BUSINESSWEEK ONLINE : MAY 22, 2000 ISSUE
GOVERNMENT

Oh, What a Sweet Soft-Money Scheme
So-called joint committees are raising vast sums. It's all perfectly legal--but is it ethical?

At a September fund-raiser on Manhattan's East Side, Hillary Rodham Clinton was the big draw. And what a draw: Nearly $700,000 was raised, with some donors writing checks as large as $20,000--or $18,000 more than individuals are allowed to give to a candidate.

So why weren't the fat checks illegal? Because they were channeled to her fund-raising partner, the Democratic Senatorial Campaign Committee. When allies of New York Mayor Rudy Giuliani, Clinton's rival for a New York Senate seat, questioned whether the money was flowing out the DSCC's back door and into Clinton's campaign coffer, the DSCC issued a swift denial.

So it came as a surprise when the DSCC, shortly after the posh event, spent $300,000 to produce television ads urging voters to call Hillary Clinton. The DSCC still denied any link to the Manhattan event, insisting that it was simply responding to ads Giuliani was already airing. But critics are not mollified. ''It's money-laundering,'' says Scott Harshbarger, president of Common Cause. ''This is a perfect example of how the system should not work.''

POPULAR. Sorry, but this is exactly how the system does work. The joint fund-raiser, often masquerading as a ''victory committee,'' is one of the most popular campaign-finance schemes this election cycle. Even Giuliani has set one up--now that Clinton has shown him how.

In the pre-1992 Dark Ages of fund-raising, House and Senate candidates were pretty much on their own, holding Rotary Club lunches and Fourth of July picnics to raise a maximum of $2,000 per individual and $10,000 from political action committees. No more. A 1996 U.S. Supreme Court decision allowed national campaign committees such as the DSCC and its GOP counterpart, the National Republican Senatorial Committee, to raise unlimited amounts of ''soft money,'' or large-dollar checks from wealthy donors, labor unions, and corporations. Soft money is supposed to be spent on voter turnout and other party-building efforts, not individual candidates. But there are many loopholes, and the joint fund-raiser takes advantage of them. The Democratic Party has teamed up with 10 candidates to create victory committees, eight of which have already raised more than $9 million. Republicans have followed suit with four, taking in $2 million so far (table, page 86).

Here's how these hybrids work: Candidates and a national committee join forces to hold dinners or other events. The first $2,000 of an individual donor's check goes to the candidate. Anything above that is funneled directly to the national committee, which collects all the soft money in a single pot. Then the funds can be spent on so-called issue ads ticking off a candidate's qualifications. This is permissible, as long as the ads don't directly suggest that you vote for a specific candidate. The joint committee has its roots in the 1998 campaign of then-California State Treasurer Matt Fong, who unsuccessfully sought to unseat Democratic Senator Barbara Boxer. Although Fong focused on hard money, his pioneering joint committee opened a new door.

Party officials concede that they keep track of who raises what. The tally is one of the factors, along with polls and financial need, used to determine who gets soft money from the party. Says University of Maryland political science professor Paul S. Herrnson: ''It's 'you scratch my back, I scratch yours.''' Fund-raising invitations from the victory committees of both parties include page-long disclaimers that clearly outline how donations will be doled out.

FEROCIOUS. The national committees defend the practice as a bookkeeping convenience and a way to minimize harassment of wealthy donors by allowing them to write a single large check that can be divided among the campaigns. ''These people are in high demand and are frequently asked for money,'' says Jim Jordan, DSCC political director. ''It's better for us to ask them to cut one check at one event.''

Still, victory committees have drawn ferocious criticism. Campaign watchdogs Common Cause and Democracy 21 deem them misleading and unethical. On Apr. 4, they asked the Federal Election Commission and the Justice Dept. to look into Clinton's joint fund-raising committee, New York Senate 2000, and Giuliani's mirror group.

The DSCC threw fuel on the fire last month when it tried to withhold the names of soft-money donors until the funds were transferred to it. But because that might delay disclosure until after the election, a storm erupted. Jordan says his staff simply couldn't keep up with the sheer volume of paperwork. ''This has been solely about the technicalities of our bookkeeping. There's nothing sinister or mysterious,'' he says. But embarrassed Democratic candidates urged the DSCC to relent, and now the committee plans to file its first detailed list of soft-money donors with the FEC on May 15, and monthly thereafter.

Still, there is no denying that joint committees are effective. Michigan Representative Debbie Stabenow, who is trying to unseat Republican Senator Spencer Abraham, has a victory committee that featured President Clinton at a Mar. 28 fund-raiser. Campaign manager Carol Butler concedes that the committee has raised Stabenow's profile and could bring financial benefits in the long run. Fumes Abraham campaign director Joe McMonigle: ''She's broken every rule in the book.''

The upshot? Expect even bigger growth in campaign spending this election cycle, particularly when it comes to soft-money spending on issue ads. Common Cause reports that the national parties raised a record $160.5 million in soft money in the first 15 months of the campaign cycle. That's nearly double the $84.6 million raised in the '96 season. Already the ripple effect is evident. Because of Stabenow's success, Abraham has raised his fund-raising goal from $9 million to $11 million. As Giuliani campaign aide Juleanna Glover Weiss puts it: ''This is a fact of life in political campaigning now.'' It's also a fact of life that the race to raise soft dollars knows no bounds.

By Lorraine Woellert in Washington

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