Posted June 12, 2007 by Paul S. Ryan

“Hybrid Ads” and the $50 Million Loophole—Will It Grow in 2008?

Yesterday the Campaign Legal Center together with Democracy 21 filed comments in response to FEC Notice of Proposed Rulemaking (NPRM) 2007-10 regarding so-called “hybrid communications.”  At stake in the rulemaking is the effectiveness of federal law limits on party expenditures coordinated with all Federal candidates, as well as the limit on publicly financed presidential candidate spending.

During the 2004 presidential election cycle, both the Republican National Committee (RNC) and the Democratic National Committee (DNC), together with their presidential candidates, engaged in a new scheme to evade both the $74.6 million general election publicly financed candidate spending limit and the $16.2 million limit on party expenditures coordinated with their presidential candidates.

Both the RNC and the DNC coordinated so-called “hybrid ad” campaigns with their respective presidential candidates—producing ads that referred by name to Senator Kerry or President Bush, and contained some kind of generic reference to members of Congress (e.g., “President Bush and our leaders in Congress,” “John Kerry and liberals in Congress,” “John Kerry and his liberal allies”), but identified no other candidate.  The Bush/RNC “hybrid ads” were worth more than $81 million, while the Kerry/DNC “hybrid ads” were worth $22 million.

Although no statute, regulation or advisory opinion authorized them to do so, the party committees unilaterally decided they could allocate just 50% of the cost of these ads to the party’s presidential candidate, and allocate the other 50% to the party itself (as if half of the ad were irrelevant to the presidential campaign).  In fact, the existing rule on “party coordinated communication” clearly states that “[a] payment by a political party committee for a communication that is coordinated with a candidate . . . must be treated by the political party committee making the payment as either . . . [a]n in-kind contribution . . . or . . . [a] coordinated party expenditure . . . .”  11 C.F.R. § 109.37(b).  Importantly, the rule does not state that only 50% of such payment must be treated as an in-kind contribution or coordinated expenditure.  The plain meaning of the existing coordination rule is that the entire payment must be treated as an in-kind contribution or coordinated expenditure.

But the parties argued that because the ads contained some incidental language purportedly benefiting the party generally, instead of the presidential candidate specifically, the cost of those generic references could be attributed to the party rather than to the candidate, and further, that the value of such generic references amounted to 50% of the total cost of the ad.  The candidates’ campaigns then reimbursed the parties for the 50% of the ads attributed to the candidates.

The effect of this innovative allocation scheme was to evade completely the $16.2 million coordinated spending limit, and to dramatically supplement with private funds the $74.6 million spending limit applicable to the publicly financed presidential campaigns (an increase of $41 million for the Bush campaign and $11 million for the Kerry campaign).  In short, the parties subsidized half of the cost of the candidates’ campaign ads, and did so outside the spending limits that applied to both the candidates and the party—all based on the simple expedient of including an incidental generic reference in an ad that otherwise was plainly a candidate campaign ad.

The Commission deadlocked on the legality of this 50% allocation scheme when considering the audit report for the Bush-Cheney ’04, Inc. committee.  Chairman Lenhard together with Commissioners Walther and Weintraub stated publicly their belief that the Bush-Cheney ’04 campaign “impermissibly accepted $42,409,406 in in-kind contributions from the RNC” and that the committee “should be required to repay this amount to the U.S. Treasury.”  Commissioner Weintraub explained in a separate statement that the result of this 50%-50% allocation strategy “was to increase by more than 55% the funds subject to the [Bush-Cheney] General Committee’s direction and control” in a “way that was surely not contemplated by the architects of the public funding system.”  Vice Chairman Mason and Commissioner von Spakovsky issued a statement defending the 50-50 allocation scheme.

And when considering the materially indistinguishable so-called “hybrid ad” strategy employed by the Kerry-Edwards committee in coordination with the DNC, the Commission deadlocked again, lacking the minimum four affirmative votes required to make a finding as to whether or not the 50% allocation complied with FECA and Commission regulations.

Although not authorized by statute, regulation or advisory opinion, the parties and their candidates did not pull this 50-50 allocation scheme out of thin air.  Indeed, the Commission has to some degree already facilitated the evasion of the coordinated party spending limit (applicable in all federal elections) and the candidate spending limit (applicable in publicly financed presidential elections).  Several years ago, in response to the allocation practices of the Bush 2000 campaign, the Commission promulgated a rule allowing 50-50 allocation for certain “hybrid” phone bank communications (current 11 C.F.R. § 106.8).  The “Explanation & Justification” for the phone bank rule, however, made clear that the rule applied only to phone banks—not to any other form of communication.  Nevertheless, the parties and candidates took what the Commission seemingly envisioned as a small loophole and blew it up, creating a tunnel through which they drove more than $50 million in private funds to publicly-financed presidential candidates in a “way that was surely not contemplated by the architects of the public funding system,” to once again quote Commissioner Weintraub.  Then last year, against the advice of the Campaign Legal Center and Democracy 21, the Commission formally expanded this exception even more when it issued Advisory Opinion 2006-11, permitting 50-50 allocation for certain “hybrid” mass mailings.

The Commission now stands at a crossroads.  With audits of the Bush and Kerry campaigns now complete, the Commission knows full well the extent to which the rationale employed by the Commission in the phone bank rule and the mass mailing advisory opinion undermines both the coordinated party spending limit and the presidential candidate spending limit.

The Commission erred by allowing 50% allocation for “hybrid” phone banks and mass mailings and the Commission should not compound that error by extending the same faulty rationale to the much more potent realm of all broadcast ads, and other means of public communications.

Instead, the Commission should repeal the 50-50 allocation phone bank rule and supersede Advisory Opinion 2006-11—with a regulation requiring the full costs of ads coordinated with one or more Federal candidates to be attributed to those candidates, regardless of whether the ads contain some generic party reference.  As noted in NPRM 2007-10, such a 100% candidate allocation requirement “would be similar to the allocation rules for separate segregated funds and nonconnected committees” and is based on the commonsensical “proposition that a generic party reference could be reasonably expected to provide at most an insignificant benefit to the political party making the public communication, and that the Federal candidate of the political party making the communication could reasonably expect to derive all of the benefit from the communication.”

Any new rule allowing attribution of any amount of candidate-specific ads to the party—simply by including a generic party reference in the ad—would complete the evisceration of longstanding statutory provisions limiting political party coordinated expenditures and in-kind contributions, as well as presidential expenditure limits.  No statutory basis or policy justification exists for such a rule.