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Project on Government Oversight

Stimulus Funds Vulnerable to Pay-to-Play Contracting

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September 24, 2009

A POGO investigation has found that many state and local governments with laws limiting contractors’ campaign contributions (meant to reduce the influence of private interests in the public contracting process) are facing obstacles to enforcing these “pay-to-play” laws on stimulus-funded contracts. As a result, stimulus-funded contracts are not being subjected to this additional level of corruption prevention, a missed good-government opportunity.

Nine states and at least 60 city governments have enacted pay-to-play laws. For example, Illinois prohibits current and prospective state contractors that do more than $50,000 a year in business with the state from making campaign contributions to state races. There is a wide range of differences between the laws, and some are being challenged in court. And with a larger economy than many states, New York City has its own pay-to-play laws that it will apply to stimulus-funded contracts. The Big Apple restricts campaign contribution not only from those who have or are bidding on city contracts, concessions, franchises, and grants totaling at least $100,000, but also land use ruling applicants and those with economic development agreements.

The federal government, on the other hand, lacks comprehensive pay-to-play laws for federal contractors, other than the Security and Exchange Commission’s groundbreaking Rule G-37, which limits the contributions of brokers, dealers, and municipal securities dealers. The American Recovery and Reinvestment Act (ARRA) did not outline any specific ethics requirements on contracting, instead relying on state and local policies governing conflicts of interest, financial disclosure, and selecting responsible contractors.

Some State Laws May Not Apply to Federal Funds

One obstacle is that some states’ pay-to-play laws can’t actually apply to stimulus contracts. In South Carolina, Colorado, West Virginia, and Kentucky, the laws only apply to no-bid contracts, which are prohibited under ARRA. Connecticut’s pay-to-play law exempts exclusively federally-funded contracts. Likewise, Hawaii’s statute only applies to funds appropriated by its own legislature, but captures all mixed-funded contracts. The good news is, even these limited pay-to-play laws can have anti-corruption value for exclusively federally-funded stimulus contracts, because the contractors who comply with the laws in order to bid on the state-level contracts are likely to also bid on stimulus contracts.

Federal Highway Administration’s Roadblock of State Laws

Another obstacle is that the Obama Administration has continued a Bush Administration practice at the Department of Transportation’s Federal Highway Administration (FHWA) to withhold federal highway funds from states that enforce their pay-to-play laws. The FHWA claims the pay-to-play laws reduce the pool of potential bidders for contracts and thus restricts competition. The FHWA has enforced its prohibition in Illinois (section 50-37a) and New Jersey. This practice not only interferes with state and local campaign finance and ethics reforms, but also needlessly strips a layer of protection against corruption and contract abuse from up to $26 billion of stimulus-funded highway contracts.

Despite FHWA’s concerns, Craig Holman at Public Citizen recently showed that New Jersey’s pay-to-play law has had no discernible impact on the number of bidders for construction projects. In fact, the analysis shows that New Jersey contracts subject to the pay-to-play law enjoy more competition than FHWA-funded contracts not subject to the law, both in terms of total numbers of bidders and average numbers of bidders per contract.

There are efforts underway to overturn FHWA’s practice, including Public Citizen’s request to the Administration to change the policy, and legislation proposed by Representative Mike Quigley (D-IL) to close a loophole that allows FHWA to withhold the federal highway dollars. While this issue has not come up at House Committee on Transportation and Infrastructure oversight hearings, Committee staff say it may come up in future hearings on waste, fraud, and abuse.

States May Not Be in Position to Bolster Enforcement for Stimulus

Yet another obstacle to preventing corruption in the procurement process is that the state agencies that enforce pay-to-play rules are hampered by budget cuts and statutory limitations on their work. For example, the Ohio Elections Committee, with only a handful of staff, can only react to allegations brought to it rather than be proactive and seek out violations. Lack of effective monitoring of pay-to-play practices in Ohio resulted in one of the largest corruption scandals in the state’s history. Dubbed “coin-gate,” a major campaign contributor received a contract to invest public funds into his personal rare coin collection. The state lost millions of dollars. Following the lead of Connecticut, New Jersey, and the SEC, Ohio has since implemented new requirements that State contractors must file disclosure reports about their campaign finance activity to the contracting agencies before qualifying for State contract work.

How to Connect the Dots Between Campaign Contributions and Stimulus Contracts

Even when states and localities can’t enforce their pay-to-play laws, it is possible to connect the dots between campaign money and stimulus-funded contracts. Some states have tools that make it easier to connect the dots. For instance, Illinois has Open Book, a database that allows the public to search state contracts and campaign contributions. The database does not identify contracts as ARRA-funded, so this oversight tool must be used in conjunction with the state’s Department of Transportation website, which clearly identifies stimulus contracts. In other states, it’s also possible to identify pay-to-play contracting, although only by comparing up to three different databases and websites: one for campaign contributions; one for state contracts; and the state Recovery website for a list of ARRA contracts. In New York City, the public can keep track by identifying the contractor from NYC Stimulus Tracker, plugging them into the Doing Business Search, and then referencing the Searchable Campaign Finance Database.

In other states, however, it may be close to impossible to compare this data at all. Good Jobs First found that only 10 states provide contractor names on their ARRA website, and POGO has discovered that only 11 states clearly identify ARRA contracts on their state procurement websites. (Those interested in searching campaign contributions by state, including industry and donor name, have a resource in the National Institute on Money in State Politics.)

The Federal Gov Can Remove Some Obstacles, and Learn from the States

If the above obstacles are removed, many states and local governments have practices that may serve as model legislation for other states — and even the federal government — such as the Open Book in Illinois and well-crafted pay-to-play laws.
 

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.