The Debate Over The 527 Political Groups

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
October 5, 2004

IN THIS ISSUE:

1.  What Are These Mysterious 527 Organizations?

2.  527s Emerge From 2002 Campaign Reform Law

3.  The 10 Largest 527s & The Billionaire Donors

4.  Why Democrats Are Way Ahead On 527 Money

5.  Potential Impact Of 527s On The 2004 Election

6.  Should These 527 Groups Be Eliminated?

7.  A Disappointing First Debate For Bush

Introduction

When President Bush signed the McCain-Feingold campaign finance reform bill in 2002, we were promised that this would bring an end to “soft money” in political campaigns.  Political Action Committees (PACs) that so dominated the last several presidential elections were to become largely a thing of the past.  However, in the last year we have seen the emergence of dozens of “527” non-profit groups that have raised hundreds of millions of dollars and poured that money into the presidential election race. 

The Republicans apparently believed that the Federal Election Commission (FEC) would regulate 527s and limit the amount of money that 527s could raise.  As a result, the GOP was not aggressive in organizing their own 527 groups, even though the Democrats were moving full speed ahead.  Yet in May, the FEC voted NOT to regulate the 527s, and Republicans found themselves way behind the curve.

Based on the calls I get, many people don’t understand how these 527 groups came to be or the rules they have to operate under.  So, this week I’ll give you the low-down on the 527s, the pros and cons, and you can decide for yourself if these groups are a good thing or a bad thing.

527s – How They Came To Be A Force In Politics

There’s an old axiom that a camel is actually a horse built by committee.   I’ve served on plenty of committees and boards, and have found this axiom to be true in many cases.  And it certainly applies to Congress, America’s largest committee, especially when it came time to address the issue of campaign finance reform.  They told us it was a horse, but we now know it’s a camel.

The 2004 presidential election is the first to be held under the new restrictions of the Bipartisan Campaign Finance Reform Act which was signed into law by President Bush in 2002.  While the so-called McCain-Feingold Bill was promoted as the means to reduce the money, and therefore the influence, of special interest groups in political elections, subsequent events have shown that it is having just the opposite effect.

The case in point is the emergence of dozens of new “527” organizations.   These virtually unregulated, tax-exempt organizations are proliferating and are raising hundreds of millions of dollars.  527 groups are spending that money in orchestrated efforts to influence the outcome of this year’s election.  So let’s see how these groups came to be, who is using them most effectively and how they are influencing this year’s presidential election. 

According to the IRS, a Section 527 (§527) entity is a tax-exempt organization created to receive and disburse funds to influence or attempt to influence the nomination, election, appointment or defeat of candidates for public office.  While 527s can seek to mobilize voters and run issue ads, they are specifically prohibited from directly advocating (endorsing) the election of any specific candidate, or coordinating with any candidate’s campaign.

The definition of a 527 sounds very similar to the old Political Action Committees (PACs). However, there are important differences between the two. The biggest difference is that PACs were allowed to specifically endorse their favored candidate(s).  Yet while PACs were able to endorse their favored candidates, they were strictly regulated by the Federal Election Commission (FEC), and they were limited as to the sources of their contributions.

While 527s are not allowed to endorse any candidate – and this is the big point – they are NOT prohibited from attacking the candidate they oppose.  In a two-man race, the ability to attack one candidate is a defacto endorsement of the other.

Unlike PACs, 527s are permitted to accept contributions in any amount from any DOMESTIC source. Contributions from foreign sources are not allowed; however, this prohibition is in question as a result of huge contributions from liberal billionaire George Soros and others who arguably derive much of their huge wealth from abroad. 

McCain-Feingold, we were promised, would bring an end to so-called “soft money” that was regularly donated to the major party political machines (RNC and DNC) for general party purposes.  Soft money was most often used by the political parties to buy  “issue ads.”  The end of soft money certainly sounded good, but I remember wondering back then, why were the Democrats and the media so solidly behind this?  Now I know.  They knew about 527s.

527s:  A Side Effect Of McCain-Feingold

With the adoption of campaign finance reform in the form of McCain-Feingold, soft or unregulated money was supposed to have been removed from the election process.  Yet nothing could be further from the truth.  The fact is there is more soft money now than there ever was, and it is almost totally unregulated.

While the Internal Revenue Code section authorizing 527 organizations existed prior to 2002, they were not widely used as they are today until McCain-Feingold came along and prohibited the endorsement of political candidates and placed new restrictions, supposedly, on the use of soft money.  

Now, instead of the respective campaigns or national party organizations directing the use of soft money contributions, and thereby being held accountable by the FEC, the current mountain of soft money is in the hands of skilled and not-so-skilled political operatives who run the 527s.  By the way, anyone can form a 527, raise money and run ads.

Those Scathing 527 Ads

Political hate speech has never been more prevalent.  As noted above, 527s are not allowed to endorse any particular candidate specifically; however, they are not prohibited from attacking the candidate(s) they oppose.   You can’t endorse your guy, but you can blast the guy you oppose with unlimited amounts of money.  And when there are only two candidates in a race, what’s the difference?

Many of these ads, as you may have seen, have made wild and near slanderous claims. This would not have been possible if these vast sums of money were still in the hands of PACs and or the national party committees (RNC and DNC), because the candidates would have been held responsible. 

In the present situation, these highly funded 527 groups are only constrained by their conscience and sense of decency.  Based on some of the scathing ads put out by these groups, some of them are severely lacking in either of these qualities.

No doubt, this has been the nastiest presidential race ever.

Are The Campaigns Coordinating With 527s?

Election laws prohibit the campaigns from coordinating with these 527s, but there have been claims by both sides that such coordination is going on.  Kerry claimed that Bush was in cahoots with the Swift Boat Vets, and Bush claimed that Kerry was coordinating with groups like Moveon.org, ACT and others.  Naturally, both camps claim there has been no coordination, and that they have no control over these 527 groups or the content of their ads.

Whether you believe there has been coordination or not, it is important to note that many of the largest 527 groups are staffed and run by veteran political operatives.  So even if there is no direct coordination, I find it hard to believe that there is not some level of communication going on.

Which brings us to an interesting scenario. Everyone knows that there are some things the candidates and campaigns would like to say, but good taste and decorum prevent them from doing so.  The 527 organizations, on the other hand, can be as nasty and repugnant as they wish, as we’ve no doubt seen.  The candidates remind us that they are not coordinating with the 527s, and in some cases condemn the ads, but one wonders if they aren’t happy that the message got out.  I think they call this “plausible deniability.”

The Major 527s Groups

As noted earlier, the Democrats got a significant head start in the 527 sweepstakes.  The GOP was hesitant in the beginning about having 527 groups out there that they might not be able to control.  And they were confident, in light of McCain-Feingold, that these groups would be ruled in violation of the law by the Federal Election Commission, or at least strictly regulated.  So they were not aggressive in pursuing 527s.  The Democrats, on the other hand, never hesitated and built a massive lead in 527 funding.

There are hundreds of 527 organizations, so let’s focus mainly on the top 10.   You’ve probably heard of some of these. 

Media Fund, America Coming Together (ACT), Service Employees International Union, American Federation of Municipal Employees, Moveon.org, New Democrat Network, Club For Growth, EMILY’s List, AFL-CIO, and Voices For Working Families.

These 10 groups have a lot in common. With one exception, they are all Democrat-friendly, anti-Bush groups.  The one exception is the Club for Growth, which is a conservative 527.

These groups have reportedly raised over $150 million combined (and maybe a lot more than that). It really sounds like they took the big money out of politics, doesn’t it?  Conservative-leaning 527s got a late start but have reportedly raised about $36 million.  That’s over a 4-to-1 advantage for the Democrats.

You’ve no doubt heard about the Swift Boat Veterans for Truth 527, but they are not listed in the top 10 above.  That’s because they are small in the grand scheme.  The Swift Boat 527 was initially funded with just $100,000 and on a shoestring got their first ad on the air.  Because of the firestorm that ad created, the Swift Boat Vets have since raised a lot more money, but they are still small in comparison to those listed above.

The Major 527 Donors

So who are the major players in the 527 sweepstakes?  There are a handful of  “big givers” that have made astoundingly large contributions to various 527s. They include Peter Lewis who has reportedly donated over $14 million, George Soros reportedly over $12 million and Steven Bing reportedly over $8 million. Who are these people?

Of the three listed above, Steven Bing is likely the least known to the general public.  He is a major Hollywood producer and power broker who was a big supporter of Bill Clinton.  So it is not at all unusual that he would give generously to unseat Bush.

Perhaps slightly more well known is Peter Lewis, CEO of Progressive Insurance, and he is reportedly a billionaire.  Lewis is a long time advocate of far left causes, including the legalization of marijuana. (Strange for the founder of an insurance company, don’t you think?)

That brings us to international financier and multi-billionaire George Soros. While Soros comes in second in contributions (so far), he is far and away the most active of the mega-givers.  Soros has pledged to spend whatever it takes to topple Bush, no matter the cost.  In late September, when Bush pulled ahead, Soros reportedly said he would spend another $20 million of his own money if necessary.

Soros has written a book, made the talk show circuit, and has taken out giant spreads in national newspapers. Beyond his far-left agenda, Soros has a seething hatred of Bush.  Soros has compared the Bush administration to Nazi Germany and Bush personally to Hitler.

The Impact of 527s on the Election

Without a doubt, 527 groups have and will likely continue to have a major impact on this election.  But not in quite the way you might think.  It is natural to assume that the mega-funded Democrat leaning 527s would have savaged and shredded Bush to bits by now. And yet as of this writing, the President still holds a slight lead in most of the polls. How can this be? 

Here is how political analyst Dick Morris (former senior Clinton advisor) explains it, in two parts.  First, Morris argues that the American middle (right-leaning Democrats and the left-leaning Republicans) can only take so much.  He believes that the scathing attacks leveled at President Bush have overloaded the American middle.  Many of these voters were turned off by the negative 527 attacks.

Second, Morris reminds us that something similar occurred in 1996 when the far right was blasting away at Clinton (in attacks that were down right tame by today’s low, low standards.)  Clinton never flinched, never acknowledged them and never gave them any additional fuel to run on.  Morris believes Bush did exactly the same thing by refraining from publicly responding to, or complaining about, the firestorm of attacks from the 527s.

Morris believes that John Kerry, on the other hand, made a tactical mistake with his public outrage over the Swift Boat ads.  He called on the FEC to have the ads taken off the air.  As a result, a small under-funded 527 group rose to national attention.  And the story was the focus of attention for several weeks.

Aside from the ad controversy, another activity by the 527 groups that can affect the election is mobilization of the vote.  Democratic-leaning 527 groups have been very active in voter registration drives and other attempts to get out the vote.  They have especially appealed to young people, who prior to now have felt that they really had no voice in the political process.

Should We Get Rid Of 527s?

There are a couple of good arguments here.  The pro-527 crowd believes that these independent groups serve a positive function.  Clearly, they provide a medium for free debate.  Because they are (supposedly) independent from the national political parties, they can bring facts and issues (and trash) to the political debate via their ads and other activities. 

They also take some of the control of the political process away from the Democrats and Republicans (for better or worse).  They also argue that their presence makes it more likely that third-party candidates could have a real shot in the future and challenge today’s two-party system.

Many Republicans argue that we should not eliminate 527s.  Even though the Republicans gambled that 527s would be outlawed this year, and lost, they believe GOP-leaning 527s will raise more money than the Democrat-leaning groups next time around.

On the other hand, there are those who believe that 527s are dangerous and should be eliminated.  They believe that the proliferation of 527s should scare you, no matter your political affiliation.  They warn of the dangers in allowing one or a handful of super-wealthy people to have such an incredibly disproportionate and unregulated impact on our political process.

President Bush and John McCain called for the elimination of the 527 organizations from the political process.  Some have argued that they did so only because the left-leaning 527s have so much more money.  John Kerry also finally said that 527s should be eliminated or more tightly regulated.  Some said this was only because the left-leaning groups had already done most of their damage.

Calls To Abolish The FEC

Those who still support McCain-Feingold point to the Federal Election Commission as the source of the problem.  The FEC was assigned the job of writing the regulations to enforce McCain-Feingold.  No less than McCain and Feingold themselves have criticized the FEC for issuing regulations that bore little resemblance to the law.

In September, a federal district judge struck down 15 of 19 regulations issued by the FEC to govern campaign finance.  Judge Colleen Kollar-Kotelly said in her opinion that the regulations had created an “immense loophole” that allowed continued abuse of soft money contributions.   This rebuke came on the heels of the Supreme Court’s chastisement of the FEC in its “ McConnell” decision that upheld the McCain-Feingold law.

In response to the Supreme Court’s reprimand, FEC Chairman Brad Smith arrogantly remarked, “Now and then the Supreme Court issues a decision that cries out to the public, ‘We don’t know what we’re doing!’   McConnell is such a decision.”  This kind of blatant disregard to the intent of laws regulating elections has led many to call for the FEC to be abolished and replaced with a more responsible agency.   I can’t say that I disagree with them.

Finally, there is still the question of why the Federal Election Committee didn’t put a stop to the 527s earlier this year.  I’m sure there’s a juicy story about how they voted 4 to 2 not to regulate 527s and to conduct “more study,” when the Bush campaign fully expected the FEC to shut down the 527s.

Conclusions

There are good things and bad things about the Section 527 groups.  On the positive side, they provide a marketplace of ideas and free speech, well beyond what the traditional political parties might bring to the table or disclose.  Such free speech should not be eliminated.

Yet on the negative side, some of these large groups are highly influenced by a handful of billionaires who think they should be able to buy an election.  And I must add that some of the 527 ads have been over the top, and have only served to further divide and polarize the electorate.

There is also the problem of the source of the donations.  The law says that 527 donations can only come from domestic sources.  Yet as alluded to earlier, there are growing concerns that some of the 527 money raised this year may have come from foreign sources.  Control on this issue is imperative if 527s are to continue.  We don’t want foreigners influencing our elections.

If the goal of McCain-Feingold was to eliminate soft money from the political process, then it was a huge failure.  One has to wonder if many in the Congress voted for McCain-Feingold to look good publicly, knowing full well that 527s would ensure the free flow of soft money.

Finally, if the government decides to leave 527s in place, and regulate them, then they need to revamp the Federal Election Commission.  Its current structure with three appointed Democrats and three appointed Republicans is a recipe for inaction and/or failure.

I hope this discussion of 527s helped in understanding this complicated issue.

A Quick Word About Last Week’s Debate

Many of you, I’m sure, are wondering what I thought about the presidential debate last week.  I’m sorry to say that I think Bush did poorly.   While I fully expected the press to claim a Kerry victory at the end of the debate, I had to score it that way, too.

As a result of the debate, the race for president has narrowed significantly.   A Newsweek poll over the weekend actually shows Kerry ahead by two points.  Bush definitely needs to do better in the next two debates.  In 2000, it was generally agreed that Bush lost the first debate to Gore, but then he prevailed in the remaining two.  We’ll see what happens.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Website that is critical of the Federal Election Commission.
http://www.democracy21.org/index.asp?Type=B_PR&SEC=

FEC bows to pressure to regulate 527s (well maybe).
http://www.washingtonpost.com/wp-dyn/articles/A17049-2004Aug19.html

President Bush needs to take the gloves off.
http://www.townhall.com/columnists/davidlimbaugh/printdl20041005.shtml

Can Bush turn it on in St. Louis?
http://www.weeklystandard.com/Content/Public/Articles/000/000/004/726sxtdi.asp


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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