $108,524, resulting from

the misstatements detailed above. The correct ending cash was $407,446.

2. 1996 Misstatement

Beginning cash on hand was overstated by $108,524, carried

forward from 1995.

Receipts were understated by $864,068. The components ofthe

misstatement are as follows:

Reported receipts

Transfers from non-federal account to payroll account

not reported

Transfers from non-federal account to allocation account

for payments to Multi Media Services not reported

Transfer from non-federal account to allocation account

not reported for payment to Strategic Media Services

Interest not reported

In-kind contributions from RNC not reported

Contribution from an individual not reported

Contributions from Political Committees not reported

Reconciling item

Total Adjustments

Correct reportable

$5,686,069

$ 196,628

$ 451,657

$ 182,062

$ 12,271

$ 20,391

$ 5,000

$ 1,200

$ (5,142)

$ 864,068

.$6,550.135.

Disbursements were under-reported by $949,596. The components

ofthe misstatement are as follows:

Reported disbursements

Payments to Multi Media for media buys featuring Bob

Dole in cooperation with the RepUblican National

Committee

Non-federal salaries paid from allocation account

Transfers to non-federal account under-reported

Interaccount transfer reported as disbursement

In-kind contributions not reported as disbursements

Reconciling item

Total Adjustments

Correct reportable

Page 26 of 38 Approved 04/13/00

$ 722,470

$ 196,628

$ 10,200

$ (1,861)

$ 20,391

$ 1,768

$5,982,298

$ 949,596

$.6.,931.894
23

Ending cash on hand was overstated by $194,054, resulting from

the reporting errors detailed above. The correct ending cash was $25,687.

At the Exit Conference the MRSC was provided schedules which

detailed the reporting errors discussed above. MRSC officials agreed to file amended

reports to correct the errors noted above.

The Interim Audit Report called for the MRSC to file

comprehensive amended reports for calendar years 1995 and 1996 correcting the

misstatements noted above. In addition, it was recommended that the MRSC amend its

most recently filed report to correct the ending cash on hand.

The MRSC filed the requested comprehensive amended reports for

calendar years 1995 and 1996 which corrected the misstatements. On March 21,2000 the

Committee filed an amended summary page for the 1999 Year End Report to correct the

ending cash on hand.

Page 27 of 38 Approved 04/13/00
"

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~.

FEDERAL ELECTION COMMISSION

WASHINGTON. D.C. 20463

February 28, 2000

MEMORANDUM

TO: Robert J. Costa

Assistant StaffDirector

Audit Division Il

THROUGH: James A. Pehrkon

StaffDirector

FROM: Lawrence M. Noble

General Counsel

BY: Kim Leslie BrightJ/t)

Associate General~u~sel

Lorenzo HollowayJ~ ~~ Assistant General Counsel

Susan L. Kay -It-tt.'J::,

Attorney

Dawn Anderson £),/l/.>t 'l.,k

Legal Intern

SUBJECT: Proposed Final Audit Report on Michigan Republican State Committee

(LRA#523)

I. INTRODUCTION

The Office of General Counsel has reviewed the proposed Final Audit Report for

the Michigan Republican State Committee ("the Committee") submitted to this Office on

January 24,2000. The following memorandum summarizes our comments on the

proposed Report. l We concur with the findings in the proposed Report that are not

discussed in the following memorandum. Ifyou have any questions, please contact Susan

Kay, the attorney assigned to this audit.

The Office ofGeneral Counsel recommends that the Commission consider this document in open

session since the report does not include matters exempt from public disclosure. See 11 C.F.R. § 2.4.

Page 29 of 38 Approved 04/13/00
Memorandum to Robert J. Costa

Proposed Final Audit Report

Michigan Republican State Commillee (LRA #523)

Page 2

II. MEDIA EXPENDITURES

The Audit Division has included information in the proposed Report that relates

to payments made by the Committee to certain media vendors for advertisements

broadcast during the 1996 election cycle. The Audit Division considered these

advertisements to be in-kind contributions by the Republican National Committee

("RNC") to Dole for President, Inc. CDFP") in the context ofthe DFP audit. According

to infom1ation available to the Audit Division, and included in the DFP Audit Report, the

RNC transferred funds to state party committees including the Michigan Republican State

Committee. According to the Audit Division, the RNC transferred to the Committee's

accounts the exact amount reflected on invoices from media vendors just prior to each

payment by the Committee. The Audit staff has not included a finding against the

Committee related to these disbursements in view of the position taken by the

Commission with respect to these advertisements in the DFP audit and in other recent

decisions by the Commission. While it is appropriate to include this summary ofthe

issue in the Report ofthe Committee so that the Report is complete and accurate, this

issue is no longer being considered by the Commission in any context. Therefore, this

Office recommends that the Audit Division raise with the Commission the question ofthe

advisability ofincluding a discussion ofthis issue in the pending audit report. See

Memorandum to Robert J. Costa on Media Advertisement Issues in Pending Audits,

dated February 18,2000.

III. SHARED EXPENSES PAID FROM NON-FEDERAL ACCOUNTS

(Finding II.B.)

A. Administrative Account (II.B.I)

The cover memorandum to the proposed Final Audit Report directs this Office's

attention to the issue ofshared expenses from the Committee's administrative account.

The Committee maintained a non-federal account, the Michigan Republican State

Committee Administrative Account ("Administrative Account"). The Audit Division

contends that the Committee made expenditures for federal activity from this account and

these expenditures should have been shared between federal and non-federal accounts

pursuant to 11 C.F.R. § 106.5.2

The expenditures at issue include $271,150 for expenses such as payments for

federal tax preparation and the annual audits of all committee accounts, monthly legal

expenses incurred by the Committee's legal counsel for courier services and

According to the Audit staff, similar disbursements made by the Commitlee during the 1993-1994

election cycle were deemed to have been allocable expenses. The Committee made the same arguments in

response to the earlier audit and the Audit staffrejeeted those arguments in the 1993-94 Final Audit Report

which was approved by the Commission on February 9, 1999. The Audit staff maintains its position that

the Committee must allocate disbursements from this account. The Audit staff also identified shared

expenses from two other non-federal accounts.

Page 30 of 38 Approved 04/13/00
Memorandum to Robert J. Costa

Proposed Final Audit Report

Michigan Republican State Conmuttee (LRA #523)

Page 3

photocopying, compensation to a Gary Reed or Reed Govemmental Consulting, and hotel

bills, catering and festivities costs related to the 1996 Republican National Convention in

San Diego, Califomia. In addition to these expenses, the Audit staff detetmined that

funds from this account in the amount of$142,423 were used to pay for the annual state

convention, various state committee and RNC chair meetings and other conferences held

in 1995 and 1996, including the 1995 Mackinac Conference.

The Committee maintains that this is a non-campaign account and not subject to

the Federal Election Campaign Act ("FECA") because the funds in the account were not

spent for the purpose ofinfluencing any election for Federal office or for the purpose of

influencing the nomination or election of a state candidate. In support ofits argument

that the Administrative Account was a non-campaign account, not subject to the FECA,

the Committee references Commission advisory opinions that allow for the establishment

ofspecific non-campaign accounts in which funds may be maintained that are not subject

to the FECA. See Advisory Opinion ("AO") 1982-14 (Commission detennined that

receipts and disbursements from a reapportionment account would not constitute

contributions or expenditures since influencing reapportionment decisions is not

considered election-influencing activity subject to the FECA), AO 1983-37 (Commission

determined that a legal defense fund could be maintained so long as it was maintained

separately from funds used for federal elections); AO 1993-9 (Commission held that

creating a building fund is not done for the purpose ofinfluencing an electioni; AO

1996-39 (Commission determined that a legal fund could be established for purposes of

defending the legal sufficiency ofthe nominating petitions qualifying a candidate for the

primary election ballot). According to the Committee, its Administrative Account did not

make expenditures for the purpose ofinfluencing a federal election, and therefore it is

entitled to the same status as a building fund account, a reapportionment account or a

legal defense fund account, all of which have been approved by the Commission.

The Commission has concluded, in the context of advisory opinions, that certain

types of activities and legal expenses are not subject to the requirements ofthe FECA.

See AOs: 1982-14,1983-37,1993-9,1996-39. However, these advisory opinions appear to

be limited to their particular circumstances.4 A party committee that makes

disbursements in connection with nonfederal elections and also makes disbursements in

connection with federal elections is required to allocate all oftheir administrative

disbursements. 11 C.F.R. § 106.5(a)(2); see Explanation and Justification for II C.F.R.

106.S(a), 55 Fed. Reg. 26063 (January 26,1990). Although the Committee claims that

the Administrative Account was not established to be used in connection with any

election activity, the Committee concedes that some funds were expended from the

Pursuant to the FECA, building funds may be established that are not for the purpose of

influencing the election of any candidate in any particular election for Federal office." See 2 U. S. C.

§ 431(8}(B)(viii}.

4 See Concurring Opinion of Vice Chairman Wold and Comnlissioners Elliott and Mason on AO

1999-11.

Page 31 of 38 Approved 04/13/00
Memorandum to Robert J. Costa

Proposed Final Audit Report

Michigan Republican State Committee (LRA #523)

Page 4

account in cOimection with a federal election. 5 Therefore, the Committee made

expenditures in cOimection with a federal election and must follow the Commission's

rules at I I C.F.R § 106.5 for allocating expenses between the federal and non-federal

accounts. 11 C.F.R. § 106.5.6

Once a Committee makes disbursements in connection with a federal election, the

committee must follow the "detailed instructions as to how [it ]must allocate [its]

administrative expenses and costs for combined federal and non-federal activity."

Explanation and Justification for II C.F.R. § 106.5,55 Fed. Reg. 26061 (June 26,1990).

The allocation rules only apply to committees that make disbursements in connection

with federal and nonfederal elections. Id. Therefore, the expenses from the

Administrative Account should be allocated in accordance with 11 C.F.R. § 106.5.

B. Republican National Convention Account (II.B.3)

The proposed Audit Report includes a finding related to another ofthe

Committee's non-federal accounts, the Republican National Convention Account

("Convention Account"). The Audit Division believes that "party sponsored events held

in conjunction with a National Nominating Convention, in a convention city cannot be

said to be non-politicaL" The Audit Division further contends that as party building or

general party activity, these expenses must be allocated between the federal and the nonfederal accounts.

The Audit Division detennined that the federal share ofthis activity is $29,452

based on the allocation ratio for administrative expenses. Expenses paid from this

account related to the 1996 Republican National Convention and included consultant

fees, room deposits, travel reimbursements, printing costs, supplies, bus transportation,

and souvenirs and gifts made out as "1996 Republican National Convention" or "96

Convention Program."

The Committee maintains that the receptions or hospitality suites were held solely

as social functions for individuals in the San Diego area attending the Convention and

Although the Committee has claimed that a portion ofthe disbursements it made in connection

with a federal election were mistakenly made, the regulations do not address the issue ofwhether the

committee must intend to make disbursements in connection with the federal election to fall within the

ambit of the allocations rules.

6 In addition, the Audit staff indicates that Committee Chairman Heintz made what appeared to be

campaign related comments against Mr. Bonior at the state convention, Newt Gingrich spoke at the state

Mackinac conference, and Presidential Primary candidates attended the conference. Although, the mere

presence offederal candidates at state conventions and conferences may not indicate federal activity, the

fact that Chairman Heintz made federal campaign related comments at the state convention appears to

indicate that federal election activity was a component of the state convention. However, this analysis is not

necessary since the committee has conceded making federal disbursements from the account.

Page 32 of 38 Approved 04/13/00
Memorandum to Robert J. Costa

Proposed Final Audit Report

Michigan Republican State Committee (LRA 11523)

Page 5

were not an attempt to influence the outcome of the Convention, or to solicit

contributions, or advocate the election or defeat of any candidate.

The Commission's allocation rules do not address the issue ofspecifically what

must be shown to prove disbursements were made in connection with a federal election.

This Office recognizes that while it may appear that party committees inherently make

disbursements in connection with both federal and non-federal elections, it is possible

that a party committee makes purely non-federal expenditures. Thus, to require all

administrative disbursements made by the Committee to be allocated maybe too far

reaching without evidence of disbursements for specific federal activity. However, to the

extent that the facts set forth in the proposed Audit Report show that some disbursements

were made from this account in connection with a federal election, then the Committee

must allocate all disbursements made from this account.

Page 33 of 38 Approved 04/13/00
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•

Page 34 of 38 Approved 04/13/00
FEDERAL ELECTION COMMISSION

WASHINGTON. DC 2046J

April 18,2000

Mr. William H. Gnodtke, Treasurer

Michigan State Republican Party

2121 E. Grand River

Lansing, MI 48912

Dear Mr. Gnodtke:

Attached please find the Final Audit Report on Michigan State Republican Party.

The Commission approved the report on April 13, 2000.

The Conunission approved Final Audit Report will be placed on the public record

on April 21, 2000. Should you have any questions regarding the public release of the

report, please contact the Commission's Press Office at (202) 694-1220. Any questions

you have related to matters covered during the audit or in the report should be directed to

Ms. Cornelia Riley or Mr. Russ Bruner ofthe Audit Division at (202) 694-1200 or toll

free at (800) 424-9530.

o ert J. Costa

~"fT---:Assistant StaffDirector

Audit Division

Attachment as Stated

cc: Ms. Henrietta Tow, Assistant Treasurer

Mr. Eric E. Doster

Page 35 of 38 Approved 04113/00
Page 36 of 38 Approved 04/13/00
CHRONOLOGY

MICHIGAN REPUBLICAN STATE COMMITTEE

Audit Fieldwork

Interim Audit Report to the

Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

Nov. 9 to Dec. 16, 1998

Sept. 15, 1999

Nov. 2,1999

April 13,2000

Page 37 of 38 Approved 04/13/00
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Page 38 of 38 Approved 04/13/00