Super PAC Spending Replaces Dark Money as Election Nears

Daily Report for Executives provides in-depth coverage of unfolding legislative, regulatory, and judicial news from the nation’s capital, the states, and around the world. This daily news service...

By Llewellyn Hinkes-Jones

Oct. 14 — Major campaign spending organizations closely tied to Democratic and Republican leaders and funded by undisclosed donations—known by critics as “dark money”—have spent $26 million in key Senate races in 2016 but have significantly reduced their TV ad spending in the final weeks of the campaign, according to a Bloomberg BNA analysis of Kantar Media/CMAG data.

The change allowed the groups to avoid Federal Election Commission reporting requirements that apply to “electioneering communications”—targeted TV and radio ads that refer to a federal candidate 60 days of the Nov. 8 general election.

As the dark money groups wound down their TV ads last month, super PACs connected with these groups began spending furiously on the same handful of races that will determine control of the Senate after the election.

The switch in funding shows how political groups are tiptoeing around current FEC and Internal Revenue Service regulations by avoiding official reporting of their spending, experts said.

Republican Groups

For example, One Nation, the Republican-leaning nonprofit group organized under Section 501(c)(4) of the tax code, sponsored an estimated $21 million worth of TV ads across 12 states, led by over $5.7 million paid to Massachusetts stations for ads referring to New Hampshire's U.S. Senate race.

But the nonprofit stopped running TV ads on Sept. 6, three days before the start of the electioneering communications reporting period for the general election. The FEC rules require reporting of targeted TV and radio ads referring to a candidate within 60 days before the general election or 30 days before a primary.

Not a dollar of One Nation's TV ad spending was reported to the FEC, though the group more recently has reported some smaller expenditures for mailing and other communications in some of the same Senate races in which it sponsored TV ads.

A week after One Nation stopped running TV ads in the Senate races, a super PAC linked to Senate Republicans—the Senate Leadership Fund—started spending millions for TV ads in the same races where One Nation stopped running TV ads. The Senate Leadership Fund, which had barely spent any money in the 2016 race until last month, launched over $2 million worth of ads in Indiana, North Carolina, Nevada and Missouri. The Republican super PAC's website says it plans to spend a total of at least $30 million in the Senate races in these states and in Florida.

Links to McConnell

Both One Nation and the Senate Leadership Fund are registered with the FEC at the same location in Warrenton, Va.

Both organizations are headed by Steven Law, a former top aide to Senate Majority Leader Mitch McConnell (R-Ky.). Law also heads the super PAC American Crossroads and nonprofit Crossroads GPS, both of which have spent tens of millions on political ads in recent election cycles but have been largely dormant in the 2016 campaign.

One Nation was previously named Alliance for America's Future until it was brought into the “constellation of Crossroads organizations” by top Republican strategist Karl Rove in 2015 while the Rove-linked Crossroads GPS was waiting for tax-exempt status from the IRS, according to a 2015 story in the National Journal. Crossroads GPS eventually received exempt status under Section 501(c)(4) of the tax code in 2016, although the organization has ceased to run ads or file independent expenditures with the FEC this year.

The Senate Leadership Fund, which as a super PAC reports its finances to the FEC, has raised a total of $50 million, including $20 million recently contributed by Las Vegas Sands Corp. casino mogul Sheldon Adelson and his wife Miriam. Other big contributors to the super PAC include Chevron Corp. and Kenneth Griffin, chief executive of Citadel Investment Group.

Donors to One Nation, however, remain unknown. One Nation and the Senate Leadership Fund declined to respond to Bloomberg BNA requests for comment.

Democratic Groups

The spending pattern for major Democratic groups was similar, although the amounts were lower.

Majority Forward—a Democratic-linked nonprofit that keeps its donors secret—spent almost $4 million in the same key Senate races where Republican spending is concentrated. Then, as the electioneering communications reporting window opened, Majority Forward cut back TV ad spending considerably as the Democratic super PAC, Senate Majority PAC, began buying ads.

One Nation, however, spent over 4.5 times as much on television ads as Majority Forward.

While Majority Forward did run candidate ads within the 60-day electioneering communications reporting window—$746,000 for ads in Missouri targeting Sen. Roy Blunt's (R-Mo.) reelection campaign—Shripal Shah, communications director for both Majority Forward and Senate Majority PAC, told Bloomberg BNA that Majority Forward has no plans for running issue ads between now and Election Day. He otherwise declined to discuss strategy.

The Senate Majority PAC has raised over $40 million in the current election cycle, according to FEC reports, including $6 million from Newsweb Corp. Chairman Fred Eychaner. The Democratic super PAC also received $2 million from the Greater New York Hospital Association Management Corp. and a total of nearly $10 million from several unions, liberal groups and the trial lawyers' group American Association of Justice.

The super PAC has announced plans for extensive TV and radio ads in key Senate races but has not said how much it plans to spend in total.

As with the Republican side, donors to the Democratic super PAC are known, but donors to the Democratic dark money group, Majority Forward, remain unreported and unknown.

Both Majority Forward and Senate Majority PAC are registered with the FEC at the same address in Washington, D.C., and were previously described by Shah as “allied organizations.” Top advisors to Senate Majority PAC include former Democratic Senate aides with ties to Senate Minority Leader Harry Reid (D-Nev.), such as Rebecca Lambe, Susan McCue and J.B. Poersch.

Protecting Tax Exempt Status

The Democratic and Republican groups' switch from TV ads sponsored by dark money groups to super PAC ads might be linked to concerns about the groups’ tax-exempt status, according to Brendan Fischer, associate counsel with the Campaign Legal Center, a nonprofit watchdog group that supports stronger disclosure rules.

IRS rules stipulate that political activity can't be the primary purpose of a 501(c)(4) nonprofit—a rule that has been interpreted to mean they can't spend more than 49 percent of their overall expenditures on electoral intervention. By maintaining 501(c)(4) status, nonprofit groups are able to maintain secrecy for their funding sources under IRS rules.

“One Nation might argue that ads run outside of the reporting window do not constitute electoral intervention; that becomes a harder argument to make once they cross into the 60-day window and start reporting spending to the FEC,” Fischer told Bloomberg BNA.

Outside of the 60-day electioneering communications window, all expenditures on express advocacy need to be reported to the FEC, but spending on “issue ads” that don’t specifically encourage voting for or against the candidate doesn't necessarily have to be reported. This can be true even for ads that refer to a candidate but don't include express words of advocacy such as “vote for,” “defeat” or “elect.” These are sometimes called “issue-candidate” ads.

Recently, numerous court challenges have been brought against the FEC over its determinations in a series of enforcement cases whether specific issue ads referring to candidates constitute express advocacy. These include a case resulting in a federal district court decision last month that Republican commissioners on the FEC acted “contrary to law” by voting to dismiss an FEC enforcement case against two conservative nonprofit groups that refused to disclose their donors (See previous story, 09/20/16)

The IRS also went through a lengthy review of the tax status of the Republican dark money group Crossroads GPS, focusing on whether its spending on political ads meant that its primary purpose was to influence campaigns. Ultimately, the IRS determined the group was eligible for tax-exempt status, though Crossroads GPS has been largely inactive since last year (See previous story, 02/10/16)

Coordination Allowed

There aren’t really any restrictions on dark money groups coordinating with super PACs as long as the groups are all purportedly independent of candidates, Fischer said.

“If the 501(c)(4) is coordinating with a super PAC that picks up on TV advertising where the 501(c)(4) leaves off, then the operation isn’t giving up very much strategically,” he said. “Donors who want to stay anonymous can give to the 501(c)(4) and still support the overall electoral effort.”

While One Nation ceased running TV ads during the 60-day window, it began filing FEC reports for the first time on Sept. 14 for direct mail campaigns.

The switch to direct mail might be a way to keep costs down within the 60-day window and not risk their 501(c)(4) tax status with the IRS, Fischer said.

“If One Nation spends, say, $3 million on TV issue ads outside of the reporting window, and only $1 million on express advocacy mailers as they get near the election, they can still claim they are staying below the 49 percent threshold,” he told Bloomberg BNA.

David Keating, president of the nonprofit Center for Competitive Politics, which opposes restrictions on political spending, dismissed the idea of dark money in general.

“It's a pejorative term that also includes groups like the Sierra Club,” Keating told Bloomberg BNA. “And the amounts given by 501(c)(4)s are small in comparison to other groups. It's only about 3 percent of political donations,”

Other Dark Money Groups Filing

Besides One Nation, other dark money groups filed independent expenditure reports with the FEC for the first time in their history in the last month. These included The Libre Initiative and Concerned Veterans for America—groups affiliated with the network of conservative donors linked to Koch Industries Inc. leaders Charles and David Koch.

The groups have reported a total of over $1 million in spending on canvassing, mailings and other voter mobilization in favor of Republican Senate candidates in Florida, Nevada and Pennsylvania.

Brian Faughnan, the communications director for The Libre Initiative, explained the FEC filings as simply the first time the group had been required to file. When asked whether their political activity and filing within the 60-day window would risk their tax-exempt status, he added that the group is nonpartisan, works on a “broad range of activities that are conducted year-round,” and is not limited to the election cycle.

‘What Works.'

Noah Bookbinder, executive director for Citizens for Responsibility and Ethics in Washington, a liberal watchdog group that has been critical of the Koch network, was surprised that some of these groups that have avoided reporting in the past were coming into the light, but he also implied that the decision to file was most likely strategic.

“They’ve done research on what works, and Americans for Prosperity [another nonprofit linked to the Koch network] has been quoted saying express advocacy is more effective than other forms of speech,” Bookbinder told Bloomberg BNA. As to whether these dark money groups risked running afoul of their tax-exempt status, he said that “grassroots organizing and voter registration hasn't been interpreted by the FEC as a political activity.”

Bookbinder added that running more issue ads outside the FEC reporting window helps make sure the groups won’t risk their 501(c)(4) status and their donors’ anonymity.

“Really, the issue-candidate ads should be considered candidate ads, but the Republican FEC commissioners aren’t focusing on it,” he said.

Bookbinder was referring to the recent FEC enforcement cases in which the six-member FEC split along party lines regarding whether several conservative nonprofit groups may have violated disclosure rules. The FEC's three Republican commissioners generally have accepted the groups' contention that they were focused on policy issues, rather than campaigns. The FEC's three Democratic commissioners have been more skeptical.

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at ljones@bna.com

To contact the editor responsible for this story: Kenneth P. Doyle in Washington at kdoyle@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.