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Campaign Finance and the Business of Politics

As the Watergate scandal unfolded in 1972, a series of explosive revelations detailed how the Nixon White House, through its Committee to Re-Elect the President (CREEP), raked in vast sums of campaign cash from friends, allies, and industries seeking favor; in some cases, these funds were used for illicit or illegal purposes. In the aftermath of Watergate and the resignation of President Richard Nixon in 1974, Congress passed sweeping legislation intended to overhaul the nation’s campaign finance laws. Ambitious in scope, the Federal Election Campaign Act (FECA) Amendments of 1974 set limits on individual contributions, restricted the use of party funds on behalf of candidates running for office, and capped the amount political action committees (PACs) could give to candidates. The 1974 act also set limits on spending by congressional candidates and created a system of public funding for presidential elections. Finally, the act required that each individual candidate submit detailed reports on contributions and campaign expenditures to a newly created independent regulatory agency, the Federal Election Commission (FEC).77

Almost immediately, the practical effects of campaign finance reform began to erode through a combination of legal action and clever adaptation. In 1976, the Supreme Court declared spending limits to be an unconstitutional infringement on free speech. Meanwhile, the number of PACs exploded into the thousands, and the national and state parties exploited loopholes in the law that allowed them to raise and spend money almost without limit so long as they were independent of a candidate’s campaign. Periodic attempts by Congress to address these gaps in the law did little more than inaugurate another cycle of innovation that further subverted the system.78 Today, presidential candidates’ ability to raise huge sums from millions of individual donors has rendered the system of public funding an antiquated relic, while recent Supreme Court cases have eliminated almost all remaining restrictions on spending and contributions.79

Throughout this twisted path of reform, one constant element remained: a high degree of transparency in the conduct of campaigns. Indeed, one feature of reform that did survive the unraveling of the campaign finance system created in the 1970s is the requirement that candidates submit detailed reports on precisely when and how they spend their money. These reporting requirements were a boon to the consulting industry, and not only the relatively small group of professionals (mostly lawyers) who helped candidates comply with the growing list of rules and regulations that governed the conduct of elections. Rather, consultants benefited more generally from the fact that campaigns had to enumerate expenditures. Loose accounting practices that had greased the party system for so long gave way to a new regime in which professional services like polling or media became a clean and legal way to spend money.

The reporting requirements of FECA and its amendments were an uncontroversial element of reform; efforts to bring about greater transparency in political expenditures date back to the Progressive Era.80 The 1974 legislation differed from these previous efforts by placing a greater onus on individual candidates to report receipts and expenditures. The law also granted the FEC the authority to audit campaigns and levy fines on those who failed to comply with the rules. However, the paper authority of the FEC greatly exceeded the practical capacity of the agency. Particularly in the early years after reform, the FEC struggled to handle the volume and complexity of information it received from candidates or create a workable set of rules and regulations that could keep up with rapidly changing campaign practices that tested legal limits. The manner in which the FEC addressed these administrative challenges redounded to the benefit of the consulting profession.

In 1976, the FEC marked its first full year of operation. A number of factors made it a difficult one for the new agency. First, 1976 was an election year and the first presidential campaign in which candidates were eligible for public matching funds in state primary races and the general election. In addition, the 1976 campaign was the first to take place after the two major parties enacted reforms that assigned convention delegates on the basis of state primary results, the effect of which was to require candidates to run expensive, primary campaigns in multiple states in order to win the nomination.81 Third, the commission began the year in a partial state of limbo after a January 1976 decision by the Supreme Court in Buckley v. Valeo invalidated portions of the 1974 FECA Amendments. The decision forced the FEC to suspend some of its operations until Congress passed new legislation in May 1976.82

These factors combined to create a daunting task for the new agency. A total of fifteen candidates running for president submitted almost 1 million individual contribution records to the commission for verification under the matching fund program. At the same time, more than 3,000 candidates for federal office and almost 6,000 campaign committees submitted another half million documents for FEC review, representing $300 million in campaign expenditures. All of this required a set of sophisticated data collection and auditing procedures, most of them constructed on the fly in the midst of a hotly contested presidential election. As the commission noted in its 1976 annual report, “The candidates and Commission were breaking entirely new ground. ... This situation demanded patience and flexibility on the part of the Commission and campaign treasurers alike.”83

These challenges were especially daunting in the area of auditing and enforcement, which was plagued by uncertainty and delay from the start. The FEC was still issuing judgments against presidential candidates almost three years after the 1976 election. For instance, the Carter campaign was ordered to pay back some of its public matching funds after a commission audit completed in 1979 deemed certain expenses to be improper or lacking sufficient documentation. Similar judgments were made against the Wallace and Udall campaigns.84 Meanwhile, the FEC failed to complete even a single audit from the 1978 congressional midterm election, contributing further to a backlog of decisions and mounting criticism of the agency.85 An outside study by Arthur Anderson & Company in 1979 found “bottlenecks [and] delays ... at almost every point in the audit process” and further concluded that in many instances the commission was simply unable to determine whether candidates or their committees were “materially complying with the act.”86

One reason for this difficulty was the lack of clear criteria for what counted as legal campaign expenditures under the law. One of the goals of the FECA Amendments, following on the heels of the Watergate scandal, was to eliminate unregulated slush funds used for unsavory or illegal purposes. Like many complex pieces of legislation, however, the FECA Amendments did not state precisely how this was to be achieved. For instance, the law restricted the use of public funds by presidential candidates to “qualified campaign expanses,” but the statute did not specify what, exactly, counted as a qualified expense. Similarly, the statute required that candidates include the “particulars of expenditures” in reports to the commission; however, many campaigns simply provided an itemized list of disbursements that failed to indicate exactly how funds were spent.87 This left a great deal of room for campaigns to engage in questionable tactics that violated the spirit if not the letter of the law. For instance, many campaigns simply listed cash disbursements such as “advance to fieldman” or “Election Day expenses.”88 Although campaigns often did engage in legitimate efforts to get out the vote, FEC auditors worried that such vague and imprecise categories could conceal more questionable practices like the use of “walking around money” by precinct workers in large cities to round up votes. Auditors also feared that without precise documentation candidates might use campaign funds for personal expenses.89 The FEC acknowledged the difficulty in bringing these various practices under control by noting in its 1976 annual report that “the variety and ingenuity of political campaigners in spending funds for a campaign [does] not lend itself to


easy categorizing. 90

Despite this “variety and ingenuity,” commission staff tried to resolve the legal ambiguity by creating a set of categories campaigns should use for the purpose of reporting their expenses. This would serve two aims: to make it easier for candidates to comply with the law and, second, to help FEC auditors identify violations by standardizing the kind of information they received from each campaign. Accordingly, the commission issued guidelines in 1978 that deemed certain categories “adequate” when considering the legality of campaign expenses. These included “transportation, consultant/professional fees, surveys/polls, advertising, printing/photography, fundraising, administration/operat- ing, postage and meetings, [and] direct mail.”91 The commission further specified that expenditures listed as “advances” or “get-out-the-vote” or “election day expenses” were not acceptable categories by themselves and would require additional information regarding “actual use” of funds, namely, one or more of the acceptable categories listed here.92 Approved in August 1978, these rules subsequently governed how the commission reviewed reports as well as conducted audits of campaigns.93

The creation of FEC rules for reporting expenses had important consequences for the consulting industry. In effect, the commission signaled that the best way for a campaign to avoid an audit was to employ the services of a professional who could carefully document the nature of work they performed. In fact, the commission specifically distinguished “between a commercial firm ... providing goods and/ or services to a committee” using the approved categories for expenditures “and those same terms when used in association with an individual or unregistered political organization/entity as payee.” Whereas an expenditure to “ABC Printing” was deemed acceptable, payment to “John Jones” for a “printing expense” was likely to trigger an audit.94 Commission rules and audit practices had an immediate effect on the conduct of campaigns. As the controller of the 1980 Carter re-election effort acknowledged, “We must now be very specific about ... spending. ... We must leave a very careful audit trail” for the FEC.95 Gone were the days of loose accounting practices when parties and campaigns could distribute cash to precinct workers on Election Day. “It’s enough to make a Baltimore boss weep,” quipped the Washington Post.96

Consultants benefited from campaign finance rules in other ways as well. One consequence of the system created in the 1970s was the fragmentation of the political environment into thousands of individual candidate committees, national party committees, congressional campaign committees, state party organizations, and PACs—each one a potential buyer of polling, media, direct mail, and other professional services. The explosive growth in the number of PACs was especially significant in this regard. In the first five years after passage of the 1974 FECA Amendments, the number of PACs increased from just over 600 to 2,000. Five years later, in 1980, the number of PACs had doubled again, exceeding 4,000 in total.97 Whereas FECA rules limited how much money PACs could contribute to candidates or spend directly on their behalf, the Supreme Court struck down provisions of the 1974 law that restricted so-called independent expenditures. Under the ruling, PACs (and party committees) could advocate for the election or defeat of an individual candidate so long as these expenditures were not made “with the cooperation or with the prior consent of, or in consultation with,” the candidate or her committee.98 Like the definition of particulars, however, the precise meaning of “cooperation” or “consultation” was far from clear, and efforts to resolve this ambiguity were generally beneficial to the consulting industry.

For example, in March 1980 the FEC issued an advisory opinion in response to a series of questions from the National Conservative

Political Action Committee (NCPAC) concerning the use of consultants. At issue was whether the same consultant could simultaneously work for a candidate seeking office and for NCPAC in its efforts to defeat the same candidate’s opponent. The answer, according to the FEC, varied considerably depending on the specific circumstances of the expenditure.99 In fact, the FEC provided a detailed response that explained precisely when and how NCPAC could use consultants without violating the law. According to the advisory opinion, the same consultant could work for a candidate and for NCPAC during the primary because the candidate seeking the Republican nomination and the Democratic candidate who was the target of NCPAC expenditures were not yet opponents. The FEC also explained that the same consultant could work for a candidate and NCPAC so long as activities on behalf of the latter did not include specific media advocating the election of the former or the defeat of her opponent. This included polls or fundraising conducted by NCPAC as an “operating expense,” as well as general communication that omitted the name of a candidate, what became known as “issue ads” in the “soft money” era of the 1980s and 1990s.100 With the FEC ruling in hand, NCPAC and its leader, Terry Dolan, went on to spend $3 million on behalf of conservative candidates running in the 1980 election, including more than $1 million on efforts to defeat six liberal Democratic senators (four of whom lost their bid for re-election in 1980).101 As campaign finance expert Frank Sorauf described NCPAC’s innovation, “a potent new political tactic, independent spending, had arrived.”102

Yet it was the consultants who perhaps benefited the most from the growth of PACs and the rise of independent expenditures. The Supreme Court decision in Buckley v. Valeo invalidating spending limits combined with the FEC advisory opinion on independent expenditures expanded the number of potential clients in need of consulting services. Rather than transfer funds to a candidate who may spend the money unwisely, PAC directors could target spending on specific races through the services of a consultant working on their behalf. This benefited consultants, who could now work for multiple clients through a single contract with a PAC rather than having to sell their wares to individual campaigns.103 And because consultants were commercial vendors employed on a contractual basis, they could work for multiple candidates, parties, and PACs without violating FEC rules that prohibited coordination or collusion in campaign spending—tasks a party employee or head of a PAC could not legally perform. Even where the FEC explicitly prohibited a single consultant from working simultaneously for a candidate and a party committee or PAC, it simply created more opportunities for the profession as a whole. The proliferation of PACs and the growth in independent spending gave the industry “a new lease on life,” one political consultant observed.104

The requirement that committees and candidates submit detailed reports on spending, the designation of preferred categories of professional services (or risk an audit), and the rules governing independent expenditures by PACs and party committees created myriad opportunities for consultants to tap into a rich vein of capital flowing through the political system as campaign contributions. Put simply, it became difficult to spend money in politics without hiring a consultant. Things could have been different. Had the Supreme Court upheld spending limits in political campaigns, considerably less money would have been available to hire consultants, and the profession likely would not have grown to the extent it did. Instead, consultants became an important link in a new political economy of influence, transforming lightly regulated contributions into legal campaign expenditures. As central figures in these circuits of exchange, consultants were arguably the principal beneficiaries of reform.

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