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![[small logo: Let America Speak!]](/las/speak_sm.gif)
by Janne G. Gallagher
Harmon, Curran, Gallagher & Spielberg
for the Let America Speak! Coalition.
November, 1995
Earlier this year, Representatives Ernest Istook (R-OK), David McIntosh (R-IN), and Robert Ehrlich (R-MD) introduced legislative language that would restrict the advocacy voice of federal grantees. Their proposals raise concerns about establishing different standards for federal grantees than for federal contractors. Accordingly, the Let America Speak Coalition commissioned the enclosed analysis to compare restrictions on lobbying and political activity imposed on federal grantees and federal contractors.
The report, prepared by Janne G. Gallagher of the law firm Harmon, Curran, Gallagher & Spielberg, reviews all existing law and regulation covering grantees and contractors with respect to lobbying and campaign activities. She found that recipients of federal funds have worked under virtually identical rules with respect to lobbying and political advocacy restrictions -- regardless of whether they are a grantee or a contractor.
For the first time ever, as a result of the Istook-McIntosh-Ehrlich amendment (and subsequent amendments by Istook and McIntosh individually) there would be significant differences between restrictions imposed on federal grantees and federal contractors. Federal grantees would have a limit imposed on the amount of private money they could spend on advocacy activities, whereas contractors would not. Federal grantees would have new reporting requirements that deal with lobbying and political activity, whereas contractors would not.
It is ironic that the focus of the Istook-McIntosh-Ehrlich amendment is on grants and not contracts. The amount of money spent of federal contracts ($196.4 billion in FY 1994) is eight times the amount spent on grants covered under the Istook-McIntosh-Ehrlich amendment ($24.5 billion in FY 1994).
We offer this report to help set the record straight
Legislation sponsored in the House of Representatives by Congressmen Istook, McIntosh, and Ehrlich would impose several significant new restrictions on the ability of federal grantees to use non-federal funds for advocacy. While there have been several drafts of the Istook/McIntosh/Ehrlich measure, all would impose a monetary limit on the use of non-federal funds for a broad range of activities before federal, state, and local executive and legislative bodies; all would place a high burden of proof on grantees to show that they comply with the new limits; and all would allow any interested person to sue a federal grantee believed to have violated the restrictions. However, the Istook/McIntosh/Ehrlich proposals do not place any advocacy restrictions on federal contractors' use of their private funds. Some proponents of the Istook/McIntosh/Ehrlich bill argue that federal contractors already are governed by such complex rules that additional limitations are unneeded or would be excessively burdensome.
This report compares restrictions found in current law governing lobbying and political activity by federal contractors with those applicable to federal grantees. It concludes that there are relatively few differences between the treatment of grantees and contractors with respect to these activities. Neither may use federal funds for lobbying and electioneering, but both may use their private resources for lawful purposes, including lobbying. One key difference, which disadvantages those nonprofit federal grantees that are exempt from tax under section 501(c)(3) of the Internal Revenue Code, is that these nonprofits may not support or oppose candidates for office and are limited in the amount of lobbying they can undertake. Commercial businesses that receive federal grants and contracts and other categories of nonprofit organizations are not subject to these restraints. Since federal grantees and federal contractors are treated relatively equally under current law, the Istook/McIntosh/Ehrlich proposals would significantly burden federal grantees without imposing comparable restrictions on federal contractors.
This analysis addresses only federal restrictions on lobbying and electioneering that apply to federal grantees and contractors. Besides the lobbying and electioneering restrictions discussed, both grantees and contractors are subject to detailed requirements governing all aspects of their relationships with the federal government. Contract rules generally are found in the Federal Acquisition Regulation (FAR) and agency FAR supplements, all of which are collected at Title 48 of the Code of Federal Regulations. Grant rules are set forth in Executive Orders, in a series of Office of Management and Budget Circulars, including Circulars A-21, A-110, A-122, and A-133, and in agency supplemental rules which are codified in the various volumes of the Code of Federal Regulations devoted to the agency's rules. One can make stacks of various heights of either contract or grant rules, depending on what one chooses to include in the pile, but the fact remains that nothing in current law bars government contractors from using their non-government funds for lobbying.
Following are my conclusions in summary:
Table of Contents
The federal government uses three basic types of legal instrument grants, cooperative agreements, and contracts in providing assistance to others to carry out federal programs and in acquiring goods and services for the benefit of the government. Generally speaking, the government uses procurement contracts when the principal purpose of the transaction is to acquire goods and services for the direct benefit of the government. 31 U.S.C. § 6303. When the government's purpose is to transfer things of value to a state or local government or other recipient to carry out a public purpose authorized by Congress, the government uses either a grant or a cooperative agreement. Cooperative agreements are favored when the government expects substantial involvement in carrying out the program; otherwise the preferred legal instrument is a grant. 31 U.S.C. §§ 6304 and 6305. The nature of the activity, not the nature of the recipient, dictates the form of agreement. The government can and does enter into contracts with nonprofit organizations and it can and does make grants to commercial businesses.
Federal procurement laws, the Federal Acquisition Regulation (FAR), and agency FAR supplements govern relationships between the federal government and its contractors, including nonprofit organizations. Grants to and cooperative agreements with institutions of higher education, hospitals, and other nonprofit organizations are governed by detailed rules contained in OMB Circular A-110 and by rules adopted by individual federal agencies. OMB Circular A-110 addresses such issues as standards for financial and program management, standards for acquiring and safeguarding property, procurement standards governing the grantee's acquisition of goods and services, reports and records, termination and closeout procedures, and penalties.
Many nonprofit organizations receive federal discretionary grant funds indirectly, as subrecipients of federal grants to state and local governments or to other nonprofit organizations. Nonprofits that receive pass-through federal funding remain subject to all applicable federal grant rules, including OMB Circulars A-110, A-122, and A-133. This is the case even if the nonprofit's agreement with the state or local government is in the form of a contract rather than a grant. In addition to remaining subject to federal grant regulations, nonprofits receiving funds passed through a state become subject to state rules as well. OMB Circular A-110, Subpart A.1. Nonprofits receiving federal block grant funds through state and local governments are subject to state requirements, but not those of the federal government.
Federal cost principles are the main source for lobbying and electioneering restrictions on the use of federal funds by grantees and contractors. Cost principles are general rules that govern whether and under what circumstances the government will pay for selected items of cost incurred by contractors and grantees. Cost principles apply only when a grant or contract is based on cost. While this is generally the case for grants and cooperative agreements, some federal contracts are not based on cost. Thus, cost principles do not apply to fixed-price contracts without cost incentives or to firm, fixed-price contracts for the purchase of commercial items. 41 U.S.C. § 256(l).
The cost of a federal grant or cost-type contract is the total of the allowable costs an organization directly incurs in performing the grant or contract and the portion of the organization's overhead expenses that is allocable to the federal agreement. Overhead expenses, known as indirect costs, consist of those costs that are incurred for common or joint objectives and which cannot readily be assigned to a particular program or activity. Examples of indirect costs include general administration costs, such as the salaries and expenses of executive officers, personnel administration, and accounting, as well as costs of operating and maintaining facilities and equipment. There are several methods for allocating indirect costs and determining indirect cost rates; the rates themselves are negotiated with the organization's federal cognizant agency.
Federal cost principles applicable to both commercial contractors and nonprofit grantees are carefully designed to preclude passing any element of an unallowable cost through to the government. Unallowable costs may not be charged directly to a federal award, nor may they be included in an organization's indirect cost pool for calculating the indirect cost rate charged to a federal award. In addition, unallowable costs must be treated as a direct cost and assigned a proportional share of the organization's indirect costs to ensure that the government does not pay indirectly for any portion of the overhead costs of supporting an unallowable cost.
Grants and cooperative agreements typically do not permit the recipient to make a profit or provide for any incremental payment by the government in addition to cost. In fact, grants and cooperative agreements almost always require the recipient to share part of the cost of carrying on the activity being funded, reducing the funds available to the organization for other purposes. Note 1 Contracts,on the other hand, generally do include an element of profit for the contractor. Money that a contractor receives from the federal government as a fee or profit is the contractor's private property and is not subject to limits on its use deriving from its origin as federal funds.
Cost principles for grants, contracts, and agreements with most nonprofit organizations are contained in Office of Management and Budget Circular A-122. Colleges and universities are governed by cost principles in OMB Circular A-21. Hospital cost principles can be found in 45 C.F.R. part 74, Appendix E, Principles for Determining Costs Applicable to Research and Development under Grants and Contracts with Hospitals. Commercial entities follow cost principles set forth in the Federal Acquisition Regulation.
Compliance with federal cost principles is enforced through audit. Both nonprofit grantees and commercial contractors may be audited by the agency that awarded the grant or contract, by the agency's Inspector General, and by the Comptroller General of the United States. Nonprofit organizations that receive more than $100,000 in federal funds from more than one federal program also must contract with an independent certified public accountant, who meets standards set by the Comptroller General, to carry out an independent and comprehensive audit of the organization's books and of its compliance with federal financial and program requirements. An important issue for these audits is whether the organization's use of federal funds complies with the cost principles of Circular A-122 for all major programs and whether the organization's financial controls are otherwise adequate to assure that the organization is not charging unallowable costs to federal grants. Office of Management and Budget Circular A-133, Audits of Institutions of Higher Education and other Nonprofit Organizations (1990). Organizations that receive less than $100,000 or receive funds from only one federal program must provide a detailed independent audit for that program. This audit also will include checks of the recipient's compliance with applicable cost principles.
Note 1 Federal grant rules also provide
that an organization's cost-sharing contribution to the project
may not include any costs that would not be allowable under federal
cost principles. OMB Circular A-110, _____.23(a)(4).
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The Federal Property and Administrative Services Act of 1949 generally bars federal contractors from charging the government for costs they incur (either directly or indirectly) to influence legislative action on any matter pending before Congress, a state legislature, or the legislative body of a political subdivision of a state. 41 U.S.C. § 256(e)(1)(B). There is a parallel provision applicable to defense contractors. 10 U.S.C. § 2324.
Comparable provisions applicable to nonprofit organizations are contained in Office of Management and Budget Circular A-122, which provides the principles for determining costs of grants, contracts, and other agreements with most nonprofit organizations. Grants to and contracts with colleges and universities are governed by OMB Circular A-21, which contains a parallel provision. OMB Circular A-21 ¶ 24.
Neither federal procurement law nor the OMB circulars limit an organization's ability to lobby with non-federal resources. These rules only proscribe charging certain lobbying expenditures to the federal government. Specifically, all three sets of rules bar commercial contractors and federal grantees from charging the government directly or indirectly for costs incurred in the following activities:
Nonprofit organizations exempt under section 501(c)(3) of the Internal Revenue Code may devote no more than an insubstantial part of their activities to carrying on propaganda or otherwise attempting to influence legislation. Charities may meet this test by electing to be governed by defined expenditure limits established by section 501(h) of the Internal Revenue Code. If they do so, they must be able to prove that their lobbying expenditures do not exceed the prescribed limits. For purposes of the section 501(h) election, lobbying includes efforts to influence legislation at the state and local level, as well as lobbying directed at Congress. However, the definition of the term influencing legislation excludes certain activities, including making available the results of nonpartisan analysis, study or research, self-defense activities, certain communications with members, communications with employees of the executive branch (other than for the purpose of influencing legislation) and providing technical advice and assistance at the written request of a legislative body or committee. I.R.C. § 4911(d)(2). Organizations that exceed the limits are subject to monetary penalties and, in extreme cases, to revocation of their tax exemption. Nonprofit organizations exempt under other sections of the Internal Revenue Code, including section 501(c)(4), which exempts social welfare organizations, and section 501(c)(6), which exempts trade associations, may lobby without comparable limits.
The Internal Revenue Code does not limit expenditures by businesses for lobbying. However, businesses may not deduct expenditures incurred for influencing state and federal legislation, for participating or intervening in political campaigns, for grass-roots lobbying efforts, or for direct communications with top executive branch officials for the purpose of influencing their official actions or positions. Businesses may deduct expenses for lobbying local governments on issues of direct interest. I.R.C. § 162(e). There are no exceptions to the rule of non-deductibility comparable to those provided in § 4911(d)(2). Businesses also may not deduct that portion of their dues paid to membership organizations that is allocable to lobbying expenditures. I.R.C. § 162(e)(3).
Note 2 The applicable statute
states that listed costs are not allowable under a covered contract,
defined as one that exceeds $500,000, a figure that is to be adjusted
periodically for inflation, with rounding to the nearest $50,000.
While the statute arguably creates a complete exemption from cost
principles for contracts for less than $500,000, the agencies
charged with administering the Federal Acquisition Regulation
take the position that cost principles apply, but that contracts
for less than $500,000 will not be subject to penalties for false
certifications of indirect cost rates. See, Department of Defense,
General Services Administration, and National Aeronautics and
Space Administration, Federal Acquisition Regulation; Penalties
on Unallowable Indirect Costs, 60 Federal Register 42657 (Aug.
16, 1995).
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Note 3 While federal grantees
are not completely barred from charging local lobbying costs to
a federal grant, they cannot do so unless they can demonstrate
that the expenses are necessary, reasonable, and related to the
federally-sponsored activity. Local lobbying costs could not be
included in the organization's indirect cost pool unless the lobbying
is undertaken to further a common or joint objective and so benefits
the federal project as well as the organization's other activities.
If the lobbying is undertaken to further another objective of
the organization, it cannot be charged to the federal grant either
directly or indirectly.
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Neither federal procurement laws nor OMB Circular A-122 contains a general limit on executive branch lobbying by either commercial contractors or nonprofits. However, both bar the use of federal funds for lobbying any government official or employee in connection with a decision to sign or veto enrolled legislation. OMB Circular A-122 ¶ 1.a.(3); 48 C.F.R. ¶ 31.205-22(a)(3).Note 4
The Internal Revenue Code does not limit communications between nonprofit charitable organizations and executive branch officials except to the extent that those communications are for the principal purpose of influencing legislation. I.R.C. § 4911(d)(1). Businesses also may communicate freely with executive branch officials and may deduct the costs they incur in doing so. However, they may not deduct the cost of lobbying certain top federal executive branch officials, including the President, the Vice President, officers, members of the Cabinet and their deputies. I.R.C. § 162(e)(6).
Both commercial contractors and nonprofits are governed by the Byrd Amendment, 31 U.S.C. § 1352, which prohibits the use of federal funds to influence or attempt to influence members of Congress, their staff, or federal agencies in connection with the award of federal grants, contracts, cooperative agreements, loans and loan guarantees. The Byrd amendment also requires these organizations to report the use of non-federal funds expended for these purposes.
Note 4 FAR cost principles also
declare unallowable costs incurred in trying to improperly influence
officers and employees of the executive branch with regard to
regulatory or contract matters. 48 C.F.R. ¶ 31.205-50. An
influence is improper if it induces consideration of a matter
on any basis other than its merits. 48 C.F.R. ¶ 3.401. While
there is no comparable cost principle for nonprofits, general
rules governing the allowability of costs would disallow expenditures
for improper purposes.
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The Federal Election Campaign Act bars campaign contributions and expenditures by all corporations both for-profit and nonprofit.Note 5 2 U.S.C. § 441b. In addition to the general bar on corporate contributions, FECA also bars campaign contributions and expenditures by federal contractors during the period between the commencement of negotiations and either the completion of performance or the termination of negotiations. 2 U.S.C. § 441c. Reg. § 115.2(a). However, the practical effect of this provision simply extends the ban on corporate contributions and expenditures to include individuals, partnerships and other unincorporated entities that contract with the government.
Federal cost principles bar both government contractors and government grantees from charging the government for costs associated with electoral activities, including the cost of maintaining a PAC. Otherwise, government contractors that are corporations, labor unions, membership organizations, cooperatives, or nonstock corporations have the same ability as other corporations and similar entities to establish, maintain and solicit contributions to separate segregated funds (PACs). While federal election law does not bar nonprofit corporations from establishing PACs, federal tax law does bar those nonprofits that are exempt from tax under section 501(c)(3) of the Internal Revenue Code from participating or intervening in political campaigns. This means that charities exempt under section 501(c)(3) may not set up, manage, or fund a PAC to engage in political campaign activities, evaluate candidate positions, or coordinate activities with a campaign.
Nonprofits exempt under section 501(c)(4), which are not eligible to receive tax-deductible contributions, can engage in some electoral activities, so long as they obey federal and state election laws and electioneering is not their primary activity. These nonprofits can set up, manage, and solicit contributions to a PAC, as can labor unions exempt under section 501(c)(5), and trade associations exempt under section 501(c)(6). As in the case of commercial contractors, these nonprofits are not barred from this activity by the receipt of federal grants or contracts.
Note 5 A very limited set of
nonprofit corporations organized for the promotion of political
ideas may use general treasury funds to make independent expenditures
in connection with federal election campaigns. Federal Election
Commission v. Massachusetts Citizens for Life, 479 U.S. 238 (1986).
That exception is unlikely to cover nonprofits receiving federal
grants or contracts.
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The changes proposed in the Istook/McIntosh/Ehrlich amendment would significantly restrict grantees' use of private resources for a range of activities that the amendment's authors term political advocacy, without imposing a comparable restriction on federal contractors. Existing federal procurement, tax, and election laws do not significantly restrict the ability of government contractors to spend their private resources on political advocacy activities. While federal procurement law is complex, and the Federal Acquisition Regulation and its agency supplements occupy several volumes of the Code of Federal Regulations, the bulkiness of procurement law does not equal a restriction on the use of private resources for lobbying or political advocacy.
More about the Silence America Amendment