New ‘Pay to Play’ Rules for Companies Doing Business With Los Angeles

The voters of the City of Los Angeles recently passed Charter Amendment H, enacting new local "pay to play" laws that impose significant restrictions on contractors doing business with the City. The amendments to the City Charter will cut a wide swath across all industries and include specific provisions for subcontractors, company executives, contractors’ agents, and bond underwriting firms.

This Amendment to existing ordinances has the stated purpose to "encourage a broader participation in the political process and to avoid corruption or the appearance of corruption in city decision making, and protect the integrity of the City's procurement and contract processes by placing limits on the amount any person may contribute or otherwise cause to be available to candidates for election to the offices of Mayor, City Attorney, Controller, and City Council and promote accountability to the public by requiring disclosure of campaign activities and imposing other restrictions."

In general, the approved Amendment limits the ability of contractors (including executives and substantial owners), certain subcontractors, and contractors' agents from making political contributions to a variety of Los Angeles city officials while bidding or contracting with the City.

The Amendment revises and broadens existing campaign finance rules. It restricts contributions from any "person who bids on or submits a proposal or other response to a contract solicitation that has an anticipated value of at least $100,000 and requires approval" by the city council or by the relevant city office of the candidate, and applies as well to "subcontractors that are expected to receive at least $100,000 as a result of performing a portion of the contract obligations" and to "principals" of contractors or subcontractors. In relevant instances, such persons shall not make a campaign contribution to any elected city official, candidate for elected city office, or city committee controlled by an elected city official or candidate.

The campaign contribution prohibitions last from the time a bid or proposal is submitted until a contract is signed, or until the bid or proposal is withdrawn or rejected and for 12 months after the contract is signed for the winning bidder, its principals, its subcontractors of at least $100,000, and principals of those subcontractors.

The Amendment also limits "prohibited fundraising" for city officials or candidates by contractors, subcontractors with at least $100,000 value in subcontracts, and their principals.

Note the broad scope of these new Los Angeles laws.

The Amendment applies to "a principal of a person who is a bidder, proposer or subcontractor" which includes a Chairman of the Board, President, CEO, COO, or "the functional equivalent[s]" plus any individual with an ownership interest equal or greater than 20 percent in the contractor and anyone authorized by the bid or proposal to represent the contractor before the City (i.e., contractors' agents). This creates thorny issues for anyone doing business with the City of Los Angeles. Compliance is critical because penalties can apply, plus potential debarment for up to four years.

In addition, the voters also approved amendments to City Charter Section 609(e) to prohibit bond underwriters from making, in a given 12 month period, gifts equal or greater than $50, as well as prohibiting one or more political contributions totaling $100 or more, to any city elected official or any member of the board of the department whose revenue bonds are the subject of the sale, or to any other city official who has decision making authority over the sale. No underwriting firm, its principals, subcontractors, and subcontractors' principals can make any contribution or engage in prohibited fundraising for elected city officials or candidates “as further provided by ordinance.”

This second amended ordinance has a broad reach to underwriting company executives, owners, agents, PACs, and others. Underwriters must also comply or face penalties or debarment. The ordinance does exempt bond underwriters in situations where the underwriting firm is selected on the basis of competitive bidding.

All told, these Los Angeles amended ordinances will pose tricky new compliance issues for many contractors and their agents.

The ordinances could be subject to legal challenges in part on constitutional grounds, especially given the U.S. Supreme Court's 2010 decision in Citizens United. However, the ordinances as amended reflect a growing trend toward further regulation and campaign finance compliance efforts in state and local public contracting. One can expect other cities and states to continue this restrictive “pay to play” trend in light of the increasing public and political push towards greater scrutiny over how scarce government dollars are spent.