FEDERAL ElECT'O~ C().\·\tv'ISSION

AK006370

May 31, 1995

MEMORANDUM

TO:

FROM:

RON M. HARRIS, PRESS OFFICER

PRESS OFFICE

ROBERT J. COSTA

ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

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SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

THE MINNESOTA OeHOCRATIC-FARKER-LABOR STATE PARTY

Attached please find a copy of the final audit report

and related docume~ts on the Minnesotta

Democratic-Farmer-L&bor State Party which was approved by the

Commission on May 23, ~995.

Informational copies of the report have been received by

all parties involved and the report may be released to the

public.

Attachment as stated

cc: Office of General Counsel

Office of Public Disclosure

Reports Analysis Division

FEC Library

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FEDERAL ELECTION COMMISSION

\\ASHtNGTON DC 2t)4b\

AK005403

A89-32

A91-41

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REPORT OF THE AUDIT DIVISION

ON '!'HE

MINNESOTA DEMOCRATIC-FARMER-LABOR STATB PARTY

I. Background

A. Overview

This report is based on an audit '-.·f the Minnesota

Democratic-Farmer-Labor State Party (Nthe _am-ittee",) undertaken

by the Audit Division of the Federal Election C~8sion in

accordance with the provisions of the Federal Election C.-paign

Act of 1971, as amended ("the Act".) The audit was conducted

pursuant to 2 U.S.C. S438(b) which states, in part, that the

Commission may conduct audits and field inve8tigations of any

political ea.aittee required to file a report ~under Section 434 of

this title. Prior to conducting any audit under this 8U6Bee~lon,

the COJIIIIlission shall perfor. an internal review of reports filed

by selected c~ttee8 to deteDline if the reporte filed by a

particular ca.aittee ...t the threshold requ~nt8 for

substantial c08pliance with the Act.

The JUnnesota Dollars for Deaocrats registered with the

Comptroller Genexal of the Uni~ed States on July 15, 1975, as the

State committee of the Minnesota Deaocratic-Pax-er-Labor State

Party. In :980, the Comaittee filed an ~nded Stat...nt of Organizatio~ changing the name of the Ca.aittee to ~nne8ota

Democratic-Farmer-Labor State Party. The Ca.aittee .aintains its

headquarters in Saint Paul, Minnesota.

1.\,,\) separate lAud.its were conducted which covered the

period from January 1, 1987 through December 31, 1990. The

Committee reported a beginning cash balance at January 1, 1987 of

$3,005; total receipts for the period of $2,024,122; total

disbursements for the period of $2,028,294, and a cash balance on

December 31, 1990 of $1,647.~1

~I There are mathematical discrepancies within the Committee's

reported fiqures. All figures in this report have been

rounded to the nearest dollar.
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This report is based on documents and work papers which ~~~port each of its factual statemen~s. They form part of the r~cord upon which the Commission based its decisions on the

matters in the report, and were available to the Commissioners and

appropriate staff for review.

B. Key Personnel

The Treasu~er of ~he Committee during the period covered

by the audits was Ms. JoycP Brady from January 1, 1987 through

June 1988, and Mr. William J. Davis from June 1988 to the present.

c. Scope

The audit included such tests as verification of total

reported receipts, disbursements, and individual transactions;

review of required supporting documentation; analysis of Committee

debts and obligations; and such other audit procedures as deemed

necessary under the circumstances. Although the contribution

records provided by the Committee substantially met the

recordkeeping requirements at 2 U.S.C. S432(c) and 11 C.F.R.

S102.9(a), the 1987 contributor records were batched to include

deposit ticket copies in no apparent order or identifiable manner.

The b~tch order precluded the testing of aggregate year-to-date

totals and allowed only a partial verifica~ion of the Committee's

1987 itemization system.

II. Audit Findings and Recommendations

A. Allocation of Administrative Expenses

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Section 106.1(e) of Title 11 of the Code of Federal

Regulations states, in part, that Party committees which have est~blished federal campaign committees pursuant to 11 C.P.R.

102.5 shall allocate administrative expenses on a reasonable basis

between their Federal and non-Federal accounts in proportion to

the amount of funds expended on Federal and non-Federal elections,

or on another reasonable basis.

Section 102.5(4)(1)(i) and (ii) of Title 11 of the Code

of Federal Regulations states, in part, that political committees,

including a party committee, which finances political activity in

connection with both federal and non-Federal elections shall

establish a separate federal account in a depository. Only funds

subject to the prohibition and l~itations of the Act shall be

deposited in such federal account. All disbursements,

contributions, expenditures, and transfers by the committee in

connection with any federal election shall be made from its

federal account; or, establish a political committee which shall

receive only contributions subject to the prohibitions and

limitations of the Act, regardless of whether such contributions

are for use in connection with Federal or non-Federal elections.
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The Committee has established a separate account and has

treated it as a separate Federal political committee. However,

the Committee has not allocated its administrative expenses

between its Federal and non-Federal accounts as required by 11

C.F.R. 106.1(e). During the audit of the 1988 election cycle, a

review of Committee records disclosed expenditures of $1,082,371

for administrative activities. Relative to the above amount,

$388,268 was paid from the Committee's federal accounts. When

asked about a ratio method established for allocating these

expenses to its Federal and non-Federal accounts, Committee

officials responded that there was none but felt that a 50/50 or

60/40 federal split was used.

The Audit staff reviewed the official DFL (DemocraticFarmer-Labor) ballot for the Minnesota general election which

indicated that three Federal candidates and two non-Federal

candidates would appear on the ballot in Minnesota's general

election. It was determined that the make-up of ~he Minnesota

sample ballot reflected a 3:2 federal ratio or 60\ federal

candidates of total candidates. Since the Committee had no

allocation method for its Federal/non-Federal accounts, the Audit

staff reviewed several Commission-approved methods to determine

the method(s) that would result in the least financial outlay by

the Committee. Based on the review of those methods, the auditors

selected the Commission's expenditures method to determine the

Federal allocation share. The results of applying the relevant

percentage from this method indicated that the Committee underpaid

its share of administrative expenses by $104,834.

During the audit of the 1990 election cycle, the

Committee's federal account paid more than its share of

administrative expenses, which more than offsets the shortage of

$104,834 from the audit of the 1988 election cycle. Therefore,

averaging the Committee's administrative expenses over a four year

period the Committee has paid its fair share of administrative

expenses.

The Interim Audit Report recommended no further action

with respect to the 1987-1990 period. However it was noted that

effective January I, 1991 the Commission's Regulations at 11 CFR

S5 106.5 and 6 were revised to specify in greater detail the

requirements for the allocation of administrative and other

expenses. It was recommended that the Committee ~plement a

system to insure compliance with these regulations and provide the

records which demonstrate the system in use.

In its response, the Committee provided the Audit staff

with a document which outlines the procedures currently used by

the Committee to determine the allocation of expenses between its

Federal and non-Federal accounts in accordance with the current

regulations.
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Recommendation .1

The Audit staff recommends no further action with regard to

this matter.

B. Failure to Itemize Debts and Obligations

Sections 434(b)(2)(H), (3)(E), and (8) of Title 2 of the

United States Code state, in part, that each report shall disclose

for the reporting period and calendar year, the total amount of

all loans; the identification of each person who makes a loan to

the reporting committee during the reporting period, together with

the identification of any endorser or guarantor of such loan, and

date and amount or value of such loan; each report should also

disclose the amount and nature of outstanding debts and

obligations owed by or to such political committee; and where such

debts and obligations are settled for less than their reported

amount or value, a statement as to the circumstances and

conditions under which such debts or obligations were extinguished

and the consideration therefore.

Section l04.3(d) of Title 11 of the Code of Federal

Regulations states, in part, that each report filed under 11 CFR

104.1 shall, on Schedule C or 0, as appropriate, disclose the

amoun, and nature of outstanding debts and obligations owed by or

to the reporting committee. Where such debts and obligations are

settled for less than their reported amount or value, each report

shall contain a statement as to the circumstances and conditions

under which such debts or obligations were extinguished and the

amount paid.

Furthe=: Section 104.11(a) of Title 11, Code of Federal

Regulations states, in part, the debts and obligations owed by or

to a political committee which remain outstanding shall be

continuously reported until extinguished. These debts and

obligations shall be reported on separate schedules together with

a statement explaining the circumstances and conditions under

which each debt or obligation was incurred or extinguished.

During ~he review of Committee vendor files, it was

noted that the Committee did not itemize the Federal share of nine

debts and obligations totaling $228,916 as of December 31, 1990 as

required. Of the $228,916 in debts and obligations, $111,600 were

for three outstanding loans obtained by the Committee. Six of the

debts and obligations totaling $117,316 were for various services

which included legal fees, telephone, consulting, polling and

phone banks.

At the exit conference, the Committee was provided with

a schedule listing the debts and obligations that were not

disclosed as required.
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The Inter~ Audit Report recommended that the Committee

file amended Schedules C (Loans) and 0 (Debts other than Loans)

for the year end 1990 report.

The Committee's response to the Interim Audit Report

included proposed amended schedules. However, in dete~ining the

Federal share of these obl~9ations, the Committee used their

revised and undocumented allocation percentages (29\ Federal and

71% non-Federal). Although the Audit staff does not accept the

allocation percentages, the material provided shows both the

allocation and the full amount of each obligation.

Recommendation .2

The Audit staff recommends no further action with respect to

this matter.

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c. Itemization elf Transfers to Other Political

Party Committees

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Sections 434(b)(4)(C) and (S)(C) of Title 2 of the

United States Code state, in part, that each report shall disclose

for the reporting period and the calendar year, the total amount

of all transfers to affiliated committees or organizations and,

where the reporting committee is a political party committee, the

name and address of each affiliated committee to which a~ran8fer

is made by the reporting cOIIBIlittee and, where the reporting

committee is a political party committee, each transfer of funds

by the reporting committee to another political party c~ttee,

regardless of whether such committees are affiliated, together

with the date and amount of such transfers.

During the audit of the 1988 election cycle, a review of

Committee transfers to affiliated party co_ittees re.~~'.lted in a

determination by the Audit staff that 74 transfers which totaled

$7,328 had been made to affiliated committees. The results of the

review indicated that 65 transfers for $3,006 had not been

itemized. Committee officials offered no response relative to the

itemization of the transfers. A schedule of th~se uniteaized

transfers was provided to Committee officials at the exit

conference.

In its May 16, 1990 comprehensive amendment filed with

the Commission, the Committee itemized all of the transfers.

Recommend~tion .3

The A-Jdtt staff recommends no further action with respect to

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D. Loans Not Made in the Ordinary C2urse of Business

and Loans Made in Excess of the Limitation

Section 441b(a) of Title 2 of the United States ~ode

states, in part, that it is unlawful for any national bank to make

a contribution in connection with any election to any political

office, or in connection with any primary election or political

convention or caucus held to select candidates for any political

office, or for any candidate, political committee, or other person

knowingly to accept or receive any contribution prohibited by this

section, or any officer or director of any national bank to

consent to any contribution by the national bank.

Section lOO.7(b)(11} of Title 11 of the Code of Federal

Regulations states, in part, a loan of money by a State bank, a

federally chartered depository institution (including a national

bank) or a depository institution whose deposits and accounts are

insured by the Federal Deposit Insurance Corporation, the Federal

Savings and Loan Insurance Corporation, or the National Credit

Union Administration is not a contribution by the lending

institution if such loan is made in accordance with applicable

banking laws and regulations and is made in the ordinary course of

busine5s. A loan ~ill be deemed to be made in the ordinary course

of business if it: bears the usual and customary interest rate of

the lending institution for the category of loan involved; is made

on a basis which assures repayment; is evidenced by a written

instrument; and is subject to a due date or amortization schedule.

Each endorser or guarantor shall be deemed to have contributed

that portion of the total amount of the loan for which he or she

agreed to be liable in a written agreement. Any reduction in the

unpaid balance of the loan shall reduce proportionately the amount

endorsed or guaranteed by each endorser or guarantor in such

written agreement. In the event that such agreement does not

stipulate the portion of the loan for which each endorser or

guarantor is liable, the loan shall be considered a contribution

by each endorser or guarantor in the same proportion to the unpaid

balance that each endorser or guarantor bears to the total number

of endorsers or guarantors.

Section 441a(a)(1)(C) of Title 2 of the United States

Code states that no person shall make contributions to any other

political committee in any calendar year, which in the aggregate,

exceed $5,000.

1. Unsecured Loans

The Committee received or had outstanding five

loans during the period January 1, 1987 through December 31, 1990.

Each loan and one long term lease had formal agreements, with a

specific timetable for repayment and the interest rate charged.
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The long-term lease was entered into with Preferred

Financial Corporation on February 28, 1986 for an offset printer

with payments being made to Norwest Bank in Stillwater, Minnesota.

The Committee also obtained a $25,000 loan from

Firstar/Metropolitan Bank in Saint Paul, Minnesota on January 22,

1987 to purchase a computer. The loan agreement was signed by the

State Party Chairman and the note was secured by the computer

equipment.

On August 11, 1989, the Democratic-Farmer-Labor

Party of Minnesota made a 30 day, 11.5\ business loan for $7,000

with Firstar Metro Bank in Saint Paul, Minnesota. There was a

formal agreement; however, the loan was unsecured and there were

no apparent guarantors. The loan agreement was siqned by the

State Party Chairman.

The Committee used a 50/50 method for allocating

expenses at the time the loans were made. Therefore, the

Committee's federal portion for the unsecured loan would have been

$3,500 for the $7,000 loan (See Finding II.A.).

Although the unsecured loan for $7,000 has been

repaid, there appears to be some question whether the loan was

made in the ordinary course of business considering the

Committee's cash pOsition and the other outstanding loans at the

time these additional loans were made.

The Interim Audit Report recOJaendecl that the

Committee provide evidence that the $7,000 loan vas ..de in the

ordinary course of business and identify any endorsers or

guarantors of the loan. In addition, it was recam.ended that

documentation be provided to demonstrate that the loan was .ade on

a basis that assured repayment.

In its response, the Committee contends that the

$7,000 loan was a 30 day loan for the purpose of financing the HHH

Day dinner. The Committee states that loans for the purpose of

financing the HHH dinner were cOllUDOn for the OFL for ..ny years.

"Since the dinner is primarily a social event, its cost is not

generally in the regular party budget. Therefore, monies [sic]

are borrowed shortly before the event to finance it and the

proceeds of the dinner are used to repay the loan. Essentially

the dinner is a 'break-even' event used almost exclusively for

party building purposes.~ The Committee further submits that

rather than the 50'/50\ Federall non-Federal allocation contained

in the Interim Audit Report, "the more appropriate method of

allocation should have been the ballot allo~ation method (29\

Federal - 71% non-Federal), which would re6ult jn a $2,000 federal

allocation. tt No support for this contention is provided. Given

the Committee's explanation of this loan, the relatively small
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amount involved, that the loan was outstanding for approximately 7

weeks, and that the majority of the repayment was made from the

Federal accounts, the response is accepted as adequate.

2. Loans in Excess of the Limitation

The Democratic-Farmer-Labor Party of Minnesota

obtained a $125,000 loan from Firstar Metro Bank on January 4,

1990 to pay accumulated 1988 and 1989 payroll taxes and associated

interest and penalties. The loan carried a due date of July 4,

1990. The loan was unsecured, but it was guaranteed by four

individuals. One individual did not sign as the guarantor until

April 12, 1990. In addition, the agreement was signed by the

State Party Chairman for the Party. The loan was deposited in the

Committee's non-Federal account. The Committee'S Federal share of

the loan was $62,500 based on a 50/50 allocation method used by

the Committee at the time the loan was made. Each guarantor's

liability for the federal share of the loan was $15,625

($62,500+4). Individuals may make contributions of $5,000 per

year to State party committees. Therefore, the Interim Audit

Report concludes that the Committee had received at the time the

loan was made an excessive contribution from each quarantor in the

amount of $10,625 ($15,625 - $5,000) excluding any other

contributions made to the Committee from these individuals.

On September 10, 1990 the balance of the original

$125,000 loan was renewed in the amount of $96,500. The renewal

was subject to monthly payments through March of 1995. The loan

renewal was necessitated by the withdrawal of one of the

guarantors on the original $125,000 loan. This guarantor was

subsequently replaced by another individual. The Committee's loan

balance as of December 31, 1990 was $96,500. The three original

guarantors did not sign the agreements until March 28, 1991. The

new guarantor did not sign until May 9, 1991. The Federal portion

of the loan at that ttme was $48,250 based on the 50/50 allocation

method. Therefore it appeared that each contributor had made an

excessive contribution to the Committee of $7,062.50 ($48,250 + 4 - $5,000) excluding any other contributions that have been made to

the Committee from these individuals. Three of the guarantors

made contributions to the Committee during 1990. These

contributions totaled $285 ($250 + $10 + $25).

The Interim Audit Report recommended that the

Committee provide evidence that the loans did not result in a

excessive contribution from the guarantors, and demonstrate that

the loan balance has been paid down to where the guarantees are

not excessive or provide evidence that additional guarantors have

been added to reduce the amount of each contribution to $5,000 or

less.

The Committee responded that "the 50/50

allocation set forth in the Audit report as having been used by

the party was unrealistic and inaccurate at the time. A more

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appropriate allocation method would have been based upon the

ballot place allocation method (29% Federal and 71%

non-Federal). If that method is used, the Federal share was

$36,250 and each guarantor's share was $9,062.50. To date, the

DFL's information is that the loans were taken out on an

emergency basis to satisfy pressing Internal Revenue Service

claims. tt The Conunittee provides no documentation for their

revised allocation percentages. The Committee notes that the

State Party Chair also signed the loan agreement and should be

considered an additional obligator for a total of five rather

than four.

The Committee's response also provides a schedule

of payments on the loan. As of December 31, 1992, the schedule

shows an outstanding balance of $53,220. The Federal share

would be half of that amount or $26,610. With four guarantors

each had a remaining contribution of $6,653. However, the

Committee had been making regular payments that would, if

continued, reduce each guarantors share to less than $5,000

within 7 months. Twelve payments were reported during 1993.

Payments on the loan through December 31, 1992, total $97,176

with $58,458 being made from the Federal account.

Recommendation .4

Since the guarantors are no longer in excess of the

contribution limit, and the proceeds of the loan were used to

pay administrative expenses for which the Federal share vas paid

with permissible funds (See Finding II.A.), the Audit staff

recommends no further action with regards to this matter.

E. Matters Referred to the Office of General Counsel

Certain matters noted during the audit have been

referred to the Commission's Office of General Counsel.
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