FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

Jul y 11 , 2011 

MEMORANDUM 

TO: 

FROM: 

Thomas Hintermister 

Acting Assistant Staff Director 

Christopher Hughey 

Acting General Counsel 

Lawrence L. Calvert, Jr. 

Associate General Counsel 

Lorenzo Holloway ^14— 

Assistant General Counsel 

For Public Finance and Audit Advice 

Danita C. Lee 

Attomey 

SUBJECT: Interim Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the proposed Interim Audit 

Report ("L\R") on the Minnesota Democratic-Farmer-Labor Party ("MDFLP"). ^ Our 

comments address issues pertaining to the MDFLP's payroll account as presented in 

Finding I (Misstatement of Financial Activity) and Finding 2 (Over-funding of Federal 

Accounts by Non-Federal Accounts). We concur with any fmdings not specifically 

discussed in this memorandum. If you have any questions, please contact Danita C. Lee, 

the attomey assigned to this audit. 

As background, the MDFLP established a separate payroll account to ease its 

administrative payroll processing burden. The payroll account was funded by transfers 

fi-om the MDFLP's Federal and non-Federal operating accounts. The MDFLP made 

Federal and non-Federal payroll disbursements for salary and taxes from the payroll 

account. The MDFLP did not allocate the salaries of any of its employees but rather paid 

' We recommend that the Commission consider this document in Executive Session because the 

Cominission may eventually decide to pursue an investigation of matters contained in the proposed Report. 

11C.F.R. §§ 2.4(a) and (b)(6). 
Memorandum to Thomas Hintermister 

Interim Audit Report - Mirmesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 2 

employee salaries as either 100% Federal or 100% non-Federal. The MDFLP did not 

disclose any non-Federal activity associated with the payroll account. The MDFLP states 

that the payroll account was a "pass-through" account and not either a Federal or nonFederal account and, therefore, it was not required to disclose any non-Federal activity. 

II. USE OF PAYROLL ACCOUNT (Findings 1 and 2) 

Finding 1 addresses the MDFLP's failure to disclose non-Federal activity 

associated with the payroll account. The proposed IAR concludes that the payroll 

account is a Federal account from which all activity, including non-Federal activity, is 

reportable to the Commission. The Conmiission recently considered similar facts when it 

addressed the Audit Division Recommendation Memorandum on the Georgia Federal 

Elections Committee ("Georgia"). In Georgia, the Commission considered the 

permissibility of a payroll escrow account and whether the Georgia conmiittee was 

required to disclose non-Federal activity associated with the payroll escrow account. The 

Georgia conunittee had established a separate account from which to make its Federal 

and non-Federal payroll disbursements. The Georgia conmiittee transferred fimds from 

its Federal and non-Federal operating accounts to a payroll account to enable its payroll 

vendor to pay the salaries of the committee's Federal, non-Federal, and allocable 

employees. The Georgia committee considered the payroll account an "escrow account" 

because it was used exclusively by its payroll vendor to draw funds to pay salaries and 

payroll taxes. The Georgia committee asserted that the payroll escrow account was 

neither a Federal account nor an allocation account and thus stated that it was not 

required to report the account's non-Federal activity. The Commission concluded that 

Georgia was "not required to further amend its reports in relation to the transactions 

involving the payroll escrow account." Audit Division Recommendation Memorandum 

on the Georgia Federal Elections Committee, Motion #4 on A07-14 (Georgia FEC) 

("Consensus" Motion) v.2. 

The language of the motion approved by the Commission in the Georgia audit, 

however, did not state the reasons for the Commission's conclusion, and different 

Commissioners advanced different rationales - some of them more than one rationale. 

Accordingly, we are unsure whether the payroll account in this case is legally 

distinguishable from the payroll escrow account in Georgia. Given the uncertainty in 

how the Georgia audit should be interpreted, we recommend that the Audit Division raise 

this issue in the cover memorandum that forwards this audit report to the Commission. 

In Georgia, some Commissioners indicated agreement with the audited 

committee's argument that a payroll escrow account is neither Federal nor non-Federal. 

These Commissioners, as we understand it, specifically rejected the argument we set 

forth in our legal analysis memorandum that the payroll escrow account there was the 

"functional equivalent" of an allocation account established pursuant to 11 C.F.R. 

§ 106.7(f), and that all of the account's activity was therefore reportable under 11 CF.R. 

§ 104.17(b). If this was the conclusion reached in Georgia, we are unable to perceive a 

legally significant difference between the account there and the account here. Like the 
Memorandum to Thomas Hintermister 

Interim Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

PageS 

account in Georgia, the account here appears to have been set up as a type of escrow 

account used only for the payment of salary and payroll taxes. It does not appear to have 

been any more of an allocation account than the account in Georgia. It is tme, as the 

Audit Division pointed out, that the account in Georgia was established to accommodate 

a payroll processing vendor that represented it could not handle payroll from multiple 

bank accounts for a single client, whereas this account was administered by the 

committee itself and appears to have been established solely for the committee's 

administrative convenience. But the written conclusion in Georgia was not limited by the 

facts regarding the payroll vendor. If the Commission's action in Georgia means that 

coinmittees conducting both Federal and non-Federal activity may establish "payroll 

escrow" accounts of this type that are neither Federal nor non-Federal, and that any 100% 

non-Federal payroll that flows through this account need not be reported, we do not see 

that the committee's motive for establishing such an account makes any difference. 

On the other hand, if the Commission's action in Georgia was an act of 

administrative discretion driven by the fact that there was no "overfunding" of Federal or 

allocable payroll in that case, different facts are present here. 

In our comments after the Georgia audit hearing, we noted that 

[I]n the circumstances where the Commission has permitted the mixing of 

federal and non-federal money in the same account, committees have been 

required to disclose all of the activity in that account, including the nonfederal portion. See 11 C.F.R. § 104.17(b) ... The purpose of these 

requirements is to "allow the Commission to track the flow of non-federal 

funds into federal accounts," and "ensure that the use of such funds is 

strictly limited to payment for the non-federal share of allocable 

activities." Explanation and Justification for Methods of Allocation 

Between Federal and Nonfederal Accounts, 55 Fed. Reg. 26,058,26,065-

66 (June 26,1990). 

Memorandum to Joseph F. Stoltz, July 1,2010, at 3. We noted that the Commission 

might wish to determine that because the Audit Division was satisfied that non-Federal 

funds in the Georgia payroll account had been strictly limited to payment of 100% nonFederal salaries and taxes and the non-Federal share of allocable salaries and taxes, then, 

as a matter of administrative discretion, there was no need to require the Georgia 

committee to amend its reports to disclose 100% non-Federal payroll. And, indeed, a 

number of Commissioners noted the lack of "overfunding" at various points in the 

Commission's consideration of Georgia. One Commissioner noted that she believed the 

Georgia committee did not need to make any additional disclosures, in part, because 

Georgia's payroll account transactions did not involve any non-Federal subsidies. During 

the audit oral hearing, another Commissioner indicated that he did not have any concems 

with Georgia's payroll account because there was no overfunding present. Finally, 

another Commissioner indicated that since there was no evidence of circumvention 

involving non-Federal money funding Federal activity and because the auditors 
Memorandum to Thomas Hintermister 

Interim Audit Report - Miimesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 4 

confirmed there was no overfunding, he considered Georgia's payroll account 

permissible. He also distinguished **pass-through" accounts from accounts where there is 

a potential of soft money flowing into Federal accounts and funding Federal activity. 

Different facts, however, are at issue here. In contrast to Georgia, where there 

was no overfunding, the proposed IAR here indicates that non-Federal transfers to the 

payroll account paid for $86,363 of Federal payroll - sHghtly less than one-third of the 

total overfunding addressed in Finding 2, the overfunding finding. If the Commission's 

determination in Georgia was an act of administrative discretion based on the 

documented lack ofany overfunding in that case, then the facts suggest that the cases are 

distinguishable and MDFLP should be required to report the non-Federal payroll from 

this account. 

By clarifying the rationale for its action in Georgia, the Commission can resolve 

the issue in this case. The Audit Division can assist the Commission by raising the issue 

in the cover memorandum that forwards the proposed IAR to the Commission. 

IIL HEALTH AND RETIREMENT BENEFITS EXPENSES PAID FROM 

FEDERAL ACCOUNT (Finding 1) 

Although the MDFLP paid its employee salaries and taxes from its payroll 

account, the MDFLP paid from a Federal "administrative" account employee health 

insurance and retirement benefits for both its 100% Federal and 100% non-Federal 

employees. However, the MDFLP did not report the 100% non-Federal expenses. The 

auditors are unsure how MDFLP financed these payments because the state of the 

MDFLP's records is such that it is not possible to match specific transfers of non-Federal 

funds to the "administrative" account with any specific disbursements from that account.^ 

It is clear that the MDFLP transferred some non-Federal funds to this account, but 

because the MDFLP paid allocable expenses from this account that, in and of itself, is not 

surprising. 

Thus, MDFLP might have used 100% Federal funds to pay these particular 100% 

non-Federal expenses. This is always permissible. Nevertheless, when a committee 

chooses to use Federal fimds to pay a non-Federal expense, it must still report the 

disbursement of those funds. Regardless of the Commission's rationale in Georgia for 

not requiring the reporting of non-Federal payroll from a "payroll escrow" account, we 

do not understand that decision to extend to clearly defined Federal accounts such as the 

MDFLP's Federal "administrative'* account - even if the financial activity is for 

employee salaries or benefits. All disbursements from a Federal account must be 

reported. See 2 U.S.C. §§434(b)(2) and (4). If the MDFLP paid these expenses with 

100% Federal funds, it should have itemized the payments on Schedule B as operating 

expenses (assuming the payments exceeded the itemization threshold). 

^ The Audit Division did not include a recordkeeping finding because the activity did not breach the 

materiality thresholds for recordkeeping. 
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Interim Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 5 

Alternatively, MDFLP might have intended to pay these non-Federal expenses 

using non-Federal fiinds that were transferred from the non-Federal account following the 

same procedure as it used for payment of allocable expenses but as if the payment was 

"allocated" 100% non-Federal and 0% Federal. If this were the case, then the 

transactions were not in compliance with 11 C.F.R. § 106.7(f) because "State, district and 

local party committees may transfer fiinds from their non-Federal to their Federal 

accounts or to an allocation account solely to meet allocable expenses under this 

section[.]" 11 C.F.R. § 106.7(f) (emphasis added). An expense payable with 100% nonFederal fimds - and the proposed IAR does not dispute that the employee insurance and 

benefits at issue were 100 % non-Federal - is, by definition, not allocable, and thus 

transfers of non-Federal funds to a Federal account and payment of the expense thereafter 

by the Federal account are not permissible. Despite the impermissibility of such transfers 

in Federal accounts, committees are required to disclose all receipts and disbursements. 

We raised the issue with the Reports Analysis Division ("RAD") of how should MDFLP 

report the receipts and disbursements if MDFLP used non-Federal transfers to finance the 

non-Federal salary benefits, and RAD recommends that committees disclose the transfers 

as receipts of activity on Schedule A, Line 17 (Other Receipts) and include memo entries 

referencing the original disbursements. 

The Committee should be given the opportunity in response to the IAR to provide 

fiirther information as to how it paid these non-Federal employee health insurance and 

retirement benefit expenses, and to amend its reports accordingly. 

IV. USE OF PAYROLL ACCOUNT FOR OTHER COMMITTEES' PAYROLL 

(Finding 1) 

Finally, we note that the proposed IAR indicates that the MDFLP processed the 

payroll for two Federal candidate committees. The auditors explained to staff that the 

candidate committees transferred funds to cover their payroll expenses to MDFLP's 

Federal account. The MDFLP then transferred the salary payments it received from the 

candidate committees to its own payroll account and then disbursed the salary payments 

on behalf of the candidate committees. The auditors indicated that both the candidate 

committees and the MDFLP properly disclosed the salary-related transfers and 

disbursements. The auditors also explained that they examined the transactions to 

determine whether funds from the candidate committees subsidized MDFLP's Federal 

payroll and concluded that they did not. Nonetheless, we recommend that the auditors 

modify the proposed IAR to explain in detail the MDFLP's activity in processing the 

payroll for other committees and its conclusion that the activity was permissible.