Politics

Chasing the Shadow

"527" groups are a mysterious but increasingly powerful force in American elections. One state has cracked down on them; others are trying.
by | June 2006

Two years ago, Don Blankenship may have been the most influential man in West Virginia politics, and he wasn't an officeholder, a party leader or a candidate. Blankenship is the president of Massey Energy, the largest coal company in central Appalachia. In 2004, he largely bankrolled a group called "And For the Sake of the Kids," which spent $3.6 million in an effort to oust a sitting state Supreme Court justice Blankenship considered anti-business. That was a lot of money- -nearly double the combined spending by the candidates themselves--but it paid off. The incumbent lost, and Blankenship made it clear he wasn't finished. He set his sights on state legislators for 2006.

Despite West Virginia's $2,000 limit on campaign contributions, what Blankenship did was not illegal. That's because And For the Sake of the Kids was a "527" group. With no restrictions on donations or spending, 527s offer wealthy individuals or well-funded organizations the chance to spend far more than the limits imposed on political committees. The influx of 527 money in 2004 contributed to one of the most brutal and expensive elections West Virginia had ever seen, one in which the actual candidates were merely bit players. Blankenship's group was opposed by another 527 called "West Virginia Consumers for Justice," which dumped $2 million into the campaign.

This year, however, Blankenship and others will find it more difficult to use 527s to influence politics in West Virginia. That's because West Virginia is the first, and so far the only, state to institute strict regulations for those groups. Contributors to any 527 in West Virginia will be limited to donating $2,000 over the course of the 2006 election cycle, and every 527 will be required to disclose all of its sources of funding. Other states are beginning to consider similar measures. Until those laws are enacted, 527 groups will remain the shadow power in American politics.

BEYOND SWIFT BOAT

So named because of the section of the U.S. tax code under which they are incorporated, 527 groups are not new. Created by the Internal Revenue Service in 1974, 527s are nonprofit, tax-exempt political organizations that are operated "primarily for the purpose of directly or indirectly accepting contributions or making expenditures." Effectively, they're just like political committees, except that they don't explicitly advocate the election or defeat of a candidate. They may say instead that a candidate "has failed us" or "is working for corporate interests." It's a fine-line difference, but the upshot is that 527s register with the IRS, not the Federal Election Commission. So there are no limits on the amount of money they can raise and spend. In many cases, 527s aren't required to disclose the sources of their funds.

Because the federal campaign finance reforms that took effect in 2003 placed new limits on conventional political committees and individual donors, 527s achieved unprecedented prominence in 2004. It was the first election year in which the only way to give unlimited amounts of money was through a 527. The most conspicuous examples came in the Bush-Kerry presidential campaign, when groups such as Swift Boat Veterans for Truth and MoveOn.org spent unchecked amounts of money.

But the flexible structure of these organizations makes them ideal for state-level contests as well. Over a hundred new 527s were formed in 2004, most of them started in response to presidential politics but now free to move to the state level. "A lot of those groups are still around," says Evan Tracey, of the Campaign Media Analysis Group. "State elections are a fairly obvious place for them to go." Tracey likens 527s to charities that spring up around a particular cause but maintain their infrastructure even after the original cause has been eradicated. "They change their focus and adapt to a new cause."

527s are easy and quick to set up. In most cases, when a single wealthy donor wants to inject a lot of money into a campaign, he can charter a 527 and begin advertising immediately. There's no lag time for opening offices, hiring a staff, establishing a fundraising infrastructure or soliciting donations. In 2004 in West Virginia, Blankenship's group filed with the IRS and received its donations on the same day. "All it takes to set up a 527 is a P.O. box and a bank account," says Daniel Lathrop, a researcher at the Center for Public Integrity. "You can set it up, register and spend the money before people know what hit them."

TARGETING LEGISLATURES

Because it's so easy for national 527 groups to adapt to the state level--and because new 527s can spring up literally overnight-- predicting where and when these groups might appear in a state election can be extremely difficult. But there are some indicators.

One place to look for 527s this year is in down-ballot campaigns, where one sizable contribution can have a dramatic impact. In 2004, many business-related 527s focused on judicial elections (as in West Virginia) or on contests for state attorney general. In Washington State, for example, a 527 known as the Voters Education Committee spent nearly $1.5 million against attorney general candidate Deborah Senn. The organization turned out to be a front group funded solely by the U.S. Chamber of Commerce.

At first, during the campaign, the group refused to disclose its source of funding, claiming that, as a 527, it was not required to do so under Washington law. A judge later determined that the group had crossed the line into expressed advocacy against Senn, and therefore was required to disclose its donor source. But the damage against Senn was already done: She lost in the general election. Highly competitive campaigns for attorney general in California, Delaware and Kansas are likely to attract 527 attention this year.

In state legislative elections, 527s will be most active this year where one or both chambers are closely divided. That means Colorado, Iowa, Maine, Montana, North Carolina, Oklahoma, Tennessee and Washington, where one house is controlled by a narrow majority, are likely targets. Gubernatorial elections, particularly in Colorado, Iowa, Ohio and Pennsylvania, are also likely to see a substantial influx of 527 money between now and November.

Two other, less obvious factors will help determine 527 activity this year. One is the 2008 presidential election. Groups that want to maintain a visible presence until the presidential primaries begin are focusing on states that will be important in 2008. 527s such as MoveOn and Progress for America will have a significant presence this year in Florida, Ohio and Pennsylvania. Looking even further ahead, national 527 groups are trying to set the stage for 2011, when states will be engaged in the next round of post-Census congressional redistricting. Most of the state legislative seats up for election this year will be up again in 2010, and national political groups want to establish strong incumbencies for that year's campaign. That suggests most of the previously mentioned states, plus Indiana, Minnesota, Nevada and Oregon.

There's one point on which everyone agrees: State-level 527 spending in 2006 will far surpass the levels of 2004. In addition to all the strategic factors pointing to state-level expansion, the simple truth is that campaign financiers are better at setting up and running 527s than they were two years ago. "In 2004, people were figuring out the boundaries of what these groups could do," says the Center for Public Integrity's Lathrop. "By 2005, they had established a comfort level with how 527s work. In 2006, it can only magnify, because there are so many more people who know how to use them." That level of comfort translates into massive amounts of money nationwide. Outside groups are expected to spend hundreds of millions of dollars at the state level this year, and 527s will lead the way.

TRYING TRANSPARENCY

There's one state, however, that won't see record-breaking 527 expenditures: West Virginia. Scalded by the 2004 experience and scared that it might only be the beginning, West Virginia rewrote its election law to treat 527s as ordinary political committees. "The overwhelming majority of activity in 2004 was from faceless groups," says state Senator Jeff Kessler, chairman of the Senate Judiciary Committee and the lawmaker who pushed the reforms. "It was time to shed some transparency," he says. "The public has a right to know that these groups with happy-sounding monikers are not some grassroots- driven consumer groups. They're just corporations doing indirectly what they couldn't do directly."

Kessler's legislation places a ceiling on contributions to 527s of $1,000 during a primary campaign and $1,000 for the general election, the same limits that apply to conventional political action committees in the state. Passed unanimously by the state Senate and overwhelmingly by the House, the law makes West Virginia a testing ground for 527 reform. Since it covers contributions rather than expenditures, the law appears to present few constitutional problems; no legal challenges are pending.

Lawmakers across the country will be watching to see the measure's effects on campaign finance. "State legislators are very savvy," says Winnie Strzelecki, field director for the Reform Institute, a national think tank that supports regulations for 527s. "They saw what happened in 2004, and we're going to see more legislative activity like the West Virginia statute." Time is running out for states to enact regulations for this year's elections, but Strzelecki predicts many more such measures will be in place by 2008. She and other campaign- finance experts expect Colorado, North Carolina, Pennsylvania and Virginia to look at tightening controls on 527s in the near future.

Not everyone is convinced that regulating 527s will do much to remove outside influence from the election process. "These groups were set up specifically to skirt campaign finance laws," says Lathrop. "Anytime a state passes a new regulation, all these groups have to do is figure out a new loophole and work their way around the new law. If a state says you have to register as a political committee if you do X, Y and Z, these groups will do everything except X, Y and Z. They'll do A to W."

But disclosure requirements ensure that voters will at least know who's funding the efforts. That's the most important issue, says West Virginia's Kessler. "I can't stop Don Blankenship or Bill Gates or anyone else from coming in and spending a million or a billion dollars," he says. "Our dedication to free speech requires that and protects that. But at least we'll know where the money's coming from."

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