FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C 20463

1101 2 35 l'~ '58

November 4, 1998

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MEMORANDUM

TO: . The Commission

THROUGH: James A. Pehrkon

Acting Staff· D

FROM: Lawrence M. Noble

General Counsel

By: Kim Bright-Coleman \t:f'V Associate General Counsel

,

Rhonda J. Vosdingh t.[::;J

Assistant General Co_l

Delbert K. Rigsby L1"t::

Attorney

SUBJECT: 1996 Democratic National Convention Committee. Inc. -

Request for Oral Hearing (LRA #471)

On September 8, 1998, the 1996 Democratic National Convention Committee.. Inc. (the

"'Convention Committee") requested the opportunity to address the Commission in open session

in connection with its request for an administrative review ofa repayment detennination

contained in the audit report as provided in the Commission's regulations at 11 C.F.R.

§§ 9008.12(c) and 9007.2(c)(2)(ii): See Attachment. According to 11 C.F.R. § 9008.l2(c), the

Commission will follow the same repayment determination procedures for publicly funded

convention committees. and publicly funded convention committees will have the same rights

and obligations as are provided for repayment determinations involving publicly funded

candidates under 11 C.F.R. §§ 9007.2(c) through (h). The Office ofOeneral Counsel

recommends that the Commission grant the Convention Committee's request for an oral hearing

and schedule the hearing for January 13.. 1999.

The Convention Committee's request for an administrative review oftile repayment detennination was

timely in accordance with II C.F.R. § 9007.2(c)(2)(i).
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Memorandum to the Commission

ONCe Request for Oral Hearing (LRA #471)

Page 2

The Commission's regulations provide that ifa publicly funded convention committee

disputes the Commission's repayment detennination, the convention committee may request an

administrative review ofthe determination. 11 C.F.R. § 9007.2(c)(2). The convention

committee shall submit written legal and factual materials to demonstrate that no repayment. or a

lesser repayment, is due. 11 C.F.R. § 9007.2(c)(2)(i). A convention committee may request an

opportunity to address the Commission in open session. 11 C.F.R. § 9007.2(c)(2)(ii). The

convention committee should identify in its legal and factual materials the repayment issues that

it wants to address at the oral hearing. Id. The Commission may grant this request by an

affirmative vote offour ofits members, and infonn the convention committee ofthe date and

time set for the oral hearing. Id.

The Convention Committee has requested an opportunity to make an oral presentation

regarding its dispute of the Commission's repayment detennination made pursuant to 26 U.S.C.

§ 9008(h). Specifically, the Convention Committee states that "requiring the Convention

Committee to repay payments made by the Host Committee [Chicago's Committee for '96] and

the City [ofChicago] for telephone service charges would be arbitrary, capricious and contrary to

law" because "given the ambiguous and contradictory language ofthe regulation [11 C.F.R.

§ 9008.S2(c)] and the E&J, the Convention Committee did not have fair notice that the regulation

could be interpreted to allow payment by a host committee for a whole variety ofadministrative

and overhead expenses, but not including telephone service charges." Furthennore, the

Convention Committee states that the "Commission's reliance on the one sentence oflanguage in

its E&J as governing the scope ofthe regulation is in violation ofthe Administrative Procedures

Act."

The Office ofGeneral Counsel recommends that the Commission grant the Convention

Committee's request for an oral hearing. Should the Commission approve our recommendation,

the Office ofGeneral Counsel proposes that procedures similar to those used for previous oral

hearings during the 1996 election cycle be followed. Pursuant to these procedures., the Office of

General Counsel will prepare an agenda document containing materials relevant to the

Convention Committee's oral hearing. This document will be provided to the Commission and

to the Convention Committee prior to the date ofthe hearing.

At the hearing, the Chairman will make an opening statement. The Convention

Committee will then be given 30 minutes to make a presentation on the issues raised in the legal

and factual materials it has submitted. 11 C.F.R. § 9007.2(c)(2)(ii). Following the presentation..

individual Commissioners, the General Counsel, and the Audit Division may ask questions.

11 C.F.R. § 9007.2(c)(2)(ii). The letter to the Convention Committee will infonn them ofthese

procedures and also state that any additional materials the Convention Committee may wish to

have the Commission consider should be submitted to the Office ofGeneral Counsel within five

(5) days following the oral hearing.
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Memorandum to the Commission

DNCC Request for Oral Hearing (LRA #47 t)

Page 3

RECOMMENDATIONS

The Office ofGeneral Counsel recommends that the Commission:

1. Grant the request ofthe 1996 Democratic National Convention Committee.. Inc.

to address the Commission in open session as provided at 11 C.F.R.

§ 9007.2(c)(2)(ii);

2. Schedule the oral hearing for January 13. 1999 at 10:00 a.m.; and

3. Approve the appropriate letter.

Attachment

1996 Democratic National Convention Committee, Inc. response dated

September 8, 1998.
FEDERAL ELECTION COMMISSION

Washington, DC 20483

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DATE & TIME OF TRANSMITTAL: WtdDlfdg. Hg",""r 4. 1111 4:00

BALLOT DEADLINE: Monday. November 9. 1898 4:00

COMMISSIONER: ELLIOTT, MASON, McDONALD, SANDSTROM, THOMAS, WOLD

SUBJECT: 1996 Democratic National Convention Committee, Inc. -

Request for Oral Hearing (LAA 1471) Memonlndum to the

Comml••lon dated November 3, 1998.

( ) I approve the recommendation(s)

( ) I object to the recommendation(s)

COMMENTS: _

DATE: _ SIGNATURE: _

A definite vote is required. All ballots must be signed and dated. Please retum

ONLY THE BALLOT to the Commission Secretary. Please retum ballot no later

than date and timp shown above.

FROM THE OFFICE OF THE SECRETARY OF THE COMMISSION
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BEFORE TIlE

FEDERAL ELECTION COMMISSION

REQUESTOr

1996 DEMOCRATIC SATIONAL CONVENTION COMMlllEE, INC.

FOR ADMINISTRATIVE REVIEW OF

REPAYMENTDETERNDNAllON

Pursuant to 11 C.F.R. §§ 9008.12(c) and 9007.2(c)(2), the 1996 Democratic

~ational Convention Committee. Inc. (the "Convention Committee") hereby disputes the

repayment detennination set fOl1th in the Repon ofthe Audit Division on the 1996

Democratic National Convention Committee, Inc., approved by the Commission on June

25, 1998 and served on the Convention Committee on July 8, 1998 (the "Final Audit

Report'), and requests administrative review ofthat determination.

Pursuant to 11 C.F.R. §§ 9008.l2(c) and 9007.2(c)(2)(ii), the Convention

Committee further requests that the Commission provide an opportunity for the

Convention Committee to address the Commission in open session, to demonstrate that

no repayment is required.

The sole issue presented by the Final Audit Report is whether the Convention

Committee should be required to repay $600,325 paid by Chicago's Committee for '96

(the "Host Committee") and 5126,510 paid by the City ofChicago (the "City') for local

and long distance telephone service charges for telephone calls made by the Convention

Committee. (Final Audit RepoI1 at 1()'12). That question turDs on the application ofthe

Commission's regulation govemiDg permissible disbursements by a host committee, 11

C.F.R. § 9008•.52(c): which reads in pertinent part:

(1) Local businesses (excluding banks), local labor organizations and

other local organizations or individuals may donate ftmds or make in-kind

douatiou to a host committee to be used for the following pmposes: ...

(v) To provide the national committee use of aD auditorium or

convention center and to provide coastruetion and convention

I Private colllribulioDs to a separaIe fuDd or ICCOUDI or a lovemmaat alney or DDIIIicipaliry may be made

to pay (or the same carelories ofexpases u thole for which a host commiuee may pay. 11 C.F.R. §

9008.53(b)(1).
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related services for that loeanon such as: construction 0 f podiums;

press tables; false tloors: camera platfonns; additional seating;

lightiDl. electrical. au condiuoninl and loudspeaker systems;

gtlieCJ: orlie; ;gulpmmt; and decorations; ...

(Xl) To proX'de other simdar convention-related (lSiliries and semees.

The Final :~uc1it Repon concedes that payment by the Host Conmuttee andior the

City tor Convention Committee for offices and office eqwpment. whether at the

. Convention Hall or off-site. was entirely permissible under this language. Final.~udit

Repon at 10. Funher. the Audit Division reviewed and allowed payments by the Host

Committee and/or the City for numerous office-related service charges. including

mamtenance. cleaning, use of office supplies. equipment rental charges. cellular phone

semce charges, pager service charges, and the like. Severtheless, Fina1.~udit Report

drew a distinction between all ofthese c~arges for office equipment facilities and

services, on the one hand. and telephone service charges.. on the other hand. citing a

single sentence ofthe lanpage ofthe Commission's Explanation and Justification for its

Convention regulations: "Please note that the revised rules do Dot permit host

committees or municipalities to pay salaries ofthose workin. for the convention

committee or the national party, or to pay the convention committee's or the national

party's overhead and administrative expcuses related to the conventiolLt. Presidential

Election Campaign Fund and Federal FinarlCiDl ofPresidential Nominating Conventions,

Final Rules. 59 Em. &a. 33606 a& 33614 (June 29, 1994).

In these circumstaDCel, requiriDl the Convention Committee to repay payments

made by the Host Commiuee aDd the City for telephone service charles would be

arbitrary, capricious mel comrary to law. for two reasons. First, pVeD the ambiguous and

contradietory lanpapoftile rqulatioa aDd the E&J, and their coDtrldictory application

by the Audit Divisioa, the Convention Committee simply did not bave fair notice that the

regulation could be interpreted to allow paymCDl by a host committee for a whole variety

of administrative and overhead e~ but not iDcludiDl telephone service charges.

Second. the Commission's reliance on the one sentence oflaDguap in its E&J as

governing the scope aCthe regulation is in violation ofthe Admi.DistraIive Procedme Act,

SU.S.C. §§ 5S3(b) and (c). because the Convention Committee clearly wu not afforded

any notice ofor opportunity to comment on the entire concept that convention committee

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administrative and overhead charges would be excluded from the category of permissible

disbursements by a host committee or municipality.

I. THE A!mlIGUOUS AND CONTRADIC1"ORY LANGUAGE AlVD

.-\PPLICATION OF THE REGULATION AND EAJ FAILED TO

PROVIDE THE CONVENTION COMMITTEE WITH FAIR NOnCE

THAT P ~yMENT OF TELEPHONE CHARGES WAS PROHIBITED

To be sure, "substantial deference" must be given "to an agency's interpretation

ofits own regulations." Thomas Jefferson University v. Shalala. 512 U.S. 504, 512

(1994). Where the imposition of a civil sanction is at stake, however, "the due process

clause prevents that deference from validating the application of a regulation that fails to

give fair warning ofthe conduct it prohibits or requires." Gates & Fox Co.. Inc.. v.

Occupational Safety and Health Review Commission. 790 F.2d 154, 156 (D.C. Cir.

1986)(Scalia. C.1.). "In the absence ofnotice--for example, where the regulation is not

sufficiently clear to warn a party about what is expected ofit-an agency may not

deprive a party ofpropeny by imposing civil or criminal liability." General Electric Co.

v. United States Enyirppmental Protection Ageucy. 53 F.3d 1324, 1328 (D.C. Cir. 1995).

As the coun explained in Diamond RooMe Co. v. Occypational Safety & Health Reyiew

Commissjop. 528 F.2d 645 (Sell Cir. 1976), the regulated entity:

is entitled to fair notice in dealiDl with his government. Like other statutes

and regulations which allow monetary penalties against those who violate them,

an occupational safety and health standard must give an employer fair warning of

the conduct it prohibits or requires. ...

Ifa violation ofa regulation subjects private parties to criminal or civil

sanctioDl, a regulation caDDOt be coDItrUed to mean what an agency intended but

did not adequately exprea. ... [T]he ... enforcer ofthe Act has the responsibility

to stale with ueataiDable certainty what is meant by the standards he has

promulgated.

528 F.2d at 649. Sec .'rn EQUip, Enyirppmental SmiCeI· Inc, v, V,S, Enyironmenlal

Protectiop Agcpe;y. 937 F.U 649, 654 (D.C. Cil. 1991)(tack ofadequate notice resulting

from regulation's inherent uncertainty in meaning resulted in setting aide penalty for

violating regulation).
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rn this case, it cannot possibly be said that the Convention Committee had fair

warning that the Commission's regulation prohibited the payment by a host committee or

municipality oftelephone service charges, for the following reasons.

A. The Languale of the ReguladoD Does Not DisdDIUisb Between

Telepbone Service Charles and Other omC! Equipment Facilities

and Services

"'.0\. regulation should be consttued to give effect to the natural and plain meaning

ofits words." Diamond Roofing Co., 528 F.2d at 649. It is impossible to glean

from a reading ofthe plain language ofthe regulation, section 9008.52(c)(I), that host

comminees are permitted to pay for a wide variety ofoffice-related facilities and

services, but not telephone service charges.

The regulation clearly permits host committees to pay for "offices" and "office

equipment." 11 C.F.R. § 9008.S2(c)(1)(v). The regulation goes on to allow host

committees to pay, without limitation. to "provide other similar convention-related

facilities and serviCes." Id. § 9008.S2(c)(l)(xi)(emphasis added). Thus, host committees

are indisputably permitted to pay for the provision and installation oftelephone

equipment for the convention committee. Any natural and plain reading ofthe regulation

would give rise to the conclusion that the host committee is also permitted to pay for

"other similar" "services,,. and that use ofa telephone is a "service" simUar to the

provision and installation oftelephone "facilities".

Further, the very use ofthe phrase "other similar CODvention-relatecl facilities and

services" indicates that the list provided in the preceding subsection ofthe regulations is

illustrative rather than exclusive. C£ Puerto Rico Maritime Sbipginc Authority v.

Intern,,, Cgmmm;e CommiMiQD, 64S F.2d 1102, 1112 De 26 (D.C. eir. 1981)(use of

word "iDcludiq" indicates specified list is illustl'ative, not exclusive). Clearly the use of

telephones is aD "otherservice," "similar' to the provision. for example, ofother utilities

for which a cbarge is paid specifically, air conditioning and electricity, specifically

listed in subsection (c)(1)(v).

Nothing in the plain language ofthis regulation, therefore, gives the convention

committee any notice whatsoever that the provision and iDstallatiOD ofoffice equipment

may be paid for by a host committee, but not service charges for use ofsuch equipmen~
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or that cenain types ofservice charges for use of offices or office eqwpment may be paJd

for by the host committee (e.g.• electricity fOr offices). but not telephone service charges.

B. ~otbiDl iD the AdmiDistfadve History of tbe ReauJadoa.IDcludiDC

tbe E&.I. Gives Fair Sodce That Telephoae Cbarges Are Excluded

from the Lilt or ElpeDln (or \\t)jcb Hos' Committees Mav Pay

~othing in the administrative history of the regulation gives a convention

conumttee any indication that cenain types of convention comnunee administrative

facilities and services may be paid for by a host committee. but not telephone service

charges. First. the regulation has never containecL in any of its formulations. any

limitation on payment of convention cormmnee admuustrative expenses by a host

committee. provided that the source of funds was permissible. The first regulations

promulgated by the Commission allowed cenain local businesses to donate funds to a

host committee in an amount "proportionate to the commercial return reasonably

expected" by thal business during the convention. and allowed the host committee to use

those ftmds '~o pay for wlw would otherwise be a convention expeuse by the national

committee." obviously iDcludiDl convention committee admiDis1rative cosu. Former

section 121.9(b). 41 f5 &u. 35965 (Au.. 2'. 1976). The Commission's explanation to

Congress made clear that such ftmds could be used by the host committ~ "ifit so

chooses, to... defray convention expenses oCthe lWioaal party.... U House Doc. 95-44.

9Sdl Coni., 1

51 Seas. 137 (1977).

The second version ofthe reguWiou. promulgated in 1979, added the list of

purposes for which expeDditurel could be made by IOvemmem agencies and

municipalities, iDcludiq me tenD. "other CODveDtiOll related facilities and

services,'· .~. ~decl thatboll commiuees could make expenditures for purposes that

"inc'ude but an; PAt 'i'Di"" ip" the purposes listed for municipalities. provided the funds

were doDaIeclby local ret8i1 busjnesses in aD amount proponiODate to the commercial

retunl reuoaably expected. Formersectioas9008.7(bX2) aDd (dX,3), 44 f5 B& 63036

at 63041-42 (Nov. 1, 1979). In essence.. the concept ofthese regulatious. carryiDl

forward the policy ofthe original replaDoaa, was that the resuietions on source ofthe

funds would ensure that the donations were commercially motivated and thai. once these

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restnctlons were met. the host comaunee could spend the funds for "convention

expenses." s.= Explanation & Justincatlon. section 9008.7, .w Em. Ru. at 63038.

In promulgating the current version ofthe regulations. the Comnussion decIded to

elimmate what it regarded as complex and unworkable distinrtions between ··local" and

··local retail" businesses. 59 £;d. Ru. at 33610. But the new rules continued to provIde,

as the Commission explained.. that "both host committees and government agencies and

municipalities may accept monetary and in-kind donations from local businesses and

other local organizations and individuals to defray a variety of expenses for promotmg

the convention city and paying for convention-related facilities and services."

Explanation and Justification C'E&rl. section 9008.52, S9 £;d. Ru. at 33614 (emphasIS

added). Significantly, the Commission retained, in the final language ofthe CWTent rules

1n section 9008.S2(c), the exast samo list ofpermissible host committee disbursements as

had been set forth in prior section 9008.7(b)(2) in 1979, including "[olther simllar

convention related facilities and services." for which a host committee could use funds

donated by iocal retail businesses under section 9008.79(d)(J). The Commission openly

recogniz~ in 1979, that this list allowed the bost committee to "defray cODvmtiOQ

expenses," without limita!ioQ- aDd that wu precisely the reason there had been placed

severe limitatioDS on the sourc' ofthe ftmds. 44 &d- && at 63037·38. Thus, the

legislative history ofthe laDguap oCthe cummt regulation indicates DO intent whatsoever

to limit the use ofhost committee fundi for admiDistrarive expeDSeL

That leaves, ofcourse. the ODe scatcace ofthe E&J ofthe current regulatioa.

asking convention commiReel to "Please DOte that the revised rules do not permit hOIl

committees or mUDicipaliti. to pay•.. the convention committee's or the national party's

overhead aDd aetmmisu...apeueI related to the convention. 59 ad. Ba. at 33614.

The problem with tbia seateaee is WI it i. flatly cop_cicci by the lansual' ofthe

r;gulatiog itsel£ n:acIaiDa it essentially unintelligible. The E&J languqe does not say

that a host committee caD pay some admiDistrarive expeDSCS, but not telephone charges.

It says that a host committee may Dot pay IDX admiDistrative or overhead expenses ofthe

convention committee. Yet the plaiD lanauase ofthe regulation itselfclearly permits

payment ofsuch expenses. in particular, "offices" and "office equipment.,. Offices and

office equipment are administrative and overhead expenses. by anybody'5 definition.
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How can a convention committee make any sense whatsoever of a sentence lD the

E&J that says a host committee canpgt pay convention committee administrative

expenses and a regulation that says a host committee pay administrative expenses?

Certainly, such contradictory languaae cannot eVfm remotely be said to give fair notice of

rypes ofadminisntive expenses win be all\owed-in panicular. which types of

office facilities and services will be allowed to be paid by the host committee and which

will not.

The Final Audit Report sullests tbat the "E&J ofTers a reasonable starting point

for applyin. the regulations:· Final Audit lRepon at 12. But a ··reasonable staning point"

is not enough to tell a party committee that it is loiD. to be held liable for more than

5700,000 in repayments based OD a distiDcUOD tlw is ngwbm to be found in the

lanpale or history ofthe rules. For these reIIOns. nodliDl ill the admjniSU'ltive history

ofthe reauJatioa-includiDa the EIcJ languaae 00 which the FiDa1 Audit Report places so

much relilDCI pves fair notice that telepboDe servi~ chari- would be disallowed u a

permissible hose committee disbursemeac.

t. n. Applleatloll ofae .......... by *. Aadlt DIYtItoII WII

CgpncUctgn UtiJun'''.'

The Audit Divisioa itselfiDteIPleted..s applied the laDpIae ofsection

9OO1.52(c), aad the E&J 1........ ill III eatirely COIdIadietory aDd iDcoDlisteDt way. The

Host Committee aDd the City paid for. aDd the Audit DivisioD allowed their payments for.

a variety ofadministrllive IIId ovedIeId ex,... (or CODVeatioa-related facilities IDd

servic. for dieCoaveali-.Cali"';'" iDcludiq DIe ofoffice equ.ipmeat u weD.

provisioa aDd iDlblJ.....ofIIIlCb eqaipmeaL IDdeed, die Audit Divisioa itself

ackDow.....1IIII.DGCWidll' _ die"""" oftile EAJ purponiDa to _ boll

committee,.,...... few allYCOImIIIioa COIDIIIittee IdmiDistradve or overhead expenses.

it wu permigible Cor tM IfGItCommittee to pay for CoaveDtioa Committee offices mel

office equipmeat, iDel",te1lpllaal systeIIIL FiDal Audit Report. 10.

Moreover, u belt we CID.....hID die ftICOId., die Audit Divisioa allowed

paymentS by the ROIl Co,,,ntjaee for wyjse s"- wbich are coaceptuaUy aad

defiDitiODllly iDdistiDpisbible fioal telepboae ....chari. COlMlltioa Committee

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pager t"beeper") charges. usage charges for cellular phones. rental of certain types of

office equipment. and consumable office supplies such as paper. printer and fax

cartridges. pens, pads. fasteners and the like. as well as postage for use by the Convention

Committee. The .~udit Divisio~ again. approved such payments 110twithstanding the

language of the E&J suggesting that a host committee may not pay for any convention

committee administrative and overhead expenses.

Thus. the Audit Divisionts own inconsistent and contradictory application ofthe

regulation demonstrates that no regulated entity could possibly figure out, or have been

put on notice. that the regulation contained distinctions between certain kinds of

administrative expenses and others, or that certain kinds ofservice charges would be

allowable and others would not. For this reason too. the regulation did not provide fair

notice to the Convention Committee thai telephone service charges would be disallowed.

D. The DeftDidoD ofCODveadoD Espea... Is Vseleu fa IDterpretiDl tbe Scope

of Perml',ih" BOlt Comgaign Dlsbgncrpc••

The Final Audit Report places some relimce OD the fact that the Commission's

rules ofcourse allow a convention committee itselfto pay for its own admiDisttative and

overhead expenses. The Final Audit Report citesll C.F.R. § 9008.7(a)(4)(x), which

pennits a convention committee pay for its own'la]dmiDisttative and office expenses for

conducting the convenuoa. iDcludiq. .. telepbone charges:' Reference to these

regulations wu also made duriDa the opeD Commission mectiDl on JUDe 25, 1998, at

which the FiDal Audit Report...IppIOved.

thai a CODveaUOIl emnnittee may pay for ccrtIiIl apcDIII with its own funds.

from the Public plat, sayI DOtbiDa whatsoever about whether a host committee may also

pay for such expeaI& There are numerous eateaories ofexpeusea which the regulations

allowmm.tile coavemioa committee or the host committee to pay for, including its own

offices aDd ot1ice equipmeat, aDd expeDSel CorpnpariDl the physical site ofthe

conventioa. inclucli.q remal ofthe hall. p1alforml aad satin.. all ofwhich are

specifically set forth both illsection 9008.7(a)(4), U permissible convention committee

expenses, and in section 9008.53(c)(1), as permissible host committee expenses. There is

no provision in the regulations. anywbere, or ill the E&J, even remotely suggesting that if

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a panlcular category of expense may be paid for by the convention cotnmlttee aseif. It

cannot be paid for by the host committee or municipality, and any such reading would be

tlatly contradicted by the language 0 f the regulations.

Therefore, it is utterly meaningless that the convention committee could lawfully

have paid for all of its own administrative and overhead expenses. The question is

whether the convention committee was fairly put on notice that certain categones of

administrative and overhead expenses could be paid for by the host committee, while

others, specifically telephone charges, could not. The definition of "convention

expenses" is wholly irrelevant and useless in addressing that question.

E. The CODveDdoD CollUllittee Wu Not Provided Fair ~otiee that the

ReguladoD Probibited Host CollUllittees from PayiDl Cor Telephoae Semee

Cbargn

In the circumstances described above. where the regulation obviously failed to

give fair warning ofthe conduct the Commission now seeks to prohibit-I.e., payment by

host committees oftelephone service charges-it would be unlawfill for the Commission

to force the Democratic Natioaal Committee to repay those Hose Committee payments.

In Gates '- Fox Co., amra, a federal contractor workiDl OD the Washinaton Metro system

was cited for violating aD OSHA regulation requiriDl that cenaiD breathiDl devices be

provided for workers near the ·'advanciDl face'· ofa shaft and that "such equipment"

shall be on cenaiD equipment in that area "and in other area" where employees might be

trapped by smoke. The conttaetor had Dot been workinl near aD ·'adVaDcing face", but

was working in another area where employees might be tlappecl by smoke. The court

foUDd that the laDpqe was ambipoua becauIe it wu not clear whether the ·'other

areas" w~ 9~ thoseDar. advanciDl face, or could include other area as well. The

court concluded tbal the COIl1rICtOr could DOt be fiDed for the violarion because it "did not

receive coDStituCioaa1ly adequate notice'· that OSHA would apply the resu!ation to such

other areas. 790 P.2d at 156. The court reasoned thai:

Courts must Jive defermce to aD ageDCY's interpreWiOD ofits own resu!atioDS... . Where the imposition ofpeDa! saactioas is at issue. however, the due process

clause prevents that deference from validatiDl the application ofa resu!ation that

fails to give fair warninl ofthe conduct it prohibits or requires.

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Sinularly, in Satellite BroadCasUDi Co.. Inc v. FCC, g2~ F.ld 1 (D.C. Cit. 198-:-).

the FCC dismissed.a company's application to operate a microwave radio statIon because

the application had been tiled in the wrong place. The coun fOund that the FCC's rules

addressed the proper place for tiling in a "baffling and inconsistent fashion." 82.$ F.ld at

~. One section ofthe rules said that private radio applications should be tiled in

Gettysburg, PA. while another section suggested that applications for any lottery should

be tiled in accordance with the rules for each service. and for that specific servtce. the

. place of tiling was Washington. The company filed in Washington but the FCC ruled

they should have tiled in Gettysburg. The coun vacated the FCC's dismissal decision as

arbitrary and capricious, holding that the company's interpretanon ofthe confu.,ing rules

was equally reasonable and that:

Traditional concepts ofdue process incorporated into administrative law

preclude an ageney from Penalizinl a private pany for violating a rule without

fIrSt Providinl adequate notice ofthe substance ofthe rule.... The Commissioa

through its regulatory power cannot. in effect. punish a member oCthe regulated

class for reasonably interpretiDl Commission rules. Otherwise the practice of

administrative law would come to resemble "Russian Roulette.'· The agency's

interprewiOD is mtided to deference. but ifit wishes to use dill interpretation to

cut offa pany's rilb!. it must Jive tW1 notice ofits interpretation.

1d- at 3-4.

"\IaiD. in Gcnml Elecqjc C9· v, U.S. Epyjrggmcgtal Pmtcstioo Agmeey. 53 F.3d

1324 (D.C. Cir. 1995), the EPA fined OS for distillinl the CODtaminated solvent from

cenain PCB's before iDciDerabq them. ODe sectiOD ofEPA's complex rules appeared to

allow intermediate procasinl for purposes ofdisposaL Anothersection required

disposal ofthe solvent by ID appmved metbacL which would not include dis1:i11aIioa. only

immediate iDciDcratioa. TIle coun held tbat EPA's readiq ofill replatioos wu

reasonable, aDd would be upheld. but tbat the llcacy cou1cl DOt impose any fiDe or

penalty OIl GE for violatiq tbat rqulatiOD based OD such the aacacy's interprewioa:

Due procaI requireI that pam. receive fair notice before beiDl deprived

ofploperty••.• III the IbseDce ofnotie_for example, where the replatiOD is DOt

sufficiently clear to wam a party about wbat is expected ofit-an llcacy may DOt

deprive apany ofpropeny by imposiDa civil or crimiDalliability.

53 F.2d II 1328. The court DOted that there bad been DO pre-enforcemeDt effons to brinl

about compliance and DO other way for GE to bave kDowa rhe EPA would interpnl the

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regulations the way it did: "(W]e conclude that the interpretatIon is so far from a

reasonable person's understanding ofthe regulations that they could not have fairly

informed OS ofthe agency's perspective." Id. at 1330. The coun found that the

regulations on their face did not prohibit use of distillation as a pre-disposal process. that

other parts ofthe regulation appeared to permit use ofdistillation. that the panies

themselves were confused about which sections ofthe rules actually applied. EP.A.

pomted to a policy statement purponing to address PCB separation activities. but the

coun found that the application ofthat policy was itself unclear. The court concluded

that:

EPA did not pmvide GE with fair warning ofill interpretatioD ofthe regulations.

Where as here. the r;gulatioDl and other pglicy statements are unclear. where the

petitioner'S interpretation is reasonable, mel where the agency itselfstrUggles to

provide a definitive readiDl ofthe regulatory requiremenu. a reGllted pam is

Dot "00 notic,tt ofthe agencY'1 ultimate jntcrmtatigg pfthe regulatigOl. and may

not be punished.

ld- al1333-34 (emphasis added). sa, to the same etrecL Unitcd States v. Hges;hst

C;Jmca Cgm.9 964 F. Supp. 967 (D.S.C. 1996), aft"d jppm m'd in pan. 128 F.3d

216 (4&11 Cir. 1997), em denied, 118 S. Ct. 2367 (1998Xwhen rep1alioD was

unambiguous aDd unclear and there wa DO pn-enforcemem wamiDl ofqeDCY

interpreWioa. there could be DO fiDctiDl ofliability or peaa1ty imposed); United States v,

COO5QUdatcd Edisog Co, gfNCW yPri. 1981 U.S. DilL LEXIS 13234, No. CV 88-0049

(E.D.N.Y., Nov. 16, 1988)(wbcre EPA rquWion wu ambipoUl, regulated party was

not put OD fair notice ofEPA iDtcrpretatiOD IIId. DO peaa1ty cou1cl be imposed).

ill these c-. tbe Commission'. replatiODIlOvemiDl permillible

disbuncmlNl '"boltCODIIDiUea an "baftliq aDd iDcoDlisteDt,tt Satellite Broadcasting,

supra, 824P.2cI at 2. to say the laIL M ill Qlta " FQI. IJIJrI, the plaiD lanpaae ofthe

replatioa daeI DOt draw the distiDction the CommislioD seeks to impose, betweea

telepboDe service chlrpllDd other adminillnlive expeIlIeI The lanpaae ofthe

regulaboD, expreuly allowiq paymeDt ofsome CODveDtiOD commiaee overhead and

admiDisIralive expeDlel by bolt committeel, tlady COIlUIdieu dial ofthe E&J, purporting

to prohibit any payment by holt committees ofCODVeDUoa committee admiDis1:rative and

overhead expeDIeI. The application ofthe replation by the Audit Division iuelfwu
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contradictory and inconsistent. .~<L as in General Electric, it was surely reasonable for

the Convention Committee to regard telephone service charges as being an "other similar

convention-related service" within the meaning ofthe reguJatio~ similar to office

equipment and supplies. to utility charges, and to service charges for office equipment

that the :\udit Division in fact treated as pennissible for payment by the Host Committee.

In these circwnstances, it is manife'St that the Convention Committee was not

provided with "fair warning" oCthe Commission's interpretation. was not "on notice" of

the Commission's ''ultimate interpretation" imposed for the first time in this audit, and

therefore "'may not be punished" with a repayment obligation ofmore than $700.000.

General Electric Co., nmm, SJ F.3d at 1333-J4.

II. THE CONVENTION COMMITTEE WAS NOT PROVIDED WITH .~~

~OnCE OR OPPORTUNITY FOR COMMENT ON THE E&J

LANGUAGE THE COMMISSION NOW REGARDS AS CONTROLLING

As not~ the Final Audit Report, in holding that the Host Committee and city

payments oftelephone service charges for the Convention Committee were

impermissible. relies almost entirely on the language ofthe E&J indicating that the

revised rules "do not pennit host committees or municipalities to ... pay the convention

committee's ... overhead and administrative expeuses related to the convention." Final

Audit Report at 10-12. citing E&J, S9 &de 1m. at 33614. To the extent that the

Commission has conferred on this language the fo~e ofa new regulatio~ controlling the

entire scope ofsection 9008.S2(c) ofthe regulations, the Commission has clearly violated

the Administrative Procedure Act, 5 U.S.C. §§ SS3(b)&(c), by failing to provide the

Convention Committee or the ONe my notice ofor opportunity to comment OD this new

restriction OD the scope ofpamissible host committee disbursements,

The Commission issued a Notice ofProposed Rulemaking, with a request for

comments OD new rules govemiDg federal financing ofPresidential nominating

conventioDS, on August 12, 1993, 58 &d. Ru- 43046. Section 9008.53 ofthe proposed

new rules essentially retained the concept ofthe former ndes: host committees could

accept donations from local retail businesses, in amounts proportionate to the expected

commercial retum, and the host committee CQuid usc thoR funds to defray essentially

any cODvcmioD expenses. The proposed niles further clarified that municipalities could
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donate or expend their own funds to defray any convention expenses., without limItatIon

in amount The preamble to the ~"R..\{ coruinned that the only changes to the eXisting

rules were to combine cenain sections., con.fi.nn that host committees could accept in-land

as 'W·ell as cash donations., con.fi.nn that banks do not qualify as local rew! businesses and

clariEy that municipalities could donate funds to host committees without restriction in

amount. 58 Fed. Reg. at 43051-52. There was I1Q suggestion anywhere in the ~-pIt.\1

that the Commission was considering any new restriction on the use of funds donated by

local retail businesses to host committees, under this section. for payment 0 f

administrative or overhead expenses.

The ONe submitted comments on the proposed new roles and also presented oral

testimony before the Commission at an open hearing on October 27., 1993. Of coW'Se, the

ONC, having been given no indication whatsoever that the Commission was considering

restricting the scope of permissible host committee disbursements for convention

committee administrative or overhead expenses, did not think to comment on any such

concept either in its written comments or at the hearing. As best as we can determine

from the record. no one commented OD this issue in any way.

The Commission considered the new rules at a number ofopeD meetings during

April, May and June of 1994. The final Agenda Documeat, #94-58, had revised section

9008.52 to eljminate the requirement thai the amount donated to a host committee by a

local business be proportiODale to the expected recum. but added a requirement thai it be

in the ordinary course ofbusiDeu for the local donors to make donations to nonpolitical

conventioDL Id. II 5-6. The Aleada DocumeDt made clear. however. that with respect to

the scope ofpermissible holt committee disbunemems, the new "rules allow local

bllsja...IIId.adler local orpnizatiou to make mcmetIrY or iD-kiDd dolWioDS to either

the host committee or the IIlUIIicipality for a variety ofpurposes involving the promotion

ofthe collvemioa city aM tItc com ofcOPyeptiop ("iliriCl aM scryieg..,. Agenda

Document #94-.5" Dilcussioa § 0 at p. S(emphasis added).

Indeed., the entire concept oflimitiDl the scope ofpermissible bost committee

expenditures with respect to convention committee admiDis1rative expenses was not

introduced, to our mow1edae, until the very last meetinl ofthe Commission OD the new

rules. At that meeting, one ofthe Commissioners sugested addinllanguage to the E&J

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to lndlcate that the host conunittee could not pay for convention comrmttee

administrative expenses. That suggestion was adopted without a fonnal vote by the

Commission. The exact wording was created by the Office ofGenera! Counsel and

inserted in the E&J, which was finally approved by the Commission. presumably on tally

vote, and issued on June 29, 1994. There was no advanc:e notice whatsoever that this

new concept would suddenly be introduced and adopted at the last Commission meeting

on the proposed new rules, let alone an oppommity for anyone to comment on It.

.~gencies are of course allowed to modify proposed rules during the rulemaking

process, without necessarily atTording an opportunity for a second round of comment. .~s

the District ofColumbia Circuit has explained. however:

The test we have developed for deciding whether a second round of

comment is required in a particular case is whether the tiDal rule promulgated by

the agency is a "logical outgrowth'· ofthe proposed rule.... We apply that

standard functionally by asml wbether '~e purposes ofnotice and comment

have been adequately served." ... that is, wbether a new round ofDotice and

comment would provide the tint oppommity for interested parties to offer

comments t1W could persuade the agency to modify its rule.

American Water Works Asa'o y. Egvimumemal PmtcctjOQ Agcpcy. 40 F.3d 1266. 1274

(D.C. Cir. 1994)(citatiODS omitted). Accgrd, United Swes v, Bethlehem Steel Corp., 38

FJd 862 (7th Cir. 1994); Shell Oil Co. v Enyjrpgmcptal Prgtee;tiog Agcucy, 950 F.2d

741 (D.C. Cir. 1991).

In the case oCthe Commission's rules IOvemi!l1 host committee disbursements, it

is clear that the restriction on the ability ofhOIC committees to pay for convention

committee admiDisttative aDd ovahad wa in DO way a "topcal outgrowth" of

the proposed rule. Notbipi ill the proposed rules eYeD hiDted tbat such a restriction

would be iinPo"'l The DNC \Va liVeD DO oppommity wIWsocver to comment OD such

a restriet:iolL Had the ONe been afforded such aD oppommity, it could have called on the

Commissioa to c1ari1Y aaetly wbat types ofconventioD committee expenses the host

committee would be precluded Uom payina. thereby obvilliDl all ofthe confusion and

uncertainty that pve rise to the repayment obliprioD imposed by the Final Audit Repon.

Manifestly, thea. the "purposes ofnotice and commCDl'" have Dot been ··adequately

served" in this case.
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[n KQontzky v. Reich, 17 F.3d 1509 (D.C. Cir. 1994), the Labor Depanment's

rules pennitted employers to substitute alien workers on labor cenifications. DOL issued

a notice of proposed rulemaking to implement legislative changes in the immigration

laws, including changes in the system for priority dates. but not mentioning any change in

the ability of employers to substitute aliens. Then. in the final role, the depanment

amended its rules to limit the validity oflabor cenifications to the alien named on the

employer's application. The court held that the rule was invalid because the depanment

had failed to afford notice ofor opportunity to comment on the no-substitution provision.

The court noted that that the NPR...\f "did not contain the tenns ofthe no-substItution rule

it later promulgated; it did not propose abolishing substitution; and it did not mention the

issues involved in doing so." 17 F.3d at 1513. Acknowledging that "a final rule need not

match the rule proposed." the court nevertheless held that "a necessary predicate... is

that the agency has alened interested parties to the possibility ofthe agency's adopting a

rule different than the one proposed. The adequacy ofnotice depen~ ... on whether the

final rule is a 'logical outgrowth' 0 fthe proposed rule." Id- The court ruled that, in this

case:

The Department'S interim final rule does not even come close to complying with

the notice requirement of§ 553. Something is not a logical outgrowth of nothing.

The notice ofproposed rolemaking contains nothing, not the merest hint. to

suggest that the Department might tighteD its existing practice of allowing

substitution. ..

ld- The court concluded that. "Interested persons... therefore had no opportunity to

present their views on the matter before the Department acted." Id- at 1514. See also.

National Mininl Ap'p v. Mine Safety and Health Adm'n. 116 F.3d 520, 530-32 (D.C.

eir. 1997)(new rule invalidated where NPRM made no mention ofchanging significant

aspect oCrule; notice considered inadequate when "interested parties could not

reasonably have anticipated final rulemaking from draft rule".

Likewise. in the case ofthe Commission's rulemaking, the NPRM contained

"nothing, not the merest bin~ to suggest'- that the Commission was going to prohibit host

committees from using any oftheir funds to pay for convention committee administrative

and overhead expenses. The DNC would obviously have been very interested in

commenting on such a proposal. Manifestly it was deprived of any such opportunity,
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before the Commission acted in adoptmg the E&J language and thereby changing the

scope ofthe entire regulation. at least as the Commission now seeks to apply it. rn the

absence of any notice of or opponunity to comment on this significant language

effectively adopted as part ofthe final rule, the Commission has violated the

Administrative Procedure Act. Therefore. the rule was not validly adopted.

CONCLJ:SION

The Commission may have good reasons to craft a rule that limits the scope of

disbursements by host committees and municipalities for convention committee

admimstrative and overhead expenses. The answer is to undertake a ruJemaking that

proposes such a rule, a rule which makes clear to host and convention committees exactly

what types of convention committee expenses can and cannot be paid for by host

. committees and municipalities, and that invites public comment on such a proposed rule.

To require convention committees to guess about the meaninl of a vague,

ambiguous and contradictory regulation together with its equally contradictory preamble

languag~ with a penalty ofhundredl ofthousands ofdollars in repaymeDt obligations for

guessing wrong, violates ftmdamental precepts ofconstitutional due process and

administrative law. The Convention Committee wu not even remotely afforded fair

notice that section 9008.53(c) prohibited host committee paymeat oftelepbone service

charges while permittinl host committee payment ofnumerous other cateaories of

convention committee expenses, includiDl overhead expenses. And bad the ONe been

provided notice ofand. opporumity to comma OD the entire concept oflimiting host

committee paymeDt ofCOllVemioa committee administrative expea.sa, ill the first place.

the Nle could ~ve bemclarified. mel the entire problem could have beeD avoided. The

Commiuioa's failure to pnMde such notice and oppommity to commeDt is a clear

violation ofthe AdmiDistntive Procedure Act.

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For these reasons. pursuant to 11 C.F.R. § 9007.2(c)(3), the Commission should

revise the repayment determination in the Final.-\udit Repon to find that the Host

Committee payment 0(S6OO,325 oftelephone service charges and the City payment of

S126.510 oftelephone service charges were permissible disbursements and not in-kind

contributions to the Convention Committee, and therefore, that no repayment by the

Convention Committee is required.

Respectfully submitted,

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';:':::':~er Neil P. Reiff

SANDLER & REIFF, p.e.

6 E. Street, S.E•.

WashiDacoa. D.C. 20003

(202) 543·7680

COUDIII for 1996 Democrllic Nllioaal ConvennoD

Committee, IDe.

Dated: September 8, 1998
FEDERAL ELECTION COMMISSION

WASHINGTON, 0 C. 20463

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July 17,1998

MEMORANPUM

TO: RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

FROM: ROBERT J. COSTA t~ ,c.·v /z.~) (,. ../ -I 7 -(i~'

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

DEMOCRATIC NATIONAL CONVENTION COMMITTEE, INC.

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

1996 Democratic National Convention Committee, Inc. which was approved by the

Commission on June 25, 1998

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

the report may be released to the public.

Attachment as stated

cc: Commissioners

Office ofStaffDirector

Office ofGeneral Counsel

Office ofPublic Disclosure

FEC Library
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REPORT OF THE AlTDIT DIVISIO:S

ON

1996 DEMOCRATIC NATIONAL

CONVENTION COMMITTEE, INC.

Approved June 25. 1998

FEDER.\L ELEC'TIOl\ (~O~IMISSI()'

999 E STREET. NW

\\·."'SHI'GTO'. 0<"

,
Table ofCODteDts

1996 Democratic NatioDal CODventio. CommiUee.IDc.

Page

(Bottom Pagination)

Executive Summary

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Audit Report

Background

Findings

Legal Analysis

Transmittal to the Committee

Chronology

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REPORT OF THE AUDIT DIVISION

O~THE

1996 DEMOCRATIC NATIONAL CONVENTION COMMITfEE.INC.

EXEC(:TIVE SUMMAR'·

The 1996 Democratic National Convention Committee, Inc. (DNCC) registered

with the Federal Election Commission on June 6, 1995 as a National Convention

Committee ofthe Democratic Party.

The audit was conducted pursuant to Section 9OO8(g) ofTitle 26 ofthe United

States Code which directs the Commission to conduct an examination and audit ofthe

payments for presidential nominating conventions no later than December 31 ofthe

calendar year in which the nominating convention is held. In accordance with 26 U.S.C.

§9008(b), the Committee received 512,364,000 in federal funds.

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

held on August 7, 1997 and in the Exit Conference Memorandum (ECM). The

Committee's responses to the findings are contained in the audit report.

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

ApPARENT CONVEl'TI01\ EXPENSES PAID By THE HOST COMMITTEE AND

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

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

§104.3(a). The Audit statTidentified payments, totaling 52,580,742, made by Chicago"s

Committee for '96 (Host Committee) and the City ofChicago for certain production and

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

permissible expenses which could be paid by the Host Committee or theCity ofChicago.

The production payments, which totaled $1,,455,407, \vere made to six vendors

for services such as providing a public address system" constructing camera platfonns

and lighting, providing stagehands" riggers, projectionists, electricians.. teamsters.. etc.

Based on the DNCC"s response to the ECM, the Audit staff conceded that audio services..

including a public address system, provided by one vendor could be pennissibly paid.

The Commission determined that services provided by the remaining five vendors were

permissible Host Committee expenditures. Regarding the telecommunications expenses,

the Commission determined that payments totaling $726..835 for the DNCC"s local and

long distance telephone charges \yere not permissible Host Committee or City expenses

and the amount must be repaid to the US Treasury and itemized as an in-kind

contribution on an amended disclosure report.

I!\-KIND CO~TRIBl·TIO~STO THE HOST (:O\I\lITIEE \'IE\\'ED ..\S ApPARE'T

(:ON\'E!'iTIO~ [XPE~SES- 11 CFR *9008.(b)( 3). 11 CFR *9008. 7( aH4)( ix). Tht: Audit

statTidentified an ""electronic voting system·" contributed by AT&T. \'alued at SI50..000.

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

at S15..000. \\'hich appeared to be items \\'hich should ha\e been paid for by the DNCC.

The Commission determined ho\\'ever. that the use of funds for a voting tabulation

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system was a pennissible Host Committee expense. In addition, based on the ONCC·s

response to the ECM, the Audit ~taff concluded that the credentials management system

was used as a security measure and, as such, did not result in a prohibited in-kind

contribution.

IMPROPER USE OF FUND PAYMENTS- 11 CFR §9008.12(a), (b)(4), and (c). The

DNCC made payments of533,183 to seven vendors for expenses that were not

convention-related. The ONCC received reimbursements totaling $14,131 from four of

the vendors. The amount, ofthe payments to the remaining two vendors, $19..052.. is

repayable to the US Treasury. The ONCe made the repayment on July 24, 1997.

DETERMINATION OF NET OUTSTANDING CONVENTION EXPENSES AND

AMOUNTS SUBJECT TO THE SPENDING LIMITATION- 26 U.S.C. §9008{b)( 1) and (5)~ II

CFR §9008.5(b): 11 CFR §9008.8(a)( I), (b)( 1), (b)(2): 11 CFR §9008.IO(g): 11 CFR

§9008.12(b)(3), (b)(7), (c). The Net Outstanding Convention Expenses amount of

(5676,218) is in contrast to the ONCe"s most recent calculation, prepared October 21 ..

1997, showing unspent funds of550,617. The Audit statrs inclusion of5726,835 in inkind contributions, viewed as subject to the spending limitation, created this situation.

Prior to receipt ofthe ECM, the ONCC made a repayment to the US Treasury in the

amount of5120,562. The Commission detennined that the $120,562 paid to the US

Treasury by the ONCC is a credit against the $726,835 repayment due. The net

repayment due is 5606..273 ($726,835 - 5120..562).

ApPARENT ALLOCABLE CONVENTION-RELATED EXPENSES- During the review

of backl,1J'ound materials, the Audit Staff ide~tified a possible in-kind contribution to the

DNCe. Published reports stated that the Democratic National Committee assumed

$25,000 in hotel bills associated with its Finance Chainnan and the ONCC·s Treasurer.

R. Scott Pastrick"s stay in Chicago during the Democratic National Convention. The

Audit staffrequested documentation such as copies ofthe hotel bills, information

concerning the payment ofthe expenses, a copy of Mr. Pastrick's appointment calendar

during the convention and an explanation of why at least a ponion ofthe expenses \vere

not related to the convention. The DNCe responded that Mr. Pastrick \vas not required

to serve in the role ofTreasurer ofthe DNCe during the convention week. The

requested documentation was not provided.

Page :!
FEDERAL EL[CTION COMMISSION

WASHINCTON, 0 C 20463

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REPORTOF THE AUDITDIVISION

ON THE

1996 DEMOCRATICNATIONAL CONVENTIONCOMMITTEE, INC.

I. BACKGROUND

A. AUDIT AUTHORJTV

This report is based on an audit ofthe 1996 Democratic National

Convention Committee, Inc. (the Committee or DNCC), to detennine whether there has

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

amended (the Act). The audit was conducted pursuant to Section 9OO8(g) ofTitle 26 of

the United States Code which directs the Commission to conduct an examination and

audit ofthe payments for presidential nominating conventions no later than December 31

ofthe calendar year in which the presidential nominating convention is held.

In addition to examining the receipt and use ofFederal funds, the audit

seeks to detennine ifthe Committee has materially complied with the limitations.

prohibitions and disclosure requirements oCthe Federal Election Campaign Act of 1971,

as amended.

B. AUDIT COVERAGE

The audit covered the period from February 6, 1995, the date the

Committee initially deposited funds from the Democratic National Committee (DNe),

through September 30, 1996. In addition, certain financial activity was reviewed through

September 30, 1997, to determine any amounts due to the United States Treasury. The

Committee reported an opening cash balance of5-0·, total receipts of512,380.763. total

disbursements of$9,859,144, and a closing cash balance on September 30, 1996 of

52.521,619.'

c. COMMITTEE ORGANlZAnON

The Committee registered with the Federal Election Commission on June

6. 1995, as a National Convention Committee ofthe Democratic Party. The Treasurers

for the period audited were Roben T. Matsui from June 6, I99S to October 6, 1995, R.

All figures in this report have been rounded to the nearest dollar.

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Scott Pastrick from October 6, 1995 to February S, 1997 and Carol Pensky from February

5, 1997 to the present. During the audit period, the Committee maintained offices in

Washington, D.C. and Chicago, IL. The Committee records are maintained in

Washington, D.C..

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

From these accounts it made approximately 1,958 disbursements. The Committee

received $12,364,000 in federal funds which represents the full entitlement established at

26 U.S.C. §9008(b).

D. AUDIT SCoPE AND PROCEDURES

The Audit ofthe Committee covered the following general categories as

appropriate:

1. The receipt ofcontributions from prohibited sources;

2. the receipt ofcontributions or loans in excess ofthe statutory limitations

(Findings II.A. and B.);

3. proper disclosure ofreceipts including the itemization ofreceipts when

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

disclosed;

4. proper disclosure ofdisbursements including the itemization of

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

the information disclosed;

S. proper disclosure ofCommittee debts and obligations;

6. the accuracy oftotal reported receipts, disbu~ments and cash balances as

compared to Committee bank records;

7. adequate record keeping for transactions;

8. accuracy ofthe Statement ofNet Outstanding Convention Expenses filed

by the Committee to disclose its financial condition (Finding 11.0.);

9. compliance with requirements concerning expenditures for convention

expenses (Finding I1.C.);

10. the Committee's compliance with spending limitations; and,

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

(Finding I1.E.).

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

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

conducted to detennine ifthe auditee's records are materialiy complete and in an

auditable state. Based on the review ofrecords presented, fieJdwork began immediately.

Unless specifically discussed below, no material non-compliance was

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

discussed in this report in an enforcement action.

AUDIT FINDINGS AND RECOMMENDATIONS - AMOUNTS DUE

TO THE U.S. TREASURY

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II.

A. ApPARENT CONVENTION EXPENSES PAID BY THE HOST COMMITTEE

AND CITY OF CHICAGO

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Section 9008(h) ofTitle 26 ofthe United States Codes states, in part, that

the Commission shall have the same authority to require repayments from the national

committee of a political party as it has with respect to repayments from any eligible

candidate under section 9007(b).

Section 9008.3(a)(4)(vii) ofTitle 11 ofthe Code ofFederal Regulations

states, the convention committee shall agree to comply with the applicable requirements

of 2 U.S.C. 431 et seq., 26 U.S.C. 9008, and the Commission's regulations at 11 CFR

Parts 100-116 and 9008.

In addition, Section 104.3(a) ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that each report filed under 104.1, shall disclose the total

amount ofreceipts for the reporting period and for the calendar year and shall disclose the

infonnation set forth at 11 CFR 104.3(a)(I) through (4).

Section 9008.l2(b)(3) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, ifthe Commission determines that contributions accepted to defray

convention expenses which, when added to the amount of payments received, exceeds the

expenditure limitation ofsuch party, it shall notify the national committee ofthe amount

ofthe contributions so accepted, and the national committee shall pay to the Secretary an

amount equal to the amount specified.

Section 9008.12(b)(7) ofTitle 11 ofthe Code ofFederal Regulations

states.. in part, that the Commission may seek a repayment from the convention

comminee ifthe convention comminee knowingly helped.. assisted or participated in

making convention expenditures by the host comminee.. governmental agency or

municipal corporation that are not in accordance with 11 CFR §§9008.S2 or 9008.53.

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Section 9008.S2(c) ofTitle 11 ofthe Code ofFederal Regulations states..

in part, that contributions received by host committees may be used to defray those

expenses incurred for the purpose ofpromoting the suitability ofthe city as a convention

site; to defray those expenses incurred for welcoming the convention attendees to the city,

such as expenses for infonnation booths, receptions, and tours; to defray those expenses

incurred in facilitating commerce, such as providing the convention and attendees with

shopping and entertainment guides and distributing the samples and promotional material

specified under 11 CFR §9008.9(c); to defray the administrative expenses incurred by the

host committee, such as salaries, rent, travel, and liability insurance; and to provide the

national committee use ofan auditorium or convention center and to provide construction

and convention related services for that location such as: construction ofpodiums; press

tables; false floors; camera platfonns; additional seating; lighting; electrical, air

conditioning, and loudspeaker systems; offices; office equipment; and decorations.

Further, contributions may be used to defray the cost ofvarious local

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

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

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

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

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

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

provide other similar convention facilities and services.

Section 9008.7(a)(4) ofTitle 11 ofthe Code ofFederal Regulations states

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

pany"s national committee or convention committee with respect to and for the purpose

of conducting a presidential nominating convention or convention-relate~ activities.

Ua'kerQund

The Audit staffidentified payments made by and contributions to

Chicago"s Committee for '96 (the Host Committee) and payments made by the City of

Chicago (the City) relative to several vendors totaling $2.580.742, which appear to be for

convention-related expenses and not for items noted above at II CFR §9008.52(c). Most

ofthe infonnation pertaining to the vendors was obtained as a result ofour audit ofthe

Host Committee.

On August 4, 1994.. the City ofChicago and the 1996 Democratic National

Convention Committee, Inc. entered into a \\Titten agreement (the Convention Contract

or Contract). One section ofthis agreement provided for the establishment of a host

committee to serve. in pan. as a separate fund to satisfy the financial obligations ofthe

City specified in the Convention Contract, and. for securing cash and in-kind

contributions necessary to obtain goods and services needed for the Convention. The

Host Committee fonnally registered with the FEC on August 16, 1994 as Chicago·s

Committee for ·96.

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

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

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

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

Audit staff's review ofmanagement controls disclosed that the Host Committee's

disbursement records included memoranda which identified expenditures made on behalf

ofthe DNCC and the budget line number to which each expense should be allocated~

The apparent objective ofthese controls was to facilitate managerial reporting and

compliance with the budget. Furthennore, the Host.Committee obtained written

concurrence from the ONCC for all ofthe payments. In accordance with the Convention

Contract, expenses defrayed fell into one oftwo major budgetary classifications,

production expenses or telecommunications costs, as discussed below.

The issue ofthe pennissibility ofthese payments was addressed in Exit

Conference Memoranda (ECM) resulting from the audits of both Chicago '96 and the

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

respond to the Memoranda, and infonnation provided by them is incorporated in the

discussions below.

In response to the respective Exit Conference Memoranda, both the DNCC

and the Chicago's Committee for '96 argued that most or all ofthe expenses discussed

below are covered by one ofthe categories ofpermissible host committee expenses at 11

CFR §9008.S2(c)(1) or, referring to 11 CFR §9008.S2(c)(I}(xi), are "similar" to expenses

covered by one ofthe pennissible expense categories. To read II CFR 9008.S2(c)(I) as

broadly as both committees propose would effectively negate the limitation on

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

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

the prohibition on the use ofcorporate contributions in connection with federal elections

at 2 U.S.C. §44lb; and the Commission's clear statement in the Explanation and

Justificatjon (E&J) supporting the provisions contained in i.l CFR 9008.S2(c)(I) that

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

very narrow exception to the statutory limitation on convention expenses.ttl

1. Production Expenses

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

things, the following production hardware and related services to the ONCC: "a lighting

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

system;'" han audio system (including but not limited to microphones at each delegation

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

the system;" "the broadcast on one ofthe City's cable television stations gavel to gavel

coverage ofthe Convention and special programming directly related to the Convention"

See 44 Fed. Reg. 63.038 (No\'. I. 1979).

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provided that the "station shall make available to the DNCC a tape ofsuch

coverage...without charge for rebroadcast, display, or other rights;" and, "all necessary

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

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

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

be required."

The Audit staff's review ofthe Host Committee's disbursement

records identified payments to six vendors totaling 51,455,407. Furthennore, documenltS

obtained by the Audit staffindicate that the City ofChicago paid an additional 5233,500.3

These payments were apparently made in execution ofthe Contract's provisions related

to production; these expenditures are discussed in detail below.

a. Audiotek Corporation

The Audit staffidentified one disbursement by the Host

Committee to Audiotek Corporation dated August 19, 1996, in the amount of5113,500 as

partial payment against invoice #12542. Host Committee internal memoranda allocated

the payment to budget line item "32-Audio." According to the Host Committee's

contract with Audiotek, the vendor was to provide public address systems, press and

media feed distribution systems, delegate microphone selection systems, and on site

technicians for the convention. A payment of5113,500 by the City against the same

invoice was also identified.

b. Automated Studio Lighting

The Audit staffidentified four payments to Automated

Studio Lighting, totaling S299't016, from July through October 1996. Host Committee

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

"31-Lighting." The remaining disbursement, in the amount ofS48,070, was allocated to

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

supported the Host Committee's expense classifications.

c. Chicago Scenic Studios, Inr.

The Audit staffidentified two payments to Chicago Scenic

Studios, Inc. dwing August and November of 1996, totaling 5615,083. The Audit staffs

review ofHost Committee records disclosed that both disbursements were allocated to

budget line item "19-Production Personnel." Vendor documentation confinned that all

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

3 No audit was performed ofthe City ofChicago; however, we do note that pursuant to

11 CFR §9008.S3(b) expenditures made by a municipality or government agency should also

meet the requirements of 11 CFR §9008.S2(c).

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

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

d. Theatrical Resources, Inc.

The Audit staffidentified one payment in the amount of

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

Committee records disclosed that the disbursement covered payroll for riggers and

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

DNCC and the vendor. The expense was allocated to budget line "19-Production

Personnel." A separate review ofthe convention committee's records disclosed that the

DNCC subsequently paid this vendor a total ofSS9,848 with three additional checks

Mitten during September 1996 and Febnwy 1997.

e. VANCO Lighting Services

The Audit staffidentified one payment in the amount of

$175,000 to VANCO lighting services during July 1996. A review ofHost Committee

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

invoicing described the services provided dwing July and August 1996 as a "rigging

package" and identified the Convention as the "show" to be supported by VANCO.

f. Vari-Lite, Inc.

The Audit staffidentified one payment by the Host

Committee in the amount of5120,000 to Vari-Lite. Inc. during August 1996 as payment

against invoice # 1701/02. A review ofHost Committee records disclosed that the

expense was allocated to budget line "3 I-Lighting." Vendor invoicing identified the

Convention to be the "producer" using automated lighting and technical support provided

during July and August 1996. The Audit staff also reviewed City memoranda asserting

the equipment provided to be "lighting instnunents. border and cyclorama striplights,

follow spotlights, floodlights. special effects lighting, spotlights, etc." for the Convention.

A payment of5120,000 by the City against Van-Lite invoice #1701/01 was also

identified.

In the ECM, the Audit staff concluded that payments to the

vendors described above are not expenses properly paid by the Host Committee or the

City pursuant to 11 CFR §9008.52(c) or §9008.S3(b). Rather, they are convention

expenses that should have been paid by the ONCC pursuant to II CFR §9008.7(a) for

reasons discussed below.

As noted previously, some ofthese disbursements relate to

salaries for electricians and other individuals for labor such as rigging cameras and

lighting. .\Ithough 11 CFR §9008.S2(c) allows a bost com!ninee to defray salaries and

convention related expenses such as construction of camera platforms and lighting. the

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Audit staff believes that the expenses paid by the Host Committee related to rigging

cameras, automated lighting, and audio systems with the stated purpose ofproviding

media feeds or cable broadcasts are not the same as building a platfonn from which

cameras can be used for the television production. Furthermore, the Host Committee

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

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

numerous other disbursements separate from the production expenditures relating to

construction of podiums, platforms and other facilities at the Convention center, the

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

production and broadcasting.

Categories ofpermissible host committee expenses

enumerated at 11 CFR §9008.S2(c)(1) deal with preparing the convention site to host the

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

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

Convention proceedings through press feeds and cable broadcasts. Instead ofmerely

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

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

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

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

seen by the country are clearly costs ofconducting a convention as described at 11 CFR

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

regulations. Consequently, in the ECM, the Audit staff concluded that the total amount

of$I,455,407 paid by the Host Committee and $233,500 paid by the City for production

expenses, result in an in-kind contribution to the DNCC. In addition, the Committee is

required to itemize these in-kind contributions on an amended report.

In the ECM, the Audit staffrecommended-that the

committees provide documentation to demonstrate that the payments described above

were allowable Host Committee and City expenses pursuant to 11 CFR §9008.52(c) and

did not result in prohibited in-kind contributions to the DNCC. Also, for these specific

items, the Committee was to address whether these disbursements would have been

necessary for the convention hall if not for the television production requirements. Ifthe

Committee elected to vie\\' any ofthe aforementioned expenses as allocable in whole or

in part to pennissible activities.. the documentation supporting the Committee's basis for

such allocation was to be presented.

In response to the ECM, the DNCC challenged the Audit

staffs position, stating h ••.it is clear that these expenses were ofa type that the

Commission"s regulations explicitly and specifically provide may be paid for by the Host

Committee or the City.'" The DNCe summarized payments to each vendor, asserting that

h[a]11 ofthe expenses at issue were incurred for lighting or sound equipment used within

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

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

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

within the scope ofthis subsection."

Furthennore, the DNCC asserted in its response that the

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

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

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

extent that sound, lighting, and other electrical was [empha3is in original] needed or used

to facilitate television, radio or cable broadcast ofthe Convention proceedings, the

. expenses ofsuch equipment are manifestly a pennissible expense under section

9008.S2(c)(1)(v)."

The DNCC contended that "[n]othing in the language, prior

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

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

facilitating broadcast or other press coverage ofthe Convention, as distinct from other

expenses ofconstructing and preparing the Convention Hall." The DNCC concluded that

the Audit staffhad "...no basis for such a distinction," adding that there is "no possibility"

that any committee "could have been aware ofany such distinction by reading the

regulations."

Ofspecial interest was a section ofthe DNCC's response

providing details regarding the $113,500 Host Committee payment to Audiotek

Corporation. According to the DNCe, services provided by this vendor comprised

h •••public address systems, wiring and speakers so that people in all parts ofthe Hall

could hear the proceedings while they were taking place, delegate microphone systems, a

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

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

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

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

essentially similar to "loudspeaker systems," and therefore pennissible under 11 CFR

§9008.52(c)(1 lev).

Regarding the remaining five vendors, however, other

statements in the ONCC's response confinn that at least some portion ofthe payments

were used to facilitate television, radio or cable broadcast ofthe Convention proceedings.

Furthennore, other than Audiotek, the responses from both the ONCC and Chicago '96

failed to offer any new documentation or basis for allocation which identify those pans of

the expenses that would have been required even ifthe Convention had never been

broadcast, as recommended in the ECM. The Audit staff believes that the regulations..

together with the explanatory material published in the Federal Register, fonn a

reasonable basis for its position, and therefore concludes that Chicago '96 and the City of

Chicago made prohibited in-kind contributions to the DNCC in the amount of $1,461,907

($1.688..907-$227,000).

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On April 23, 1998 the Commission, during its

consideration ofthe audit report on the 1996 Committee on Arrangements for the

Republican National Convention, voted that the use offunds, for such services as

provided by the remaining five vendors discussed above, is a pennissible host committee

expense.

2. Telecommunications

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

Regulations states that 44Convention Expenses" include all expenses incurred by or on

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

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

conducting the convention, including stationery, office supplies, office machines, and

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

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

convention and not utilized primarily for the convention.

As mentioned above, 11 CFR §9008.52(c) pennits host committees

to provide the national committee use ofa convention center and convention-related

services for that location such as offices and office equipment. In addition, an

explanation ofthe regulatory intent behind 11 CFR §9008.52(c), printed in the Federal

Register (Vol. 59, No. 124, Page 33614), states, in part, that the revised rules do not

permit host committees or municipalities to pay the convention committee's or the

national pany"s overhead and administrative expenses related to the convention.4

Pursuant to the Convention Contract, the City agreed: to provide

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

phone system; and.. to pay for all long distance service charges incurred by the ONCC at

the Convention facilities. The Audit staffs review ofdisbursements disclosed that the

Host Committee and City made substantial payments on behalfofthe ONCC for

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

office equipment, and therefore are pennissible host committee expenses pursuant to

)) CFR §9008.52(c)(1 )(v), the following discussion focuses on telephone service

charges.

According to Host Committee records, payments totaling $600,325

were made to defray local and long distance telephone service charges. Furthennore,

documents obtained by the Audit staff indicate that the City ofChicago paid an additional

$) 26.5 1O.~ These payments were apparently made in execution ofthe Contract's

provisions related to telecommunications and are discussed in more detail belo"'.

.. See S9 Fed. Reg. 33.614 (June 29. 1994).

See Foomote 3.

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a. Ameritech

In the Exit Conference Memorandum (ECM).. the Audit

staffidentified 10 payments to Ameritech, which net ofrefunds to the Host Committee

from the vendor, totaled 5512,637. In addition, payments by the City totaling 5105,621

were identified. A review ofthe invoices disclosed that all ofthe billings were local

telephone service charges for Convention telephone numbers or accounts apparently

assigned to the ONCC. Furthermore, internal Host Committee memoranda attributed all

ofthe expenses to the DNCC.

b. AT&T

The Audit staffidentified 15 payments by the Host

Committee to AT&T, totaling 587,688. A review ofthe invoices disclosed that all ofthe

billings were long distance telephone service charges for Convention telephone numbers

or accounts apparently assigned to the ONCC. Furthermore, internal Host Committee

memoranda attributed all ofthe expenses to the ONCC. Payments by the City totaling

$20,889 to AT&T were also identified.

In the ECM, the Audit staff concluded that service charges

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

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

or promotion ofthe City ofChicago. Therefore, the 5600.325 paid by the Host

Committee and $126,510 paid by the City for telephone service charges, result in in-kind

contributions to the ONCC. The Audit staff also recommended that the Committee

provide documentation to demonstrate that the payments for telephone service charges

were allowable Host Committee or City expenses pursuant to 11 CFR §9008.52(c) and

did not result in prohibited in-kind contributions to the DNCC.

In its response, the ONCC argued that "by any reasonable

reading, the regulation on its face [emphasis in original] authorizes the host committee to

pay for the costs oftelephone service for the Convention." In the ONCe's opinion.. 406[t]o

say that the costs ofoffice telephones are not an overhead or administrative expense but

that the costs of using the telephones are such an expense is to draw a distinction that no

reasonable reading ofthe plain language ofthe regulation would support." The DNCe

then criticized the Ulanguage ofthe E.;pIqnqtion and Justification (E&J)," declaring that it

should "not be given precedence over the plain language ofthe regulation," and that "the

E&J language is itself ambiguous"'·

The Host Committee took a different approach in its

response, stating that the telecommunications systems '·existcd for the benefit of

Chicago '96" and that without having provided these services, it would have been

impossible for the Committee to fulfill its obligations under the Convention Contract.

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The Host Committee asserted that the ~'telecommunications system served to accomplish

a wide variety oftasks directly related to the Convention" including construction as well

as security. The Host Committee concluded that expenditures for the phone charges "fall

within the parameters of II C.F.R. Section 9008.52(c)," and therefore, it was appropriate

to pay for them.

Despite the arguments presented above, the Audit staff

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

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

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

administrative and overhead expenses ofthe convention committee and not construction

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

$600,325 paid by the Host Committee and $126,510 paid by the City for telephone

charges, result in in-kind contributions to the DNCC.

RecommegdatioD ##1

The Audit staffrecommends that the Commission detennine that the Host

Committe~ made in-kind contributions totaling S600,325, and the City ofChicago made

an in-kind contribution ofSI26,510, and that this total of$726,835 is repayable to the

United States Treasury. In addition, the Committee should file an amended disclosure

report and itemize these in-kind contributions.

B. IN-KIND CONTRIBUTION TO THE HOST COMMITTEE VIEWED AS

ApPARENT CONVENTION EXPENSES

Section 9008.12(b)(3) ofTitle 11 ofthe Code ofFederal.Regulations

states that ifthe Commission determines that the national committee accepted

contributions to defray convention expenses which, when added to the amount of

payments received, exceeds the expenditure limitation ofsuch party, it shall notify the

national committee ofthe amount ofthe contributions so ac~ci'ted., and the national

committee shall pay to the Secretary an amount equal to the amount specified.

In the Convention Contrac~ the City agreed, in part. to provide the DNCC

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

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

donor records, the Audit staffidentified in-kind contributions from two vendors totaling

$165.,000. In the ECM, the Audit staffstated that contributed equipment appears to have

been used for convention-related purposes pursuant to tenns ofthe Contract and not for

items noted above at 11 CFR §9008.52(c)() as discussed below.

1. AT&T

During a review ofthe Host Committee's donor records, the Audit

staffidentified an in-kind contribution from AT&T of an "'electronic voting system"

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valued at $150,000 by the vendor which appears to have been used for convention-related

purposes and not for items noted above at II CFR §9008.52(c)(I). The donated voting

system fulfilled Convention budget line number "70-Electronic Voting."

The Host Committee asserted that the electronic voting system

"enabled state delegations to have interactive contact with leadership and other personnel

on the convention podium itself:" Accordmg to the Host Committee, the voting system

was used in the United Center as a part ofthe actual convention services in accordance

with the Convention Contract. A Democratic National Convention press release issued

. dwing November, 1995 confmned that AT&T was designated as an official technology

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

Convention floor.

In the ECM, the Audit stafffound that the donation ofa voting

system provided the DNCC with the same benefit as ifthe Host Committee had paid a

convention expense, and therefore was an impennissible use ofHost Committee

resources. Categories ofpennissible uses for contributions to host committees

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

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

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

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

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

concluded that use ofthe voting system, valued at $150,000, resulted in a prohibited

in-kind contribution to the DNCC. The Audit staff also recommended in the ECM that

the Committee provide documentation to demonstrate that the electronic voting system

was put to permissible uses pursuant to 11 CFR §9008.S2(c) and did not result in

prohibited in-kind contributions to the DNCC.

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

DNCC verified that "(t)he electronic system used to count the votes ofdelegates at the

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

convention." Later, in its response to the ECM, the DNCe pointed out that 11 CFR

§§9008.S2(c)(I)(v) and (vi) pennit the host committee to pay for office equipment in the

convention hall as well as similar convention-related facilities and services. According to

the ONCC, "[t]here is no logical difference between telephone receivers used to

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

thing." The DNCC found it "difficult to imagine a 'facility' more 'related' to the

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

Audit staffs position on the grounds that "[t]o say that a voting system is an

·enhancement to political operations" contributes nothing to any analysis of pennissibilit)'

ofthis expenditure, since vinually every expenditure...specifl=aJly allowed by section

9008.52(c)(1 )(v) could be said to "enhance' political operations."

In response to the ECM, the Host Committee described its

obligation to provide a delegate voting system under the Convention Contract as part of

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the "actual convention services." The Host Committee disagrees that the voting system·s

furtherance ofa partisan party function would prohibit its use by the DNCC. arguing that

"because a convention naturally must serve one party or another, it is implicitly

understood that the convention itselfis partisan while a host committee remains

nonpartisan." Also, the 'Host Committee stated its understanding that "similar Voting

Systems have been donated for past conventions and no regulatory problems have been

raised." As a result, the Host Committee concluded that the delegate voting system ufalls

squarely within the parameters of 11 C.F.R. Section 9008.S2(c)."

The responses discussed above do not demonstrate that the in-kind

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

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

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

resulted in a prohibited in-kind contribution to the DNCC. On January 22, 1998" the

Commission, during its consideration ofthe audit report on the San Diego Host

Committee/Sail to Victory San Diego '96, voted that the use offunds for a voting

tabulation system was a pennissible host committee expense.

2. Polaroid COQ)oration

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

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

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

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

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

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

Polaroid Corporation of a ucredentials management system" assigned a value ofS15,000

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

a text and image database of all DNCC and host committee employees. Included in the

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

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

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

credential color, to different sections ofthe convention facility.

The Audit staff concluded that the donation ofthe credentials

management system provided the DNCe with the same benefit as ifthe Host Committee

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

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

Committee apparently made a prohibited in-kind contribution of$15,000 to the ONCC.

•~Iso. it was recommended in the ECM that the Committee provide documentation to

demonstrate that the credentials management system was put to pennissible uses pursuant

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

ONCC.

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In its response to the ECM, the Host Committee disagreed that the

use ofthe credentials management system was not in compliance with 11 CFR

9008.S2(c). The Host Committee asserts that the system "related directly to the security

services necessary to ensure safety and orderly conduct for the convention staff and

participants," and therefore came under provision which allow host committees to defray

the costs oflaw enforcement services necessary to ensure orderly conventions.

According to the Host Committee, the system "provided photo identification passes for a

variety ofpersonnel working at the 320 North Clark location (which housed both

. Chicago '96 and the DNCC, as well as numerous other city and state offices and

courtrooms) as well as at the United Center," the site ofthe convention. The ONCC's

response addressed this issue in a similar manner.

In order to clarify representations made above, the Audit staff

contacted both committees. Statements made by representatives ofthe ONCC and the

Host Committee, along with documents contained in the audit workpapers, corroborate

that the credentials management system generated identification cards which were used

exclusively as a security measure for employees of both cOJmllittees to gain access to the

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

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

credentials management system assisted the ONCC in managing the movement of

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

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

scope of 11 CFR §9008.52(c)(I)(vii) and did not result in a prohibited in-kind

contribution to the ONCC.

c. IMPROPER USE OF FUND PA\'MENTS

Section 9008.12(a) ofTitle 11 ofthe Code ofFederal Regulations

states.. in relevant part, that a national committee that has re\:eived payments from the

Fund under 11 CFR Pan 9008 shall pay the United States Treasury any amounts which

the Commission determines to be repayable under this section. The Commission will

notify the committee of any repayment determinations made under this section as soon as

possible, but not later than 3 years after the last day ofthe Presidential nominating

convention. The Commission"s issuance of an audit report to the committee will

constitute notification for purposes ofthe three year period.

Section 9008.12(b)(4) states, in relevant part, that ifthe Commission

detennines that any amount of any payment to the national committee or convention

committee under 11 CFR 9008.6(b) was used for any purposes other than the purposes

authorized at 11 CFR 9008.7.. it shall notify the national committee ofthe amount

improperly used and the national comminee shall pay to the Secretary an amount equal to

the amount specified.

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Section 9008.l2(c) ofTitle 11 ofthe Code ofFederal Regulations states

the Conuraission will follow the same repayment determination procedures, and the

committee has the same rights and obligations as are provided for repayment

detenninations involving publicly funded candidates under 11 CFR 9007.2(c) through

(h).

During our review ofthe DNCC's disbursements, we identified payments.

totaling $33,183, to seven vendors for expenses which did not appear to be conventionrelated. In the case offour vendors, the payments ($14,131) defrayed the travel expenses

of non-DNCC staffor represented overpayments ofDNCC convention-related expenses.

The DNCC sought and received reimbursements in each instance; therefore, no

repayment is necessary.

As to the remainder, ($19,052), these payment~ involved (a)

reimbursements to two vendors for lost telecommunications equipment, $15,902, and (b)

airline tickets purchased for which no convention-related purpose could be shown,

$3,150. On July 24, 1997 a check drawn on an account ofthe Democratic National

Committee and payable to the United States Treasury was received, representing a

repayment of$19,052 pursuant to 11 CFR §9008.I2(b)(4).

In response to the ECM, the Committee slated that the recommended

repayment has been made.

RecommendatioD ##2

The Audit staffrecommends that the Commission detennine that the total amount

of $19,,052 is repayable to the United States Treasury. As noted above" the repayment has

already been made. .

D. DETEIUUNATION OF NET OUTSTANDING CONVENTION EXPENSES AND

AMOUNTS SUBJECT TO THE SPENDING LIMITATION

Sections 9008(b)(I) and (5) ofTitle 26 ofthe United States Codes state, in

relevant part, that the national committee of a major pany shall be entitled to payments

under paragraph (3), with respect to any presidential nominating convention, in amounts

\\'hich'J in the aggregate, shall not exceed $4,000.000, as adjusted pursuant to the

provisions of 2 U.S.C. §441a(c).

Section 9008.S(b) ofTitle 11 ofthe Code ofFederal Regulations. states

that the entitlements established by 11 CFR 9008.4 shall be adjusted so as not to exceed

the difference between the expenditure limitations of 11 CFR 9008.8(a) and the amount

of private contributions received under 11 CFR 9008.6(a) by dIe national committee of a

political pany. Except as provided in 11 CFR 9008.12(b)(1), in calculating these

adjustments. amounts expended by Government and municipal corporations in

accordance with 11 CFR 9008.53. in-kind donations by businesses to the national

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committee or convention committee in accordance with 11 CFR 9008.9; expenditures by

host committees in accordance with 11 CFR 9008.52; expenditures to participate in or

attend the convention under 11 CFR 9008.8(b)(2); and legal and accounting services

rendered in accordance with 11 CFR 9008.8(b)(4) will not be considered private

contributions or expenditures counting against the limitation.

Section 9OO8.8(a)(I) ofTitle 11 ofthe Code ofFederal Regulations states,

in part, that the national party committee ofa major party may not incur convention

expenses with respect to a Presidential nominating convention which9 in the aggregate,

exceed the amount to which such committee is entitled under 11 CFR 9008.4 and 9008.5.

Section 9008.8(b)(t) ofTitle 11 ofthe Code ofFederal Regulations states

that expenditures made by the Host Committee shall not be considered expenditures by

the national committee and shall not count against the expenditure limitations ofthis

section provided the funds are spent in accordance with 11 CFR 9008.52.

In additio~ 11 CFR §9008.8(b)(2) states that expenditures made by

government agencies and municipal corporations shall not be considered expenditures by

the national committee and shall not count against the expenditure limitations ofthis

section ifthe funds are spent in accordance with the requirements of 11 CFR 9008.53.

Section 9008.1O(g) ofTitle 11 ofthe Code ofFederal Regulations states,

in part, that a convention committee shall file, no later than sixty days after the last day of

the convention, a statement ofthat committee's net outstanding convention expenses. A

revised statement shall be filed no later than 30 calendar days after the end ofthe ninth

month following the last day ofthe conventioo9 and shall be accompanied by the interim

repayment, ifrequired under II CFR 9008.12(b)(S)(ii).

Section 9008.12(b)(3) ofTitle 11 ofthe Code ofFederal Regulations

states that ifthe Commission detennines that the national committee accepted

contributions to defray convention expenses which, when aqded to the amount of

payments received, exceeds the expenditure limitation ofsuch party, it shall notify the

national committee ofthe amount ofthe contributions so accepted, and the national

committee shall pay to the Secretary an amount equal to the amount specified.

Section 9008.12(b)(7) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, that the Commission may seek a repayment from the convention

committee ifthe convention committee knowingly helped, assisted or participated in

making convention expenditures by the host committee, governmental agency or

municipal corporation that are not in accordance with 11 CFR §§9008.52 or 9008.53.

Section 9008.12(c) ofTitle 11 ofthe Code of Federal Regulations states

that the Commission will follow the same repayment determination procedures, and the

committee has the same rights and obligations as are provided for repayment

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determinations involving publicly funded candidates WIder 11 CFR 9007.2(c) through

(h).

The 1996 Democratic Convention ended on August 29, 1996. The ONCe

filed its initial Statement ofNet Outstandina Convention Expenses(NOCE), as of

October 13, 1996, on October 29, 1996. A revised NOCE, also as ofOctober 13. 1996,

was filed on October 21, 1997. The Audit staffreviewed the DNCC's financial activity

through September 30, 1997, analyzed winding down costs, and prepared the figures

shown below.

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STATEMENTOF NETOUTSTANDING CONVEN110N EXPENSES

As ofOctober 13, 1996

As Determined at 10121197

ASSETS

Cash on Hand SI,649,981

Accounts Receivable: 295,030

Capital Assets 0

Total Assets SI.945.011

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• OBUGA:DONS 0

7 Accounts Payable for Comeention 51,855,019 •

0 Expenses

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5 In-kind Contributions 726,835 (a)

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2 Winding Down Costs 3 I0/01/97 and later: Estimated 39,375 (b) 1

3 Total Obligations 52,621.229

NETOUTSTANDING C0NVEN110N EXPENSES (S676.218)

FOOTNOTES TO NOCE

(al This is the ImOUDl from Findila 1I.A.2.• previously discussed mthis report.

(b) IncWeslppl'Oximllely $6.600 mreported wildial down costs pUS 10I22J9I.31311981nd estmaled windm, down

costs of8ppI'Oximllely $33.000. The Audc sWT will review the CommGee's disclosure reportS -.d records 10

CompII'C the ICtuai flJUfCS wih the estinalcd flJUl'CS Ind prcpII'C Idjusuncnts • necesgoy.

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The NOCE as calculated by the Audit staffshows a deficit of$676.218 which is

in contrast to the DNCC's most recent calculation, prepared October 21, 1997, showing

unspent funds ofS50,617. The Audit staff's inclusion ofS726,835 in in-kind

contributions, viewed as subject to the spending limitation, created this situation.

Prior to receipt ofthe ECM, the DNCe made a repayment to the u.s. Treasury in

the amount of5120,562, representing its calculation ofan interim repayment of unspent

funds pursuant to 11 CFR 9008.l2(b)(5)(ii). Since the repayment was made, the DNCe

identified an additional 569,9456 in convention expenses, thus explaining the 550,617 in

unspent funds shown on its October 21, 1997 statement (5120,562 - 569,945 =550,617).

Since the value ($726,835) ofin-kind contributions received from the flost

Committee and the Ci~ is repayable to the U.S. Treasury (see Recommendation #1 at

page 12), the $120,562 already paid to the U.S.Treasury is viewed as a credit against the

amount due.

RecommendatioD ##3

It is recommended that the Commission determine that the 5120,562 paid to the

U.S. Treasury by the DNCC be considered a credit against the 5726,835 repayment due

related to the acceptance ofin-kind contributions discussed at Finding II.A.2. The net

repayment due is $606,273 ($726,835 - 5120,562).

E. ApPARENT ALLOCABLE CONVENTION-RELATED EXPENSES

During our review of background materials related to the convention, we

identified a possible in-kind contribution to the ONCC. According to published reports,·

the Democratic National Committee was assuming about 525,000 in hotel bills incurred

at the Chicago convention in August, 1996, "partly because of concerns that a donor who

originally paid the bill might have used foreign funds, according to sources." The hotel

bill reportedly covered costs associated with Democratic National Committee finance

chainnan Rosen's stay in the presidential suite at Chicago's Four Seasons, R. Scott

Pastrick's stay in a smallersuite, and two additional rooms.

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The ONCC identified additional accounts receivable of511 ,986 and additional accounts payable

ofS81 ,931 which resulted in a net increase in convention expe~ of569,945.

The ONCC may, at its option, submit a written request to the Commission requesting that funds

previously refunded to the U.S. Treasury be cenified for payment of convention expenses

(I! CFR §9008.12(bX5)(ii). Ifsuch a request was made and if approved by the Commission. the

net repayment due of5606.273 would increase by an amount equal to the amount cenified to the

ONCC for payment of convention expenses.

The Washington Post, Dec. J2. J996, p.A28; and Jan. 8, J997, p. AJ4.

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Mr. Pastrick served as treasurer ofthe ONCC from October 5" 1995 to

January 20, 1997, and also served as treasurer ofthe DNC Services Corporation!

Democratic National Committee, Democratic Unity Fund, and six other committees

registered with the Commission, according to the FEC Disclosure Data Base for the 95-

96 cycle. The DNCC did not defray the cost ofMr. Pastrick"s hotel expenses during

convention week. During fieldwork, the Audit staffrequested copies ofthe hotel bill and

related expenses and infonnation concemiIig the payment ofthese expenses. Also

requested was infonnation as to why no portion ofthese expenses relate to the

convention, even though Mr. Pastrick and Mr. Rosen were both present during

. convention week and met with persons attending the convention.

The DNCC responded by stating that "during the week ofthe convention,

Mr. Pastrick's sole function, other than a five minute speech at the Monday Convention

session, was to serve in a fundraising capacity for the DNC [Democratic National

Committee]." The DNCC went on to explain that there was no point during the week of

the convention where Mr. Pastrick was required to serve in the role oftreasurer ofthe

DNCC. A copy ofMr. Pastrick's remarks ofAugust 26th 'was provided. He was

introduced as "Treasurer ofthe Democratic National Committee." In his remarks.. Mr.

Pastrick made references to Party finances, campaign fmance reform, and the November

general election. Infonnation relating to the hotel expenses and payment thereofwas not

provided.

In the Audit staffs opinion" the expenses associated with Mr. Pastrick"s

suite during convention week would seem, at least in part, allocable to the DNCC.. as

would the two additional rooms, given his position and responsibilities as the ONCe

treasurer.

In the ECM, the Audit staffrequested that the ONCC provide support for

its POSItion. The documentation was to include (a) copies ofthe hotel bill and related

expenses for Mr. Pastrick's suite and the two additional rooms, (b) information

concerning the payment ofthese expenses, (c) a copy ofMr. Pastrick's appointment

calendar or other written record of his activities during convention week, and (d) any

additional infonnation the DNCC believes is relevant in support ofits current position.

In its response to the ECM, the ONCC did not submit any ofthe

documentation requested in the ECM in support ofits position. The ONCC did reiterate

the points discussed above and further stated:

[I]t is fundamental to the Convention financjng system that the

costs of national pany fundraising at the Convention should nw be paid

for with public Convention grant. 11 CFR §9008.7(a)(4)(viii)(B). Thus. it

is clear that no part of Mr. Pastrick"s expenses should have been allocated

to the ONCC." The Audit Division's insistence that part ofthe expenses

of a Party official to attend the Convention should be charged to the public

The Audit Division·s position" were the Commission to uphold it.. would

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be an open invitation for future abuse-an invitation to national party

committees to slough offpart oftheir fundraising costs on the taxpayers.

That is exactly what the Commission should be discouraging, not

encouraging. The Audit staff's hunt for further documentation, proofof

Mr. Pastrick's activities dming the Convention, etc.., is pointless and

counterproductive. His expenses were properly paid for by the DNe.

Given the lack ofdocumentation provided in response to the request

contained in the ECM, the Audit staff's position is unchanged.

F. SUMMARY OF AMOUNT DUE TO THE U.S. TREASURY

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Finding IJ.A.2.

Finding II.C.

Subtotal

Amounts paid to date:

Net Amount Due

In-Kind ContributionTelecommunications

Improper Use ofFunds

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$ 726,835

$ 19052

$ 745,887

(519,052)

($120562)

$ 606273
FEDERAL ELECTION COMMISSION

WASHINCTO~. 0 C 20463

March 17, 1998

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MEMORANDUM

TO: Robert J. Costa

Assistant S tor

Audit Di~~i, .~

THROUGH: John C. . a' ,-

StaffDi~

FROM: Lawrence. Noble //

General C6unsel r

Kim L..B~ght-Coleman \~ Associate General Co~~l i ,

Rhon4a J. Vosdingh .~~J

Assistant General Counsel

Delbert K. Rigsby C~~ Attorney

SUBJECT: Proposed Audit Report on the Democratic National Convention Committee, Inc.

(LRA #471)

1. INTRODUCTION

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

Democratic National Convention Committee, Inc. (the "Convention Committee"), which \\'as

submitted to this Office on January 7, 1998.I This memorandum summarizes our comments on

the proposed Audit Report.2 Some ofthe issues discussed in the proposed Audit Report and

herein overlap with issues in the proposed Audit Report on the Chicago Committee '96 (the

Comments from this Office are due on March 4, 1998.

Since the proposed Audit Report concernsthe audit of a convention comminee. this Office recommends

that the Commission consider this document in open session in accordance with 11 C.F.R. §§ 9008.11. 9007.l(e)( 1)

and 9038.1(e)( I).

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Mem~dwmto~J.CO~

Proposed Audit Repon on Democratic National Convention Comminee, Inc:.

LRA #471

Page 2

"Host Committee,,).3 Many issues discussed herein also overlap with this Office's comments on

the Audit Report for the Committee on Arrangements for the Republican National Convention,

which were submitted to the Audit Division on November 19, 1997. This Office concurs with the

findings in the proposed Audit Report that are not discussed separately in this memorandum. If

you have any questions, please contact Delbert K. Rigsby, the attorney assigned to this review.

D. APPARENT CONVENTION EXPENSES PAID BY THE HOST COMMfITEE

AND CITY OF CHICAGO (ll.A)4

The proposed Report states that the Host Committee's and the City ofChicago's

payments to vendors for television production and telecommunications were impennissible

expenses. Those impermissible expenses may have resulted in apparent prohibited in-kind

contributions to the Convention Committee. In regard to the television production expenses, the

proposed Report states that the Host Committee apparently made in-kind contributions of

SI,341,907 and the City ofChicago apparently made in-kind contributions ofS120,000 to the

Convention Committee. The proposed Report concludes that such television production expenses

appear to be in-kind contributions to the Convention Committee because they are not permissible

host committee expenditures listed in 11 C.F.R. § 9008.52(c), and were not used to promote the

city and prepare the convention site for the convention.

Host Committee expenditures that are made in accordance with 11 C.F.R. § 9008.52 shall

not be considered convention committee expenditures and shall not count against the convention

committee's expenditure limit. 11 C.F.R. § 9008.8(b)(1). Moreover, host committee

expenditures that are not permitted by 11 C.F.R. § 9008.52 may be considered convention

committee expenditures and shall be subject to the expenditure limitation in 11 C.F.R.

§ 9008.8(a)(I). The Commission may seek a repayment from the convention·committee ifthe

convention committee knowingly helped, assisted or participated in making convention

expenditures by the host committee, governmental agency or municipal corporation that are not in

accordance with 11 C.F.R. §§ 9008.52 or 9008.53. 11 C.F.R. § 9008. 12(b)(7).' Because

11 C.F.R. § 9008. 12(b)(7) is an applicable regulation to this audit, the proposed Report should

include a discussion ofthis regulation with the discussion ofthe other applicable regulations.

This Office concurs with the proposed Report's conclusion that the television production

expenditures appear to be impermissible host committee expenses, which may have resulted in

apparent prohibited in-kind contributions to the Convention Committee. The proposed Audit

The proposed Audit Rcpon for the Host Comminee was submined to this Office on December 29,1997

and comments on that Repon were submined to the Audit Di\'ision on February 23, 1998.

Parenthetical references are to the rela'ant section ofthe proposed Audit Repon.

The Explanation and Justification for 11 C.F.R § 9008.12(b){7) states that strict and \icarious liabiht)'

\\ill not be imposed on con\'ention committees for actions taken ~. cJlies or host committees. but convention

committees \\il1 be held accountable for actions of cities or host committees In\'olving impermissible aeti\'lues In

\\hich they knOWingly helped or panicipated. ~9 Fed. Reg 33613 (June 29, 1994).

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Memorandum to Raben J. Costa

Proposed Audit Repon on Democratic National Convention Committee, Inc.

LRA #U71

Page 3

Report interprets 11 C.F.R. § 9008.52 narrowly in concluding that the television production

expenses were impennissible host committee expenditures. The proposed Report concluded that

most ofthe television production expenses were for lighting and personnel costs for the television

production and broadcasting ofthe convention and not for infrastructure costs to prepare the

convention site to host the convention. Infrastructure costs are deemed to be permissible host

committee expenses under 11 C.F.R. § 9008.52 because such costs are necessary to prepare the

convention site for the convention. Production personnel costs are deemed impermissible

expenses. The proposed Report notes that the Audit staffrequested, in the Exit Conference

Memorandum, that the Convention Committee submit additional documentation to demonstrate

that the payments were allowable Host Committee expenses, but the Convention Committee did

not provide such documentation.6

In regard to telecommunications expenses, the proposed Audit Report concludes that the

Host Committee appears to have made impermissible host committee expenses totaling $600,325

for local and long distance telephone charges, which may have resulted in apparent prohibited inkind contributions to the Convention Committee. Additionally, the City ofChicago appears to

have made impermissible expenses totaling 5126,510 for local and long distance telephone

charges, which may have resulted in apparent prohibited in-kind contributions to the Convention

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

administrative and overhead expenses ofthe Convention Committee and not construction or

security expenses benefiting the Host Committee. To support its conclusion that the telephone

charges are overhead expenses, the proposed Report cites the Explanation and Justification for

11 C.F.R. § 9008. 52(c), which states that the regulation "does not permit host committees .... to

pay the convention committee's or the national party's overhead and administrative expenses

related to the convention."

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

be impermissible host committee expenses, which may have resulted in apparent prohibited inkind contributions to the Convention Committee. However, this Office believes that this section

ofthe proposed Report should also discuss 11 C.F.R. § 9008.7(a)(4), which defines convention

expenses that are permitted to be paid with public funds received by the convention committee.

Administrative and office expenses, specifically telephone charges, are listed as such types of

expenses. 11 C.F.R. § 9008.7(a)(4)(x).

Additionally, this Office believes that the proposed Report should contain further

discussion regarding the contract between the City ofChicago and the Convention Committee,

which obligated the city to pay for many expenditures ofthe convention, such as the television

production expenses and the telecommunications expenses. The Host Committee was established

pursuant to this contract to meet the financial obligations ofthe city in hosting the convention

This contract provides evidence that the Convention Committee knowingly participated in the

6 The Host Committee onl)' submitted additional documentation regarding Audiolek. one of the vendors

After re"ie\\;ng the additional documentation. the audit staff concluded that the payment 10 Audiotek was a

pcrnussible host committee expense because the equipment prOVIded was essenually a loudspeaker system

Pag~ 27
Memorandum to Roben J. Costa

Proposed Audit Repon on Democratic: National Convention Comminee. Inc.

LRA*4'1

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Host Committee's spending on activities not listed in 11 C.F.R. § 9008.52. Additionally, for most

convention expenditures, the Host Committee prepared a form letter listing the vendor, budget

line item and amount ofthe expenditure and requested the Convention Committee to sign the

letter acknowledging and approving such Host Committee expenditures. Those letters also

provide evidence that the Convention Committee knowingly participated in the Host Committee's

expenditure offunds on activities that were not set forth in 11 C.F.R. § 9008.52.

m. IN-KIND CONTRIBUTION TO THE HOST COMMI1TEE VIEWED AS

7 APPARENT CONVENTION EXPENSES (lLB)

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

the Host Committee should be considered an apparent prohibited in-kind contribution to the

Convention Committee in the amount of5150,000 because it is not an expense listed within

11 C.F.R. § 9008.52, and was not used to promote the city or prepare the convention site for the

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

stated that this service was a core part ofthe physical systems needed to run the convention. The

Convention Committee also argued that the voting system is closely related to office equipment,

which is a permissible host committee expense under 11 C.F.R. § 9008.52(c)(v). The proposed

Report should explain that 11 C.F.R. § 9008.12 (b)(3) provides that ifthe national committee

accepts contributions to defray convention expenses which, when added to the amount of

payments received, exceeds the expenditure limitation, the Commission will notify the committee

ofthe amount ofthose contributions and the national committee shall pay such amount to the

U.S. Treasury.

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

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

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

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

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

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

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

to specify the amount offunds ($44,067) that were spent solely on the voting system even though

it was a pan ofa larger computer system. The Audit staffconcluded that the expense of$44,067

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

1998, the Commission voted to allow 544,067 spent on the voting tabulation system as a

permissible host committee expense.

The documentation provided by the Convention Committee indicates that the sole purpose

ofthe electronic voting system was to tabulate votes Ifthe electronic voting system was a

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

was an impermissible host committee expense However, to be consistent with the Commission's

decision regarding the electronic voting system in the San Diego Host Committee Audit Report,

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

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Memorandum to Raben J. Costa

Proposed Audit Rcpon on Democratic National Convention Committee. Inc.

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voting system appears to be a permissible host committee expense and does not result in a

prohibited in-kind contribution to the Convention Committee.

IV. DETERMINAnON OF NET OUTSTANDING CONVENTION EXPENSES AND

AMOUNTS SUBJECT TO THE SPENDING LIMITATION (D.D)

. The proposed Repon states that there are additional convention expenses 0($69,945 that

have been identified since the Convention Committee made a 5120,562 interim repayment to the

United States Treasury as required by 11 C.F.R. § 9008. 12(b)(5). The proposed Repon

recommends that the interim repayment of$120,562 by the Convention Committee be classified

as an asset to the Convention Committee and the Democratic National Committee be permitted to

purchase this asset. Thereafter, the Convention Committee would use the funds to pay additional

convention expenses and the remaining amount would be required to be credited against the

balance ofthe in-kind contributions (i.e., paid to vendors who provided apparent in-kind

contri~utions to the Convention Committee).

This Office does not agree with this recommendation. There are no Commission

regulations that would pennit the Commission to require the Convention Committee to follow the

approach to the interim repayment suggested in the proposed Report. The Commission cannot

require the Democratic National Committee to purchase such asset, and it is speculative that the

Convention Committee would adopt this course of action. In its response to the Exit Conference

Memorandum, the Convention Committee disputes the Audit Division's conclusion regarding the

apparent in-kind contributions and would most likely oppose this recommendation. Ifthe

Convention Committee refuses to adopt this approach to the interim repayment, the Commission

would not have a legal basis for requiring the Convention Committee to follow this procedure.

This Office recommends that this section ofthe proposed Report be revised to state that

the Commission's regulation that relates to an interim repayment provides that iffunds previously

refunded to the U.S. Treasury by a convention committee are needed to defray additional

convention expenses, a convention committee may submit a written request to the Commission

requesting that funds previously refunded be certified for payment ofconvention expenses.

11 C.F.R. § 9008. 12(b)(S)(ii). Upon such request, the Commission could certify $69,945, the

amount of additional convention expenses that the Audit Division has verified the Convention

Committee owes, to be refunded to the Convention Committee.7 According to the Convention

Committee's version ofthe Net Outstanding Committee Expenses (NOCE) statement, the

Convention Committee would then have a surplus of5S0,617. This surplus could be applied

toward reducing the amount ofin-kind contributions and consequently, reduce the Democratic

National Committee's repayment for apparent in-kind contributions by the Host Committee to the

Convention Committee. The Commission, however, could deny the Committee's request for

cenification to pay convention expenses from funds previously refunded and thus, the entire

interim repayment of $120,562 could be used to offset the amount of apparent in-kind

The Commission ma~' den~' such a request by the Democratic National Convention Committee after

rCVie\\lng the Information it submits.

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contnbutions attributed to the Committee's expenditure limit. See 11 C.F.R. § 9008. 12(a) (The

national committee is responsible for any repayment to the U.S. Treasury).

This section ofthe proposed Report should also discuss 11 C.F.R. § 9008.12(b)(7) as a

basis for repayment because the Convention Committee knowingly participated in the making of

convention expenditures by the Host Committee. Finally, the Convention Committee's NOCE

statement has a category under liabilities that is named "Amount Payable to the U.S. Treasury for

in-kind contributions." This category seems inconsistent with 11 C.F.R.. § 9008.10(g)(3), which

states that the amount submitted as the total ofoutstanding convention obligations on the NOCE

statement shall not include any amounts determined or anticipated for repayment under 11 C.F.R.

§ 9008.12. While the Audit staffis using the tenninology "Amount Payable to the U.S. Treasury"

for this category, the Audit staffhas determined that the in-kind contnDutions must be repaid on

the basis of 11 C.F.R. §§ 9008.12(b)(3) and 9008. 12(b)(7). Thus, the NOCE statement may need

to be reviewed to resolve this apparent inconsistency.

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FEDERAL ELECTION COMMISSION

WASHINGTON. 0 C 204&3

July 7, 1998

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Ms. Carol Pensky, Treasurer

1996 Democratic National Convention Committee, Inc.

430 South Capitol Street, SE

Washington, DC 20003

Dear Ms. Pensky:

Attached please find the Audit Report on the 1996 Democratic National

Convention Committee, Inc. The Commission approved this report on June 25, 1998. As

noted on page 3 ofthis report, the Commission may pmsue any ofthe matters discussed

in an enforcement action.

In accordance with 11 CFR 9008.12(a)(l) and (c), the Commission made a

detennination that a repayment to the Secretary ofthe Treasury in the amount of

$745,887 is required. Ofthat amount, the Committee has repaid 5139,614. The balance,

5606,273, is required to be repaid within 90 calendar days after service ofthis report

(October 8, 1998).

Should the Committee dispute the Commission's detennination that a repayment

is required, Commission regulations at 11 CFR §9008.12(c) provide the Committee with

an opportunity to submit in writing, within 60 calendar days after service ofthe

Commission's notice (September 8, 1998), legal and factual materials to demonstrate that

no repaymen~ or a lesser repayment, is required. In addition to the submission ofwritten

materials the Committee may request an opportunity to address the Commission in open

session. The request for an oral hearing should identify the ~yment matters that will

be addressed and the Committee's presentation must be based on the legal and factual

materials submitted.

The Commission will consider any written legal and factual materials submitted

within the 60 day period when deciding whether to revise the repayment detennination.

Such materials may be submitted by counsel. Ifthe Committee decides to file a response

to the repayment determination, please contact Kim L. Bright-Coleman ofthe Office of

General Counsel at (202) 694·1650 or toll free at (800) 424-9530. Ifthe Committee does

not dispute this detennination within the 60 day period provided. it will be considered

final.

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

July 15, t998. Should you have any questions regarding the public release ofthis report,

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

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

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

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

cc: Joseph Sandler

Attachment as stated

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Chronology

1996 Democratic National Convention Committee. Inc.

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Audit Fieldwork

Exit Conference Memorandum to the Committee

Response to Exit Conference Memorandum Received

Audit Report Approved

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12/2/96 - 7/1/97

8/7/97

10/21/97

6/25/98
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