BELL , MCANDREW S & HILTACHK , LL P 

ATTORNEY S AN O COUNSELOR S A T LA W 

4 5 5 CAPITOL MALL . SUITE SO O 

SACRAMENTO , CALIFORNIA-95614 

(916) 4-4S-775 7 

F A X (916) 442-775 9 

CHARLE S H. BELL . JR . 

COLLEE N C . MCANDREW S 

THOMA S W. HILTACH K 

BRIAN T. HILORET H 

ASHLE E N. TITUS 

AUDRE V PERR Y MARTIN 

laai SEVENT H STREET , SUITE 20 5 

SANT A MONICA , C A B040 I 

OIO) 4BB-I40 B 

F A X OIO) aeo-a66 6 

www.bmhlaw.com 

PAU L T. GOUG H 

ROBER T W. NAYLO R 

o r COUNSEL 

March 19,2012 

Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

999 E Street, NW 

Washington, DC 20543 • 

Re: Audit of 2007-2008 Election Cycle for Califomia Republican 

Party, C#000014590 

Dear Mr. !l^termister: 

The Califomia Republican Party (CRP) responds furiher to the FEC Audit Division's 

Interim Audit Report of the 2007-2008 election cycle. This response is primarily to Finding No. 

3. 

Responses to Findings Nos. 1 & 2 

The CRP has amended and thus complied with the FEC's audit division's request in 

regards to Findings No. 1 and 2. With respect to Finding No. 2, the CRP has amended its 

campaign statements to reflect adjustments of the period-end itemized debts and obligations 

totals. It should be noted that Finding No. 2 does not conclude that die CRP failed to report 

debts and obligations; rather that the reported debts and obligations by period were maccurate. 

Some of these debts and obligations were reported on a later monthly report than the pne the 

FEC auditor found it should have been reported. In fact at the end of the cycle in 2008 the 

auditor ordy had 12,439 of additional debt that CRP failed to disclosis on its year end 2008 

report. We would also like to point out that CRP's largest vendor (Strategic Fundraising, Inc. 

("SFI")) was disclosed properly every month. 

. Response to Finding No. 3 

Extension of Credit bv a Commercial Vendor 

With respect to Finding No. 3, the CRP disputes the FEC Audit Division's contention 

that its corporate vendor, SFI, ever made, or uitended to make, a corporate contribution by 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

March 19,2012 

Page 2 

extending credit in a manner that was not in the ordinary course of business or that SFI failed to 

make commercially reasonable efforts to collect the debt of the CRP to SFI. 

Background 

The Interim Audit Report correctiy notes that the CRP mcurred, and was unable to pay, 

its obligations to SFI, on what would commonly be thought to be a *timely" basis during the 

audit period. The Interim Audit Report also correctly notes that the CRP paid off its outstanding 

obligations to SFI in early 2009, followdng die end of die 2007-2008 audit period. 

The facts and circumstances that led to the CRP incurring the debt to SFI were discussed 

but apparendy not given much credence by the Audit Division. This is not much different than 

noting that the national economy declined in 2008 and 2009 without mentioning either the 

undisputed or disputed causes ofthe stock market decline and the mortgage credit collapse. 

A. Fundraising is Cyclical - Off Year Fundraising Declined Before Federal 2008 

Campaign Year and SFI Debt Repayment Reduced CRP's 2008 Capability to 

Support Federal Campaigns 

Much of the CRP's debt to SFI occurred in 2007, an ofif-election year. Traditionally, the 

CRP and other political party committees raise littie money m the months following a major 

statewide gubematorial election or a Presidential election. Moreover, the CRP and other 

political parties committees do not spend money on federal campaigns or federal election activity 

during such periods. The CRP incurred the largest part of its SFI debt during the 2007 off-year 

due to'this traditional fundraising drought period as well as due to some special political factors 

discussed below that exacerbated that drought. 

Then, die CRP and SFI negotiated die SFI debt pay down during die height of die CRP's 

fundraising in the third and fourth quarters of2008, during the active part of the 2008 

Presidential campaign and the time when CRP would be best able to help Congressional 

candidates. At just this period, the CRP was devoting large sums of federal dollars to pay down 

its SFI debt. 

Thus, the CRP's traditional fundraising cycle has peaks and valleys, and the valley in 

2007 after the big Califomia gubematorial election of2006 and the decline of national 

Republican fortunes in the 2006 Congressional elections, was especially large and problematic. 

However, when the CRP resumed better fundraising during the 2008 Presidential election year, it 

was using federally - qualified dollars to repay debt, not to maximize its assistance to federal 

candidates. In 2007, it cannot be said that the CRP was utilizing SFI's "extension of credit" to 

benefit federal campaigns or federal elections in a practical sense. When the CRP received 

federally- qualified dollars in mid to late 2008, the CRP directed those federal dollars to pay 

dovm its SFI debt, which affected the CRP's ability to support federal candidates and in no sense 

resulted in SFI's corporate debt being used to support federal campaigns. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

March 19,2012 

Page 3 

B. CRP Organizational Changes and Decline in Direct Mail & Tele-fundraising 

Response Rates 

The CRP, like many organizations that engage in direct mail and tele-fundraising, 

suffered a decline in fundraising receipts from these activities. This decline coupled with the fact 

that the CRP lacked sufficient funds to devote to enhancing or maintaining its fimdraising donor 

base by prospecting for new donors, compounded the CRP's fundraising problems. 

Further, as SFI notes, CRP began 2007 wdth a new Chairman and a new Chief Operating 

Officer. The new Chief Operating Officer served only a few months and was replaced by an 

interim Chief Operating Officer in July 2007. The interim Chief Operating Officer had to deal 

wdth the debt issue immediately and in circumstances described above that were less than ideal. 

Between July 2007 and January 2008, the CRP interim Chief Operating Officer, the Finance 

Director and the Controller attempted to resolve outstanding issues by discussion and partial 

payments. At SFI's and CRP's agreement, SFI's representatives appeared before the CRP's 

Board of Directors to discuss the state of the debt, SFI's services, and the necessity for both to 

contmue the CRP fundraising and prospecting efforts. The CRP Board directed the Treasurer, 

the interim Chief Operating Officer and the Finance Director to evaluate billings and billing 

issues and to negotiate a payment arrangement with SFI to retire the debt. 

C. National and State Decline in Republican Fortunes Had a Major Effect on tfae 

CRP's Fundraising Capability 

Like other Republican organizations that engage in direct mail and tele-fundraising, the 

CRP also suffered a loss of brand identification and support that was related to the declining 

popularity of the national adininistration and special conditions in California, where in 2006, 

Republicans had suffered a loss of all but two statewide Republican officeholders. For the CRP, 

that related in part to the declining popularity of the Bush Administration fiom 2005-2008. The 

most obvious results of this declining popularity were (1) the loss of control of Republican 

majorities in the U.S. Senate and House of Representatives in 2006 and (2) the loss of the 

Presidency in 2008 to Democrat President Obania. 

Moreover, the CRP suffered a loss of larger dollar donors in part because its major 

statewdde officeholder, Govemor Schwarzenegger, had declared after his re-election in 2006 that 

he no longer considered himself as a partisan Republican govemor, and he described his party as 

a damaged brand. Beginning in early 2007, Govemor Schwarzenegger ceased to assist the CRP 

in fundraising, which had two practical consequences: (1) it discouraged donations by small 

donors, particularly the small donors who typically constitute the bulk of hard federal dollar 

contributors for which SFI raised funds for the CRP from tele-fundraising efforts, and (2) 

severely precipitated an even larger loss or larger, hard dollar major donor dollars. Moreover the 

CRP's non-federal campaign reports showed substantial non-federal debt arismg in 2006 from a 

$3,000,000 loan that had been raised to help re-elect Govemor Schw^arzenegger which the 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant Staff Dnector 

Audit Division 

Federal Election Commission 

March 19,2012 

Page 4 

Govemor ceased to help retire, and its federal campaign reports reflected a growing, unpaid debt 

to SFI and several other vendors that began to arise at the start ofthe 2007 off-election year and 

only grew larger as the CRP attempted to keep its doors open and to attempt to rebuild its donor 

base, as SFI had repeatedly urged die CRP to do. 

SFI Made Commercially Reasonable Efforts 

To CoHect the CRP Debt 

The CRP and SFI engaged in good faith discussions and negotiations to resolve the 

CRP's debt to SFI. These good faith efforts resulted in the extinguishment ofthe debt by early 

2009. The CRP's officers and key employees, particularly its Treasurer, Chief Operating OfGcer 

and Finance Directpr, were in constant, regular communications with SFI during the 2007-2008 

period. The CRP's Board of Directors received regular briefings at each Board meeting by these 

individuals of the growing campaign debt to SFI, and about CRP's efforts to deal with this 

problem. SFI's key staff visited Califomia in January 2008 as noted above and in SFI's letter, 

and in 2008, CRP's key staff also visited SFI's offices in Minnesota to discuss, review, and 

following that meeting in Minneapolis, to negotiate a mutually - satisfactory method to pay off 

the debt. This led to the solution that eliminated the debt in early 2009. 

SFI made commercially reasonable efforts to collect this CRP debt, as its correspondence 

submitted herewith details. SFI billed CRP monthly on all telemarketing and direct mail matters, 

regularly was in contact with the CRP's Chief Operating OfGcer, Controller and Finance 

Director about these bills and made regular inquiries about payment. 

The CRP estimates that it had hundreds of separate communications by telephone, email 

and face-to-face wdth SFI's representatives during the period that related to addressing the debt 

issue. The CRP on its part also proactively communicated with SFI representatives about the 

obligation, the CRP's current and prospective capability to pay, its overall fimdraismg progress 

and status. SFI's invoices mcluded finance charges. 

In July 2008, the CRP and SFI negotiated an agreement that (1) resolved disputes about 

billing items; (2) negotiated a set aside of SFI-generated tele-fimdraising receipts that were 

dedicated and credited to pay-down of the CRP debt; and (3) extended the SFI-CRP fundraising 

agreement into 2009-2010. SFI continues to this day as the CRP's tele-fimdraising vendor. 

Thus, the CRP along wdth SFI strongly disagrees that SFI failed to make commerciallyreasonable efforts to collect the CRP debt, or that CRP considered the SFI's extension of debt to 

be a contribution by the corporation. 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Commission 

March 19,2012 

Page 5 

The SFI-CRP Fundraising Agreement 

Was an Ordinary Course of Business Agreement 

The Audit Division contends that CRP and SFI had not sufficientiy documented why the 

SFI-CRP Fundiraising Agreement was an "ordinary course of business" agreement, and sought 

documentation and justification of it. SFI has separately responded to the specific questions 

raised by the Audit Division to why the "break even guarantee" was reasonable in light of the 

potenti^ly significant risk. 

The Audit Division report seems to indicate that any CRP/SFI agreement that did not 

provide for SFI to cage and sequester funds necessary to pay its bills to CRP was not in the 

ordinary course of business. This position ignores two cmcial facts: (1) CRP was one of the 

largest, if not the largest, of SFI's political accounts, and CRP had other direct mail fundraising, 

event fundraising and special fimdraising contracts during the audit period. CRP chose to 

separate caging functions from all of its fundraising vendors, and had a separate caging 

agreement and vendor, better to ensure compliance wdth FEC and non-federal campaign 

reporting requirements; (2) CRP's financial situation in 2007 and 2008 resulted in a number of 

vendors and others receiving delayed payments. CRP of necessity had to try to balance the 

payment of its obligations with continuing to keep its doors open, the only means by which it 

could practically continue to pay its debts to vendors. 

From the CRP's standpomt, the CRP faced a dilemma - if it failed to prospect, its active 

donor base would decline and lose its value, but if it did prospect, such prospecting generally 

doesn't cover its costs, at least in the short run. In the long run, a new donor acqmred is a 

valuable asset. The SFI-CRP agreement was designed with this dilemma in mind. By 

establishing an exclusive right to CRP's fimdraising projects for a year or more, SFI was enabled 

to benefit from both direct mail and telemarketing, which have performed differentiy over the 

years. 

Moreover, the long term CRP/SFI relationship (which had commenced in the mid-1990s) 

demonstrates that neither party intended to engage in non-ordinary course business 

arrangements. The CRP's fundraismg goals are to maximize "contributions" firom its telefimdraising, direct mail fundraising and other donor fundraising programs as well as to acquire 

donors who will contribute to the CRP to advance its goals of elected Republicans to federal, 

state and local offices. 

The CRP did not and does not expect to maximize contributions by failing to pay its bills 

or extracting contributions via lengthy extensions of credit from vendors. The CRP is not in the 

political business to break even in electing candidates, to stand by while its donor base erodes, or 

to just get by paying its vendors. 

That this situation occurred in 2007-2008 is fully explaining by the perfect storm of 

adversity described above, and should not result in an adverse audit finding by the FEC, 

1001.01 
Letter to Mr. Tom Hintermister 

Assistant StaffDirector 

Audit Division 

Federal Election Cominission 

March 19,2012 

Page 6 

particularly where, as here, the CRP extmguished the SFI debt shortiy after the close ofthe audit 

period. 

The FEC has in the past taken into account the problem of candidates' and committees' 

permanent or temporaiy inability to pay their debts and obligations. The FEC's debt settlement 

procedures which are required for the termination of coinmittees acknowledge that some debts 

simply cannot be paid timely, if at all. Moreover, the FEC's Advisory Opinions that are cited in 

the Interim Audit Report contemplate advance methods for corporate vendors and cominittees to 

use to avoid debt that might be viewed at some point as an illegal extension of credit. However, 

none of these advisory opinions address the distress situation, when a regular business 

relationship of long standing cannot be maintained accordingly to the strictures of a theoretical, 

arms' length, and ordinary course-of- business contract provision. 

The Interim Audit Report seems to suggest that when strong winds blow in the course of 

a long standing business relationship, the parties should adjust their business relationships to 

utilize the approaches described in die advisory opinions, whether those affect the continued 

opportunity for the debtor to continue in business and work out those debts in a manner that is 

satisfactory to a particular creditor or all creditors. The most salient fact of the CRP and SFI 

relationship is that the parties worked out a payment plan and set aside arrangement that resulted 

in the extinguishment of the CRP's debt to SFI shortiy after the end of the audit period. This 

demonstrates, rather than condemns, the course of business process and relationship that 

obtained between the two parties in the 2007-2008 audit period. 

CONCLUSION 

For the forgoing reasons, and on the basis of the information submitted by CRP and SFI, 

CRP respectfully requests the Commission to amend Finding No. 2 and not to adopt Finding No. 

3. 

^ery traly yours. 

Charles H. Bell, Jr. 

General Counsel 

California Republican Party 

1001.01 
strategic 

FUNDRAISING ' 

Tom Hintermister, Assistant StaffDirector, Audit Division 

Federal Election Commission 

999 E Street, NW 

Washington, DC 20543 

Re: Audit of2007-2008 Election Cycle for California Republican Party, 

C#000014590 

Dear Mr. Hintermister: 

On behalf of Strategic Fundraising, Inc. ("Strategic") of St. Paul, Miimesota, this letter is in 

regard to an Interim Audit Report of the FEC concerning the extension of credit by Strategic to the 

California Republican Party ("CRP"). 

Strategic has been a primaiy industiy vendor to pohtical parties, campaigns, PACs and nonprofit organizations since its founding in the early 1990's. Strategic provides 

telefundraising/telemarketing/donor list development and caging services to its clients, including 

the CRP. The CRF has been a major, valued client since 1995-1996. CRP is among Strategic's 

largest political tdefundraising clients. Strategic currentiy employs more than 700 people in five 

locations (St. Paul, Miimesota; Eau Claire, Wisconsin; Oshkosh, Wisconsin; Springfield, Missouri 

and Fargo, North Dakota.) 

In the 2007-2008 cycle. Strategic provided telefimdraising services to the CRF. During that 

time period, Strategic raised primarily hard federal dollars for the Party. During this time, the CRF 

developed and maintained a substantial account receivable, largely due to circumstances related to 

the external political atmosphere (something that affected most of Strategic's Republican Party 

dients at that time). Due to this unantidpated negative impact on its financial situation, the CRF 

did not enable it to engage in sustainable new donor acquisition, membership renewal and 

reactivation of old donors. 

The-Audit-staff spedficaUy is seeking to answer-two separate-anddistin^^^^ 

Whether or not the extension of credit was in SFI's ordinary course of business, and 2) Whether or 

not, commerdally reasonable attempts to collect the debts were made by SFI. Demonstrating the 

efforts pertaining to question two, wdll also help show why the extension of credit was in our 

ordinaiy but not desired course of business. 

Going back several years prior to the 2007-08 cyde, the CRF was always current on their 

account. SFI recognized this history so when their accounts receivable started to get behind in mid2007, and we immediately escalated the issue to key CRF staff (executive director and controller). 

Unfortunately there were some staff changes made in the midst the summer of2007, and the 

new staff inherited an undesirable situation. Besides our nonnal weekly invoices, SFI also sends out 

via an e-mail link bi-weekly billing summaries and open invoice reports which contain the *aging' for 

eadi dient (not just the CRP - all dients - political and non-profit). In addition to this regular 

communication to the accounting staff at the CRF, SFI's account management staff also 

communicated via phone and e-mail eveiy two weeks during the period in which the balance was 

7591 Ninth Street North, St. Paul, MN 55128 - Phone: 651.649.0404 - Fax: 651.649.0424 

www.strategicfundraising.com 
growing. SFI requested and was presented with several iofbrmal payment plans in the fall/winter of 

2007. They would be adhered to for a while, and then the CRF would be unable to keep up with 

payments, most likely due to cash flow constraints. 

In Deceinber 2007^ SFI had internal discussions regarding suspending fundraising on behalf 

of the CRF until we could get a better undeistanding of when the balance would be paid down. This 

led to a meeting with the CRF Board of Directors in Januaiy 2008, in which SFI demonstrated the 

value of service we provide to the CRF and the need to continue the fundraising program. Both SFI 

and the CRF realized that by stopping fimdraising activity completdy, the CRF would have even 

less money to operate on. This helps explain why an extension of credit was in SFI's best interest 

ordinary course of business. 

Unfortunately, the CRF continued to use funds raised from SFIs activities to pay other bills 

which increased the overall debt substantially in the first quarter of2008. Repeated extraordinary 

attempts were made to obtain payments throughout February, March and April besides the normal 

billing reminder process. The hi^ balance eventually caused the executive director to cease all 

prospecting in early April in an effort to stop the balance from growing further. What was not 

understood at that time is it also meant the income from said prospecting would also cease. Over the 

next several weeks, SFI worked diligentiy to show the importance of prospecting and its direct 

impact on future fundraising, which funils the CRF with federal dollars. 

At SFI's urging in late June 2008, the CRF financial and fundraising staff took another 

unprecedented step and flew to SFI's St. Paul, Minnesota oflice to discuss the situation in person -

much more than the normal course of business but necessary for a long-time, valued partner like the 

CRF. At that meeting, SFI presented a detailed house file analysis which induded details on 

historical fundraising trends and renewal rates as well as a look bade at how the balance got to be as 

large as it was at that time. 

This meeting led to a better understanding of the need to prospect and fundraise to hdp the 

CRF out of the situation it found itself in. Following this meeting, serious discussions began about 

-developing a fomial payment plan (uidike-the-infonn^ 

that end, SFI's CEO, CFO and Account Director flew to Califomia to work out the details. The plan 

was mutually agreed to and the debt was paid off. 

As one can dearly see, Strategic believed at all times that this extension of credit would 

further the CRP's receipt of new funding from new donor acquisition, and the renewal and 

reactivation of pld donors. The long terin rdationship we enjoy with the CRF was worth the extra 

effort to work out a mutually benefidal payment plan that allowed SFI to continue raising funds for 

the CRF. At no time has Strategic intended to make a contribution to the CRP's federal account by 

virtue of its extension of credit. 

One can also dearly see that Strategic extended credit to the CRP in the ordinary course of 

business. In doing so, Strategic followed its established procedures and its past practice as wdth 

other tdefundraising dients in the political and non-profit arena in approving the extension of credit. 

Many of Strategic's other clients have experienced similar fundraising problems at one time or 

another, and Strategic has worked with them in their mutual interests by providing flexible payment 
plans. During the time period in question, the CRF and Strategic negotiated a resolution of disputed 

billing items, a payment plan which involved Strategic's continuing telefimdraising for the CRF and 

a retention against the outstanding but unpaid balances of receipts until the obligation was satisfied 

in 2009. 

Strategic received as reasonably prompt payment in full from the CRF based on this 

extension of credit. During the subsequent time periods, the CRF has continued to make regular 

payments for ongoing services provided by Strategic. Strategic's extension of credit to the CRF 

conformed to a usual and normal practice in the political and non-profit fundraising industry. Over 

our long history it has not been uncommon for a few clients to fall behind in any given year, and 

moving forward we work with them to continue fundraising while simultaneously bringing their 

accounts back to current status. 

Due to confidentiality dauses in our contracts with our non-profit dients that do not flEdl 

under the purview of the Federal Election Commission, we cannot list them in a public forum. 

There is currentiy one very large, national non-piofit 501(c)3 that SFI recentiy worked out a similar 

payment plan for. As one can imagine it is not in anyone's best interest to cease fundraising and 

make the situation worse, while at Strategic we could run the risk of never receiving payment. As far 

as SFI's other political clients that have fallen into similar circumstances, we beheve all have been 

duly reported on their Schedule Ds. 

The Audit staff also recommended that SFI 'provide evidence' (plO) on; 1) The 'break-even 

guarantee' as a common industry practice; 2) The value of the exdusivity dause to SFI; 3) 

Conflnnation that the terms of the credit are similar to a non-political client of similar risk. 

Without disdosing too much of the details of our business modd or explaining how 

fundraising works, SFI will stress that our standard fundraising agreements wdth all poHtical dients 

cadi for exdi]^ivity. As a company, we understand the need to £icx[uue new donors for the long-term 

health of our partners liike the CRF and we have a 20 year history whidi sdlow^ us to mitigate our 

intemal 'risk'. All o^gcield^iadraising firms offer the exact or similar 'break-even guarantee'. As 

pointed o^jakxS^e^e issu^^dit to non-political dients as well in the exact same fashion. 

Mails. Dixon 

dliief Financial Officer 

Strategic Fundraising, Inc.