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September 12, 2004

527's and Campaign Finance Law

There's a delightful paradox in campaign finance law. Some people-- let's call them Limiters-- think political expenditure is bad, because it helps candidate with access to money, and want to limit it. Those people supported the McCain-Feingold Bill, Public Law 107-155 (2002). Other people-- let's call them Expanders-- think political expenditure is good, because it educates the public. Those people opposed McCain-Feingold and sued in court, unsuccessfully, to block it (see McConnell v. FEC(2003)).

Here's the paradox. It has turned out that far from reducing political expenditure, McCain-Feingold has vastly increased it. Far from limiting the freedom to contribute and spend, it has expanded it and money from millionaires is more important than ever. Thus, we really should now see the Limiters wanting to repeal McCain-Feingold and the Expanders saying it was a good thing after all.

I have been trying, not very successfully, to figure out how this came about. I'd like to, since I want to teach campaign finance law this semester and next semester. But it's a hard area of law, and I'm still looking for either a journalist or an academic who has dared to try to explain it....

... The part I want to focus on are the "527's"-- the expenditures by supposedly independent organizations that are exempt from paying taxes (but to whom contributions are not tax deductible). In practice, it seems that these can run exactly the same kind of ads as the candidates do, and be run by the same people as the candidates' campaigns, but they can receive unlimited donations from individuals, labor unions, and corporations, and they have no spending limits. All they have to do is file detailed reports of what they spend and who they get the money from. Also, there is some undefined but lax limit on how close they can be to the candidate's campaign. The candidate's campaign manager cannot be the boss of a 527, though the candidate's party leaders can be the bosses, and the candidate's party can set up and directly fund its own 527 in a building across the street from its headquarters. Also, the candidate cannot directly fundraise for a 527, though he can put a link on his website to direct contributors to a 527 if he has reached his own fundraising limits.

Thus, McCain-Feingold seems to have pretty much repealed the limitations of campaign finance law, although it imposed onerous reporting requirements and transaction costs in terms of multiple websites, buildings, and corporate shells.

The law did not do this explicitly, though, and McCain, at least, seems genuinely outraged. Rather, it seems that the result is due to sloppy drafting and tolerant interpretation by the Federal Elections Commission, which is supposed to enforce it.

Here's what's going on as best as I can tell. We started with a complicated law in 2002, before McCain-Feingold, and McCain-Feingold amended it rather than replacing it. This means you can't just read the 36 pages of McCain-Feingold to know what the law is. In any case, knowing the written law wouldn't help, because what is crucial are the regulations that lay out the law in detail and the court decisions interpreting it. The Supreme Court decision, McConnell v. FEC(2003), is not useful because it is about whether the restrictions of McCain-Feingold are valid constitutionally, rather than what the text means.

Much of this 527 spending might have been legal even before McCain-Feingold, but there was less demand for it then, because "soft money" could be given and spent without restraint by the Democratic and Republican Parties. "Hard money" expenditures, though-- ads which attack candidates by name, for example, was not permitted to the parties, and for some reason 527's didn't do so much of it before McCain-Feingold.

Republicans seem to have thought that campaign finance law limited what 527's could do, and maybe the written law does. Everyone seems to have thought that 527's could do "soft money" sorts of things-- registering voters and suchlike-- but the Republicans didn't think they had much legal "hard money" possibilities-- TV ads attacking candidates. It seems they thought that the law forbade a 527 from running anti-Bush ads, accepting unlimited donations, engaging in unlimited spending, and being run by party leaders. They (and some liberal campaign reform lobbies, I think) complained to the FEC in Spring 2004. The FEC looked at the law, and said that it would permit all that for the 2004 election, but would maybe issue some restrictive regulations for the 2008 election. The Republicans were caught playing catch-up.

I think the FEC interpretation of the law might have been this (but I have not been able to pin this down): 1. A 527 can't coordinate with a political party, but "coordination" means sharing detailed plans and using the same ads, not discussing strategy or being run by the same people; 2. A 527 can't have campaign ads as its only purpose, because it is supposed to have "issues" as its main purpose, but it can nonetheless have campaign ads as its main purpose in any given year. But I'm not sure. I've seen articles saying even the FEC doesn't know what it would permit and wouldn't permit if cases were brought before it.

The Swiftvet ads, by the way, are a very small part of this. Not only has the expenditure on them and the contributions by single individuals been relatively small (in the low millions and hundred-thousands, as opposed to the high tens of millions and 5-20 million dollars for the Democrats), but also the big impact of the Swifvets has not been through their ads, but through their book, website, radio interviews, and so forth, none of which required significant expenditure (I suppose they have a book agent, a webmaster, and a scheduler, but those are trivial amounts and those things could have been done by volunteers if they'd had no cash).

A collection of links and quotes follows.

Top 50 List from Opensecrets. The top 5, the ones over $10 million, are Joint Victory Campaign 2004, Media Fund, America Coming Together, Service Employees International Union, and American Fedn of St/Cnty/Munic Employees. Joint Victory Campaign 2004 is a joint fund-raising committee run by America Coming Together and the Media Fund. Money raised by JVC is split by them.

By sector, Opensecrets reports these 527s

Type Receipts
Democratic/Liberal $126,849,747
Misc Unions $26,156,631
Repub/Conservative $17,224,036
Public Sector Unions $16,045,742
Environment $9,808,198
Bldg Trade Unions $5,231,512
Women's Issues $4,597,346
Unknown $4,455,921
Industrial Unions $4,381,287
Human Rights $4,294,279

Opensecrets has a list of the main 527's and 501's, with a sentence on each to say who they're backing.

Some webpages:

  1. I found Opensecrets.org's "Basics of McCain- Feingold" unhelpful-- it says what McCain-Feingold limits, but not what it doesn't limit.

  2. A WSJ op-ed that uses the phrase, "law of unintendeded consequences".

  3. "No one understands FEC 527 opinion (including FEC)" says Luke Francl in February 2004.

  4. Moresoftmoneyhardlaw.com talks about the fine points of the FEC decision, but somehow avoids telling us the bottom line.

The Washington Post on July 29, article 1

Flush with more than $60 million in the bank, the Democratic National Committee has set up a separate campaign operation with its own pollster, television consultants and media buyer to run a full-scale "independent" drive on behalf of Kerry. On Saturday, the first week's TV buy, worth $6 million, starts in 20 battleground states.

The first commercial is likely to use film clips of Kerry's acceptance speech at the convention here Thursday. Under federal campaign law, starting Friday, the Kerry campaign may spend only the $75 million it has agreed to accept from the federal government to run its general election campaign.

So an independent campaign can still use film clips of the candidate's speeches, and be funded by his party, and be run by his party!

As envisaged by Congress, the general presidential election would cost a total of less than $200 million -- $75 million in federal grants to each of the two candidates and $16.2 million in "coordinated" expenditures each by the Democratic and Republican national committees. In practice -- with the courts ruling that independent expenditures are legal, the spending of millions more by the parties on field operations and the planned spending by third-party groups, such as the pro-Democratic America Coming Together and the pro-Republican organizations financed by the pharmaceutical industry -- total presidential spending is likely to exceed $750 million, according to a compilation of party and independent-group estimates.


The new form of independent expenditures by the DNC was sanctioned by a 2003 Supreme Court ruling on the constitutionality of the McCain-Feingold campaign finance law. The court declared that the national parties can each spend $16.2 million on activities fully coordinated with the presidential campaigns, and "unlimited independent expenditures" that may not be coordinated with the presidential campaigns. The only restriction on the independent expenditures is that contributions must comply with the federal limit of no more than $25,000 from each individual. Moreover, each campaign cannot be involved in decisions concerning how the money is spent.

The Washington Post on July 29, article 2

Ickes, for example, spent his days in a suite at the Four Seasons Hotel with Rosenthal, Smith and Malcolm, greeting a steady stream of would-be donors to ACT and the Media Fund. The hotel also happened to be the one used by fundraisers for the Kerry campaign and the Democratic Party.

At night, Ickes took off his fundraiser hat and mingled with other Democrats on the floor of FleetCenter as a superdelegate, representing Washington, D.C. Ickes is also a member of the Democratic National Committee's executive committee, which makes him a party official.

Another 527, the New Democrat Network, has counted New Mexico Gov. Bill Richardson on its advisory board. As chairman of the convention, Richardson could be found gaveling open the proceedings. He also appears in anti-Bush ads aimed at Hispanics that NDN has run around the country.

At one point this week, Rosenthal acknowledged that ACT had hired a phone-bank operation owned by the Dewey Square Group, the Boston-based consulting firm run by several key Kerry strategists.

Insight says

Harold Ickes, former deputy chief of staff during the Clinton administration and a member of the Democratic National Committee's executive committee, heads the Media Fund.

"Harold Ickes has even admitted he has told the Kerry campaign what he is doing in his 527 activities," Stanzel said.

Media Fund Executive Director Eric Smith worked with Kerry Deputy Campaign Manager Steve Elmendorf on the primary campaign for Rep. Dick Gephardt, D-Mo., and attorney Bob Bauer serves a counsel both to the Kerry campaign and ACT, Stanzel said.


Late last week the commission also voted in favor of rules closing some of the loopholes governing 527s, including a $5,000 limit on donations by individuals. The rules, however, will not go into effect until 2006.

So it seems party officials can run a 527 and talk about it with other employees at the political party.

Also, it seems the FEC does think it has authority to regulate 527's strictly, but that it doesn't *have* to regulate them.

The Hill says

Several prominent election-law lawyers say a loophole may allow foreign citizens to make unlimited donations to 527s and 501(c)4s, both named after the sections of the tax code under which they are organized.


Congressional reformers modified section 441e of the federal election campaign laws to say that it is unlawful for a foreign national to make a contribution or donation of money or other thing of value in connection with a federal, state or local election; to make a contribution or donation to a political party; or to make an expenditure, independent expenditure or disbursement for an electioneering communication. In the second paragraph of the section, the drafters wrote that it is unlawful for a person to solicit or receive a contribution or donation from a foreign national in connection with a federal, state or local election, or to a political party. However, the section omits a prohibition that election lawyers had expected the drafters to place on soliciting or receiving an independent expenditure or disbursement from a foreign national for electioneering communication, the types of activities that are the purpose of 527 groups.


When the election commission contemplated new rules for 527s this spring, reformers such as Noble urged the agency in written testimony to require the groups to "register as federal political committees and to comply with federal campaign finance laws for their spending, which is clearly for the purpose of influencing federal elections."

However, the election commission could not agree how to determine whether an organization’s major purpose is to influence a federal election and issued no rules for 527s.


Bradley Smith, the chairman of the FEC, said campaign-finance reformers were wrong to blame the possible loophole on the agency’s decision to not regulate 527s.

Smith argued that the campaign-finance-reform law passed in 2002 did not ask for new regulations of 527 groups. Smith also noted that the commission has traditionally interpreted restrictions on foreign nationals more strictly than restrictions on other campaign-finance activity.

So Bin-Laden could legally spend $100 million, if he had it, to run anti-Bush ads. (Note that many foreign leaders *do* have that kind of money. It would have been pocket change for Saddam Hussein-- and a good investment for him in 2000! )

The FEC Chairman's position seems to be that McCain-Feingold did not change the law on 527's, and that 527's are pretty much unregulated, except for disclosure requirements.

The Washington Times of March 2004 says

" The Supreme Court stated that in McConnell v. Federal Election Commission that the FEC had 'subverted' the law, issued regulations that permitted more than Congress had ever intended and ... invited widespread circumvention of the Federal Election Campaign Act's limits on contributions," Mr. McCain said.

For his part, Mr. Feingold says he has given up on the FEC and wants it overhauled, saying at yesterday's hearing that effective campaign-finance reform will require another bill from himself and Mr. McCain to restructure the FEC.

"To be successful, campaign-finance reform must be implemented and enforced by an agency that is dedicated to carrying out the will of Congress, not frustrating it," Mr. Feingold said.

The FEC has argued in recent years that "527 groups" are not regulated under the 1974 Federal Election Campaign Act and later refinements, because they are private and nonpartisan and because their primary mission is not to influence federal elections.

It's a bit humorous that Feingold hasn't given up on regulation, after the total failure of his previous bill. He does seem to have learned, though, that changing a law is useless if you don't make sure that the court or agency that interprets the law has to pay attention to what you write.

The Washington Post on August 26, 2004 says

Critics warned that the law would weaken the parties by starving them of cash. Instead, the parties have managed to wean themselves from soft money: According to the most recent figures, each has raised more hard money so far this cycle than they did in hard- and soft-money donations combined four years ago.


As of June 30, the last period for which comparable figures are available, the Democrats' national party committees had collected $230 million in hard money this election, more than double the $102 million they raised in the 2000 race. The Republicans also doubled their tally, raking in $381 million, up from $178 million in the 2000 election.


Of the $154 million raised by groups linked to the presidential race through June 30, $145 million has gone to Democratic organizations. By contrast, the Democratic party committees had raised $126 million in soft money at the same point four years ago.

It's clearly troubling to have groups whose clear intent is to influence federal elections playing by different, looser rules than others involved in the process. The federal election law requires groups to register with the FEC -- and most important, to abide by strict donation limits -- if their "major purpose" is to influence a federal election. It's tough to see how the Swift Boat vets or the Democratic groups don't meet that test. And the involvement of marquee-name politicians in supporting the groups, enabled by the FEC's lax reading of the prohibition on federal lawmakers soliciting soft money for the groups, adds to the risk of such groups re-creating the problems of the old system under a different guise.

That article says that the FEC is simply not enforcing the law, using the wiggle room of "major purpose" (e.g., someone might claim that the major purpose of the Swiftvets is not to defeat Kerry in the presidential race, but to bring out the truth of his Vietnam service, regardless of whether he is elected or not).

MSNBC wrote on August 18, 2004,

According to the non-partisan research group the Center for Responsive Politics, Soros has donated $12.6 million so far to anti-Bush 527 groups.


Under federal law, the 527 groups cannot coordinate their ads with the presidential campaigns. But if they use individual donations, rather than labor union or corporate donations, they can run ads praising or attacking a candidate right up until Election Day.


This year, the 527 groups have taken on a more prominent role, and perhaps a decisive one. So far, the groups have spent a total of more than $200 million, according to the Center for Responsive Politics.

To put this number in perspective, as of June 30, the Kerry campaign had spent $142 million and the Bush campaign, $159 million.


The Swift Boat group is financed partly by Texas Republican donor Bob Perry, who has given to Bush’s 2000 campaign and House Majority Leader Tom Delay’s campaigns, as well as to that of Democratic Rep. Sheila Jackson Lee of Texas.

With more than $600,000 in funds raised, the group is small compared to the Media Fund, which has raised $28 million and run ads assailing Bush, or America Coming Together, which has raised $80 million and is looking to add another $45 million.

So by June 30, pro-Kerry 527s had spent more on the campaign than Bush had. Combined with Kerry's spending, that means Bush was outspent by 2 to 1.

Posted by erasmuse at September 12, 2004 02:40 PM

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