Dornauer, M.R. 1

Introduction

A major impetus in my decision to research 527s is the scant amount of information available about these groups. Prior to the 2000 election, their election related activities were negligible. The last two election cycles have seen a tremendous growth of these groups. With over $40 million spent by these groups in television ads alone, they had a profound impact on the past Presidential election. However, minimal research exists on their true impact. Since 527s are not regulated by the Federal Election Committee, but rather within the Internal Revenue

Code, they were not exploited as advocacy groups until after the passage of the McCain-

Feingold Bipartisan Campaign Reform Act (BCRA) in 2002.

As a result, 527s are the new loophole in politics. They can raise and spend unlimited amounts of money. Following the caustic 2004 Presidential race, they have become a burgeoning facet of electoral politics. Wealthy individuals, such as Peter Lewis and George Soros, have posted large sums of money to fund the activities of these groups. The 2004 election season saw myriad ads and voter mobilization drives aimed at the general electorate. These ads were often filled with sharp messages tailored to benefit one candidate. Although they never called for the direct election or defeat of a specific candidate, their messages were clear.

Research in this field is limited. The enormous amount of money used by these groups to help elect or defeat candidates is becoming omnipresent at all levels of government. These groups give a new meaning to the flow of soft money which was thought to be eliminated with the BCRA. They appear to be the future avenues of campaign ads and grassroots mobilization for both major parties. Should these groups be subjected to the same stringent campaign finance laws that govern other political interest groups, or will they continue to flourish and allow Dornauer, M.R. 2

wealthy individuals to exert their power in future elections? My research will attempt to answer

these questions.

When I began my research last year, 527s were barely a blip on the political radar screen.

However, over the past year they have had a major impact on the political landscape in America.

527s are an amorphous, constantly evolving subject area. I chose this topic predicting that these groups may play a pivotal role in 2004. At the outset of my research, financier magnate and avowed Bush basher, George Soros pledged an unprecedented $10 million to various

Democratic-leaning 527s to defeat Bush in the upcoming election. This initially piqued my

interest in the topic and was the harbinger for the salience of these groups. Although the ever-

evolving subject was enthralling to follow in the media, it also posed severe challenges to my

research.

Rather, one of the main incentives for to pursue this topic was the scant amount of

available research. I was in the unique yet intriguing situation as I saw my topic rapidly progress

in importance and attention throughout my research. Undertaking novel research in the field of

campaign finance reform was one of my primary goals. However, the lack of credible sources,

especially in terms of traditional academic resources, proved a greater challenge than I initially

foresaw. Without these sources I embarked upon the goal to seek personal interviews with the

largest and most influential 527s of the campaign. Unfortunately, this was my first roadblock;

unbeknownst to me, these groups would come under intense legal scrutiny which would inhibit

them from disclosing any information or offering opinions about their role in the electoral and

campaign finance processes.

In January 2005, I sent out letters to the twelve largest spending 527s seeking to

schedule a phone or personal interview with a representative from their office. I asked for a Dornauer, M.R. 3 response via email or phone. After three weeks of no responses from any of the groups, I attempted to call them. This effort proved to be the greatest frustration in my research. By

February I began to make headway with a few of the Democratic groups, namely New

Democratic Network and Voices for Working Families, and America Votes, all of which offered to review my questionnaire prior to answering it. However, an ironic twist ensued during this time.

On February 2nd 2005, Senators John McCain and Russell Feingold introduced a bill severely limiting the contribution limits of 527s, putting them under the surveillance of the

Federal Elections Commission. Although this legislation was exactly what I had proposed as the working hypothesis of my thesis, it caused the 527s to rescind on their offers to answer my questionnaire and shut off any opportunity for personal interviews with these groups. Lacking the credentials of high-powered news sources, who admit to the difficulty of obtaining information from these secretive groups, I was forced to seek alternative means of research.

Political interest groups have and always will find ways to circumvent campaign finance laws. 527s were formed primarily as a result of this circumvention and have become the dominant vehicle for soft money. This thesis will provide a brief historical analysis of campaign finance and how 527s came into existence. I then chronicle the rise of these groups within both major political parties in the past few years. The majority of the research is devoted to providing an investigation of their activities throughout the 2004 Presidential race, including the major groups, their strategies, contributors and activities during the electoral cycle. I then delve into the current proposed legislation pertaining to these groups and its anticipated impact. Finally, I offer my prediction for 527s and potential groups that may take their place as the new channel for soft money if the legislation is enacted and 527s are deemed ineffective. 527s have played an Dornauer, M.R. 4

important role in helping to register and mobilize an impressive percentage of the electorate in

the 2004 Presidential race; however, the fact that the groups circumvent not only the spirit but the letter of campaign finance law merits their reform in order to curtail their use of illegal soft money and place their actions under the constraints of the Federal Elections Commission (FEC)

in order to hold them to the same standards as other political committees.

An Overview of Campaign Finance

Throughout U.S. history, the government has attempted to mitigate the effects of money

in campaign politics. Even President Theodore Roosevelt lamented the impact of “big money”

corrupting the political process during his presidency. The Tillman Act of 1907, which

prohibited corporations from making contributions “in connection with” federal elections, was a

response to his concern. A similar prohibition was placed on labor unions in 1947 through a

provision of the Taft-Hartley Act.1 There were limited disclosure provisions enacted in the next

20 years as campaign finance regulations were not effectively implemented until the aftermath of

the Watergate scandal. 2

The Federal Election Campaign Act (FECA) was enacted in 1971, in response to

escalating campaign costs. This initial law invoked minor disclosure requirements and

contribution limits. The Watergate abuses, stemming from the 1972 Presidential campaign, were

the impetus for a major revision of FECA in 1974.3 The FECA was implemented with the goal of

curtailing the corruption that accompanied large, undisclosed donations and controlling rising

campaign costs. Thus, FECA created a series of contribution limits and expenditure caps. 4

Prior to the law’s full implementation in the next presidential campaign, it was challenged in the landmark Supreme Court case, Buckley v. Valeo (1976). In this case, the Dornauer, M.R. 5

central question was pondered by Justice White: “Is money speech and speech money?” The

Court’s majority ruled in dialectical opposition in regard to expenditures and contribution limits.

Generally, the Court held campaign contributions and expenditures are protected by the First

Amendment. These should only be limited in situations where “quid pro quos” accompany

donations and lead to corruption. On the other hand, the Court asserted that Congress could not

impose restrictions that limited campaigns from expressing support for their candidate.5

In terms of expenditures, the Court aligned with the free speech rights guaranteed by the

First Amendment. The majority affirmed that it is unconstitutional for the government to mandate ceilings on political expenditures. Candidates, committees, interests groups and individuals have the constitutional right to spend. Conversely, the Court espoused that contributions are equivalent to proxy speech which is susceptible to corruption in the electoral process- the major factor the Court sought to guard against in its decision. Contributions did not

garner the same Constitutional protection as expenditures because the Court reasoned that a

candidate could be corrupted by the tacit political indebtedness of large contributors. Therefore,

contribution limits can only be implemented to guard against corruption.

This caveat between contributions and expenditure limitations had been criticized as one

of the most egregious flaws in the Court’s history. In retrospect, the Court failed to perceive the influence of vast sums of money and resources being poured into campaigns in the form of

“independent expenditures.” Limiting the flow of money in terms of equality was not a concern.

Instead, the Court opened the floodgate for a proliferation of special interests and large individual donations.

The Buckley decision also impacted political speech. Prior to the ruling, FECA had

sought to control all contributions and expenditures made ‘in connection with’ federal elections Dornauer, M.R. 6

or made ‘relative to a clearly identified federal candidate.’ The Court ruled that this classification

was overly broad and vague, which posed a serious threat to free speech. It rendered the law only

applicable to “express advocacy.”

In its infamous footnote fifty two, the Court defined express advocacy as explicitly

calling for the election or defeat of a candidate. Conversely, issue advocacy can not be regulated

by FECA and is distinguished from express advocacy by eight examples of key phrases that

identify examples of express advocacy. The eight ‘magic words’ promulgated by the Court

included, “vote for”, “elect”, “support”, “cast your ballot for”, “[Smith] for Congress”, “vote

against”, “defeat”, and “reject”. Without inclination of these words, ads by parties and groups are

exempt from FECA constraints and considered educational rather than electioneering. These

“magic words” have been stretched and exploited by various groups to fall within the legal

bounds of issue advocacy.

Another major concern surrounding campaign finance evolved a few years after the

Buckley decision. In response to a Federal Elections Commission (FEC) advisory opinion in

1978, national parties began financing their party-building activities with “soft money.”

Theoretically, these funds were meant to bolster “non-federal” activities, such as voter

registration or get-out-the-vote (GOTV) activities. However, in practice, the federal parties

raised and spent unlimited amounts of soft money because it was not subjected to the constraints

of FECA since the money was not considered federal election related spending and, thus, not

required to abide by the contribution and spending limits imposed by FECA. Those massive

loopholes perpetuated an influx of unlimited soft money contributions from sources banned from

contributing to individual candidate.6 Dornauer, M.R. 7

By 1992, the FEC attempted to stifle the flow of soft money by requiring party committees to utilize allocation formulas. The formula mandated the two major national party

committees allocate 65% of their party-building costs as federal, leaving 35% to be paid with

soft money. At the national level, this proved effective in limiting some soft money, but the deleterious impact of it was not altered at the individual state-level. The vast majority of states employed a complex “ballot composition” formula whereby the number of federal candidates on the ballot equated to the percentage spent on federal party-building costs. Myriad states were subjected to utilize as little as 35% of their costs toward federal activities, leaving the remaining funds available for soft money expenditures.7

By the 1996 and 2000 presidential elections, political consultants had capitalized on the

soft money boom available at the state-party level. The transfer of soft money to the state parties was rampant as tens of millions of dollars raised by the national party was continuously directed to state parties to help with issue advocacy ads. Unlimited sums were spent on these ads as long as they avoided the “magic words” outlawed in Buckley.8

In less than two decades, the law was rendered futile. The FEC commissioners were often

deadlocked 3-3 regarding potential restrictions on soft money. Soft money sponsored ads, attacking or praising a federal candidate, was permissible under the auspices of “party-building expenses.” Consequently, prodigious sums of soft money were spent on caustic, issue ads that avoided the “magic words” explicated in Buckley.

In the most sweeping campaign reform legislation in 25 years, the Bipartisan Campaign

Reform Act of 2002 provided an overdue addendum to FECA. Championed by John McCain (R-

AZ) and Russell Feingold (D-WI) in the Senate and Christopher Shays (R-CT) and Martin Dornauer, M.R. 8

Meehan (D-MA) in the House, the bill sought to attenuate the impact of soft money and a redefinition of issue ad regulation. These two facets are the foundation of the bill.9

Under BCRA, national party committees are explicitly prohibited from raising or

spending soft money for any purpose. Moreover, federal officeholder candidates cannot raise or

spend soft money for state and local candidates and parties. Funds designated as “federal election

activity” have dwindled to $10,000 or less to fund these activities.10

The second prong of BCRA pertains to “electioneering communications.” Essentially,

this portion of the statute revised the definition of express advocacy to entail any broadcast ad

that refers to a clearly identified federal candidate within sixty days of a general election, or

thirty days of a primary, and targets the candidate’s constituency.11 Broadcast ads can be

propagated via television, radio, cable or satellite but do not include Internet advertisement.12

In the wake of BCRA, eighty-four plaintiffs, including Senator Mitch McConnell (R-

KY), the National Rifle Association (NRA), the American Civil Liberties Union (ACLU), and

both the Democratic and Republican parties, brought suit against the FEC. All of the pending

grievances were consolidated into one case, McConnell v. FEC. The Court rendered its decision

in 2003 with Justices John Paul Stevens and Sandra Day O’Connor writing for the majority.

They held that nearly all of the provisions of BCRA should be upheld including the two major

pillars: the soft-money ban in federal elections, and the regulations of “electioneering

communications.” Moreover, the Court concluded its opinion in deference to Congress. It vested

wide latitude in Congress’ capacity to respond to the mercurial forces of campaign finance.

Justice Stevens also admonished the FEC for its lackluster response to soft money proliferation

and utter failure in regard to ensuring the integrity of campaign finance. 13 Dornauer, M.R. 9

The first prong of BCRA addressed contributions to national, state and local parties, while the second prong restricted corporations and unions from running campaign advertisement.

Nevertheless, BCRA leaves other organizations unregulated: 501 (c) (3) corporations, Qualified

Nonprofit Corporations (“QNC”), unincorporated 501 (c) (4) organizations and, most importantly, 527 organizations. 14

Pertinent Legal Precedent

This major oversight in BCRA spawned the legitimatization and utilitization of so-called

“527” groups. In order to shield contributions to political parties from taxation, Congress added

§527 to the Internal Revenue Code in 1975. Specifically, they are defined as “a party, committee,

association, fund, or other organization organized and operated primarily for the purpose of

directly or indirectly accepting contributions or making expenditures, or both, for an exempt function”. The exempt function is further elucidated as “influencing or attempting to influence the selection, nomination, election or appointment of an individual to a federal, state or local

public office or office in a political organization . . .” 15

Unintended consequences have arisen regarding 527s in recent years. Section 527

assumed that these committees would fully disclose their activities since parties were required to

file disclose reports with FEC. This caveat created a campaign finance nightmare. Various 527s

interpreted that Section 527 allowed them to engage in issue advocacy and would then avoid

FEC regulation.16

Lawyers and political consultants quickly realized that the real loophole was not the tax

exempt status, but rather that 527s did not have to disclose their contributions and expenditures.

This egregious loophole was exploited by various non-profit groups, beginning with The Sierra Dornauer, M.R. 10

Club. Since no federal law regulated their activity, 527s soon became known as “Stealth PACs”

that flew under the radar of supervision. 17

527s saw limited use in the 1998 election cycle. The 2000 presidential primary was the first substantive emergence of 527 groups. Ironically, campaign reform advocate John McCain was lambasted as environmentally insensitive by a 527 group referred to as “Republicans for

Clean Air.” Not until a pair of millionaires, Sam and Charles Wyly, claimed responsibility for the ad did the public gain knowledge of the ad’s sponsors.

This lack of transparency cast an even darker shadow over 527s and yielded a minor reform. After the primaries, Senator McCain allied with Joseph Lieberman and Russell Feingold to compose a bill requiring 527s to file regular financial disclosure reports with the Internal

Revenue Service (IRS).18 Consequently, 527s are now required to notify the IRS of their

existence within twenty-four hours of organizing and to file periodic disclosure reports. 19 The

disclosure requirement was further solidified in 2002 with the passage of the Brady-Lieberman

disclosure law. It mandated quarterly reports to be posted on the IRS website in a searchable and downloadable format.

It is apparent the most exceptional increase in 527s occurred after the passage of BCRA and its reaffirmation in McConnell. In fact, in the McConnell ruling, the Supreme Court

reaffirmed that 527s, “remain free to raise soft money to fund voter registration, get-out-the-vote

activities mailings, and broadcast advertising (other than electioneering communications).”20

This legitimatized conduit for soft money quickly garnered political momentum. In their decision, Justices Stevens and O’Connor aptly stated, “…money, like water, will always find outlets.” 21 527s effectively became the de facto recipients of soft money post-BCRA. They Dornauer, M.R. 11

provided the ideal shadow to conceal their specific activities and intentions while extolling their

issue advocacy ads to the mass media and voter mobilization efforts.

Presently, BCRA imposes minimal restrictions on 527s. One is that they cannot

collaborate with federal candidates or campaigns during an election. Also, if the group chooses

to run television or radio ads that mention or reference a federal candidate within 60 days of the

general election, the money used for the ads must be raised from individuals and cannot be raised

from union or corporate donations. Finally, a 527 cannot donate directly to a candidate’s

campaign.

In addition to the names of donors, 527s must file “periodic” reports of contributions and

expenditures. Filing requirements within the IRS are two-fold: statements of organization and

periodic reports of contributions and expenditures. The former is entitled Form 8871 and simply

files the name of the designated contributor. The latter, referred to as Form 8872, follows a

similar filing schedule to FEC schedule of quarterly or monthly. The committee has the leeway

of choosing when to file the reports and must submit pre-general election and post-general

election reports during election years 22

The Rise of 527s

Democrats: 527s were initially cultivated by Democrats, who have always been more

dependent on soft money contributions than Republicans, to collect a portion of the re-routed

soft money banned by BCRA. The Democrats’ efforts were conceived and coordinated during a

Task Force on BCRA organized by former Democratic National Committee Chairman Terry

McAuliffe. Prominent members in attendance included: Harold Ickes, former Deputy Chief of

Staff to President Clinton and paid adviser to McAuliffe; Minyon Moore, DNC Chief Operating Dornauer, M.R. 12

Officer; Josh Wachs, DNC Chief of Staff; Joe Sandler, DNC counsel; Michael Whouley, a

successful Democratic consultant and former White House officials John Podesta and Doug

Sosnik. This Task Force created two 527s, the Media Fund and Grassroots Democrats. The

former would be headed by Ickes and focused on national media efforts; the latter was led by Joe

Carmichael, a DNC operative, to provide grassroots support and guidance to state parties. 23

Following a series of meetings with Democratic interest groups, the Democrats coalesced around the need to oust Bush from office. Emphasis at the meetings was placed on voter mobilization and grassroots initiatives to capture the youth vote. Subsequent action by Ickes led to the inception of a broad based coalition called America Coming Together (ACT).24

At this time, multimillionaire businessman and avowed Bush critics George Soros and

Peter Lewis were solicited by Ickes for initial contributions. Each pledged an initial $20 million

to jumpstart the Democrat’s 527s. ACT was spearheaded by former AFL-CIO Political Director

Steve Rosenthal, while Emily’s List President Ellen Malcolm assisted Ickes with the Media

Fund. Ickes and Malcolm united ACT and Media Fund under one encompassing fundraising

group called the Joint Victory Campaign (JVC). ACT would promote voter mobilization, while

Media Fund would run political advertising. Malcolm and Ickes explicated a well-devised, long

term plan for the Democrats. Looking past the 2004 Presidential race, Ickes and Malcolm

anticipated constructing a campaign funding infrastructure based on JVC.

To bolster their campaign coffers, Ickes and Malcolm enlisted the aid of former President

Bill Clinton. McAuliffe, a close friend and confidant, who had been chosen as DNC chair, chose

Clinton to assuage apprehension of potential donors and legitimize the Democratic-leaning

groups. In addition to his fundraising for the DNC, Clinton met with 527 donors on various

occasions, soliciting support for the JVC fund.25 Despite statutory requirements for 527s not to Dornauer, M.R. 13

coordinate their activities with the major parties, the Democrats continued to engender support

during the Democratic National Convention in Boston.

Republicans: In contrast to the Democrats timely establishment of 527s, the Republicans took a more cautious, deliberate approach. The core of their efforts involved a 501 (c) (4) group,

Progress for America (PFA) a grassroots entity which worked in conjunction with the Bush

Administration. PFA was founded in 2001 by Tony Feather, former Political Director for Bush-

Cheney in 2000 and a partner in Feather, Larson, Synhorst-DCI (FLS-DCI). Throughout its

inception, PFA enjoyed close ties to the Republican Party. Once BCRA was enacted, Feather

relinquished his position in deference to Chris LaCivita, former Political Director of the National

Republican Senatorial Committee due to federal legal conflicts.

Prior to his departure, LaCivita spent the majority of 2003 mired with the problem of discovering how to utilize PFA as an advocate organization for pro-Republican federal political campaigns that would be able to utilize its 501(c) (4) status without overstepping the bounds of having a primary goal of influencing elections. He struggled with the proposition to devote 49% of PFA’s resources towards “issue advocacy” and the other 51% on “express advocacy”, in order to fulfill the IRS restriction on these groups. His tenure with PFA was short as he departed in spring 2004 to work as senior strategist for another prominent Republican 527, Swift Boat

Veterans and POWs for Truth. Although he would return during election season as a consultant, he relinquished his authority within PFA to DCI partner Brian McCabe. 26

In March 2004, Democratic Presidential nominee John Kerry was losing the “hard

money” race. The Media Fund and MoveOn provided crucial assistance to Kerry’s campaign

with ads attacking Bush on various issues. In response to their scathing ads aiding deriding Bush, Dornauer, M.R. 14

the RNC and Bush-Cheney campaign filed suit against the 527s with the FEC. The groups

specifically alluded to collusion amongst the 527s and the Democratic Party. 27 The FEC refused to take action, voting on May 13th to delay ruling; therefore, giving 527s complete latitude in the

2004 Presidential Campaign.

On the same day, RNC Chair Ed Gillespie and Bush-Cheney Campaign chairman Marc

Racicot declared that the FEC’s refusal to act, “has given the ‘green light’ to all non-federal 527s to forge full steam ahead in their efforts to affect . . . the presidential race.”28 PFA considered

this joint statement an acknowledgement of their legitimacy. PFA, in particular, had struggled to

gain the large donations on par with its Democratic counterparts. After the ruling, PFA decided

to reorganize into a 527, creating the Progress for America Voter Fund (PFAVF). Another FLS-

DCI partner, Tom Synhorst, set the political wheels in motion in a role similar to Ickes,

balancing his political consulting work for FLS-DCI with his PFA responsibilities.

Republican supported 527s did not engender large scale donations until the Republican

National Committee in New York. Here, Bush proponents Dawn Arnell, a mortgage banker, and

Alex Spanos, owner of the San Diego Chargers, contributed $5 million a piece to PFA.29

Despite a slow start and initial intra-party opposition, the Republicans reversed their initial opinion of 527s and used the final months of the campaign to capitalize on their new-found political tools.

Profiles of Major 527s

There were more than 2,000 527s registered with the IRS in 2004. Nonetheless, only 257

of them were active in the electoral cycle. From this group, a smaller subset of seven groups Dornauer, M.R. 15

with partisan agendas can be delineated as having a disproportionate impact on the presidential

race in 2004, which included the flowing: America Coming Together (ACT), Progress for

America Voter Fund (PFAVF), Swift Boat Veterans and POWS for Truth, Media Fund,

MoveOn.org Voter Fund, and two major labor unions. They combined to spend nearly $210 million in the 2004 election cycle. 30

America Coming Together was one the prominent Democratic interest groups dedicated

to defeating President Bush. The group was founded and is currently run by long time

Democratic political operatives: Ellen Malcolm, President; Steve Rosenthal, Chief Executive

Officer; and Harold Ickes, who has no defined position, but contributes as a key consultant.

These major players focused ACT’s efforts towards generating the largest voter mobilization and

get-out-the-vote drive in electoral history, aimed primarily at areas of high demographic

concentrations of potential Democratic voters.

ACT’s national status was boosted when they enlisted the aid of rock star Bruce

Springsteen for a series of concerts they co-sponsored with fellow Democratic leaning group,

MoveOn and comedian Will Ferrell for an ad lampooning Bush on their website. The group’s

largest donors were George Soros, with a contribution of $7.5 million, and Peter Lewis who

donated $3 million. Labor also contributed around $8 million to ACT. Overall, they finished as

the overwhelming leader in expenditures with nearly $80 million spent throughout the campaign.

31

Media Fund was considered the little brother to ACT’s more plentiful soft money spigot.

Both groups received their funding through a joint account used to disseminate their donations,

Joint Victory Campaign (JVC) which was listed as the largest 527, but only served as a

clearinghouse for soft money distributed to ACT and Media Fund. As a subsidiary of JVC, Dornauer, M.R. 16

Media Fund was mostly under the supervision of Malcolm and Ickes. It provided 16 mass media

television, radio and print ads in an effort to defeat the incumbent Bush. Between the two of

them, they spent more than all of the Republican oriented 527s in 2004.

Not far behind ACT and slightly ahead of Media Fund on the soft money trail was pro-

Bush group, Progress for America Voter Fund. Formed mainly in response to MoveOn’s early

election cycle ads demeaning Bush, their primary focus was to form “issue truth squads” to

dispel what they felt were distortions of the President’s record. Closely affiliated with party operatives, especially the lobbying and public affairs firm of DCI Group, they were late to start in the 527 race for funds, but ended up exceeding their goal of $35 million with total contributions tallying $40 million. They served as the Republican counter to MoveOn and

Media Fund’s ads by portraying Bush as a strong, charismatic and empathetic leader through one of the campaign’s most popular television ad.

Following the same political agenda as PFAVF but with fewer funds to do so, Swift Boat

Veterans and POWS for Truth provided, some would argue, the most negative ads of the campaign. The group was founded by Vietnam War veteran John O’Neill who took over Kerry’s post when he left Vietnam. Although their website lists them as a non-partisan organization,

Swift Vets message was clearly partisan and anti-Kerry. They spent nearly their entire budget on ads defiling Kerry’s military career and questioning his anti-war activities upon returning to the

United States.32 The ads were arguably the hardest hitting and most detrimental to the Kerry

campaign.

MoveOn put 527s at the forefront of the campaign finance debate when it received the

first major donation to a 527 in early 2004 and received substantial contributions from Soros,

Lewis, and Herb and Marion Sandler. Almost all of this group’s funds paid for 21 television ads Dornauer, M.R. 17

against Bush and spent over $21 million in the process. Unlike most other 527s, MoveOn was founded well before the 2004 election. Berkeley, California based husband-and-wife duo Wes

Boyd and Joan Blades founded MoveOn in 1998 to protest the impeachment of President

Clinton. Over the years, the group developed its powerful MoveOn PAC and most recently its

527, MoveOn.org Voter Fund to foster Democratic ideals and financially support Democratic candidates.33 They pushed the envelope more than any other Democratic group by creating an

updated version of the infamous 1964 television ad “Daisy”, which suggested Bush’s policies

would lead to nuclear war.

As MoveOn and Swift Boat Vets garnered all of the media attention, union-backed 527s

exerted a clandestine influence on major electoral races. Although they were not major figures

in the presidential contest, American Federation of State, County and Municipal Employees

(AFSCME) and Service Employees International Union (SEIU) were numbers four and seven in

the final rankings of top money raising 527s in the 2004 election cycle. AFSCME utilized two

527s, while SEIU doled out money from three groups. With the hope of electing Democratic

candidates, most of their funds were distributed amongst hundreds of local unions and is used for

state and local races. 34 The graph below lists the contributions and expenditures of the top

Presidential election-oriented 527s.

2004 Presidential Election

As of June 2004, the Democratic groups had raised more than $70 million compared to a

mere $8 million reported by major Republican groups (Mullins, RC). The lack of Republican –

oriented 527s was attributed to two major factors. Primarily, the Bush Administration and the

Republican National Committee’s concern over the legality of the groups and their pending legal Dornauer, M.R. 18

action to force the FEC to rule on the legality of 527s prior to the election was the main cause for

tardiness in the race for 527 supremacy. Another major concern amongst Republican base,

especially those in the business sector, dealt with controversial donations following the fallout

from major corporate scandals involving Tyco and Enron. Executives were wary to suffer any

legal ramifications if the groups were declared illegal.35

Although Republican 527s decided to counter the overwhelming activity by the

Democratic groups as soon as the decision FEC decided not to regulate 527s in May 2004, it was

not until mid-August that the Republicans began making an impact with voters through their 527

activity. PFA saw a drastic influx in its pledges and deposits. Specifically from early July until

late August, PFA’s fund augmented from a meager $3 million to over $35 million. Until this

time, nine of the top ten fundraising 527s were Democratic or anti-Bush groups. According to

Center for Responsive Politics’ Steven Weissman, “Democrats as a fact dominate the 527s right now. There’s no question about that.” 36

Two pivotal pro-Bush groups, PFA and Swift Boat Veterans and POWs for Truth, a

group led by lawyer John O’Neill and focused on highlighting Senator Kerry’s anti-war

activities, made the most salient impact in the final weeks of the campaign.37 With each

candidate’s campaign bolstered by the $75 million in matching taxpayer funds, the 527s of both

parties realized the impact they would have on the advertising blitz and voter mobilization drives

throughout September and October. 38

In the final six weeks of the campaign, the Republican groups amplified their fundraising

efforts and began to offset the earlier fundraising inequalities between themselves and MoveOn

and ACT. PFA began focusing their radio, television and print advertisements on key

battleground states including Iowa, Wisconsin, Missouri, Florida and Ohio. “The Republican Dornauer, M.R. 19

groups got a late start, but I think what we’re seeing now is that they are becoming very active

and starting to catch up to the Democrats in fundraising,” stated Larry Noble, the executive director of the nonprofit Center for Responsive Politics at the time.39

By late September, Republican 527s had reversed the earlier trend of pro-Kerry groups as

they dominated the airwaves in the late summer months as they spent a combined $60 million. In

the final three weeks of the campaign the Bush backing 527s spent an astounding $30 million on

broadcast ads alone from October 13th through Election Day.40 This was three times the amount

the Democratic groups spent on ads supporting Senator Kerry. MoveOn had been producing a

plethora of anti-Bush ads throughout the early portion of the campaign year, but saw a

precipitous decline in activity as their funds dwindled. They had begun the ambush against Bush

in January 2004, but limped to the finish in the final weeks of the campaign.41

Swift Boat Vets and POWs for Truth and PFAVF exhausted $25 million in the final three

weeks, with PFAVF spending $16.7 million alone to target key swing states such as Florida,

Pennsylvania, Wisconsin and Ohio. The Buckeye State garnered the most media attention and

was the recipient of almost $16.6 million worth of ads, $10 million of which came from PFAVF.

42 In compliance with FEC requirement of disclosure of money spent on ads during the final 60

days of the campaign, 527s submitted detailed reports finally allowing the public a glimpse of

their expenditures.43 The graph below shows the spending trends during the final three weeks of

the campaign by pro-Kerry and pro-Bush 527s. Dornauer, M.R. 20

The Republican 527s poured the majority of their money into producing the most memorable ads of the campaign in the most vital battleground states. Swift Boat Vets proved that it is not necessarily the amount of money in your war chest, but rather how you spend it that counts. The anti-Kerry group’s ads were the most remembered according to surveys done by two major public opinion firms. The ads attacked Kerry’s anti-war stance and testimony to Congress upon his return to the U.S. while a Swift Boat captain in Vietnam.

The Swift Boat Vet ads packed a political punch on the heels of the Democratic

Convention. In conjunction with O’Neill’s best selling book, Unfit for Command, the 527 spent

$22.4 million to question Kerry’s military career and character

(http://www.swiftvets.com/videos/neverforget.wmv). Over three-quarters of respondents to a national survey by Republican firm Fabrizio, McLaughlin & Associates recalled concerns promulgated by the ad. Strategically, the Democrats faltered by not offering a response to the accusations. Their inaction coupled with the ads vitriolic message hurt Kerry’s polling numbers in the late summer months.44 Dornauer, M.R. 21

The next most impressionable set of ads by 527 groups was also pro-Bush. PFAVF’s

“Ashley’s Story” was the second most recalled ad. Ashley’s story, perhaps the most poignant ad of the campaign, involved a 16 year old girl from Mason, Ohio whose mother was killed in the

September 11th, 2001 terrorist attacks. During a campaign stop in nearby Lebanon, Ohio,

President Bush comforted and provided solace to Ashley. The ad sought to reiterate the Bush campaign’s theme of strong leadership and protecting America from terrorism in troubled times.

(http://www.ashleysstory.com/#). In the ad Ashley says, “All he wants to do it make sure I’m

safe.” The emotion and timing of the ad was vital to PFA’s strategy in the final weeks.

Produced in early June, the organization chose to save it for public dissemination late in the

election cycle. It was the largest single ad buy in campaign history at $16.5 million.45 The graph

below shows the surge of spending by Republican-leaning 527s after the Republican

Convention.

Post-Election Analysis Dornauer, M.R. 22

527s had a profound impact on the American electorate with an abundance of ads

featuring both touching and troubling moments. Critics of BCRA predicted the bill’s efficacy

was completely nullified by the 527s use of soft money in 2004. Further analysis indicates that this was not the case. 527s provided a conduit for some, but not all, of the soft money banned by

BCRA. 46

As anticipated, total 527 activity increased from $151 million in 2002 to $405 million in

2004, an increase of $254 million. Prior to BCRA, national and state parties raised $591 million

in soft money in 2002. Nevertheless, since the 527s raised only $254 million more in 2004 than

in the last year of party and candidate soft money, it is evident that 527s did not replace $337

million of the $591 million spent in the 2002 cycle. Thus, BCRA was effective in curtailing $337

million of soft money. Those figures underlie the fact that soft money donations to parties had

tripled from 1992 to 1996 and doubled from 2000 to 2004. So, it is reasonable to believe that this

amount of soft money overestimates 527s importance in substituting for soft money previously

raised by the parties. Additionally, increased donations typically occur during Presidential races,

and 2004 was no exception to this trend. Without BCRA the 2004 election cycle could have

witnessed an unprecedented amount of soft money. Regardless of the increase in 527

fundraising, this election in particular was embedded with intense passion and unprecedented

campaign donations.

527s can be classified into two distinct groups: “First Timers,” those active only in 2004

and “Repeaters,” those active prior to 2004. “First timers”, 51 groups total, represented relatively

nascent groups organized solely for the Presidential cycle. Most of these 527s had close partisan

ties. They included such influential groups as Swift Boat Vets and POWs for Truth and PFA for

the Republicans and ACT and Media Fund for the Democrats. In contrast, the “Repeaters” Dornauer, M.R. 23

represented the political stalwarts. Examples included Club for Growth, Sierra Club, American

Federation of State, County and Municipal Employees (AFSCME), Service Employees

International Union (SEIU) and Emily’s List. Of the two sets of groups, the “First Timers” more

than doubled the money raised by the “Repeaters” with a staggering $274 million.47

Nevertheless, the Repeaters impact should not be discounted.

Case Study: Interview with Brian McCabe, President of Progress for America:

After months of attempted contact with 527s from both parties, I finally made headway

with a major interview. Through a contact in DCI Group, I was able to procure an interview

with one of the most influential individuals associated with 527s in 2004, Progress for America

President, Brian McCabe. Just weeks before our interview, McCabe had been featured on

CNN’s political television show, Inside Politics with Judy Woodruff. As host Judy Woodruff Dornauer, M.R. 24

bluntly stated at the end of their segment, “It’s a rare inside look at that operation…,” referring to

the group’s reserved nature. 48

Fortunately, I was able to speak with Mr. McCabe in a phone interview. The

questionnaire I drew my questions from had been sent to the twelve largest spending 527s and

elicited no responses despite numerous phone calls and emails to all of the groups. Most groups

cited legal concerns for their inability to respond to my questionnaire. The following is a

transcript and analysis of my interview with Mr. McCabe on April 28th, 2005:

Question #1: Please list specific activities and strategies your group employed during the past

Presidential election cycle to influence the election? Which did you feel were most effective?

McCabe: “We did extensive television advertising, especially targeting certain states where there

was a lot of activity. We did a ton of internet communications; both banner advertising and

email. 20 million viewed the internet clip of “Ashley’s Story” through email exchange alone, in

addition to the people who saw it on TV. So, we were primarily a paid media operation.”

Question #2: Can you explain the strategy behind making your influential ad, “Ashley’s Story”

and your strategy of saving it until the final two weeks of campaign although it was produced in

June?

McCabe: “The reason we waited is because we were building up our issue campaign on the War

on Terror. We started this around July 4th and got really heavy around Labor Day and continued the intensity all the way through [the election]. We were discussing Senator Kerry and President

Bush’s stances on the issue. At the end, this story of President Bush hugging Ashley Faulkner Dornauer, M.R. 25

better represented the President’s character, compassion and leadership on the War on Terror

better than anything else.”

Question #3: What types of activities did your group employ to raise money (i.e. fundraising

events/dinners, mailings, internet solicitation, etc.)?

We didn’t do any fundraising events. We did one-on-one meetings to talk to them [potential

donors] and our fundraising was all information packets we had sent them. We told them about

what we were going to do; our programs, our activities. We raised $6 million in the final two

weeks which can be attributed to the power of Ashley’s story and a lot of that came from the internet. We did not do direct mail.

Question #4: How big of a role did large individual donation play in helping your efforts?

McCabe: “They were a pretty big percentage and I would estimate about 90-95% of our donations were solicited from large donations. If we had 50% give $10 and 50% give 10 million, a large percentage comes from the large donations.

Question #5: What forms of grassroots activities were most effective during the campaign?

McCabe: “We really didn’t do anything on the ground at all.”

Question #6: Many critics of 527s argue that they are a major loophole in campaign finance reform efforts and should be subject to spending limits similar to the political parties and PACs.

What are your views on this statement? Dornauer, M.R. 26

McCabe:” If you look at my statements when we first started, we were not supportive and I

remain not supportive of 527s. I think they were a product of campaign finance reform.

Questions like that would have to go to Senators McCain and Feingold- they wrote the law that created it [BCRA], the Democrats blew a hole through it and spent hundreds of millions of

dollars. So, we saw our effort as only to level the playing field with what they had done. Many

of the critics of it are the ones who actually created it. This becomes a First Amendment issue as

well. These groups have the right to have their opinions heard.

Question # 7: What is the future of your 527?

McCabe: “Who knows…I think that’s a great question and that will be a product of the

legislation. I think there will be a role for Progress for America Voter Fund in whatever shape or

form reform takes because it is an outlet for getting ideas out. We will continue to operate the

527 under the proper rules and regulations. We will wait and see what Congress does and we will react to it. But, we plan to be around.”

Question #8: What was the reason for the formation of your 527?

McCabe: “We saw that the liberal 527s, like MoveOn and America Coming Together had already spent $100 million attacking the President and once the FEC, in May 2004, decided not to regulate 527s in the last cycle, we decided the only thing to do was try to counter and level the

playing field compared to what these other groups had done.”

Question #9: Who is credited as the founder of your group?

McCabe: “Tony Feather, one of the partners of DCI.” Dornauer, M.R. 27

Question #10: What is your opinion of the newly proposed legislation by Senator’s McCain and

Feingold, 527 Reform Act of 2005? If passed, how will this legislation affect your group’s

activities?

McCabe: “I haven’t spent anytime looking at it because, as you know, as legislation gets debated

its gets changed all the time and even this week there were a lot of amendments and changes to

the 527 bill, so its just not worth my time or effort to pay attention to what is going on and only

wait and react when all is said and done.”

Question #11: Why did your group lag behind the Democrats’ efforts in utilizing 527s?

McCabe: “We made the decision to see what the FEC ruled. We wanted to wait for guidance

from them and how they were going to regulate 527s. It wasn’t as much lagging as it was waiting for some sort of direction on what the law would be.”

Question #12: Do you believe wealthy individuals unduly exert influence on the electoral process by contributing these vast sums of money to 527s?

McCabe: “There was one-trillion spent on the last election. How can a five-million donor really affect that?”

Question #13: Is there anything you would have done differently during last year’s electoral cycle?

McCabe: “I wish I had raised more money. If we would have raised more money we would have continued to get our message out in different ways and maybe even heavier in the fall because Dornauer, M.R. 28

we felt like talking about the War on Terror was really important. So, like any group, we wanted additional resources. But with the resources we had, we thought we were efficient and effective in getting our message across.

Question #14: How did you succeed even though you were drastically outspent by Democratic leaning 527 groups?

McCabe: “We targeted our resources in an efficient manner and we focused on one important issue, the War on Terror.”

Analysis of Interview:

My interview with Mr. McCabe shed insight on various topics that I had never

considered and also reiterated ideas I had previously covered. The questionnaire I utilized was

intended to be used as a generic template for every group I interviewed, with the exception of

questions 2, 11 and 14, which were asked in an impromptu fashion to expound upon superficially

covered ideas. Generally, McCabe’s answers were forthright and direct. However, he prefaced

the interview by stating that PFAVF had “nothing to do with the election and was nothing but an

issue advocacy organization” to avoid any legal ramifications stemming from his responses.

This disclaimer was a blatant reminder of the protective and secretive nature of these groups.

McCabe’s response to the first question elucidated PFAVF’s extensive use of the internet

as a means of conveying their message. Their use of banner ads on various news and journal

web pages, in addition to widespread email circulation of “Ashley’s Story”, were primary

examples of the transformation of campaign advertising via the internet. The second question

was a follow-up to the first and delved into arguably the most powerful and poignant ad of the Dornauer, M.R. 29 campaign. They chose the War on Terror, a politically volatile subject as the focal point of their advertising blitz, to point out the President’s character, an intangible quality they believed separated him from Senator Kerry.

His answers to questions four and five confirm the importance of large individual contributions in 2004. My previous data examines their influence on the Presidential race and his point provides a primary account to bolster these results. It was also interesting that PFAVF did not employ any grassroots activities and remained a paid media operation. The majority of the grassroots voter mobilization efforts were coordinated by the RNC. 49

The sixth question was perhaps one of the most contentious questions asked. McCabe’s response began as a condemnation of 527s as necessary evils exploited early on by the

Democrats, but evolved into an argument for protecting First Amendment Rights and justification for their use. This response seems somewhat hypocritical; on one hand he states that he disagrees with them but on the other hand he believes they are an outlet for First

Amendment Rights.

As McCabe stated, there is a future for his 527. In fact, PFAVF has been an integral force in the Bush Administration’s efforts for Social Security reform and an end to the stalling of the President’s judicial nominations. His answer also alludes to continued circumvention of the pending 527 legislation to create an alternative to 527s if they are immobilized.

Consistent with my research, McCabe waited until the FEC rulings had been made in

May 2004 before officially forming their 527. They chose this policy to align with the concerns of the President and the RNC. Once the FEC decided to allow these groups to operate unimpeded, PFAVF began catching up with the Democratic groups fundraising efforts. Dornauer, M.R. 30

Although McCabe contends that he does not follow the legislation that closely, he was

clearly familiar with recent amendments that had occurred a day prior to the interview. But he

made an important point that the bill is still in early, formative stages and as a stakeholder in the

process, it is not in his best interest to comment until if and when the legislation is passed.

In the twelfth question, I asked McCabe about the influence of large contributions exerting disproportionate influence. He replied with a witty response that I had not considered.

According to him, a staggering $1 trillion was spent on the overall election cycle by various

groups, including the candidate’s campaigns, the national parties, and issue based groups among others. However, his answer does not address the fact that individuals contributed the most

money to 527s and the majority of these contributors were former soft money donors as well.

An individual contribution of $5 million may seem relatively minuscule compared to the one- trillion spent overall, but when these large donations account for the majority of the donations to

527s - the most influential campaigning vehicles of the 2004 election cycle- they cannot be so easily discounted.

McCabe’s response to question #13, and his answers to previous questions, acknowledges the vast financial impact these groups had on the election and their continued desire for increased funding to promote their message. Had the Republican oriented groups, such as PFAVF, began their fundraising at the same time as Democratic groups, who is to say how much more soft money would have flowed into the 527 pipeline.

Strategies employed by 527s

Generally, the spending trend for the respective major parties was a case of diametric

opposites. During primary season and shortly after the announcement that Kerry would be the Dornauer, M.R. 31

Democratic presidential nominee, MoveOn sponsored an array of ads criticizing Bush. Their

efforts shifted later in the campaign to what they believed would win them the election-

increased voter mobilization and turnout. Overall, the Democrats spent around 28% of their

funds on broadcast advertising, primarily television ads, and a disproportionate 50% on their

mobilization efforts.

Republican based 527s relied on the RNC to pursue their voter registration efforts, while

they focused nearly 65% of their coffers for broadcast advertising. Much of this was spent by

two groups, Progress for America and Swift Boat Vets for Truth and Progress. The second

greatest expense for these groups was direct mailing at 13%. 50 With such balance in their efforts

with their respective national parties, one has to be skeptical of the groups abiding by the IRS

restriction of not coordinating with their respective parties.

Although pundits and the media lauded the voter mobilization tactics of the Democratic

groups, it was actually the Republicans who were more effective in targeting and registering

voters. ACT spent over $135 million on voter mobilization techniques. 51 Despite these efforts,

the RNC was much more successful in countering ACT’s efforts and, ultimately, registering

more first time voters for Republicans than ACT or the DNC was able to register. Campaign finance scholar Anthony Corrado commented, “I think that they (Republicans) were just ahead of the Democrats, as has often been the case, in terms of the efficiency of their targeting, the development of their lists.” The graph below provides a breakdown of 527 expenditures for each respective party. Dornauer, M.R. 32

Donors to 527s

A triumvirate of sources provided the largest shifts in 527 donations. Labor union

contributions, the first of the three sources, increased significantly, from $57 million to $112

million. Three influential unions are to credit for this influx of union money: SEIU up from $12

million to $55 million; AFSCME from $20 to $28 million and American Federation of Labor-

Congress of Industrial Organizations (AFL-CIO) up from $6 to $11 million. Contrarily, business donations from corporations and trade associations declined slightly from $32 million to $30 million. Although the largest and most publicized shift occurred with individual donors, this group’s donations escalated from $37 to $256 million. 52

Labor’s most prevalent donations were predictably directed at Democratic 527s.

Specifically, three “First Timers”, ACT, Media Fund and The Partnership for America’s Dornauer, M.R. 33

Families were the main recipients. A major reason for the decline in business donations was due to the eradication of leadership PACs which were a major source of business funds prior to

BCRA. As for individual donors, eight of the ten top destinations for their money were “First

Timers” in 2004.

Business, a typically robust donor especially to Republican-oriented groups, was much less influential in the 2004 election cycle. Instead of doling out large scale donations as in past

years their giving was hindered by BCRA. Moreover, the lack of credibility and accountability

on behalf of 527s exacerbated businesses concerns and thwarted potential donations at the outset

of the campaign. 53

Perhaps the most startling development from 2002-2004 was the extraordinary increase

in size of the top donations within the three sectors. The top three labor unions accounted for

84% of labor donations, up from 67%. Even business, despite faltering, needed a mere seven

donors to amass 50% of the total revenue. However, 2004 was the year of the individual donor.

This facet of donors was the impetus behind the 2004 surge in donations to 527s. The average

individual donation in 2004 was $135,805, four times the amount given in 2002. This increase is

largely attributed to a group of 25, $2 million-plus donors who provided 56% of all individual

contributions. 54 The graph below lists the 15 largest individual donors to 527s in the 2004

election cycle. Dornauer, M.R. 34

Of the largest donors, 65% (73/113) had been active in the soft money system, although it

is important to note that these 73 donors increased their contributions to 527s threefold in 2004.

As a result, these politically active donors not only shifted their funds from the parties to 527s but did so in an escalating fashion.

In summary, 527s spent an astounding half-billion dollars during the 2004 election cycle.

Six committees focused primarily on the presidential election raised over $10 million, while

ACT, PFAVF and SEIU Political Education and Action Local Fund raised $40 million or more.

In theory, these groups are supposed to engage in “nonfederal political activities,” but in practice

98 committees tailored their message to federal races, especially the presidential race.

Democratic-leaning groups received nearly four times as much 527 money as Republican- leaning groups in 2004, $321 million to $84 million. 55

Dornauer, M.R. 35

Future of 527s

The future of 527s is unclear. Some groups seem to have operated solely for the 2004

Presidential race, while others have become deeply embedded in the numerous policy issues

facing the nation. Both ACT and PFA have continued their efforts by delving into many of the

most contentious policy issues of the day such as the battle over Social Security reform and

judicial nominations.

PFA has been especially active with its fervent support of President Bush’s proposed reforms for Social Security, his stalled judicial nominations, overhauling the tax code and ending

frivolous lawsuits. “Our goal at Progress for America is to ensure that the voices of ordinary

Americans are heard. We want government officials to know there is strong support at the

grassroots level for a positive issue agenda,” states their website. 56 The group has employed the

similar strategies it utilized during the 2004 electoral cycle, by emphasizing television ads.

However, PFAVF has increased its grassroots lobbying efforts in pivotal states since the

election. Their ads, although not as prevalent as during the campaign, have been a mainstay on

the airwaves in recent months pertaining to Social Security and judicial nominations.

ACT has led efforts to counter these efforts and promote a Democratic agenda. They are

committed to fighting against President Bush’s “radical right wing agenda” in 2005. Their focus

remains building a grassroots infrastructure to register and mobilize increased Democratic

activism. In fact, they plan to be a long term player in politics, according to their website,

“…targeting key electoral precincts, working with candidates at all levels, and tapping the

grassroots with a mix of old-school organizing tactics and leading-edge technologies” in order to help them attain their goal of regaining a Democratic majority in Congress and placing a

Demcorat in the White House. 57 Interestingly, ACT has been involved in the policy debate over Dornauer, M.R. 36

the proposed “527 Reform Act” which they adamently oppose and have focused their efforts

toward in the past few weeks.

Aside from the actions of these two groups since the election, there is ample reason to

believe 527s will play an even larger role in the 2006 and 2008 elections. Primarily, the trend

toward high-end donations appears to be steadily increasing. As Michael Malbin stated in his

Senate testimony, “…once the genie of huge donations is out of the bottle, it is unlikely to

return.” 58 The floodgates for large contributions have opened and 527s act as tributaries eagerly

awaiting this cash flow.

Also, only 73 of the large 2004 527 donors were former soft money donors. In 2000, 214

gave at least $200,000 for the parties. Surely, this group of untapped donors will not be

dissuaded from future contributions to 527s after viewing their political efficacy over the past

year. Moreover, since Republican 527s were late getting into the pursuit of funds, it is

reasonable to believe that these 527s will raise much more than $84 million in future years. One

Republican strategist from Swift Boat Vets for Truth stated, “We’ll operate with greater

resources and efficiency and have a greater impact.”59

527s will continue to collect soft money due to their advantageous status as a safe-haven for such funds in comparison to 501 (c)’s and other groups: elections are 527s sole purpose; they are tax exempt; they have the ability to raise and contribute unlimited amounts; and they lack oversight by the FEC. All of these attributes enable 527s to be the most practical vehicle for campaign contributions. Clearly the omnipresence of these groups has flourished within campaign politics and has elicited calls for reform.

Dornauer, M.R. 37

Propose Legislation: S.B. 271

Over the past three months, the ubiquitous figures of campaign finance reform, Senators

John McCain and Russ Feingold allied with an odd bedfellow, Trent Lott, to champion a bill to

reform 527s. Senate Bill 271, introduced in early February 2005, is a bipartisan effort to curtail the soft money activities of 527s that circumvented existing campaign finance law. The sponsors contend that 527s, which spent soft money, should have been subjected to FEC regulation.

Instead, the agency failed to provide adequate oversight of 527s. Their bill elucidates the concerns raised by the Bush-Cheney campaign and the RNC in March of 2004. 60

According to Senator Feingold on the Senate floor, “Our purpose is simple—to pass

legislation that will do what the FEC could, and should do under current law, but once again, has

failed to do.”61 The bill, also advocated by U.S. Representatives Christopher Shays and Martin

Meehan offers several key reforms; first, it requires 527s to register as political committees with

the FEC and comply with federal campaign finance laws. Under this requirement, 527s would

abide by the same contribution and spending limits as other PACs. This means individual donors

and other PACs could only contribute $5,000 per election cycle in hard money contributions to

finance express advocacy ads.

In terms of voter mobilization, the other fundamental activity employed by 527s, at least

half of the funds spent on these activities would have to be hard money from the aforementioned

federal accounts. The money raised in the non-federal accounts would be solicited from

individuals and are limited to $25,000 per donor. This restriction would bar corporations and

labor unions from contributing to non-federal accounts. As Senator McCain aptly stated, “. . .

George Soros could give $25,000 as opposed to $10 million to finance these activities.” This Dornauer, M.R. 38

provision is similar to the pre-existing one in BCRA. The legislation also explicitly states it

applies only to 527s and not 501 (c) groups.62

McCain and Feingold also went on record voicing their disdain for the malaise of the

FEC and its lax policies. Both Senators staunchly defend BCRA as having nothing to do with the

mushrooming of 527s. BCRA may not have intentionally spawned the propagation of 527s, but it

did provide a loophole that was exploited by the groups. The preponderance of the sponsor’s

remarks was a castigation of the FEC. McCain pointed to Supreme Court comments within

McConnell that highlight the FECs inadequacy to uphold the law and that they had issued

regulations that “permitted more than Congress ever intended.” 63

In Congressional testimony presented on March 8, 2005, three panels of witnesses,

including Michael Malbin, Executive Director of the nonpartisan campaign finance watchdog

Campaign Finance Institute, offered compelling evidence to support my hypothesis that 527

groups should be outlawed to inhibit the influence of soft money in debasing campaign politics.

Malbin couches his argument for regulation of 527s in judicial precedent set by McConnell.

Prior to this ruling, 527s were outside the scope of regulation because as a group with a major purpose of influencing elections, they were not subject to the parameters of the law. The

Supreme Court found this point to be moot. It held that the distinction between public communications that “promote, attack, support and oppose” candidates are express advocacy as

“functionally meaningless.” 64 Thus, there is no legal obstruction preventing legislation limiting

527s.

Some scholars contend that S.271 may face the same opposition as BCRA regarding its

constitutionality in limiting individual contributions to committees that spend independently of

candidates and parties as a restriction of their First Amendment rights. Under the anti-corruption Dornauer, M.R. 39 test established by Buckley and upheld in McConnell, the Justices would entertain real world examples of whether 527s exert “undue influence” on the political process. The following propositions espoused by Malbin bolster my hypothesis and give credence to the need for swift reform:

1.) With the close collaboration between the majority of 527s with the major parties and

with contributions from donors in the millions, 527 donors are in a position to

command greater influence on the parties and the candidates than those who give up

to the maximum direct contribution of $25,000.

2.) Many of the 527s work in conjunction with concurrently sponsored PACs that

provide hard money contributions to candidates. In fact, 29 of 80 groups studied by

CFI had such PACs. These included such prominent groups as Club for Growth, New

Democratic Network and Emily’s List. It is unrealistic to assume parties and

candidates will regard the 527s and their donors affiliated with these PACs as

independent of these hard money contributions from the PAC.

3.) Individuals closely associated with Democratic and Republican parties and

presidential campaigns established, managed, and raised money for five 527 groups

in 2004. In particular, ACT, the Media Fund, and PFAVF accounted for nearly half of

all 527 contributions. Consequently, the activities of the organizations fostered a

“nexus of reciprocity” between parties, campaigns and donors. The major 527s

became quasi-party surrogates, which could eventually blur the distinction between

these groups and the parties, while perpetuating a revised version of the old, outlawed

party soft money system. This leads to the same corruption possibility the Supreme

Court warns against in Buckley and that existed prior to BCRA. Dornauer, M.R. 40

Senate Bill 271 will not be a panacea for solving campaign finance conundrums, but it will take a crucial step towards blunting the pervasiveness of soft money by 527s. Soft money in politics will always find alternative avenues and the goal should be not to entirely eliminate them from the process, but rather to mitigate their potentially corrupting influence on candidates and political parties. Regulated flows of money can exist and offer unabridged free-speech on behalf of political participants. Yet, the threat of money’s corrupting nature becomes prevalent when it distorts the process by exerting undue influence on the candidates.

In recent weeks the bill has undergone drastic alterations and is in peril of being rejected on the Senate floor. The Senate Rules and Administration Committee voted the bill out of committee but with six amendments. Although the bill has bi-partisan support, the amendments were imbued with partisan concerns. The Democrats wary of hindering the voter mobilization efforts of ACT offered an amendment to allow for the use of soft money to funds such activities.

On the other side of the aisle, Republicans offered amendments to increase the amount PACs can contribute to the national parties and allow trade and corporate PACs to solicit employees for political donations. McCain insisted that any retrogressive amendments to weaken the bill would be removed during debate on the Senate floor and that he would not allow a partisan bill to pass.65

Even if passed in the Senate, the bill faces nearly insurmountable hurdles in the House of

Representatives. Currently, two starkly contrasting proposals exist to reduce 527 influence. The first is the companion bill to S.B. 271, proposed by Representatives Shay and Meehan. The second option, proposed by Representatives Pence (R-IN.) and Wynn (D-MD) would leave the

527s unregulated and instead reduce some of the restrictions on how parties raise and spend hard Dornauer, M.R. 41

dollars.66 If both bills are reported to conference committee, it is too early to predict if the

differences in each chamber’s bill will be resolved.

Nonetheless, this staunch opposition from both parties to 527 regulation supports the

assertion that advocates of these groups have little confidence that these groups can be easily

replaced. These groups established themselves as an effective medium for soft money

proliferation in 2004. Their success has prompted groups such as ACT to heavily lobby against

such reform. Ultimately, campaign finance reform is an arduous process that may take years, as

was the case with BCRA. The 2006 midterm elections may provide the ideal impetus for reform

once certain members of Congress are targeted by the soft money funded 527s in their bids for

reelection.

Creating another loophole?

Critics of the proposed legislation contend that if a bill limiting 527s is passed, the flow

of soft money will be diverted to 501 (c) advocacy groups, as classified by the IRS under the tax

code, once the tighter restrictions on 527s are implemented. Consequently, 501 (c) groups have also worried that they may be the targets of future legislation pending a major shift of soft money in their direction. 67

501 (c) (4)’s, or “C4s” as they are commonly called, are tax-exempt advocacy groups that

may engage in some political activities as long as these activities do not comprise the primary

purpose. However, they cannot make elections their primary purpose as do 527s; a majority of

C4s’ contributions cannot pay for political activities. They are envisioned as primarily a

lobbying organization seeking to influence legislation that furthers the organization’s mission.

According to the IRS, a 501 (c) (4), “…may further its exempt purpose through lobbying as its Dornauer, M.R. 42

primary activity without jeopardizing its exempt status.”68 There is some gray area as to how

much electioneering activity is permissible and is decided by the IRS on a case-by-case basis.

Although these groups would be able to conduct voter mobilization and GOTV drives,

their political expenditures would be under much more stringent guidelines than that of the

unregulated 527s.69 “Once they decide to spend a minority of their money on political expenditures, they have to pay taxes on it,” stated Steve Weissman, Associate Director for Policy at the Campaign Finance Institute in a phone interview.70 Additionally, 501 (c) (4)’s are

subjected to the highest corporate tax rate, 35% tax on the lesser of their political expenditures.

Moreover, the donors face a hefty tax burden as well. For any contribution above $11,000, the

donor’s would incur up to a 50% gift tax on their contribution.71 Clearly, these steep taxes result

in a much less efficacious route for soft money than the unlimited donations given to 527s.

Weissman does not agree with PFA’s President McCabe view that the hydraulic theory

of soft money, the contention that it always finds a way into the system, will prevail in future

years. He points to his recent study of the 527s and the $337 million decrease in soft money.

However, he elucidates that this soft money system could be recreated if the larger 527s, such as

PFA and ACT continue to align closely with the parties. “It isn’t true that money is hanging around looking for a place to go. A lot of it depends on who is asking for it and the cost of giving it. For the 501 (c) (4)’s there is an extra cost in both giving it and getting it,” declared

Weissman.

Some critics stress the most nefarious loophole pertaining to “C4s” is their lack of disclosure of their contributors. This provision is a key component 501 (c) (4)’s lack and 527 retain. Aside from when they fund certain cable or satellite “electioneering communications,” they are exempt from disclosing their donor’s names. During recent Senate testimony about Dornauer, M.R. 43

Senate bill 271, FEC Commissioner David M. Mason addressed the concern that with the

transfer of money from 527s to 501 (c) (4)’s, the lack of disclosure would be lost.

At face value this may seem like an egregious loophole, but further analysis elucidates

that individuals were quite willing to disclose their information to 527s and disclosure was not a

concern for their practices. The willingness of donors to give vast sums to 527s in the past election cycle proves that secrecy is not a prime concern for individual donors. This may be

advantageous for the trade and professional groups, (c) 6 designation of the tax code, because

they may wish to keep their donors anonymous for business purposes, but this has not been the

case for individual donors who comprised the largest group of donors.

Additionally the disclosure concern can be assuaged by the fact that 527 groups can

shield the names of their donors by simply writing “withheld” in the space provided for donor’s

names on the IRS 8871 form.72 Although this has not been severely exploited, the option still exists. Lack of disclosure will be a major detriment to transparency within campaign finance, but it comes as a necessary cost of mitigating the impact of 527s. Even if the flow of soft money is funneled into these groups, they will prove to be a much less efficacious vehicle than 527s.

Although 501 (c) (4)’s may lack the efficacy of 527s for raising and exploiting soft money, they are an ominous reminder of the potential for soft money proliferation towards alternative routes if 527s are reformed. Accordingly, Congress and the IRS should take necessary steps to curb the potential for 501 (c) (4)’s development as the new “stealth groups”

for soft money. I foresee two reforms which should be enacted: a clarification of the disclosure

policy enforced by the IRS and the creation of a separate segregated account for political

expenditures. Dornauer, M.R. 44

The first of these reforms aims to eliminate 501 (c) (4)’s most lucrative advantage, lack of disclosure. With disclosure comes accountability. Transparency of political expenditures and individual contributors is an imperative step that must be taken. The disclosure of this information will divulge the amount of soft money being spent and the individuals that contribute this money. By mandating this essential step, the IRS will subject 501 (c) (4)’s to the same stringent disclosure requirement already applied to 527s.

Another vital reform I propose would eliminate the ambiguity of the amount of permissible electioneering activity performed by the 501 (c) (4)’s. Presently there is a gray area surrounding this topic. Since they are designated primarily as lobbying entities, less than 50% of their activities can pertain to electioneering activities. In order to eliminate the uncertainty surrounding the amount of permissible activity, these groups should be required to place donations for their political expenditures that fund these electioneering activities in a separate, segregated fund with a cap on all donations. This would essentially create a PAC for these contributions that would be subjected to the same hard money regulations as other PACs under

BCRA.

My research has led me to conclude that the future of 527s is uncertain, but their unlimited spending of soft money merits reform. If enacted, federal legislation may hinder their efficacy as soft money conduits. Predictably, this action may direct the funds elsewhere.

However, the most plausible alternative to 527s if legislation is enacted is a much less efficacious vehicle for soft money. Legislators must build on the success of BCRA in eradicating much of these illegal funds during the 2004 Presidential campaign. Although the law may have spawned the growth of 527s, it has deterred millions of soft money dollars from being contributed and utilized. Nevertheless, BCRA’s loophole allowing the proliferation of 527s may Dornauer, M.R. 45 continue to provide an ideal outlet for soft money in future elections and may undermine the law’s primary goal of eliminating soft money from the political system. Though it remains to seen as to whether 527s will be subjected to increased regulation, it is evident from my research that these groups require some regulatory control to protect not only spirit but also the letter of campaign finance law and to restrict the corrupting influence of soft money in politcs.

1 Wright, John R. Interest Groups and Congress. (New York: Longman, 2003), 116-118. 2 Thomas, Scott E. “The ‘soft money’ and ‘issue ad’ mess: How we got here, how Congress responded, and what the FEC is doing”. Campaigns & Elections, Election Law Compliance Seminar, Washington, D.C. 2003. 3 Corrado, Anthony. Campaign Finance Reform. (New York: The Century Foundation Press, 2000), 11. 4 Holman, Craig. “The BCRA: Limits and Opportunities”. Northern Kentucky University Law Review 2004, Vol. 31 N. Ky. L.Rev 243. 5 Rosenkranz, E. Joshua, ed., If Buckley Fell: A First Amendment Blueprint for Regulating Money in Politics. (New York: The Century Foundation Press, 1999) 3. 6 Corrado 68. 7 Thomas 3. 8 Holman. 9 Malbin, Michael J., ed., Life After Reform: When the Bipartisan Campaign Reform Act meets politics. (New York: Rowman & Littlefield Publishers, Inc., 2003) 9. 10 Thomas 8. 11 See 2 U.S.C. § 434 (f)(3)(A). 12 Malbin 10. 13 See McConnell, 590 U.S. at __, 124 S. Ct. at 688-91. 14 See BCRA § 203 (c) U.S.C.A. § 441 b (c) (2). 15 See U.S.C. §527 (e) (2). 16 See 146 Cong. Rec. S4110. 17The Brookings Institution “Section 527 Organizations” The Brookings Institution: U.S. Politics. 28 Feb. 2001. Nov. 10 2004. http://www.brook.edu/gs/cf/headlines/527_intro.htm..

18 Holman. 19 See 26 U.S.C. § 527 (i) 2000. 20 Sidwell, Heather L. “Taming the Wild West: The FEC’s Proposed Regulations to Bridle “527” Political Groups”. Administrative Law Review (American University) 2004, Vol. 56 Admin L. Rev. 939. 21 Holloway, Brendan T. “McConnell v. Federal Election Commission: The Supreme Court Rewrites the Book on Campaign Finance Law. Will Political Speech Survive This Most Recent Onslaught?” The Catholic University of America CommLaw Conspectus 2004. Vol. 13 CommLaw Conspectus 107. 22 Brookings. 23 Weissman, Steve and Ruth Hasssan. “BCRA and the 527 Groups” Draft Chapter. For publication in The Election after Reform: Money, Politics and the Bipartisan Campaign Reform Act. Michael J. Malbin, ed., (Rowman and Littlefield, forthcoming). Campaign Finance Institute. 9 Feb. 2005. Dornauer, M.R. 46

24 Edsall, Thomas. “Liberals Meeting to Set ’04 Strategy,” Washington Post, May 25, 2003, p. A6. 25 Stone Peter H., “Bill Clinton Helps Ickes’ 527 Group,” National Journal. 6 Mar. 2004. p.730. 26 Drinkard, Jim. “Outside Political Group Full of Party Insiders,” USA Today. 29 Jun. 2004. 27 Holloway 28 Weissman 10. 29 Getter, Lisa “With 527s New Power Players Take Position,” The Los Angeles Times. 1 Nov. 2004. http://www.latimes.com/news/politics/2004/la-na-donors1nov01,1,6039809.story?coll=la-politics-pointers. 30 “527s in 2004 Shatter Previous Records for Political Fundraising” The Center for Public Integrity. 16 Dec. 2004. 13 Jan 2005 http://www.publicintegrity.org/527/report.aspx?aid=435&sid=300. 31 Center for Responsive Politics findings 32 York, Byron “A Spectator’s Guide to the Political Action Universe,” The Atlantic Monthly. Dec. 2004. pp. 64- 65. 33 Center for Responsive Politics “Major Player Profiles-MoveOn.org,” 11 May 2005. 34 York 65. 35 Edsall, Thomas B. “Pro-GOP Groups Outpaced In Funds: Pro-Democratic ‘527s’ Far Ahead,” Washington Post, 16 July 2004. 36 Fagan, Amy “Democrats master art of 527s but GOP rallies,” Washington Times. 26 Aug. 2004. 37 Theimer, Sharon “Speedy action on 527s rejected,” Boston Globe. 16 Sept. 2004. 38 Cummings, Jeanne “Republicans Tap Rich Donors To Form Group Targeting Kerry,” Wall Street Journal. 28 Aug. 2004. 39 Keller, Amy “Republican 527s Narrow Gap with Democrats,” Roll Call. 16 Sept. 2004. 40 Knott, Alex “GOP 527s Outspend Dems in Late Ad Blitz” Center for Public Integrity 3 Nov. 2004. 41 Birnbaum, Jeffrey H. and Thomas B. Edsall “At the End, Pro-GOP ‘527s’ Outspent Their Counterparts,” Washington Post. 6 Nov. 2004. 42 Riskind, Jonathan “Political Groups Poured Millions Into Campaigns; Independent ‘527s’ spent big in Ohio to get out messages,” The Columbus Dispatch. 17 Dec. 2004. 43 Knott CPI 44 Dinan, Stephen “Congress ponders how 527s add up in wake of election,” Washington Times. 12 Nov. 2004. 45 McCabe, Brian. Personal Interview. 28 April 2005. 46 Weissman, 2. 47 Center for Responsive Politics website 48 “The Lobbying War,” Judy Woodruff’s Inside Politics, CNN. 9 Mar. 2005. http://transcripts.cnn.com/TRANSCRIPTS/0503/09/ip.01.html. 49 Carney, Eliza Newlin “Rules of the Game: Truth, Justice and the 527 Way?” National Journal. 24 Jan. 2004. 50 Center for Public Integrity website 51 Carney 52 Weissman 11. 53 Cummings, Jeanne “Closing the Spigot: In New Law’s Wake, Companies Slash Their Political Donations,” Wall Street Journal. 3 Sept. 2004. 54 Weissman 13. 55 Center for Responsive Politics “527 Committee Activity,” 11 Mar. 2005. http://www.opensecrets.org/527s/527cmtes.asp. 56 Progress for America “Who are we?” 5 May 2005. http://www.progressforamerica.com/1101-110.html. 57 America Coming Together “ACT 2.0: Building for the Future” 5 May 2005. http://acthere.com/plan. 58 Malbin, Michael J. “Testimony of Michael J. Malbin Executive Director of the Campaign Finance Institute Senate Committee on Rules and Administration” 8 Mar. 2005. 59 Keller, Amy and Suzanne Nelson “Campaign Finance Outlook: Will 527s Thunder Again in ’06? It Depends on Congress,” Roll Call 24 Jan. 2005. 60 McCain, Sen. John “Statement on the Introduction of the 527 Reform Act” 2 Feb. 2005. 61 Feingold, Sen. Russell “Statement on the Senate Floor regarding the 527 Reform Act (SB 271)” 3 Feb. 2005. 62 S. 271, The 527 Reform Act 63 McCain 64 Malbin Testimony 65 Nelson, Suzanne “Markup Alters Face of Senate’s 527 Bill,” Roll Call. 28 Apr. 2005. Dornauer, M.R. 47

66 Edsall, Thomas B. “Panel Backs Bill to Reign In ‘527’ Advocacy Groups,” Washington Post. 28 Apr. 2005. 67 Nelson, Suzanne “Panel Mulls Life After 527s,” Roll Call. 9 Mar. 2005. 68 Internal Revenue Service “Social Welfare Organizations” 5 May 2005. http://www.irs.gov/charities/nonprofits/article/0,,id=96178,00.html. 69 Mason, David M. “Testimony of Commissioner David M. Mason, before the Committee on Rules and Administration” 8 Mar. 2005. 70 Weissman, Steve Personal Interview. 17 May 2005. 71 Holman 72 Nelson, Suzanne “Loophole in 527s Shields Donors,” Roll Call. 27 Apr. 2005.