Pay-to-Play Lessons from New Jersey’s State Investment Council Rules

New Jersey is often thought of as the “pay-to-play” state – primarily because we have five separate statewide pay-to-play prohibition laws in effect (covering state procurement, county procurement,  local procurement, state redevelopment projects and the investment of state funds). We also have one statewide disclosure law (applying on both a pre-contract and an annual basis) and hundreds of local pay-to-play ordinances (covering local government contracts, local redevelopment contracts, land use approvals and board of education contracts). Until recently, most of the discussion on pay-to-play restrictions in New Jersey focused on state, county and local restrictions applicable to procurement contracts. Now, the focus seems to be shifting to New Jersey’s State Investment Council Rules. Yesterday, the State of New Jersey Department of Treasury issued an audit confirming that whether a particular individual is covered under the State Investment Council rules may very well depend on whether the individual falls within the definition of an “investment management professional.” The results of the audit also raise the question of whether pay-to-play rules serve their intended purpose of preventing undue influence in the award of government contracts when many of the rules primarily rely on self-disclosure by the company or firm seeking government businesses. Unlike other pay-to-play rules, the State Investment Council rules provide limited exemptions when the investment management firm demonstrates in writing that the violation of the rule was unintentional and inadvertent. The SIC has the discretion to grant the exemption if it determines that the beneficiaries of the Pension and Annuity Funds, the State taxpayers and the public are best served by such an exception. The discretion afforded to the SIC under its pay-to-play rules raises the question of whether New Jersey’s other pay-to-play restrictions should be amended to include similar exceptions. The exception should not be a blanket “get of jail free card”; rather, the exception should allow the contracting government entity to exercise sound business judgment to evaluate whether the taxpayers are better served by terminating a contract with a particular vendor or whether the taxpayers would be better served by allowing that vendor to complete the contract at issue.