FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

Apri l 9; 2012 

MEMORANDUM 

TO: 

FROM: 

Thomas Hintermister 

Assistant Staff Director 

Christopher Hughey ^ 

Deputy General Counsel / 

Lawrence L. Calvert, Jr. ^>-^_^i::^^ 

Associate General Coui^^T/^ ^ 

Lorenzo Holloway ^^Y^ 

Assistant General Counsel 

For Public Finance and Audit Advice 

DanitaC. Lee .^fAAAttomey 

SUBJECT: Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the Draft Final Audit Report 

("DFAR") on die Minnesota Democratic-Farmer-Labor Party ("MDFLP" or 

"Committee"). Our comments address issues pertaining to the MDFLP's payroll account 

as presented in Finding I (Misstatement of Financial Activity) and Finding 2 (Overfimding of Federal Accounts by Non-Federal Accounts). We concur with any findings 

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 claims that it established a separate payroll accoimt 

to ease its administrative payroll processing burden. MDFLP Federal and non-Federal 

operating accounts transferred fiinds into the payroll account. 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 

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 intended to act solely as a 'pass through' account and was 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 2 

not intended to pay any expenses other than the payroll expenses for which other 

[Committee] accounts would remit sufficient funds to pay those expenses." The MDFLP, 

therefore, concluded that it was not required to disclose any non-Federal activity. 

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

A. Effect ofthe Georgia Federal Elections Committee Audit Is Unclear 

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

associated with the payroll account. The DFAR concludes that the payroll account is a 

Federal account from which all activity, including non-Federal activity, is reportable to 

the Coinmission. The Commission considered similar facts when it addressed the Audit 

Division Recommendation Memorandum on the Georgia Federal Elections Committee 

("Georgia Committee"). In the Georgia Conunittee audit, the Coinmission considered 

die permissibility of a payroll escrow account and whether the Georgia Conunittee was 

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

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

and non-Federal payroll disbursements. The Georgia Committee 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 the account was used exclusively by its payroll vendor to draw funds to pay 

salaries and payroll taxes. The Georgia Coinmittee 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 the Georgia Committee 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. 

Committee 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 die payroll escrow account used by the Georgia Committee. Given 

the uncertainty in how the Georgia Committee audit should be interpreted, we suggest 

that the Audit Division raise this issue with the Commission in the Audit Division 

Recommendation Memorandum. 

In the Georgia Committee audit, a majority of Conunissioners did not accept 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 C.F.R § 104.17(b). 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 83S) 

Page 3 

During the June 2010 audit hearing, Commissioner McGahn stated that the 

Commission had previously seen the type of payroll escrow account used by the Georgia 

Committee and had not disapproved of its use or required additional reporting. 

Commissioner Petersen noted that the regulations do not prohibit payroll escrow 

accounts.^ 

If the conclusion reached by the Commission in the Georgia Committee audit was 

that the committee's payroll escrow account was neither a Federal nor a non-Federal 

account and its non-Federal funds did not require disclosure, we are unable to perceive a 

legally significant difference between the account there and the account here. Similar to 

the account in the Georgia Committee audit, 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 that the 

Georgia Committee established. It is tme, as the Audit Division pointed out, that the 

account in the Georgia Committee audit 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 the Georgia Committee audit was not limited 

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

Committee audit means that committees 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 

accoimt makes any difference. 

On the other hand, if the Commission's action in the Georgia Committee audit 

was an act of administrative discretion driven by the fact that there was no "overfunding" 

of Federal or allocable payroW in that case, the Commission should be aware that 

somewhat different facts are present here.^ 

In our comments after the Georgia Committee 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 non-

' In addition to these two Commissioners who indicated disagreement with our analysis during the 

audit hearing, Commissioner Weintraub, during subsequent Commission consideration of the Audit 

Division Recommendation Memorandum, said that sfae was not comfortable concluding either that the 

payroll escrow account was an allocation account or determining that the Georgia Committee faad complied 

with the law. She noted that payroll escrow accounts were not contemplated by the regulations. 

^ We understand the auditors use the term "overfunding" to refer to net subsidization of a 

Committee's Federal account by its non-Federal account, and "underfunding" to refer to die reverse, tiiat is, 

net subsidization of a Committee's non-Federal account by its Federal account. 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 4 

federal portion. See 11 C.F.R. § 104.17(b)... The purpose of tiiese 

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 

strictiy 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% non-Federal 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. 

Several Commissioners noted the lack of overfunding at various points in the 

Commission's consideration of the Georgia Committee audit. During the audit oral 

hearing. Commissioner Walther indicated that he did not have any concems with the 

Georgia Committee's payroll accoimt because there was no overfiinding present. 

Commissioner McGahn indicated that since there was no evidence of circumvention 

involving non-Federal money funding Federal activity and because the auditors 

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

account permissible. Commissioner McGahn also distinguished **pass-througih" accounts 

from accounts where there is a potential of soft money flowing into Federal accoimts and 

funding Federal activity. Finally, at the Commission meeting on the Audit Division 

Recommendation Memorandum, Commissioner Weintraub noted that she believed the 

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

Georgia Conunittee's payroll account transactions did not involve any non-Federal 

subsidization of Federal activity.^ 

Somewhat different facts, however, are at issue here. In the Georgia Committee 

audit, there was neither any net overfunding of the Committee's activities as a whole, nor 

was there any overfunding of the Federal share of salaries and payroll taxes. New 

information provided by the MDFLP in response to the Interim Audit Report establishes 

that, as in the Georgia Committee audit, there was no net overfimding of the MDFLP's 

activities as a whole. However, unlike in the Georgia Committee audit, here there was 

overfunding of the payroll account, in the amount of $102,663 over the course of the 

election cycle. The DFAR, however, ultimately finds that overall the MDFLP 

^ Commissioner Weintraub also noted tfaat tfae committee in tfaat matter had ceased using the payroll 

account and had come into Uteral compliance with the regulations. The Committee here is in tfae same 

position. 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 5 

"sufficientiy demonstrated that it did not overfund its Federal accounts witih funds from 

its non-Federal accounts." ^ 

If the outcome of the Georgia Committee audit was merely an act of 

administrative discretion based on the lack of overfimding in that case, then the 

Commission might decide to exercise its discretion similarly in this case given the overall 

lack of net overfunding; or altematively, it might not decide to exercise its discretion 

similarly given that the payroll account here was overfunded, and the reporting of all 

disbursements from accounts with mixed Federal and non-Federal funds is designed both 

to prevent and to identify precisely such overfunding. 

By clarifying the rationale for its action in the Georgia Committee audit - and, if 

that rationale was based solely on an exercise of administrative discretion, determining 

clearly whether to extend that discretion to the facts here - the Commission can resolve 

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

in the Audit Division Recommendation Memorandum, and by specifically noting that 

here the payroll account was overfimded, but that because of other transactions there was 

overall no net overfunding by the non-Federal account. 

B. Comments on the Committee's Assertion of an Historical Basis 

Establishing Permissibility ofthe Payroll Account 

The Committee stated that it "believed that this [payroll] account was established 

sometime during the 1970's and [that it] has been used ever since to facilitate payroll 

payments which have been handled in-house by the [Committee]." The Committee said 

that it "believed in good faith, that the 100% non-Federal payroll expenses need not be 

disclosed on Federal reports" despite the "Commission's implementation ofits allocation 

regulations in 1991 (former 11 C.F.R. § 106.5) and the passage of the Bipartisan 

Campaign Reform Act of 2002." 

The Conunission audited die MDFLP for die 1988,1990 and 1992 election 

cycles. None of the Final Audit Reports for these audits addressed tfae payroll issue 

present faere. 

We would not have expected the issue to have arisen in the 1988 and 1990 cycle 

audits. Prior to the 1992 election cycle, coinmittees that cfaose to establisfa botfa Federal 

and non-Federal accounts were absolutely profaibited from transferring non-Federal fimds 

* The DFAR concludes that in addition to the $102,663 in overfunding of the payroll account, the 

Committee used $8,833 in non-Federal fimds to fiind 100% Federal activity, and did not report this activity. 

It also concludes that the Committee effectively used Federal funds to subsidize the permissible nonFederal share of allocable activities in the amount of $120,960 over the course of the election cycle. A 

Conunittee may, of course, always choose to use Federal fiinds to meet non-Federal obligations. 

Subtracting the amount of overfiinding from the amount of underfimding, the DFAR concludes that on an 

overall net basis over the course of the election cycle, the Committee's Federal account effectively 

subsidized $9,464 of non-Federal activity. 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Minnesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 6 

into tfae Federal account; tfaus, allocable expenses were paid eitfaer witfa two cfaecks or by 

transferring funds representing tfae Federal sfaare out of tfaeir Federal accounts, and 

making tfae payments from tfaeir non-Federal accounts. 

Tfae 1992 allocation regulations cfaanged tfae procedures for payment of allocable 

expenses. Under tfae new regulation, committees were for tfae first time permitted to 

transfer in non-Federal fimds, in a limited fasfaion and under strict restrictions, for tfae 

payment of tfae non-Federal sfaare of allocable expenses; tfaey were now required to pay 

allocable expenses from tfae Federal accoimt, to report on Scfaedule H2 transfers in to 

cover non-Federal sfaares, and to report specific allocated disbursements - including tfae 

Federal and non-Federal sfaares of eacfa - on Scfaedule H4. 

Tfae 1992 cycle audit of tfae Committee noted tfae existence of tfae payroll account, 

and noted tfaat tfae Committee faad, during tfae 1992 cycle, impermissibly followed tfae 

pre-1992 process by transferring a lump sum of Federal funds to tfae payroll account 

representing tfae Federal sfaare of allocable salaries, and reporting simply tfaat lump sum 

transfer on Scfaedule B. Tfae Final Audit Report concluded tfaat tfae Committee sfaould 

faave itemized eacfa individual allocated salary payment to eacfa individual employee on 

Scfaedule H4. 

However, tfae Final Audit Report did not address tfae issue of 100% non-Federal 

salary tfaat is presented faere. Tfaere are a number of possible reasons for tfais omission. 

First, it is possible tfaat tfae Committee simply did not faave any 100% non-Federal payroll 

in tfae 1992 cycle. Second, it is possible, given tfae reference to tfae Committee's 

continuing to follow tfae pre-1992 process, tfaat tfae Audit Division regarded tfae payroll 

account as a non-federal account, witfa the payment of allocable payroll from that account 

contrary to the procedures established in tfae new regulations. Third, it is possible tfaat tfae 

Audit Division did not regard tfae non-reporting of 100% non-Federal payroll as a 

violation, wfaicfa would support tfae Committee's position faere. Fourtfa, it is possible tfaat 

any problematic unreported disbursements did not meet materiality tfaresfaolds for 

inclusion in tfae report. Because there is no remaining information indicating whicfa of 

tfaese possibilities occurred in the Committee's 1992 cycle audit, tfaere is no basis for 

saying wfaetfaer tfae determinations made in tfaat audit sfaould inform tfais one. 

III. HEALTH AND RETIREMENT BENEFITS EXPENSES PAID FROM 

FEDERAL ACCOUNT (Finding 1) 

Altfaougfa tfae MDFLP paid its employee salaries and taxes from its payroll 

account, tfae MDFLP paid from a Federal "administrative" account employee faealtfa 

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

employees. Tfae MDFLP initially did not report eitfaer tfae transfers in or transfers out 

associated witfa tfae 100% non-Federal benefits costs. 

At tfae Interim Audit Report stage, we concurred witfa tfae Audit Division tfaat tfae 

failure to report tfais activity comprised part of tfae misstatement of tfae Committee's 
Memorandum to Thomas Hintermister 

Draft Final Audit Report - Miimesota Democratic-Farmer-Labor Party 

(LRA 835) 

Page 7 

financial activity. However, we also noted tfaat, in our view, tfae transfer in of tfaese funds 

and tfae use of the Federal account to pay these 100% non-Federal disbursements migfat 

faave violated 11 C.F.R. § 106.7(f). Tfae regulations provide tfaat "State, district and local 

party committees may transfer fimds from tfaeir non-Federal to tfaeir Federal accounts or 

to an allocation account solely to meet allocable expenses under tfais section[.]" 11 

C.F.R. § 106.7(f) (empfaasis added). An expense payable witfa 100% non-Federal funds 

is, by defmition, not allocable, and tfaus transfers of non-Federal funds to a Federal 

account and payment of tfae expense tfaereafler by tfae Federal account are not 

permissible. 11 C.F.R. § 106.7(f). Based on tfae way tfae Committee had reported the 

benefits payments for the 100% Federal employees, and on its non-reporting of benefits 

payments for tfae 100% non-Federal employees, we raised tfae possibility tfaat tfae 

Conunittee faad intended to pay tfaese expenses using tfae same procedures as are required 

for allocable expenses, but as if tfaey were "allocated" 0% Federal and 100% non-Federal. 

Tfais, in our view, would not be consistent witfa 11 C.F.R. § 106.7(f). 

Tfae DFAR indicates tfaat tfae Committee faas now amended its reports to disclose 

on Scfaedule H4 payments to its benefits providers tfaat are reported as allocated between 

a Federal sfaare, representing tfae portion of tfae payment associated witfa 100% Federal 

employee compensation, and a non-Federal sfaare, representing tfae portion of tfae 

payment associated witfa 100% non-Federal employee compensation. Tfais would 

indicate tfaat tfae Committee's cfaecks or transfers to its benefits providers actually did 

contain a mix of Federal and non-Federal funds, ratfaer tfaan any of tfae payments being 

100% non-Federal but paid using tfae same metfaods as an allocated expense. Assuming 

tfais is consistent witfa tfae auditors' understanding of tfae Committee's payment practices, 

we would see no reason to pursue tfae issue regarding 11 CF.R. § 106.7(f).