SAN JOSE CAPITAL OF SILICON VALLEY

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1 CITY OF SAN JOSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL SUBJECT: SEE BELOW COUNCIL AGENDA: 5/16/17 ITEM: 3.6 Memorandum FROM: Toni J. Taber, CM" City Clerk DATE: May 12, 2017 SUBJECT: BOARD OF FAIR CAMPAIGN AND POLITICAL PRACTICES RESPONSE TO SEPTEMBER 27,2016 COUNCIL REFERRAL REGARDING LEGAL DEFENSE FUNDS, AND CAMPAIGN AND OFFICEHOLDER CONTRIBUTIONS FOR ELECTION CONTEST OR RECOUNTS. RECOMMENDATION: As recommended by the Rules and Open Government Committee on May 10, 2017, accept the report of the Board of Fair Campaign and Political Practices ("Board") responding to the Council's September 27, 2016 referral to further review the amendments to Title 12 of the San Jose Municipal Code permitting legal defense funds and campaign contributions for election contest or recounts.

2 ROGC AGENDA: 5/10/17 ITEM: G.2 CITY OF Cr 13 SAN JOSE CAPITAL OF SILICON VALLEY Memorandum TO: RULES AND OPEN GOVERNMENT COMMITTEE FROM: Toni Taber, CMC City Clerk SUBJECT: SEE BELOW DATE: SUBJECT BOARD OF FAIR CAMPAIGN AND POLITICAL PRACTICES RESPONSE TO SEPTEMBER 27, 2016 COUNCIL REFERRAL REGARDING LEGAL DEFENSE FUNDS, AND CAMPAIGN AND OFFICERHOLDER CONTRIBUTIONS FOR ELECTION CONTEST OR RECOUNTS RECOMMENDATION 1) Accept the report of the Board of Fair Campaign and Political Practices ("Board") responding to the Council's September 27, 2016 referral to further review the amendments to Title 12 of the San Jose Municipal Code permitting legal defense funds, and campaign contributions for election contest or recounts. 2) Place the item on the May 16, 2017 City Council Agenda for action. BACKGROUND On September 27, 2016, the City Council adopted Ordinance No , relating to legal defense funds, and Ordinance No , relating to campaign and officeholder contributions for election contests or recounts, which are reflected in Chapter of the San Jose Municipal Code (SJMC). 1 The City Council subsequently referred both ordinances to the Board requesting additional study and to report back to the City Council in six months with possible recommendations to adjust these laws. The Board established an ad hoc subcommittee to review these ordinances and provide recommendations. The ad hoc subcommittee has completed its review of these two ordinances and provides, with Board approval, the following observations and recommendations relating to the payment of fines, the use of pro bono legal services, and post-election fundraising windows. 1 Unless otherwise stated, all statutory references are to the San Jose Municipal Code.

3 Page 2 ANALYSIS 1) Ordinance No : Legal Defense Funds, Fines Candidates and officeholders may establish a legal defense fund separate from their campaign fund for the purpose of raising money to pay attorney's fees and other costs associated with defending a civil, criminal, or administrative enforcement proceeding relating to political or governmental activity. (SJMC ; ) Under the Political Reform Act, contributions into a legal defense fund are not considered campaign funds, and may only be used to pay "attorney's fees and other related legal costs." (Gov. Code ) "Attorney's fees and other related legal costs" under the Political Reform Act include the payment of any fine resulting from an action where payment of attorney's fees from campaign funds would be permitted; such as a "defense of an action brought for a violation of state or local campaign, disclosure, or election laws[ ]." (Gov. Code 89513(c)(1)(B); ) However, legal defense funds may not be used to pay a fine that results in: A personal benefit to the candidate or officer if it is determined that the expenditure was not reasonably related to a political, legislative, or governmental purpose. A substantial personal benefit to the candidate or officer if it is determined that the expenditure was not directly related to a political, legislative, or governmental purpose. In the City of San Jose, contributions to a legal defense fund "must not be expended for fundraising, media or political consulting fees, mass mailing or other advertising, payment or reimbursement for a fine, penalty, judgment or settlement, or payment to return or disgorge contributions made to any other committee controlled by the officeholder or candidate." (SJMC C) This is consistent with the Political Reform Act (see Gov. Code (d)), with one exception. San Jose candidates or officeholders cannot use legal defense funds to pay for fines that would otherwise be allowed under the Political Reform Act. For example, the Political Reform Act would allow legal defense funds to be used to pay a fine incurred while defending an action brought against a candidate or officeholder for late filing of campaign statements. (See Fair Political Practices Commission's Campaign Disclosure Manual 2, Chapters, Use of Campaign Funds last updated in April 2016.) This is not currently permitted in San Jose. As demonstrated in the complaint filed June 5, 2015 by Tom Cochran against Manh Nguyen, technical violations for failing to file disclosure forms can expose candidates to potentially large financial liabilities without means of raising additional funds.

4 Page 3 Recommendation: In the spirit of conforming San Jose's campaign laws to align with the Political Reform Act and FPPC regulations, the City Council may want to consider amending Section [Legal defense account uses] to permit the use of legal defense funds to pay fines as permitted under the Political Reform Act. 2) Ordinance No : Campaign and Officeholder Contributions, Pro Bono Legal Services At the September 27, 2016 City Council meeting, the City Council expressed concern over the ability of candidates and officeholders to receive pro bono legal services. The City Attorney explained that the Political Reform Act allows individuals to volunteer their time and professional services to candidates and campaign committees so long as there is a mutual understanding that such services are voluntary and not subject to reimbursement. However, if a lawyer is directed by their employer to work for a candidate or committee, the fair market value of their time must be reported as a nonmonetary contribution if the lawyer dedicates more than 10 percent of his or her compensated time. California Government Code Section and FPPC Campaign Manual 2, Chapter 3, Contributions, affirm the ability of individuals to volunteer their time and professional services without reporting their services as a contribution. Although the use of volunteer services is already in the SJMC, the City Council adopted Ordinance No to include subsection E of Section to explicitly state that pro bono legal services are permitted contributions as allowed under the Political Reform Act. While the City Council's intent was to clarify that pro bono legal services are explicitly permitted, the Board believes this language may cause confusion. Since the Political Reform Act allows any individual to volunteer their professional services, whether legal or otherwise as reiterated in Section D, the explicit reference to pro bono legal services may confuse candidates about their ability to utilize other pro bono professional services that are not explicitly addressed. In addition, since Section explains that Legal Defense contributions are not campaign contributions, this may stir confusion about the application of pro bono professional services for those using legal defense funds. Recommendation: In the spirit of aligning the City's local campaign laws with the Political Reform Act, the Board recommends that the City Council repeal subsection E of Section referring to pro bono legal services, since subsection D clarifies that personal or professional services donated to a campaign are permitted and are not reportable contributions under the Political Reform Act.

5 Page 4 3) Fundraising Window for Legal Defense Funds and Election Contests a) Timeline for Legal Defense Funds Section requires candidates and officeholders to specify pending investigations or enforcement proceedings when registering legal defense funds. The timeline in which these funds can be raised and expended is limited by the statute of limitations specific to the legal claims being alleged against the candidate or officeholder. Therefore, the Board does not believe binding the use of legal defense funds to elections or campaign reporting timelines is necessary as the law already imposes a timeline. b) Timeline for Election Contests and the Use of Campaign Contributions As for election contests, California Elections Code Section et seq. outlines two types of contests: recounts and other contests. If a candidate is contesting an election for a recount, the candidate only has five days from the official canvass certifying the election results. This is well within the Ordinance Code's 180-day fundraising window for election contests defined in Sections and The Elections Code permits other contests other than recounts on the grounds that the defendant is allegedly not eligible for the office in dispute, that the defendant has committed an offense against the elective franchise, or that there was a sufficient number of votes that were illegal, fraudulent, forged, or otherwise improper. The Elections Code does not outline a timeline in which these complaints need to be filed in court. However, it can be reasonably assumed that a candidate or elector filing a contest in court may have sufficient time within the City's 180-day post-election contribution window. For example, if the first act of contest from a candidate or elector was a recount, the County of Santa Clara Registrar of Voters was able to complete 2016's District 4 voter initiated recount within two weeks, or 10 working days. Assuming a candidate in a similar situation took five days to file a recount contest, about three weeks would have elapsed to complete this process, leaving ample time for a candidate or elector to pursue other election contest alternatives. Without more stringent local ordinance requirements, the Political Reform Act does not impose a strict timeline for local candidates wanting to terminate their controlled committees. Under Government Code Section 89519, leftover campaign funds for officials leaving office and unsuccessful candidates will be designated as "surplus" on the 90 th day after leaving office or following the end of the post-election reporting period following the defeat of a candidate. For context, an unsuccessful candidate in the City of San Jose would have a little less than three months between the November 8, 2016 election and the January 31, 2017 post-election disclosure deadline, and, with the additional 90-day period to address leftover funds before "surplus" designation, would have approximately six months' worth of time to continue to raise funds after an

6 Page 5 election. As defined under Government Code Section 89519(b)(6), surplus funds may be used for election contests. Therefore, the City's 180-day post-election contribution window aligns with the Political Reform Act's window for unsuccessful candidates to raise campaign contributions, of which one of the many allowed expenses are legal costs associated with an election contest. It is important to note that if the City Council were to impose a shorter window for postelection contributions, such a policy would not impact the ability of candidates to file contests in court only the ability to raise funds for such an action. Since the Board's purview includes campaign finance and other ethics laws in Title 12 and relevant statutes in the Political Reform Act of the Government Code, the Board declines to opine on policy changes relating to the administration of elections outlined in the Elections Code and suggests that the City Council seek counsel from the City Attorney or Staff if relevant policy changes are pursued. Recommendation: Since the City's post-election contribution window aligns with the Political Reform Act, and no adverse impacts have occurred from theoretically drawn out election contests, the Board does not recommend any changes to the post-election contribution window at this time. PUBLIC OUTREACH This memo has been posted on the City Clerk's website as a part of the May 10, 2017 Rules and Open Government Committee agenda. COORDINATION This memorandum has been coordinated with the Office of the City Attorney and the Board of Fair Campaign and Political Practices. COMMISSION RECOMMENDATION See Analysis for the recommendation approved at the March 8, 2017 Board of Fair Campaign and Political Practices meeting. CEQA Not a project. f) Toni J. Taber, CMC City Clerk For questions, please contact Toni J. Taber, City Clerk, at (408)