FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

March 8, 2010 

MEMORANDUM 

TO: 

THROUGH: 

FROM: 

SUBJECT: 

Joseph F. Stoltz 

Assistant Staff Director 

Audit Division 

Alec Palmer 

Acting Staff Duector Af 

Christopher Hughey JP 

Deputy (jenerd Counsel / 

Lawrence L. Cdvert, Jr. 

Associate Generd Co 

General Law and Advice' 

Lorenzo Holloway "^^- ^ 

Assistant Generd Counsel 

Public Finance and Audit Advice 

Allison T. Stdnle t<^ 

Attomey 

Proposed Final Audit Report on the Georgia Federd Elections Committee 

(LRA 793) 

L INTRODUCTION 

The Office of Generd Counsel has reviewed the proposed Find Audit Report ("FAR**) 

on the Georgia Federal Elections Committee ('*the Conmiittee"). Our comments address 

Findings 1 and 2. We concur with any findings not specifically discussed in this memorandum. 

If you have any questions, please contact Allison T. Steinle, the attomey assigned to this audit. 

Both Findings 1 and 2 involve the Conmiittee's payroll account. We beUeve the two 

findings are interrelated. Specifically, our ultimate analysis of Finding 1 depends on the 

documentation the Committee has provided in response to Finding 2. Therefore, we address 

Finding 2 first. 
Memorandum to Joseph F. Stoltz 

Proposed Final Audit Repoit 

Georgia Federal Elections Committee (LRA 793) 

Page 2 ofS 

As background, we understand that the Committee established the payroll account in 

question to accommodate the restrictions imposed by its payroll vendor, Paychex, which would 

not draw the Committee's payroll &om both its fedexd and non-federd operating accounts. 

Accordingly, the Committee elected to set up a separate account fi-om which it makes its federal 

and non-federd payroll disbursements. The Conmiittee states that this payroll accoimt functions 

as an "escrow account" or "transmittd accounf' because it is used exclusively to pay sdaries and 

payroll taxes. The Committee states that it cdculates the appropriate amoimt of federd and nonfederd fimds for each payroll period and transfers these iimds from the federd and non-federd 

operating accoimts to tiie payroll account, firom which it pays dl its federd, non-federal, and 

diocable employees. The Committee states it reports the federd and diocable payroll 

disbursements from this account on Schedule B or Schedule H4 as appropriate. However, the 

Committee claims that this payroll accoimt is neither a federd account nor an allocation account, 

and therefore it is not required to report entirely non-federd activity to the Cominission. 

IL FINDING 2 - PAYMENT OF FEDERAL ACTIVITY WITH NON-FEDERAL FUNDS 

Finding 2 addresses the Committee's fdlure to maintdn a monthly log detdling the time 

spent on federd activities for employees whose sdaries and related expenses were pdd fiiom the 

payroll account. State party committees must keep a monthly log documenting the percentage of 

time each employee spends in connection with a federd election. 11 CF.R. § 106.7(d)(1). If 

employees spend more than 25 percent of their time on federd election activity ("FEA'^ or in 

connection with a federal election, their sdaries and related expenses must be pdd only fi:om a 

federd account. 11 C.F.R. § 106.7(d)(l)(ii). Prior to Januaiy 19,2006, if employees spent less 

than 25 percent of their time on FEA or in connection with a federd election, their sdaries and 

related expenses could be pdd entirely with non-federd fimds. However, under the new sdary 

dlocation mles that became effective January 19,2006, if employees spend 25 percent or less of 

their time on FEA or activities in connection witii a federal election, they may be pdd either 

entirely with federd fimds or at the same dlocation rate as the coinmittee's adnunistrative 

expenses. 11 C.F.R. § 106.7(d)(l)(i). Only if employees spend dl of their time on entirely nonfederd activity may they may be pdd entirely with non-federd funds. 11 C.F.R. § 

106.7(d)(l)(iii). 

In this case, the Committee cldms that a portion of the payroll account—^perhaps as 

much as two thirds of the funds that passed through the account—^was used to pay sdaries and 

payroll taxes for employees who were engaged in exclusively non-federal activity.' However, 

the Conimittee has not provided the monthly logs requued by 11 C.F.R. § 106.7(d)(1). Instead, 

in response to the Interim Audit Report ("IAR"), the Committee has provided six affidavits fix)m 

the employees in question stating that, prior to when the new sdary mles became effective, they 

did not spend more than 25 percent of their time on FEA or activities in connection with a 

federal election, and that they did not spend any time on FEA or activities in connection with a 

' The Audit Division has stated that 33 percent of the account's activity was reported on the Conimittee's 

disclosure reports to the Conimission. It is our understanding that this means the Committee is claiming that only 33 

percent of its salaries or related expenses were for employees who spent time on FEA or activities in connection 

with a federal election. 
Memorandum to Joseph F. Stoltz 

Proposed Final Audit Report 

Georgia Federal Elections Committee (LRA 793) 

Page 3 of5 

federd election after the new sdary mles became effective. The proposed FAR concludes that 

the affidavits are sufficient to establish that the Committee properly allocated the sdaries of the 

six employees. 

In recent audits of state party committees, the Commission has permitted committees to 

use similar affidavits as supporting documentation, despite the fact that they had not maintdned 

the monthly logs reqmred under 11 C.F.R. § 106.7(d)(1). See FAR on the Missouri Democratic 

Party (Feb. 3,2009). Therefore, consistent with the Commission's practices in these audits, we 

agree with the Audit Division that the Committee has provided sufficient altemate 

documentation to establish that the Committee did not improperly pay for federal activity using 

non-federal fimds. 

IIL FINDING 1 - MISSTATEMENT OF FINANCLiL ACTIVITY 

While Finding 2 concludes tiiat a large proportion of funds in the payroll account were 

for non-federd sdaries or related expenses. Finding 1 addresses the Committee's fdlure to 

report that activity. The Committee states that it should not be required to rqport the payroll 

account's non-federd activity to the Commission because the payroll account is neither a federd 

accoimt nor an dlocation account. The Conimittee argues that the disclosure of non-federd 

activity '*would result in an artificial increase in the disclosure of its federal activity, which it 

believes would be burdensome for the Committee and confiising to readers of [the Conimittee's] 

reports." Committee Response at 2. However, the proposed FAR concludes that the payroll 

account fimctioned as an allocation account, fix)m which dl activity, including non-federd 

activity, was reportable to the Commission. To assist the Conimission in resolving this issue, we 

address the Commission's options for how to treat a committee whose payroll vendor will not 

draw payroll from multiple federal and non-federal operating accounts. 

As an initid matter, we believe the Commission could determine that the Committee's 

establishment and use of the payroll account was reasonable under the circumstances. In the 

past, the Commission has been sympathetic to committees whose payroll vendors linut their 

ability to draw payroll ftom multiple federal and non-federal operating accounts. See supra n.2. 

Here, the Committee faced a Catch-22 created by the current salary dlocation mles and the 

limitations of its payroll vendor. The Committee was prohibited from transferring fimds fcom its 

non-federd account to reimburse its federal account for non-dlocable non-federd activity, so if 

it used its federd account to make its payroll disbursements it could not have recouped the 

^ The question of whether a comniittee could set up a single payroll account to pay both federal and nonfederal salaries and related expenses was raised by a commenter during the 2005 salary allocation rulemaking. See 

Explanation and Justification for State, District, and Local Party Committee Payment of Certain Salaries and Wages, 

70 Fed. Reg. 75,379,75,383 (Dec. 20,2005). However, the Commission concluded that it was beyond the scope of 

the rulemaking and has not to our knowledge directly revisited the question. Id. In a subsequent Reports Analysis 

Division referral to the Office of General Counsel, which was not made public because die Commission declined to 

open a MUR, the Commission determined not to seek enforcement action against a committee faced with the same 

problem caused by the same payroll vendor. The committee in question there, however, had elected to pay its nonfederal payroll from its federal operating account and transfer in non-federal funds to reimburse &ose payments 

rather than set up a separate payroll account. 
Memorandum to Joseph F. Stoltz 

Proposed Final Audit Report 

Georgia Federal Elections Comniittee (LRA 793) 

Page 4 of 5 

portion of that "hard money" it used for non-federd sdaries and related expenses. 11 C.F.R. § 

106.7(f)(1). However, the Committee could not use the non-federd accoimt to make dl of its 

payroll disbursements, because the Committee was prohibited fix>m making disbursements fix>m 

its non-federd account for diocable or federd purposes. 11 C.F.R. §§ 102.5(a). The 

Committee attempted to comply with the law by creating a separate payroll account fix)m which 

it could make 100 percent non-federd disbursements, as well as federal and allocable 

disbursements. 

However, the Conimittee did not report any of the payroll account's non-federd activity 

to the Conimission. Therefore, the question becomes whether, as the Committee claims, the 

Committee could treat its payroll account as a kind of "escrow account" or '^transmittd account" 

that is neither federal nor non-federal, and fiom which the Committee would only be required to 

report its federd and allocable activity, but not its non-federd activity. This appears to be a 

question of first impression because neither the statute nor the regulations contemplate the 

existence of such an account, and therefore do not provide any guidance on the treatment of the 

accoimt for disclosure puiposes. 

On the one hand, the Coinmittee is correct that the payroll account at issue here was 

unlike an ordinary dlocation account in that it contained non-federal fimds to be used for the 

payment of non-dlocable, 100 percent non-federd expenses. See 11 C.F.R. § 104.17(b). 

Commission regulations specify that dlocation accounts may be used "solely for the puipose of 

paying the allocable expenses of Joint federd and non-federd activities." 11 C.F.R. § 

106.7(f)(1) (emphasis added). Here, requiring the Committee to disclose dl activity in the 

payroll account would resuh in the Committee disclosing payroll information for sonie 

exclusively non-federal employees pdd with exclusively non-federal fimds for a particular pay 

period. 

On the other hand, however, we agree with the Audit Division that the payroll account 

served as the fimctiond equivdent of an allocation account, in that it dlowed tiie Committee to 

make both federal and non-federd disbursements with fimds originating from both its federd 

and non-federal operating accounts. Seell C.F.R. §§ 102.5(a), 106.7(f)(1). The transfer and 

reimbursement rules ordinarily prohibit state party committees fh>m transferring non-federd 

fimds to an account containing federal fiinds to reimburse that accoimt for 100 percent nonfederd activity. 11 C.F.R. § 106.7(f). Allocation accounts permit state party committees to mix 

fiinds from a conimittee's federd and non-federd operating accounts to pay diocable expenses, 

but are considered federal accounts fix>m which that committee must report dl activity, including 

the non-federd portion of activity. See 11 C.F.R. §§ 104.17,106.7(f); Explanation and 

Justification for Methods of Allocation between Federal and Non-Federd Accounts, 55 Fed. 

Reg. 26,058,26,065-66 (June 26,1990). Just as this reportmg requirement dlows the 

Commission to verify that committees are transferring and using tiie proper amount of nonfederd fimds to pay for allocable activities, requiring the Coinmittee to report 100 percent nonfederd disbursements here allows the Commission to verify that the Committee used and 

transferred the proper amount of non-federd fimds to pay for non-allocable non-federd 

activities, and did not use non-federd fimds to subsidize federd activities. See 55 Fed. Reg. at 

26,066 (noting that a reporting requirement "aIlow[s] the Conunission to track the fiow of non-
Memorandum to Joseph F. Stoltz 

Proposed Final Audit Report 

Georgia Federal Elections Committee (LRA 793) 

Page 5 of5 

federd fimds into federd accounts, and [] ensure[s] that the use of such fimds is strictiy limited 

to payment for the non-federd share of diocable activities"). While tiie Committee cldms tiiat 

the disclosure of its non-dlocable non-federal activity would be burdensome, it has aheady 

stated that it cdculates the appropriate amount of federd and non-federd funds for each payroll 

period in order to transfer the proper amounts fi'om the federd and non-federd operating 

accounts to the payroll account. The Audit Division's proposed treatment ofthe payroll account 

would only require the Committee to disclose the financid information it has already calculated. 

Moreover, the Committee's concem that such a reporting requirement would result in an 

artificial increase in federd activity and confiision by readers is addressed by the Audit 

Division's recommendation that the Committee only report tiie non-federal activity as "Other 

Disbursements" on Schedule B, Line 29.^ Accordingly, because we are of the view that 

committees should be required to report non-federd fiinds if they mix those fimds with federal 

fimds in a single account, see 55 Fed. Reg. at 26,066, and the payroll account at issue here 

fimctions as a federd allocation account in that it mixes non-federal and federd fimds, we 

conclude that the Committee should be required to report all ofthe payroll account's activity, 

including the transfer in and disbursement of non-federal fimds to pay sdaries and related 

expenses that are 100 percent non-federal. 

We reiterate that the transfer and reimbursement rules ordinarily prohibit state party 

conimittees from transferring fimds fix>m a non-federal account to reimburse a federal account 

for non-allocable non-federal activity. 11 C.F.R. § 106.7(f)(1). We note tiiat in order to ensure 

complete compliance with the law in the future, the Committee will have to choose a payroll 

vendor tiiat will draw its payroll from its federal and non-federal operating accounts in 

compliance with the regulations. 

^ Currently, the proposed FAR instructs the Committee to report the non-federal activity on Schedule B, 

Line 29, with a memo entry indicating that the transactions are being disclosed as a result ofthe FEC audit. 

However, to avoid confusion by readers, we recommend that the FAR instract the Committee to also include memo 

entries for these transactions that specifically indicate that they are for non-allocable non-federal activity.