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Posted February 6, 2007 by Paul S. Ryan

They Walk Like Ducks, Quack Like Ducks, But Claim They’re Not Ducks

Much has been written in recent weeks regarding the general legal question of when federal campaign finance laws kick in for prospective presidential candidates or, more specifically, the extent to which prospective candidates may use state committees and federal leadership PACs to lay the foundation of a 2008 presidential campaign.  Both the Wall Street Journal and the Politico ran articles on the subject last week.  The issue is an important, contentious, and somewhat confusing one worthy of in-depth examination—which is my goal here.

FEC regulations require that only “funds permissible under” FECA be used by individuals “for the purpose of determining whether [the] individual should become a candidate.”  See 11 C.F.R. §§ 100.72 and 100.131.  In FEC-speak, such activity is referred to as “testing the waters,” and “funds permissible under” FECA means funds raised subject to the candidate contribution limits ($2,300 from individuals / $5,000 from multicandidate PACs) and also subject to a ban on corporate and union treasury funds.

While funds used for “testing the waters” exploratory activities must be raised pursuant to the federal candidate “hard money” restrictions, an individual who is “testing the waters” is not required to register a federal political committee until such time as the individual decides to run for office.  At that time, the funds already raised and spent to “test the waters” are deemed “contributions” to and “expenditures” by the candidate’s committee, and must be reported on the candidate committee’s first report filed with the Commission.  The FEC’s auditors then, presumably, examine these reports to ensure that all funds an individual raised and spent while actively exploring a federal candidacy were in compliance with federal campaign finance laws.  The FEC explains its “testing the waters” regulations as follows:

“Before deciding to campaign for federal office, an individual may first want to ‘test the waters’—that is, explore the feasibility of becoming a candidate.  For example, the individual may want to travel around the state or district to see if there is sufficient support for his candidacy.  An individual who merely tests the waters (but does not campaign for office) does not have to register or report as a candidate even if the individual raises or spends more than $5,000—the dollar threshold that would normally trigger candidate registration.  Nevertheless, the individual must comply with the contribution limits and prohibitions.  Once an individual begins to campaign or decides to become a candidate, funds that were raised or spent to test the waters apply to the $5,000 threshold for qualifying as a candidate.  Once the threshold is exceeded, the individual must register with the FEC . . . and begin to file reports . . . .”

See Campaign Guide for Congressional Candidates and Committees, 5 (emphasis added) (internal citations omitted).  The Campaign Guide states clearly later on the same page: “Funds raised to test the waters are subject to the Act’s contribution limits.  Moreover, the individual who is testing the waters may not accept funds from prohibited sources.”

It’s abundantly clear, therefore, that federal law requires the use of federal candidate hard money to conduct federal candidacy exploratory activities.  It is simply illegal for an individual to pay for such exploratory activity using state committee soft money or federal leadership PAC money.

Much of the media coverage of this issue has been incorrect on this point.  For example, the Politico article published last week, ‘08 Candidates Make End Run Around Federal Campaign Rules, incorrectly states:  “As long as the candidates avoid expressly stating they're running for president—and some stopped just short of that—their committees are not subject to federal laws that limit the sizes and sources of contributions.”  Federal candidate contribution amount limits and source prohibitions can be triggered long before an individual expressly states that they are running for federal office.

Now here’s where things start to get murky.  Undoubtedly, the hardest part of applying the FEC’s regulatory structure to the real world is not determining whether “testing the waters” exploratory activities must be paid for using hard money—but proving when an individual is “testing the waters” of a federal candidacy.  The FEC’s Campaign Guide provides some insight into what the Commission considers to be “testing the waters” activity, including “travel[ing] around the state or district to see if there is sufficient support for [a] candidacy.”  The Commission’s regulations provide further insight, noting that examples of activities that constitute “testing the waters” include, but are not limited to, “conducting a poll, telephone calls, and travel” for the purpose of determining whether to become a candidate.  See 11 C.F.R. §§ 100.72 and 100.131.  FEC regulations also provide that certain activities paid for by a federal multicandidate political committee—e.g., a federal officeholder’s “leadership PAC”—are automatically presumed to have been for the purpose of “testing the waters” and constitute a contribution from the PAC to a presidential candidate (subject to a $5,000 limit) unless the candidate reimburses the PAC within 30 days of actually becoming a candidate.  See 11 CFR § 9034.10.  Such de facto “testing the waters” expenses include:

·        “Polling expenses for determining the favorability, name recognition, or relative support level of the candidate involved”; and

·        “Administrative expenses, including rent, utilities, office supplies and equipment” and “[c]ompensation paid to employees, consultants, or vendors for services rendered in connection with establishing and staffing offices in States where Presidential primaries, caucuses, or preference polls are to be held, other than offices in the candidate’s home state and in or near the District of Columbia.”

I will readily admit that I have not closely reviewed the financial records of the state soft money committees or federal leadership PACs that have been utilized in recent months by prospective presidential candidates.  But if the Wall Street Journal article and other recent media accounts on the subject are accurate, then many of the activities being paid for with state committee soft money and leadership PAC funds fall within the scope of what the FEC considers to be “testing the waters” activity (i.e., funds spent “for the purpose of determining whether an individual should become a candidate”) and therefore must be paid for with federal candidate hard money.

To be certain, prospective candidates have reported using state soft money committees and federal leadership PACs to make contributions to other candidates for local, state and federal office.  And one might reasonably argue that such activity—particularly if analyzed in a vacuum, rather than in the real world context of prospective candidates trying to line up supporters in early primary election states—should not be deemed funds spent “for the purpose of determining whether an individual should become a candidate.”

But media reports, as well as my cursory review of campaign finance data disclosed by these committees, indicate that such contributions to candidates comprise a small percentage of total disbursements by these committees.  One prospective candidate profiled in a news article last week raised over $7 million into state committees, and donated only $1.4 million to state and local candidates—20% of funds raised.  Disclosure data compiled by the Center for Responsive Politics reflects similar use of funds by federal leadership PACs affiliated with prospective presidential candidates.  The bulk of the funds raised by prospective presidential candidates through state committees and federal leadership PACs has been spent on travel, staff and national consultants; and it’s this spending on activities in or directly connected to early presidential primary states—amounting to roughly four out of every five dollars raised—that seems to fall within the scope of the FEC’s “testing the waters” regulations.

Some candidates have claimed that this spending was necessary to raise the money eventually contributed to other candidates.  But if the real purpose of these committees was to support other candidates, and it cost these committees $4 to raise every dollar they disbursed in contributions, I’d say these operations need new finance directors if they are to have any shot at winning the presidential race.  But it didn’t cost them $4 to raise every dollar in contributions—it’s obvious to everyone paying attention that the individuals making these types of expenditures have been “testing the waters” for a presidential candidacy.

These practices are not unique to one candidate or to one political party.  It is the very fact that these practices have become so widespread that they have recently drawn the media’s attention.  And, again, to the extent a prospective presidential candidate has used a federal leadership PAC to pay for activities factually indistinguishable from those which others have paid for with state committee funds, they too have violated federal law if the leadership PAC is not ultimately reimbursed for the “testing the waters” expenses by the candidate’s eventual campaign committee.

The legal question is, how can one prove that a carefully counseled individual (i.e., one who has been told by his lawyer to refrain from making any explicit references to a possible presidential run), who has heeded their lawyer’s advice, has in fact been “testing the waters” using non-federal funds?  As I was quoted in the Politico article: “If a candidate wants to deny that their repeated trips to Iowa and New Hampshire two and a half years before an election are not for the purpose of exploring a potential 2008 presidential run, there’s little that the FEC can do in terms of law enforcement to say ‘You are lying, candidate; we know the real purpose of these trips.’  But it’s obvious to the public that there can be little purpose beyond exploring a presidential run[.]”

We’ve all heard the adage: “If it walks like a duck and quacks like a duck, you can be reasonably sure it is a duck.”  Well, many of the activities paid for in recent months by prospective presidential candidates’ using state committees and federal leadership PACs certainly look and sound like “testing the waters” activity.  Unfortunately, I’m not reasonably certain that the FEC will find these activities to have been “testing the waters” activities; and the prospective candidates have demonstrated their unwillingness to acknowledge this on their own.  But they have a responsibility to do so; after all, is a little honesty too much to ask of our next President?

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