[Federal Register Volume 70, Number 243 (Tuesday, December 20, 2005)]
[Rules and Regulations]
[Pages 75379-75385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-24249]



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  Federal Register / Vol. 70, No. 243 / Tuesday, December 20, 2005 / 
Rules and Regulations  

[[Page 75379]]



FEDERAL ELECTION COMMISSION

11 CFR Parts 106 and 300

[Notice 2005-27]


State, District, and Local Party Committee Payment of Certain 
Salaries and Wages

AGENCY: Federal Election Commission.

ACTION: Final rules.

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SUMMARY: The Federal Election Commission is amending its rules to 
revise the method by which State, district and local party committees 
(collectively ``State party committees'') may pay salaries and wages of 
employees who spend 25 percent or less of their compensated time in a 
month on Federal election activity or activity in connection with 
Federal elections (``Federal-related activity'' or ``Federal-related 
activities''). These final rules implement the decision of the U.S. 
Court of Appeals for the District of Columbia Circuit in Shays v. FEC, 
which held that the Commission had not provided an adequate explanation 
for its former rules under the Administrative Procedure Act. The 
Commission is also changing its requirements regarding the method State 
party committees use to pay for employees' fringe benefits and 
clarifying its rules regarding the use of funds raised in joint Federal 
and non-Federal fundraising events. Further information is provided in 
the Supplementary Information that follows.

DATES: Effective Date: These rules are effective on January 19, 2006.

FOR FURTHER INFORMATION CONTACT: Ms. Mai T. Dinh, Assistant General 
Counsel, or Mr. Anthony T. Buckley, Attorney, 999 E Street NW., 
Washington, DC 20463, (202) 694-1650 or (800) 424-9530.

SUPPLEMENTARY INFORMATION: The Bipartisan Campaign Reform Act of 2002, 
Public Law 107-155, 116 Stat. 81 (2002) (``BCRA''), amended the Federal 
Election Campaign Act of 1971, as amended (the ``Act''), 2 U.S.C. 431 
et seq., in various respects. Under BCRA, State party committees must 
pay the salaries and wages of employees who spend more than 25 percent 
of their compensated time per month on Federal-related activities 
entirely with Federal funds.\1\ 2 U.S.C. 431(20)(A)(iv) and 441i(b)(1). 
However, BCRA does not address what type of funds State party 
committees must use to pay the salaries and wages of employees who 
spend some, but not more than 25 percent, of their compensated time per 
month on Federal-related activities (``covered employees''). In 2002, 
the Commission promulgated 11 CFR 106.7(c)(1), (c)(5) and (d)(1), and 
300.33(c)(2). Under these rules, State party committees were permitted 
to pay the salaries or wages of covered employees entirely with funds 
that comply with State law. Id.
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    \1\ ``Federal funds'' are funds that are subject to the 
contribution limitations, source prohibitions, and reporting 
requirements of the Act. 11 CFR 300.2(g).
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    In Shays v. Federal Election Commission, 337 F. Supp. 2d 28 (D.D.C. 
2004) (``Shays District''), aff'd, 414 F.3d 76 (DC Cir. 2005) (``Shays 
Appeal''), reh'g en banc denied (Oct. 21, 2005) (No. 04-5352), the 
District Court considered a challenge to the regulations that permitted 
State party committees to use all non-Federal funds to pay the salaries 
and wages of covered employees. The District Court recognized that the 
Commission's interpretation of 2 U.S.C. 431(20)(A)(iv) and 441i(b)(1), 
did not violate the first step of Chevron U.S.A. Inc. v. Natural 
Resources Defense Council, Inc., 467 U.S. 837 (1984) (``Chevron''), 
because Congress had not directly spoken on this issue. However, the 
District Court held that the Commission's interpretation was not a 
permissible reading of the statute under step two of Chevron.\2\ Shays 
District at 113-114.
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    \2\ The first step of the Chevron analysis, which courts use to 
review agency regulations, is whether Congress has directly spoken 
to the precise questions at issue. The second step is whether the 
agency's resolution of an issue not addressed in the statute is 
based on a permissible construction of the statute. See Shays 
District at 51-52 (citing Chevron).
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    On July 15, 2005, the U.S. Court of Appeals for the District of 
Columbia Circuit affirmed the District Court's ruling on this 
regulation, but on different grounds. The Court of Appeals held that 
the regulations addressing the salaries and wages of covered employees 
survived both steps of the Chevron analysis, but that the regulation 
failed for lack of a sufficient explanation under the Administrative 
Procedure Act. See Shays Appeal, 414 F.3d at 112.
    Before the Court of Appeals decision, the Commission issued a 
Notice of Proposed Rulemaking to determine the appropriate mix of 
Federal and non-Federal funds that State party committees must use to 
pay the salaries and wages of covered employees. Notice of Proposed 
Rulemaking on State, District and Local Party Committee Payment of 
Certain Salaries and Wages, 70 FR 23072 (May 4, 2005) (``NPRM''). The 
comment period closed on June 3, 2005. The Commission received comments 
from nine commenters in response to this NPRM. The Commission held a 
hearing on this rulemaking on August 4, 2005, at which four commenters 
testified.
    After the hearing, the Commission reopened the comment period until 
September 29, 2005. In reopening the comment period, the Commission 
noted that it was doing so ``to allow all interested persons to submit 
information or comments that may be useful in this rulemaking in light 
of the Court of Appeals opinion.'' Notice to Reopen Comment Period for 
Rulemaking on State, District, and Local Party Committee Payment of 
Certain Salaries and Wages, 70 FR 51302 (Aug. 30, 2005). Five 
additional commenters submitted comments during this period. The names 
of all commenters and their written comments, as well as a transcript 
of the public hearing are available at http://www.fec.gov/law/law_rulemakings.shtml#party_salaries under ``State Party Payment of 
Salaries and Wages.''
    Under the Administrative Procedure Act, 5 U.S.C. 553(d), and the 
Congressional Review of Agency Rulemaking Act, 5 U.S.C. 801(a)(1), 
agencies must submit final rules to the Speaker of the House of 
Representatives and the President of the Senate and publish them in the 
Federal Register at least 30 calendar days before they take effect. The 
final rules that follow were transmitted to Congress on December 14, 
2005.

Explanation and Justification

    The Court of Appeals' decision allows the Commission to attempt to 
justify the

[[Page 75380]]

rules allowing State party committees to use wholly non-Federal funds 
for the salaries and wages of covered employees. However, the decision 
also indicates that a far more substantial record would be necessary to 
support these regulations. Shays Appeal at 112. Here, the Court found 
it ``quite plausible that wealthy donors would swallow costs for 
increased state and local campaigning * * * [for] an army of workers 
devoting more than a day a week to federal elections.'' Id.
    Several commenters urged the Commission to retain the rules 
allowing State party committees to pay the salaries and wages of 
covered employees with 100% non-Federal funds. They argued that there 
is no evidence of abuse or circumvention of BCRA by dividing Federal-
related activities among many employees who each devote no more than 
25% of their time to Federal races. In fact, one commenter testified 
that wealthy donors interested in Federal elections would not give a 
penny if apprised that no more than 25% of their donation would be used 
for these purposes. This commenter also urged the Commission to retain 
these rules for party committees that have under seven employees 
because it would be difficult for such small committees to engage in 
the kind of evasion that concerned the District Court.
    Thus, the record developed during this rulemaking, including the 
comments submitted by the State and local party committees or their 
representatives, suggests that, in general, State party committees may 
face practical obstacles in trying to use the rule to circumvent BCRA 
in the way the court feared. However, as explained below, the 
Commission has an alternative to the former rules that addresses the 
Court of Appeals' concerns about circumvention and has the virtues of 
familiarity, relative ease of administration, and a reasonable 
relationship to the State party committees' level of Federal-related 
activities. Consequently, the Commission is not retaining the former 
rules. Instead, it is amending 11 CFR 106.7 and 300.33 to require State 
party committees to allocate the salaries and wages of covered 
employees between their Federal and non-Federal accounts as 
administrative costs.

I. Allocation of State Party Wages

A. Introduction

    The NPRM presented three options for allocating the salaries and 
wages of covered employees. The first proposal would adopt an 
allocation method that would establish a fixed minimum of 25 percent 
that a State party committee would be required to allocate to its 
Federal account. The NPRM contained proposed rules only for this 
approach. The second proposal in the NPRM would adopt an allocation 
percentage directly proportional to the amount of compensated time an 
employee spent on Federal-related activities in a given month in 
relation to all compensated time in that same month. This proposal 
would have resulted in different ratios for different employees.
    The third proposal would follow the pre-BCRA rules by treating 
salaries and wages of covered employees as administrative costs. This 
proposal would subject the salaries and wages at issue to the 
allocation ratios at 11 CFR 106.7(d)(2) that were developed as part of 
the BCRA soft money rulemaking. For the reasons stated below, the 
Commission is adopting this allocation method for the salaries and 
wages of covered employees.

B. 11 CFR 106.7(c)(1) and 300.33(c)(2) Allocation of Salaries and Wages 
as Administrative Costs

    The Commission is amending 11 CFR 106.7(c)(1) and adding new 11 CFR 
300.33(d)(1)-(3),\3\ to require that State party committees either: (1) 
Allocate the salaries and wages of covered employees as administrative 
expenses, or (2) pay these salaries and wages entirely from a Federal 
account. Revised paragraph (c)(1) of section 106.7 sets forth these two 
options. New section 300.33(d) addresses how State party committees 
must pay the salaries, wages, and fringe benefits of their employees. 
Revised section 300.33(d)(1) mirrors the language in revised 11 CFR 
106.7(c)(1). Revised section 300.33(d)(2) requires that State party 
committees pay the salaries, wages, and fringe benefits of employees 
who spend more than 25% of their compensated time in a given month on 
Federal-related activities with only Federal funds. New section 
300.33(d)(3) states that State party committees may pay the salaries, 
wages, and fringe benefits of employees who spend no time in a given 
month on Federal-related activities entirely with funds that comply 
with State law.\4\
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    \3\ The Commission is redesignating current 11 CFR 300.33(d) as 
11 CFR 300.33(e).
    \4\ Section 300.33(c) is amended so that it addresses only 
public communications.
---------------------------------------------------------------------------

    Allocation ratios for administrative costs in 11 CFR 106.7(d)(2)(i) 
through (iv) were modified during the BCRA soft money rulemaking. Final 
Rules on Prohibited and Excessive Contributions: Non-Federal Funds or 
Soft Money, 67 FR 49064, 49079 (July 29, 2002) (``Soft Money E&J''). As 
explained in the 2002 Soft Money E&J, the Commission derived the four 
allocation ratios that range from 15% to 36% by taking the averages of 
the previous ballot composition-based allocation percentages reported 
by State party committees in four representative groupings of State 
party committees representing states of varying sizes and geographic 
locations. Id. This approach was designed ``to assure that activities 
deemed allocable are not paid for with a disproportionate amount of 
non-Federal funds.'' Id. This approach reflects the variability of 
State party committee Federal spending from election cycle to election 
cycle, depending on the types of Federal offices that are on the ballot 
in one election cycle versus another. For example, State party 
committees are required to use 15% Federal funds for administrative 
expenses in election cycles where only Members of the U.S. House of 
Representatives are on the ballot in those states, versus 36% when the 
offices of the President and U.S. Senate are also on the ballot.
    The Commission has concluded that the use of these ratios will 
prevent circumvention of the soft money rules, even though the ratios 
do not track precisely the number of hours worked by employees. In 
addition, State party committees already use these allocation ratios 
for a variety of administrative costs and they allocated their 
employees' salaries and wages as administrative costs prior to BCRA's 
effective date. Thus, their familiarity and experience with the 
administrative costs allocation method will ease the transition and 
implementation of the new rules regarding the salaries and wages of 
covered employees.
    The Commission received comments supporting partial application of 
the administrative cost allocation method. These commenters favored 
using the administrative costs ratios in election cycles other than 
Presidential election cycles. They argued that it would be 
inappropriate to apply Presidential election cycle allocation ratios of 
28% and 36% because they would apply to employees who spend no more 
than 25% of their compensated time in a given month on Federal-related 
activities. The Commission disagrees that such an application would be 
inappropriate.
    Requiring a Federal allocation percentage that is higher than the 
corresponding percentage of Federal-related activity is not 
inconsistent with BCRA. Under 2 U.S.C. 431(20)(A)(iv), Congress 
mandated that a person who

[[Page 75381]]

spends as little as 26% of his or her compensated time in a month on 
Federal-related activities must be paid entirely with Federal funds. 
Congress was silent on how State party committees should pay the 
salaries and wages of covered employees. Congress was aware, however, 
that at the time it enacted BCRA, State party committees were required 
to allocate salaries and wages of their employees as administrative 
costs. It is reasonable to conclude that Congress could have expected 
that the Commission might continue to treat the salaries and wages of 
covered employees as allocable administrative costs.
    Another commenter objected to requiring allocation of covered 
employees' salaries as administrative costs, maintaining that there is 
no rational relationship between the time actually spent by employees 
on Federal-election activities and the amount of Federal money required 
to be used to fund those employees. Neither FECA nor BCRA requires that 
the allocation ratios be precisely proportional to the amount of time 
spent on Federal-related activities. It is sufficient that the 
administrative costs allocation ratios generally reflect the overall 
level of State party committees' Federal activity based on the 
percentage of Federal candidates on the ballot.
    Other commenters who opposed the administrative costs allocation 
method were concerned that not enough Federal funds would be used to 
pay employees who spend 25% of their compensated time per month on 
Federal-related activities during any year in which no Presidential or 
Senatorial candidate is on the ballot. They argued that the 15% 
administrative costs allocation ratio for those years would allow State 
party committees to pay the remaining 10% of the employees' compensated 
time spent on Federal-related activities with non-Federal funds. 
According to these commenters, this approach is inconsistent with 
Congress' overall scheme of requiring Federal-related activities to be 
paid for with Federal funds.
    The Commission disagrees that using the administrative costs 
allocation ratios is inconsistent with Congressional intent. The 
average of the allocation ratios of 15%, 21%, 28% and 36% is 25%, and 
the weighted average based on the frequency that State party committees 
would use the various ratios over a number of election cycles is over 
26%. Moreover, when there is a Presidential candidate on the ballot, 
State party committees must pay the salaries and wages of covered 
employees with at least 28% or 36% Federal funds, depending on whether 
there is a Senatorial candidate on the ballot. Because the 
administrative costs allocation ratios for State party committees will 
average at least 25% over time, the allocation ratios will achieve one 
of the goals of the fixed minimum 25% allocation ratio--ensuring that 
over time, State party committees will use sufficient Federal funds to 
pay for employee time that is spent on Federal-related activities--
without imposing a new allocation regime on State party committees.
    Furthermore, the Court of Appeals suggested its approval of this 
approach when it noted that ``the salary rule appears particularly 
irrational given the FEC's recognition that costs for voter 
registration, get-out-the-vote drives, and generic party advertising--
all matters, like salaries, that the FEA definition specifically 
addresses--may require allocation even when the activities `do not 
qualify' as FEA. See 11 CFR 106.7(c)(5).'' Shays Appeal at 112.
    In addition to the changes to 11 CFR 106.7(c)(1) and 300.33(d), 
corresponding changes are being made to two other regulations. Section 
106.7(d)(1)(i) is being revised to state that these salaries and wages 
must be paid wholly from the Federal account, or allocated as 
administrative costs. Similarly, section 106.7(c)(5) is being amended 
to make clear that the salaries and wages of covered employees are not 
exempt from allocation but rather are subject to allocation as 
administrative expenses. Conforming changes are also being made to 11 
CFR 100.57(b), 106.7(e)(2) and 300.36(b)(2)(ii).

C. Alternative Allocation Methods

1. Minimum Allocation of 25 Percent
    An alternative in the NPRM's proposed rule text would have required 
State party committees either (1) to allocate at least 25% of salaries 
and wages of covered employees to a Federal account, or (2) to pay 
those salaries and wages entirely with funds from a Federal account. 
See proposed 11 CFR 106.7(c)(1)(i) and (ii), 70 FR at 23074. As stated 
in the NPRM, a minimum allocation percentage of 25% would ensure that 
State party committees use Federal funds to pay for all the compensated 
time covered employees spend on Federal-related activity. 70 FR at 
23073. In this way, this proposal was one way to prevent circumvention 
of the Act, which, according to the District Court and the Court of 
Appeals, the challenged rules failed to ensure. See Shays District at 
114; Shays Appeal at 112.
    Some commenters supported this proposal. They asserted that setting 
a fixed allocation ratio has the advantage of providing a clear and 
readily administered rule that would minimize the burdens of compliance 
on State party committees and simplify enforcement for the Commission. 
Other commenters supported this proposal only for election cycles when 
a Presidential candidate appears on the ballot. For election cycles in 
which there is no Presidential race, these commenters believed that it 
was more appropriate to use the same allocation ratio as is used for 
administrative costs.
    In contrast, some commenters objected to this proposal in its 
entirety. One commenter argued that a fixed 25% allocation would 
introduce another step into an already complex process and required 
additional rules for determining how to manage payroll operations over 
and above what is already required for administrative expense 
allocation. Another commenter stated that the proposed 25% allocation 
sweeps too broadly and unjustifiably interferes with the type of money 
State and local committees may use to compensate their employees who 
work substantially on non-Federal issues.
    Although a fixed minimum 25% allocation ratio on its face appears 
to be the simplest, most straightforward method for allocating salaries 
and wages of covered employees, it is not, given the other regulations 
that govern how State party committees pay for their disbursements and 
experience with past allocation methods. State party committees are 
already required to apply an allocation scheme to their administrative 
costs if they do not use 100% Federal funds. Moreover, before BCRA's 
enactment, State party committees were required to allocate their 
employees' salaries and wages as administrative costs if they did not 
use entirely Federal funds. By including the salaries and wages of 
covered employees as administrative costs, State party committees will 
use an allocation scheme with which they are familiar and have 
experience applying. The fixed minimum 25% allocation method would 
subject State party committees to an additional and different 
allocation ratio that would apply to only one category of their 
disbursements for which they would have to monitor, maintain records 
and report on a different form. To avoid creating yet another 
allocation method for State party committees to apply, the Commission 
is not adopting a fixed allocation ratio of 25% for salaries and wages 
of covered employees.

[[Page 75382]]

2. Allocation Directly Proportional to Amount of Time Worked
    This proposal would adopt an allocation percentage for salaries and 
wages of covered employees directly proportional to the amount of 
compensated time these employees spend on Federal-related activities in 
a given month in relation to all compensated time in that same month. 
This proposal would probably have required State parties to use 
different percentages for different employees in a given month. The 
percentages would also be expected to vary for each employee from month 
to month.
    Most commenters agreed that a direct proportionality allocation 
scheme would be complicated, would require additional recordkeeping 
that could be burdensome, and would be difficult to track, report, and 
enforce. The commenters who supported this method only did so to the 
extent that this method would be an optional method available to State 
party committees in lieu of another allocation method adopted by the 
Commission.
    State party committees must maintain logs of employee time spent on 
Federal-related activities under current 11 CFR 106.7(d)(1). These same 
logs could serve as the basis for allocating these employees salaries 
and wages between Federal and non-Federal funds. While in most cases 
such a method could be expected to produce an allocation that most 
closely matches the proportion of employees' time spent on Federal-
related activities, it suffers from a number of practical deficiencies. 
Under the current system, the logs only serve to distinguish covered 
employees from those over the 25% threshold. This division has legal 
consequences, while the particular percentage does not.
    It would also introduce into the allocation scheme for State party 
committees the problems with computing complicated allocation ratios 
that the Commission sought to eliminate for SSFs and nonconnected 
committees when it amended the allocation regulations in 11 CFR 106.6. 
See Final Rules on Political Committee Status, Definition of 
Contribution, and Allocation for Separate Segregated Funds and 
Nonconnected Committees, 69 FR 68056, 68059 (Nov. 23, 2004). When the 
Commission examined the allocation scheme for SSFs and nonconnected 
committees, it found that it was difficult for these committees to 
calculate a precise ratio because the calculation was based on 
predicting accurately the amount of time spent on certain activities. 
The calculation was further complicated when these committees predicted 
incorrectly the amount they spent on certain activities.
    Based on the comments and Commission experience with allocation 
methods, an allocation method directly proportional to the amount of 
time worked would be complex and likely to engender confusion, and 
would be unduly burdensome to State party committees. For these 
reasons, the Commission is not adopting this allocation method.

D. Employees Who Spend No Compensated Time on Federal-Related 
Activities

    In the NPRM, the Commission stated that it is continuing to 
interpret BCRA as allowing committees to pay the salaries and wages of 
employees who spend no time in a given month on Federal-related 
activities entirely with non-Federal funds. All commenters who 
addressed this issue supported this interpretation. Some of these 
commenters recommended that the Commission incorporate this 
interpretation into its regulations, as some committees might otherwise 
interpret the Commission's regulations as requiring them to allocate 
such salaries and wages. Consequently, the Commission is adding new 11 
CFR 106.7(d)(1)(iii), which states that, notwithstanding section 
106.7(d)(1)(i), salaries and wages paid for employees who spend none of 
their compensated time in a given month on Federal election activities 
or activities in connection with a Federal election may be paid 
entirely with non-Federal funds.

II. Allocation of Fringe Benefits of Employees

    The NPRM also sought comment on whether the methods for allocating 
salaries and wages should be applied to fringe benefits of employees. 
Specifically, the NPRM sought comment on whether the rules should be 
amended to permit, but not require, State party committees to use the 
same allocation rules for fringe benefits as are used for salaries and 
wages, instead of allocating fringe benefits as administrative costs. 
In Advisory Opinion (``AO'') 2003-11, the Commission advised a State 
party committee that it may pay the costs of fringe benefits for 
covered employees with non-Federal funds. Fringe benefits were 
described by the State party committee as medical, dental, and 
prescription drug insurance coverage; coverage for short-term 
disability (wage loss) and long-term disability insurance benefits; 
coverage for life insurance benefits; and employer matching 
contributions to the 401(k) retirement plan. The Commission determined 
in AO 2003-11 that amounts spent on fringe benefits fell into the 
category of compensated time, and thus concluded that the State party 
committee could use entirely non-Federal funds to pay for the fringe 
benefits under the rules for payment of salaries and wages that were in 
effect at that time.
    Some commenters urged the Commission to give State party committees 
the option of treating fringe benefits as administrative costs, while 
other commenters urged the Commission to treat fringe benefits as 
compensated time.
    Because the salaries and wages of covered employees are treated as 
administrative costs under the revised rules at 11 CFR 106.7(c)(1) and 
(d)(1)(i), and fringe benefits are a form of compensation, it is 
appropriate for State party committees to treat fringe benefits for 
covered employees as administrative costs. Accordingly, State party 
committees must now treat fringe benefits as they would salaries and 
wages, depending on the time spent per month on Federal-related 
activities: Either by paying for them entirely from the Federal 
account, or by allocating the costs of the fringe benefits as 
administrative costs. Consistent with the new rules' approach to 
salaries and wages, the fringe benefits of employees who spend no time 
in a month on Federal-related activity may be paid with funds that 
comply with State law. Revised 11 CFR 106.7(c)(1) and 106.7(d)(1), and 
new 11 CFR 300.33(d) reflect that salaries, wages, and fringe benefits 
are treated the same. AO 2003-11 is hereby superseded to the extent it 
stated that State party committees may pay for fringe benefits of 
covered employees entirely with non-Federal funds.

III. Use of Funds Raised Through Joint Federal and Non-Federal 
Fundraising Events

    The NPRM sought comment on whether to amend 11 CFR 106.7(c)(4) to 
clarify that Federal funds raised through a joint fundraising activity 
or a joint fundraiser (collectively ``joint fundraiser'') may be used 
for Federal election activity.\5\ The statutory basis for section 
106.7(c)(4) is 2 U.S.C. 441i(c), which reads: ``An amount spent by a 
[national committee of a political party or a State party committee] to 
raise funds that are used, in whole or in part, for expenditures and 
disbursements for

[[Page 75383]]

a Federal election activity shall be made from funds subject to the 
limitations, prohibitions, and reporting requirements of this Act.'' In 
AO 2004-12, the Commission determined that a State party committee 
could pay for Federal election activity with Federal funds raised at 
events where the costs of such events had been paid for with a 
combination of Federal and non-Federal funds, allocated through the use 
of the funds received method. See 11 CFR 106.6(d).
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    \5\ Joint fundraisers include events where a State party 
committee raises both Federal and non-Federal funds on its own, or 
together with another organization under 11 CFR 102.17.
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    Some commenters supported amending the rule to reflect the 
interpretation in AO 2004-12. These commenters argued that the current 
regulation, strictly interpreted, would have required State party 
committees to pay all of their fundraising expenses with Federal 
dollars in order to use the Federal funds raised at a fundraiser to pay 
for Federal election activities. These commenters asserted that such a 
result was unduly burdensome for, and unfair to, State party 
committees. Other commenters who opposed any revision argued that the 
regulation ``captures one of the essential elements of BCRA: to provide 
for clear separation between hard money and soft money for the funds to 
be used by state parties for Federal election activities.'' They 
asserted that 2 U.S.C. 441i(c) mandates such a rule and interpretation.
    The Commission disagrees that 2 U.S.C. 441i(c) requires this 
construction. The Commission interprets the statute to require only 
that the costs of raising Federal funds to pay for Federal election 
activities must be paid for with Federal funds. Allocation and the use 
of the funds received method accomplish this because they ensure that 
Federal funds are used to raise Federal funds. Indeed, with respect to 
the funds received method, the Commission has previously noted that it 
``provides the most accurate basis for division of [fundraising] 
costs.'' Explanation and Justification on Methods of Allocation Between 
Federal and Nonfederal Accounts; Payments; Reporting, 55 FR 26058, 
26065 (June 26, 1990).
    Further, interpreting 2 U.S.C. 441i(c) to mandate special 
fundraising rules when raising Federal funds for Federal election 
activity would result in an anomalous treatment of Federal funds raised 
at joint fundraisers. Under this interpretation, State party committees 
could not use Federal funds raised at a joint fundraiser to pay for 
Federal election activities directly, but they could transfer the 
Federal funds to the national party committee to pay for Federal 
election activities in their own states; they could also transfer 
Federal funds to other State party committees to pay for their Federal 
election activities.
    Furthermore, this interpretation of 2 U.S.C. 441i(c) would create a 
new class of Federal funds that must be used to pay for Federal 
election activity. This new class of Federal funds would be subject to 
fundraising restrictions that would not be applicable to other Federal 
funds including those used to make direct contributions to Federal 
candidates. The Commission does not believe that Congress intended 
these anomalous results.
    In order to avoid any confusion concerning fundraising costs, the 
Commission is amending 11 CFR 106.7(c)(4) to state specifically that 
State party committees may allocate the direct costs of joint 
fundraising between their Federal and non-Federal accounts according to 
the funds received method described in 11 CFR 106.7(d)(4). All other 
statements in section 106.7(c)(4) suggesting otherwise are being 
deleted.
    Corresponding changes are being made to other Commission 
regulations. Section 106.7(e)(4) and the contents of section 
300.33(c)(3) are being removed, because neither indicates that direct 
costs of fundraising may be allocated. Also, section 300.32(a)(3) is 
being amended to state that State party committees that raise Federal 
and non-Federal funds at a joint fundraiser, where the Federal funds 
raised are to be used for Federal election activity, must either pay 
the direct costs of the fundraiser entirely with Federal funds, or must 
allocate the costs according to the funds received method. That rule is 
also being revised to state explicitly that if a State party committee 
raises only Federal funds at a fundraising activity it must pay the 
entire direct costs of the fundraising activity with Federal funds. The 
language in amended section 300.32(a)(3) closely tracks the new 
language at section 106.7(c)(4).
    The Commission is also amending the description in 11 CFR 
106.7(c)(4) of what is included in the direct costs of fundraising to 
conform to the descriptions at 11 CFR 106.6(b)(1)(ii) and 300.32(a)(3). 
This amendment is not a substantive change; rather, the Commission 
seeks to avoid any potential confusion by having two different 
descriptions of ``direct costs of fundraising'' in its regulations.

IV. Additional Issues

    A commenter urged the Commission to address three issues not 
discussed in the NPRM. These issues are: (1) Establishing a payroll 
holding account into which both Federal and non-Federal funds are 
deposited for the sole purpose of transmitting payroll through a 
payroll company; (2) permitting allocation of fundraising costs among 
Federal, non-Federal and Levin accounts; and (3) providing guidance on 
how State party committees should remedy a situation in which they make 
a mistake in estimating the amount of time an employee spends on 
Federal-related activities. The first two issues are beyond the scope 
of this rulemaking.
    Regarding the third issue, the commenters noted that some State 
party committees are required to pay their salaries, wages, and fringe 
benefits in advance because of their vendor contracts or payroll 
systems. Thus, these State party committees must estimate whether 
particular employees will spend more or less than 25 percent of their 
compensated time on Federal-related activity, and that these estimates 
are sometimes wrong. As a result, salaries, wages, and fringe benefits 
for employees may sometimes be prepaid with an allocable mix of Federal 
and non-Federal funds (under the new rule), when they should be prepaid 
entirely with Federal funds. Conversely, the salaries, wages, and 
fringe benefits for other employees might be prepaid entirely with 
Federal funds when they could have been paid with an allocable mix of 
Federal and non-Federal funds. The commenter sought guidance on how a 
State party committee could remedy these situations after the fact.
    Commission regulations at 11 CFR 106.7(f) govern transfers from a 
non-Federal to a Federal account, or from Federal and non-Federal 
accounts to an allocation account, to cover allocable expenses. When a 
State party committee uses a Federal or allocation account to prepay 
salaries, wages, and fringe benefits and later determines that these 
amounts could have been paid from a non-Federal account, i.e. the 
salaries, wages, and fringe benefits for covered employees, the non-
Federal account may reimburse the Federal account or the allocation 
account within the 70-day time window in that rule. In contrast, the 
salaries, wages, and fringe benefits of employees who spend more than 
25 percent of their compensated time per month on Federal-related 
activity are not allocable expenses and must be paid for entirely out 
of the Federal account. When a State party committee uses a non-Federal 
or allocation account to prepay salaries, wages, and fringe benefits 
and later determines that these amounts must have been paid for from a 
Federal account, current regulations do not contemplate that the 
Federal account can reimburse the non-Federal account or allocation 
account within the 70-day time window. While the Commission may 
consider such a

[[Page 75384]]

transfer a mitigating factor, the use of non-Federal funds to prepay 
salaries, wages, and fringe benefits that are required to be paid for 
with Federal funds is impermissible under Commission regulations.

Certification of No Effect Pursuant to 5 U.S.C. 605(b) [Regulatory 
Flexibility Act]

    The Commission certifies that the attached final rules will not 
have a significant economic impact on a substantial number of small 
entities. The basis for this certification is that the organizations 
affected by these final rules are State, district, and local party 
committees, which are not ``small entities'' under 5 U.S.C. 601. These 
not-for-profit committees do not meet the definition of ``small 
organization,'' which requires that the enterprise be independently 
owned and operated and not dominant in its field. 5 U.S.C. 601(4). 
State party committees are not independently owned and operated because 
they are not financed and controlled by a small identifiable group of 
individuals, and they are affiliated with the larger national political 
party organizations. In addition, the State party committees of the 
Democratic and Republican parties have a major controlling influence 
within the political arena of their State and are thus dominant in 
their field. District and local party committees are generally 
considered affiliated with the State party committees and need not be 
considered separately. To the extent that any State party committees 
representing minor political parties might be considered ``small 
organizations,'' the number affected by these final rules is not 
substantial.

List of Subjects

11 CFR Part 106

    Campaign funds, political committees and parties, reporting and 
recordkeeping requirements.

11 CFR Part 300

    Campaign funds, nonprofit organizations, political committees and 
parties, political candidates, reporting and recordkeeping 
requirements.

0
For the reasons set out in the preamble, Subchapters A and C of Chapter 
1 of title 11 of the Code of Federal Regulations are amended as 
follows:

PART 100--SCOPE AND DEFINITIONS

0
1. The authority citation for part 100 continues to read as follows:

    Authority: 2 U.S.C. 431, 434, and 438(a)(8).


Sec.  100.57  [Amended]

0
2. In Sec.  100.57, amend paragraph (b) introductory text by removing 
``(consistent with 11 CFR 300.33(c)(3))''.

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

0
3. The authority citation for part 106 continues to read as follows:

    Authority: 2 U.S.C. 438(a)(8), 441a(b), 441a(g).

0
4. Section 106.7 is amended by:
0
a. Revising paragraphs (c)(1), (c)(4), (c)(5), (d)(1)(i), and 
(d)(1)(ii):
0
b. Adding paragraph (d)(1)(iii);
0
c. Removing ``300.33(c)(2)'' in paragraph (e)(2) and adding in its 
place ``300.33(d)(2)'; and
0
d. Removing paragraph (e)(4).
    Revisions and additions read as follows:


Sec.  106.7  Allocation of expenses between Federal and non-Federal 
accounts by party committees, other than for Federal election 
activities.

* * * * *
    (c) Costs allocable by State, district, and local party committees 
between Federal and non-Federal accounts.
    (1) Salaries, wages, and fringe benefits. State, district, and 
local party committees must either pay salaries, wages, and fringe 
benefits for employees who spend 25% or less of their time in a given 
month on Federal election activity or activity in connection with a 
Federal election with funds from their Federal account, or with a 
combination of funds from their Federal and non-Federal accounts, in 
accordance with paragraph (d)(2) of this section. See 11 CFR 
300.33(d)(1).
* * * * *
    (4) Certain fundraising costs. State, district, and local party 
committees may allocate the direct costs of joint fundraising programs 
or events between their Federal and non-Federal accounts according to 
the funds received method described in paragraph (d)(4) of this 
section. The direct costs of a fundraising program or event include 
expenses for the solicitation of funds and for the planning and 
administration of actual fundraising programs and events.
    (5) Voter-drive activities that do not qualify as Federal election 
activities and that are not party exempt activities. Expenses for voter 
identification, voter registration, and get-out-the-vote drives, and 
any other activities that urge the general public to register or vote, 
or that promote or oppose a political party, without promoting or 
opposing a candidate or non-Federal candidate, that do not qualify as 
Federal election activities and that are not exempt party activities, 
must be paid with Federal funds or may be allocated between the 
committee's Federal and non-Federal accounts.
    (d) Allocation percentages, ratios, and record-keeping.
    (1) * * *
    (i) Except as provided in paragraph (d)(1)(iii) of this section, 
salaries, wages, and fringe benefits paid for employees who spend 25% 
or less of their compensated time in a given month on Federal election 
activities or on activities in connection with a Federal election must 
either be paid only from the Federal account or be allocated as 
administrative costs under paragraph (d)(2) of this section.
    (ii) Salaries, wages, and fringe benefits paid for employees who 
spend more than 25% of their compensated time in a given month on 
Federal election activities or on activities in connection with a 
Federal election must be paid only from a Federal account. See 11 CFR 
300.33(d)(1), and paragraph (e)(2) of this section.
    (iii) Salaries, wages, and fringe benefits paid for employees who 
spend none of their compensated time in a given month on Federal 
election activities or on activities in connection with a Federal 
election may be paid entirely with funds that comply with State law.
* * * * *

PART 300--NON-FEDERAL FUNDS

0
5. The authority citation for part 300 continues to read as follows:

    Authority: 2 U.S.C. 434(e), 438(a)(8), 441a(a), 441i, 453.


0
6. Section 300.32 is amended by revising paragraph (a)(3) to read as 
follows:


Sec.  300.32  Expenditures and disbursements.

    (a) Federal funds. * * *
    (3) State, district, and local party committees that raise Federal 
funds through an activity where only Federal funds are raised, must pay 
the direct costs of such fundraising only with Federal funds. State, 
district, and local party committees that raise Federal funds and non-
Federal funds through a joint fundraising activity under 11 CFR 
106.7(d)(4) or a joint fundraiser under 11 CFR 102.17, where the 
Federal funds are to be used, in whole or in part, for Federal election 
activities, must either pay the direct costs of such fundraising only 
with Federal funds or allocate the direct costs in accordance with the 
funds received method described in 11 CFR 106.7(d)(4). The direct costs 
of a

[[Page 75385]]

fundraising program or event include expenses for the solicitation of 
funds and for the planning and administration of actual fundraising 
programs and events.
* * * * *

0
7. Section 300.33 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as paragraph (e) and removing 
``(d)(2)(i)'' and adding ``(e)(2)(i)'' in its place in newly designated 
paragraph (e)(2)(ii); and
0
c. Adding new paragraph (d).
    Revisions and additions read as follows:


Sec.  300.33  Allocation of costs of Federal election activity.

* * * * *
    (c) Costs of public communications. Expenditures for public 
communications as defined in 11 CFR 100.26 by State, district, and 
local party committees and organizations that refer to a clearly 
identified candidate for Federal office and that promote, support, 
attack, or oppose any such candidate for Federal office must not be 
allocated between or among Federal, non-Federal, and Levin accounts. 
Only Federal funds may be used.
    (d) Costs of salaries, wages, and fringe benefits.
    (1) Except as provided in paragraph (d)(3) of this section, 
salaries, wages, and fringe benefits paid for employees who spend 25% 
or less of their compensated time in a given month on Federal election 
activities or on activities in connection with a Federal election must 
either be paid only from the Federal account or be allocated as 
administrative costs under 11 CFR 106.7(d)(2).
    (2) Salaries, wages, and fringe benefits paid for employees who 
spend more than 25% of their compensated time in a given month on 
Federal election activities or on activities in connection with a 
Federal election must be paid only from a Federal account.
    (3) Salaries, wages, and fringe benefits paid for employees who 
spend none of their compensated time in a given month on Federal 
election activities or on activities in connection with a Federal 
election may be paid entirely with funds that comply with State law. 
See 11 CFR 106.7(c)(1) and (d)(1).
* * * * *


Sec.  300.36  [Amended]

0
8. In Sec.  300.36, amend paragraph (b)(2)(ii) by removing ``(d)'' and 
adding in its place ``(e)''.

    Dated: December 14, 2005.
Scott E. Thomas,
Chairman, Federal Election Commission.
[FR Doc. 05-24249 Filed 12-19-05; 8:45 am]
BILLING CODE 6715-01-P