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It was the morning of November 6, 2002, the day after Democrats had lost control of the U.S. Senate, lost ground in the U.S. House of Representatives and were soundly beaten in several key gubernatorial races.

The man at the top of the party, Democratic National Committee Chairman Terry McAuliffe, had some explaining to do. Standing before the gathered media in Washington, D.C., he returned to a longtime Democratic lament: Republicans simply had more money.

Fundraising figures reported to the Federal Election Commission seemed to suggest he was right. The Republican Party raised slightly more than $691 million in the 2002 election, about $228 million more than the Democrats.

The GOP “had tens of millions of dollars of special interest money on their side,” McAuliffe told the assembled reporters, and that had tipped a number of races in their favor.

In fact, the disparity was not nearly as lopsided as McAuliffe suggested. As a new Center for Public Integrity analysis shows, Democrats and their allies funneled hundreds of millions of dollars through backdoor committees designed to influence key elections. In the 2002 race, the Democratic Party’s silent partners spent more than $185 million—more than double the money spent by Republican organizations.

The Center’s report shows that the Democrats and Democratic-leaning organizations made great use of a special type of political committee that can raise unlimited amounts of money to influence elections. These committees, known as 527 organizations after the part of the Internal Revenue Code that defines their tax status, can claim tax-exempt status as political committees while at the same time avoiding regulation by state or federal election authorities. In fact, 527s may raise unlimited amounts of money from virtually any source and can spend those funds on just about any election-related activity except contributing directly to federal candidates. Since a law mandating disclosure passed in 2000, such groups accounted for just under $450 million in spending. Committees run by Democratic parties and candidates, along with their labor, environmental, abortion rights and trial lawyer allies, have spent nearly two-thirds of that total.

Nor has campaign finance reform eased 527 committee fundraising. So far in 2003, these groups reported raising around $25 million, about 40 percent of that going to two groups formerly affiliated with the two national party committees.

Two 527 committees belonging to the American Federation of State, County and Municipal Employees, a union of government workers, spent a combined total of almost $38 million in the past three years, the most of any organization. To put that in perspective, the figure is about $7 million more than the organization has given to federal candidates, PACs and parties—over the last 14 years.

Overall, AFSCME and its labor allies were big donors to Democratic party committees, together the top recipients of 527 spending. Among individuals, actress Jane Fonda was the largest donor, giving $13 million mostly in support of abortion rights, and at least eight other individuals contributed more than $1 million each.

Of the more than 20,000 committees that filed as 527s in the IRS disclosure system, the Center identified 471 that have one or more of the following characteristics: They are not required to report their financial activities to state or federal election authorities; they are tied to or formed by a federal lawmaker; or they are active in many states and spend most of their money on such election-related activities as broadcast advertisements, mailings and political research.

Because many of the filings were available only on paper, the Center had thousands of records entered into a database and added electronic records filed with the IRS. A searchable version of that database—the first of its kind in the country—is available at the Center’s Web site. Although the IRS makes individual reports available on its Web site, the agency keeps certain records on paper and others in electronic format, making it extraordinarily hard to search data across years.

The results show just how potent these organizations are. As of August, 2003, 527 committees included in the Center’s study have raised just under $25 million and spent about $21 million. The Republican and Democratic governors associations have combined to raise $10.1 million, and rank first and second among this year’s most active 527 committees. But others aren’t far behind: the Club for Growth has pulled in $1.6 million and the New Democratic Network, an organization of business-friendly Democrats, has raised $1.1 million. The Republican State Leadership Committee, a national GOP effort to fund state and local election activity, reported raising almost $1.5 million.

At least 120 of those committees were tied to a current or former federal lawmaker or candidate, while another 58 were created by national political party committees. The remainder were created by interest groups, associations and state-level organizations. In all, 227 committees were formed by Democrats and their political allies, while Republicans could call upon 174 committees. The rest were single-issue organizations or third-party committees or could not be identified.

Most, but not all, 527 committees are based in Washington, D.C. But 194 political nonprofits are based outside the beltway, concentrated in larger states like California, Florida, New York, Michigan and Illinois. The Center found one or more 527 committees located in all but 12 states.

But the preponderance of Washington addresses does not necessarily imply a federal focus. An analysis of the various committees shows that section 527 organizations enjoy substantial financial support throughout the country. They spent at least $1 million in 36 states, and $4 million or more in 15.

The study found myriad uses of 527 committees, including funding election recounts, raising money for a state official’s “administrative account” and raising soft money to influence congressional races. Unlike federal PACs, which have specific uses and normally stick within the federal election framework, 527 committees can conduct a wide variety of political activity.

Organizations affiliated with national labor unions, for example, had a clear strategy for state elections. Labor-affiliated 527s put more than $22 million into five states that saw high-profile gubernatorial elections during the last three years: Michigan, California, Illinois, New Jersey and Pennsylvania.

The two national governors’ associations are also active in the states. Now separated from their respective national parties, the groups have raised millions in 2003 to influence gubernatorial contests in three states — most notably in Mississippi — and in California’s recall election. Other 527 committees have been formed exclusively to impact state races, often without registering with state authorities.

Leading politicians have operated 527 committees to influence the once-a-decade congressional redistricting process. The largest of those groups, the Democratic-supporting IMPAC 2000, spent nearly $8 million. Similar committees in Illinois and Missouri were associated with House Speaker Dennis Hastert and former House Minority Leader Richard Gephardt, respectively.

At least one 527 group figured prominently in a campaign earlier this year on behalf of a federal court nominee being considered by the U.S. Senate. The Ave Maria List, funded mainly by Domino’s Pizza founder Thomas Monaghan, helped pay for print advertisements charging that Democratic objections to Alabama Attorney General William Pryor’s nomination to a seat on the 11th Circuit Court of Appeals were based on anti-Catholic views.

The College Republican National Committee pays for its extensive direct mail fundraising program through its 527 committee, which has spent more than $10 million in the past three years.

Prospective Democratic presidential candidates in 2004 used 527 committees to build up support and name recognition in key primary states, purchasing equipment for state parties and paying for travel expenses. Senators John F. Kerry of Massachusetts, John Edwards of North Carolina, Bob Graham of Florida and Joe Lieberman of Connecticut all operated 527 committees before closing them in late 2002 in response to changes in federal campaign finance laws, as did Gephardt. Some former members of Congress, free to raise soft money, have opened their own 527 committees.

These committees have continued to raise and spend money during the current election cycle, even as a new campaign finance law that could curb their activity is being debated by the Supreme Court. Several new committees have been established recently, including Americans Coming Together, formed by opponents of President George W. Bush. Backed by pledges from labor unions, abortion rights groups and financier George Soros, ACT has yet to file a financial report with the Internal Revenue Service but according to published reports plans to spend $75 million in 17 targeted states next year. One of ACT’s affiliated 527 committees, the Partnership for America’s Families, has already raised more than $1.2 million in 2003, according to filings. (The Center for Public Integrity has received funding from Soros’ Open Society Institute, although not for this project.)

These types of committees were popularized during the 2000 election, when a group called Republicans for Clean Air paid for advertisements criticizing GOP presidential candidate Sen. John McCain of Arizona. They are able to accept unlimited contributions from individuals, corporations, labor unions and even charitable foundations, and can spend unlimited amounts with few restrictions.

They can act as independent political operators through broadcast advertisements or provide voter turnout and mobilization to the benefit of a particular party or slate of candidates. They cannot contribute money directly to a federal campaign, but they can and do give to state candidates and party organizations, depending on state laws. There are no limits to how much one 527 committee can give to another, or how many such committees an organization can operate.

“These became a principal vehicle in the 2000 cycle for conducting issue advertising campaigns and types of voter mobilization and turnout programs that can be funded with unregulated money,” said Anthony J. Corrado, an associate professor of government at Colby College in Maine who studies campaign finance.

A union of moneyed interests

Soft money permitted the national parties to finance extensive voter outreach efforts using money contributed by party allies, but now that the national parties can only raise money under federal limits, the role and stature of 527 committees could change. The Americans Coming Together effort aims to replicate the Democratic Party’s outreach effort under its structure, which permits unlimited contributions.

Other 527 committees have been successful with a more narrow scope. The Club for Growth offers financial assistance to economic conservatives running for office and airs issue advertisements against their opponents, often in Republican primaries. Based in Washington, the Club for Growth has a federal PAC allowing it to contribute to federal candidates but also a 527 account to pay for advertising and other independent efforts. Environmental and abortion rights organizations also maintain 527 committees to help the causes and candidates they support.

The Center’s study, the first to present a comprehensive view of 527 committees’ activity since disclosure began, also found that while the list of top individual donors has long been dominated by white men, a surprising number of women rank among the top-givers to 527 committees. Actress Jane Fonda, a longtime supporter of abortion rights groups, was the leading overall donor to 527s with $13 million.

Labor unions, typically among the most generous donors to Democratic candidates and committees, have been active users of 527 committees. Political activity by national and large regional labor unions has topped $113 million in the past three years. While corporations and trade associations, some of the biggest GOP backers, employ other types of political committees, their 527 activity is a far cry from organized labor’s effort.

The American Federation of State, County and Municipal Employees and the Service Employees International Union, two of the largest unions and Democratic supporters, gave the most to 527 committees. AFSCME poured $42 million into various 527 accounts—close to $38 million to its own, the rest to other 527 committees—more than double SEIU’s $13 million in contributions. Other unions, including the Laborers, the United Food & Commercial Workers and the National Education Association, gave at least $4 million each to their own 527 committees or those belonging to other organizations.

National Democratic Party committees collected almost $32 million from 527s affiliated with unions, but smaller party organizations also benefited. State parties in Florida and Missouri got at least $1 million each, and Democratic gubernatorial candidates raked in hundreds of thousands of dollars. Republican organizations haven’t been shut out completely by union 527s; the moderate Republican Main Street Partnership received $100,000 from labor committees.

But the unions also spent money on their own, paying Democratic advertising firm Media Strategies & Research more than $6.2 million and pumping $775,000 into American Family Voices, a Democratic-friendly group that posts congressional voting scorecards and reports on corporate malfeasance on its Web site.

Labor’s spending covers more than just activity designed to influence federal elections, and in fact it’s tough to tell how much of labor’s spending was intended to benefit federal candidates. Even with disclosure of spending, “we don’t know what they’re doing, it may be mixed,” said Steven Weissman, associate director for policy at the Campaign Finance Institute, a nonpartisan research group.

National and large regional labor unions spent six times what corporate and business 527s spent during the past three years. Attorneys and other experts said that unions and single-issue organizations benefit from a relatively homogenous membership, making it easier to justify the creation of political committees to achieve their aims. Corporations, in particular, have little incentive to set up their own political organizations beyond political action committees that contribute to state and federal candidates.

“People associated with labor groups, environment groups, abortion rights groups are all by definition of one mind on their issue, which is not true of a shareholder who invests in GM,” said Trevor Potter, a former FEC commissioner who is part of the legal team defending the new federal campaign law before the Supreme Court.

Although they formed relatively few of their own committees, corporations did not shy away from contributing to other 527s. AT&T Corp. gave $2.3 million in corporate money to 527 committees, the largest amount by a single corporate entity, and was the sole funder of Floridians for Fairness Action Fund, a state-level 527. Tobacco giant Philip Morris (now Altria), sugar company Florida Crystals Inc., and SBC Communications Inc. each topped $1 million in their donations. Three different firms listed at the same address—7440 Woodland Drive in Indianapolis, Ind.—combined to give $2,250,000 mostly to Republican-leaning 527s. That address is home to Golden Rule Insurance Company, one of the biggest backers of medical savings accounts and a longtime GOP supporter.

A spokeswoman for Golden Rule said she had never heard of Woodland Group Indiana LLC, one of the contributors listed at that address. The name of the third company was Rooney Marketing. Golden Rule’s chairman emeritus is J. Patrick Rooney.

The leading recipients of spending by 527 committees, after Democratic national party committees, included several media and advertising firms. Media Strategies & Research, a Democratic firm with offices in Virginia and Colorado, received $14.8 million, while National Media Inc., a Republican advertising firm, received $8.4 million and UniWorld Group Inc., a marketing company specializing in outreach to African-Americans and Hispanics, got $3.6 million.

In all, 527 committees spent at least $45 million on advertising and media consultants during the three years examined. Millions more went to direct mail and other types of consultants, or was transferred into the federal accounts of some 527 organizations in order to pay for shared administrative expenses, such as rent and salaries.

Some 527 committee contributions to national party committees have been disclosed by the national parties on their Federal Election Commission forms, but the Center’s study is the first to detail not only the source of 527 committee funds but also where that money has gone. The searchable database released as part of the project includes expenditures as well as contributions.

527s in the States

A number of state-level interest groups, party organizations and even candidates have found political nonprofits to be a convenient way to circumvent state regulations, just as national organizations have used them to work around federal limits, the Center study found.

Take, for example, the 2001 governor’s race in New Jersey, which has some of the strictest campaign finance laws on the books. The state has comparatively low contribution limits along with bans on contributions from many deep-pocketed corporate interests. It also is one of the few to offer gubernatorial candidates public funds in return for accepting spending limits.

A year before the election, the state’s two top-ranking Republican state legislators—then Senate President Donald DiFrancesco and Assembly Speaker Jack Collins—were considering running, raising the possibility of a bruising and expensive primary election season. Their solution was to form their own 527 organizations, which would not be subject to state fund-raising limits.

The two committees raised a combined $1.6 million dollars, and spent more than $1 million of that on political consultants and advertising agencies. Both committees accepted numerous contributions that exceeded state limits, or came from sources prohibited under state regulations.

New Jersey is hardly the exception. Although it is impossible to determine whether a given 527 is targeting state or federal elections (or both), it is clear that these organizations are active at all levels in all states.

In Illinois, a network of 527s funneled more than $2.4 million into the state during the second half of 2002—just before voters elected Rod Blagojevich to the governor’s office. He became the first Democrat elected to that office in 30 years.

And in Florida, which also has highly restrictive campaign financing laws, a number of 527s have cropped up over the past few years, including several with ties to lawmakers. The Florida Mainstream Forum, for example, is affiliated with a number of moderate Democratic state legislators. It raised more than $230,000 in 2002.

Citizens for a Stronger Florida, a political nonprofit with ties to Florida trial lawyers, raised and spent more than $700,000 to influence state elections during the past two and a half years. Neither group is registered as a state political committee, or is subject to state or federal fundraising laws.

Even those committees that are affiliated with a national party or federal candidate often engage in state or local political activities. The KOMPAC State Victory Fund, for example, which was until recently affiliated with House Speaker Dennis Hastert of Illinois, is based in the D.C. area, but over the past three years, it has spent more than half of the money it has raised – about $1.4 million – in Illinois, primarily to support state and local candidates.

An overtaxed regulator

After the Republicans for Clean Air episode in 2000, Congress passed legislation requiring that 527 committees register with the IRS and report their finances on forms similar to those that federal candidates and committees file with the Federal Election Commission.

Because of their tax status, 527 committees offer some advantages to donors that aren’t available to other political non-profits, including so-called social welfare organizations, known as 501(c)(4) organizations. Social welfare groups can conduct political activity, but it cannot be their primary goal, and contributions to such committees can be subject to other federal taxes, including the federal gift tax. But contributions to 527 committees are not subject to such taxes and the money can be used for nearly any political purpose save direct contributions to federal candidates.

There is one advantage that 501(c)(4) groups hold over 527 committees, from a donor’s point of view: contributions are not disclosed anywhere. A 527 committee funded by the pharmaceutical industry, Citizens for Better Medicare, reorganized as a 501(c)(4) after Congress mandated disclosure. The committee’s 527 filings before the switch show $8.9 million in spending, but only $55,000 in contributions, since most of the money was contributed before the disclosure bill became law.

The IRS’ own disclosure system, which was upgraded in July, has received mixed reviews from advocates and experts. The agency implemented an electronic filing program and makes data from those filings available on its Web site, but many of the filings are still on paper. To complete its study, the Center had tens of thousands of records entered into a database.

The rise of the IRS as a political finance regulator is also unusual, experts say. The intersection of tax law and election law is a gray area that can lead to uncertainty for donors and political operatives alike. The task of regulating 527s was specifically given to the IRS by Congress in the 2000 disclosure law, giving the nation’s tax agency authority over some types of political activity.

“The IRS is very concerned about this — they see this shift as complicating their job of setting tax standards,” said Lloyd H. Mayer, a tax attorney at Caplin & Drysdale who represents clients that use 527 committees. “The IRS has tried its best, but it’s a task they never wanted and they never were designed to handle.”

For two years, 527 committees were not required to list the date of contributions on their reports, and some filings contain even less information. A filing for the non-federal PAC of Nevada Democratic Sen. Harry Reid contains a contribution of $60,000 with no other information accompanying it to identify the donor. A filing from Citizen Soldiers Fund, a 527 belonging to presidential candidate John Kerry, listed $332,000 in contributions but did not itemize any of them, as required by the IRS. And employer and occupation information are missing from 48,814 of the 105,341 contributions in the Center’s database.

In addition, the lack of restrictions on the types of donors to 527 committees can make it easier for donors to mask their identities. Only individuals, partnerships and registered PACs can donate to federal candidates and committees, but 527 committees can accept money from practically any entity. Personal trusts have contributed tens of thousands of dollars to 527s since 2000, and some charitable foundations also have made contributions.

Jane Fonda gave most of her donations to 527 committees in her own name. But $70,350 came from the Seymour 1989 Trust, which belongs to Fonda (her middle name is Seymour, and the trust listed an address belonging to television network CNN; Fonda was married to CNN founder Ted Turner). Fonda did not respond to a request for comment, according to an assistant.

Giving to a 527 via a personal or family trust is legal, according to Mayer.

“Many wealthy people set up living trusts, and all their financial activity runs through that trust, and it’s not different from that person giving,” he said. He called it “a cloaking device” that could be used to avoid having to put an individual’s full name on disclosure forms.

Disclosure isn’t an issue for labor union 527s because they typically move money in aggregate amounts from a local affiliate to the national organization and thus do not identify individual contributors on their IRS filings. At most, the records indicate the name of the business manager of the local affiliate transferring the money to national headquarters.

Individual donors who previously gave to 527s without the risk of being identified can no longer do so, which has expanded the opportunities for 501(c)(4)s and other types of committees that can engage in some kinds of political activity without revealing their contributors, Mayer said.

“The disclosure requirement drove political activity into 501(c)(4)s,” he said. “It’s certainly a new niche—we’re getting more and more questions from organizations who were not interested in those areas of the law.”

Non-profits also have crossed into politics by contributing to 527 committees, the Center found. They include the Edward S. Gould Human Rights Trust, the Nature Conservancy and the Peconic Land Trust, a New York land conservation group. The Gould trust gave $208,348 to the Gay & Lesbian Victory Fund, while the two conservation groups contributed a combined total of $54,550 to the Community Preservation Fund 2020 Coalition, a New York environmental group. All of these donor organizations appear to be tax-exempt organizations under Section 501 of the tax code, raising questions in the minds of some experts about the propriety of their political involvement.

Frances Hill, a tax law professor at the University of Miami who has written extensively on 527 committees, said that the IRS has not defined and enforced clear rules on charities’ political involvement.

“The law is unsettled, partly because the IRS for 25 years has been hiding on this,” Hill said. She compared the lack of definition to the gray areas of accounting and tax law that were exploited by energy trader Enron Corp.

“Just like with Enron, you plan in those areas of mismatches, and that’s what’s gone on in campaign finance. Until that’s addressed, we’re going to have just fun and games with planning.”

The foundations of campaign finance law changed dramatically last November, when Bipartisan Campaign Reform Act took effect. Although the law made few changes specific to 527 committees, it did prevent federal candidates and lawmakers from using 527s to raise money outside federal limits, and barred the national parties from raising such “soft money” via any type of committee.

If that ban is upheld by the Supreme Court, it will make a significant dent in the fundraising activities of national Democratic Party committees, which used 527s, especially joint committees that raised money for state and national parties, to great effect. The Democratic Senatorial Campaign Committee, the official fundraising arm of Senate Democrats, had at least 38 such committees during the 2000 and 2002 election cycles. The National Republican Senatorial Committee, by comparison, had four.

Federal leadership PACs and party committees raised $98 million through their 527 accounts between mid-2000 and the end of 2002, according to the Center’s analysis, nearly a quarter of the total amount raised during that period. Unless BCRA’s soft money prohibitions are overturned, those committees are essentially out of business.

To adjust to the new legal environment, some individuals with ties to federal lawmakers announced the creation of new 527 committees designed to raise unlimited contributions. The Leadership Forum was established in 2002 by GOP House leaders and received a $1 million contribution from the National Republican Congressional Committee, which it subsequently returned after concerns were raised about top congressional Republicans’ role in the Leadership Forum. It has had no further financial activity, according to IRS filings, although The Hill, a Capitol Hill newspaper, reported that the committee had recently resumed fundraising.

Most of the others haven’t raised much money, something experts attribute to their lack of official status. If the quasi-party committees are found to have direct ties to the parties or leading lawmakers, contributions to them could run afoul of the law.

“My guess is that it’s going to be difficult for these groups because there are some legal risks involved here and because they don’t have the clout with the donors that the candidates had and the parties had,” said Weissman. “The only reason that soft money went from $80 million to $500 million is not because rich people wanted to spend more, but that they were being pressured.”

Labor unions, membership groups and non-national party ideological committees can continue to operate 527 committees, with some restrictions on activity that could impact federal elections. One of BCRA’s most contentious provisions bans broadcast advertisements within 30 days of a primary or 60 days of a general election that refer to a federal candidate unless those ads are paid for by money raised and disclosed under the federal campaign finance system.

If that provision is upheld, 527 committees would be left with several choices: they could continue to air broadcast ads up to the pre-election period or pay for new ads that do not mention a specific candidate but espouse general positions. The law exempts from the ban national ad campaigns that mention House or Senate candidates, meaning that a well-funded 527 could pay for advertisements that ran on network or national cable television.

Most other forms of voter contact – direct mail, newspaper ads and Internet communications, to name three – are not restricted by the law, and 527 committees can spend unlimited amounts on those types of activities. The only exception is voter mobilization activities that could benefit a federal candidate; 527 committees can only give up to $10,000 in non-federal money to a state or local party committee for such an effort. Until the legal challenges are decided, however, the activity of 527 committees could be dampened by uncertainty.

“This is still a gray area,” Corrado said.

This study was funded by the Pew Charitable Trusts.

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