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Kentucky had no federal elections in 2003, but it did have an expensive gubernatorial race pitting Ernie Fletcher, a Republican congressman, against Ben Chandler, the Democratic state attorney general.

Yet this quintessential state race had a heavy federal flavor: most of the money raised by the Bluegrass State’s main political parties went to their federal accounts, which can accept up to $10,000 from individuals—four times the limit for contributions to parties’ state accounts.

Using their federal accounts, Kentucky’s two major party committees were able to take in between $976,000 and $1.5 million more in individual contributions than state contribution limits would otherwise allow. And there was no loss of utility for the money, either: Federal funds can be spent directly on state races.

The emphasis on federal account fundraising—the Kentucky Republican Party raised nearly nine of every 10 dollars that way—is one of the changes that the Bipartisan Campaign Reform Act, commonly known as McCain-Feingold, has brought to state political parties. Although Kentucky’s low state contribution limit is unusual, a handful of mostly smaller states—including New Hampshire, South Dakota, Vermont, West Virginia and Alaska—could see their parties use federal accounts to benefit state candidates.

The Center for Public Integrity studied the receipts and expenditures of more than 200 state party and state legislative caucus committees in 2003, the first full year under BCRA’s new rules. While most caucus committees have little contact with the federal system, they too were affected by the law’s ban on national party transfers of unlimited funds known as “soft money.”

In the changed legal landscape, Republican state political parties stepped up their fundraising efforts in 2003, pulling in 13 percent more than they did in 2001—the most recent non-federal election year—despite the absence of unlimited soft money transfers from the national parties. Democratic committees, however, fell 3 percent short of their 2001 total. GOP candidates won two of the three gubernatorial races in 2003 and also saw a successful recall of former California Gov. Gray Davis, a Democrat.

The committees combined to raise $189 million in 2003, about $9 million more than they did in 2001, according to the Center’s analysis. The 2001 total includes $29 million in soft money transfers from the national parties that no longer are permitted under federal law – money that went to states hosting competitive elections three years ago.

California’s unusual recall election helped that state’s two main parties bring in more than $18 million in contributions, which contributed to the overall total of $189 million (the Center’s study did not include money raised by recall candidates or ballot initiatives). But the $18 million raised by California’s parties was less than $4 million more than they collected during 2001 when the state had no statewide elections.

Although only a handful of states held prominent statewide elections last year, state parties and caucus committees continued to bring in millions from corporations, labor unions and individuals.

Unlike Kentucky, most of the money raised by state parties during 2003—$149 million—went to the state accounts of party and caucus committees. Some states permit unlimited donations to political parties, unlike federal law which restricts such contributions. (Two states, Utah and Wyoming, do not require reports from party committees for 2003 activity to be filed until later in 2004, so only their federal accounts were used for this study. See Methodology.) In adapting to BCRA, state parties also stepped up their fundraising efforts for their own federal accounts, which hold money that can be used to benefit House, Senate and presidential candidates.

Big Checks to Federal Accounts

The 100 Republican and Democratic state parties raised nearly $40 million for their federal accounts last year, a 54 percent increase over what they collected for them in 2001. Democratic state parties brought in $17.5 million to their federal accounts last year—52 percent more than they did two years earlier. Republican committees collected $22.5 million in 2003 and $14.4 million in 2001. Republican Party committees in Kentucky, Indiana and Massachusetts raised the most in federal money among GOP organizations, while Democratic parties in Kentucky, Minnesota and Michigan raised the most for their federal accounts. The GOP advantage in state party federal accounts is similar to the national fundraising scene, where Republicans have long enjoyed an advantage over Democrats in collecting federal dollars.

BCRA has put a new emphasis on large individual donors to state parties, which the GOP used to its advantage in 2003: Of the $22.5 million raised by Republican state party federal accounts, $3.7 million came in contributions of $10,000—the maximum permitted under the law. Democratic committees received $2.1 million in similar donations. The Republicans raised more in $10,000 increments last year than they did in $5,000 increments in 2001—the maximum at that time.

Of the $189 million total, two committees raised more than $10 million last year, the Republican state parties in California and Florida. California held a rare gubernatorial recall election in 2003, in which Democratic Gov. Gray Davis was removed from office and replaced by movie star Arnold Schwarzenegger, a Republican. Florida’s lack of a statewide election in 2003 did not dampen fundraising by its political parties; the state is seen as a key battleground in the 2004 presidential election and also has a competitive U.S. Senate race.

Most states will hold statewide or legislative elections in November, but there are only 11 gubernatorial elections on the ballot, meaning that state legislative elections will take center stage. According to the National Conference of State Legislatures, elections will be held this year for nearly 80 percent of legislative seats. The winners will have a broad range of powers, including control over state budgets and regulatory agencies.

Business, Lawyers and Labor

As in 2001-02, business interests were among the largest contributors to state parties and caucus committees, with the finance, insurance and real estate donors combining to give at least $23 million of the $189 million total. Lawyers and lobbyists accounted for at least $11.5 million, while labor unions contributed $11.1 million.

Individual unions were among the largest contributors to state parties and caucus committees. The American Federation of State, County, and Municipal Employees, which represents state and local government workers and was the largest donor in the previous cycle, gave nearly $1.3 million in 2003. The Service Employees International Union, representing health care and service workers, donated about $1.1 million in 2003. Since 1999, AFSCME has contributed more than $9.4 million to state parties and caucus committees, the most of any non-party or non-candidate organization.

The largest donor among public corporations was Altria Group Inc., the parent company of tobacco-maker Philip Morris. Altria gave more than $805,000 to 60 mainly Republican party and caucus committees, with the California Republican Party getting $174,000 and the Associated Republicans of Texas receiving $100,000—the first donation the company had given to that state’s GOP organization since the Center began tracking state party and caucus committee activity in 1999.

Organizational donors, including other party and candidate committees, contributed 69 percent of the money given during 2003, but individuals still accounted for more than $57 million.

At least 22 individuals (sometimes with their spouses) gave at least $100,000 to state parties or caucus committees last year. The overall top individual donor was Alexander G. Spanos of Stockton, Calif., who gave more than $1 million to the California Republican Party as then-Gov. Gray Davis, a Democrat, faced a recall election that he eventually lost. Roland E. and Dawn Arnall of Beverly Hills gave a combined $1 million, also to the California GOP.

The largest individual donor in 2001-02, James E. Pederson of Arizona, continued his generosity to that state’s Democratic Party, which he chairs. Pederson gave $745,000 last year. Pederson wasn’t the only state chair to provide financial help to his party: in Michigan, state Republican Party Chairman Betsy DeVos and her husband, Dick DeVos, gave the party an interest-free loan of at least $950,000 in February 2003 (a press report put the figure at $1.2 million) to help pay off bank loans the GOP took out to finance its earlier election activities. The money was later repaid by the state party after a series of fundraising events.

The DeVos family, which founded direct sales company Amway (now Alticor Inc.), has been a long-time supporter of Republican candidates and causes. The company has been described in news accounts as one of the nation’s largest companies with strong Christian leanings.

Rich Robinson, the executive director of the nonprofit Michigan Campaign Finance Network, said that the loans from the DeVos family and their other campaign contributions “have had the effect of marginalizing moderate Republicans and pushing the party to the right. The values of the party and the candidates they nominate reflect the values of the DeVos family.”

Less from Washington

After BCRA, state parties that in previous years had received millions in “soft money” transfers had to make do with less from Washington. In 2001, four state party committees received more than $1 million from their national counterparts, topped by $6 million sent by national GOP committees to the Republican Party of Virginia. Last year, with only a handful of statewide elections, no state party committee hit the $1 million mark, and only five got more than $500,000 from the national parties.

Party committees in Mississippi, Kentucky and Louisiana—the sites of 2003 gubernatorial elections—were among the top recipients of national party transfers, but the two leading recipients did not have major statewide elections last year: the Minnesota Democratic-Farmer-Labor Party, which took in $889,902 through a national Democratic fundraising program, and the Republican State Committee of Pennsylvania, which got $775,000 in a series of transfers from the Republican National Committee, most occurring before the municipal and judicial elections in November 2003.

In one instance, the RNC sent $150,000 on Nov. 3 to the Pennsylvania GOP, which sent the same amount that day to the campaign of Sam Katz, a Republican who mounted an unsuccessful challenge to Philadelphia Mayor John F. Street, a Democrat.

Other states that were among the top party priorities in 2002, such as Georgia, saw relatively little national party money in 2003. Georgia’s Republican Party took in just $1,301 in national party transfers last year, while the state Democratic Party got $23,169.

Out of State Money

States that hosted competitive statewide elections in 2003 saw an influx of out-of-state money, both from the national parties and other donors. National Republican Party committees doubled their Democratic rivals in key states with elections for governor. National GOP committees gave a total of $2.2 million to party committees in Mississippi, Louisiana and Kentucky, while Democrats sent nearly $1.1 million.

The loss of national party soft money was somewhat replaced by political committees formed under Section 527 of the Internal Revenue Code. Such “527 committees” poured hundreds of thousands into states with competitive elections last year. In Mississippi, Republican 527s such as theRepublican Governors Association and the Republican State Leadership Committee helped to boost Haley Barbour over the incumbent Governor, Ronnie Musgrove.

The RGA set up a PAC in Mississippi that gave $1,520,000 of its $5.6 million directly to the state party and spent much of the rest on Barbour’s behalf. The Democratic Governors’ Association adopted a different tactic, sending $110,000 to the Mississippi Democratic Party and giving nearly $2.3 million directly to Musgrove’s campaign. The Republican State Leadership Committee, formed to aid state parties and candidates, gave $52,446 to the Mississippi GOP.

The Mississippi Republican Party also benefited from Barbour’s close relationship with U.S. House Republican leaders: 14 out-of-state GOP lawmakers, including Majority Leader Tom DeLay of Texas and Ways and Means Committee Chairman Bill Thomas of California, donated a combined $38,500 to the state GOP via their federal campaign or leadership accounts. In contrast, no House Democrats outside Mississippi gave to the state party’s federal account.

Out-of-state money was so dominant in Mississippi that it accounted for almost nine of every 10 dollars raised by the state parties. The states with the next largest percentage of external dollars were Vermont and New Hampshire, each with 58.3 percent of its contributions coming from other states. At the other end of the spectrum, Hawaii’s party committees raised nearly 97 percent of their contributions from that state.

Kentucky’s gubernatorial election saw a wealth of outside money from national and state parties in addition to other contributors. The Republican National Committee sent nearly $700,000 to the state GOP, more than twice what the Democratic National Committee contributed. But Kentucky Democrats received a big boost from other state party committees: Tennessee Democrats sent $230,000, South Dakota’s state party chipped in $100,000 and Washington state’s Democrats sent $65,000.

Five other state and national Democratic committees sent at least $40,000 to the Bluegrass state, but their candidate, Chandler, lost to Fletcher (Chandler subsequently won a 2004 special election to fill Fletcher’s House seat).

But even that generosity was not enough to offset the financial advantage of the Republicans, which may have been helped by the state legislature’s decision not to renew a public financing program for gubernatorial candidates, according to Donald A. Gross, a political science professor at the University of Kentucky. Gross also credited Mitch McConnell, the state’s senior U.S. Senator and a mentor of Fletcher.

“It’s Mitch McConnell. He’s just really good at raising money,” Gross said. “He created the strong Republican Party that the state has right now.”

Donations to state accounts played a much bigger role in Louisiana, which also held statewide elections last year, in part because individuals can give up to $100,000 to state parties over a four-year period. Although just one person, Claude M. Penn Jr. of Watson, La., gave $100,000 (to the state Senate Democratic Campaign Committee), two corporations gave the maximum to the state’s Democratic Party. That helped Kathleen Blanco defeat her Republican rival, Bobby Jindal, in the gubernatorial race.

National party organizations also helped out: the Democratic National Committee sent more than $230,000 in November 2003 alone, and the DGA contributed $300,000 to three different Democratic committees in Louisiana. But most of the $5.6 million raised by Louisiana committees came from within the state’s boundaries.

Rebuilding the Party

For those states that did not have a prominent statewide election last year, the spending emphasis fell to increasing the number of party members, enhancing fundraising networks and, in one case, literally getting the house in order. The North Carolina Democratic Party’s headquarters is a 101-year-old “grand Neoclassical Revival House” in Raleigh that was renovated in late 2002. The party’s building fund, which can collect unlimited donations to help with the upkeep of the headquarters, received $593,070 from the Historic Preservation Foundation of North Carolina, which helps protect and preserve sites of historic value.

The contributions from the non-profit foundation go to repay the loan the party took out to cover the renovations, and come from donations made to the foundation for that purpose. Melanie Paul, the foundation’s financial officer, said that 95 percent of each donation for the “Goodwin House” went to paying off the loan, with smaller amounts taken out for upkeep costs and management fees.

Many committees spent money adjusting to the new legal framework brought on by BCRA. In 2003, parties spent $9.2 million on professional services, including accounting and legal advice, compared to $12.3 million during 2001 and 2002 combined.

The firm of Sandler, Reiff & Young, P.C., earned at least $141,328 from 33 Democratic state parties in 2003 for training and advice on compliance. That’s $25,000 more than the firm got from state parties in 2001 and 2002 combined.

Joseph E. Sandler, a member of the firm who also serves as general counsel to the Democratic National Committee, said that for state parties, the task of learning the new law was “pretty frustrating.”

“They have to continually train and retrain their people as they build up for the campaign,” he said. “Generally those trainings take about 18-20 hours over a two-to-three day period.”

In an example of heavier legal spending, the California firm of Bell, McAndrews & Hiltachk, L.L.P., which also specializes in election and campaign law, received $476,953 from the California Republican Party last year—that’s about $288,000 more than it got during the entire 2001-02 election cycle.

With only a handful of states holding key elections last year, nearly half of the money spent by state parties and caucus committees went to administrative costs: salaries, travel, meetings and other services.

In addition, parties joined other political groups in seeking greater gains through technology. Democratic committees spent tens of thousands on companies such as TriMeros South Inc. and Voter Activation Network LLC, which create and deploy software to connect parties and voters.

Mark Sullivan, a partner at Voter Activation Network, said that his firm is working for 10 Democratic state parties during the 2003-04 election cycle, up from just two—Iowa and Missouri—in 2002. Last year four state parties paid VAN a total of $158,607 for its services.

“Technology plays a bigger and bigger role,” Sullivan said. “The parties have figured out how to compete and do better in identifying voters and running Get-Out-The-Vote campaigns.”

Sullivan’s company builds databases of voter files and enables its clients to add information about those voters via hand-held computers. VAN’s technology is also used by America Coming Together, a voter registration and turnout group aiming to elect Democratic candidates in November.

Brett Paden, the president of TriMeros, based in Fort Lauderdale, Florida, said that his company was working for six Democratic Party or caucus clients during the current election cycle, providing online access to state voter lists. State parties in Arizona, Kentucky, New Jersey and North Dakota reported paying TriMeros a total of $66,400 last year.

Looking to November

In many of the states, 2003 was little more than preparation for the bigger prize—the 2004 elections for President, Congress and state legislatures across the nation. The first federal election held under BCRA’s new rules poses a challenge and opportunity for state political parties as they try to comply with rules banning the use of non-federal money in federal races. In order to fully support state candidates, parties and caucus committees still have to raise money for advertisements and voter turnout efforts, even as increased federal limits and the loss of national party soft money put the focus on fundraising for federal candidates.

In other words, most state parties will not have the option Kentucky’s had—of using federal money in a state race—because they’ll need plenty for the national races.

To help, Congress allowed state and local party committees to establish Levin accounts, named after Michigan Democratic Sen. Carl Levin. These accounts can accept up to $10,000 from each individual donor for use in voter registration and mobilization programs involving federal candidates.

Only four state party committees—located in Arizona, California and Washington—made use of Levin accounts in 2003, according to FEC records, but that number is expected to grow rapidly as Election Day approaches.

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