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How the Money Exchange Works

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DNC Trims Debt, Says It Can Compete in '98 (Washington Post, April 10)

Soft Money Explained

Money Talks: Big Donors Still Give Early and Often

DNC Swaps Funds
With Its State Affiliates

By Scott Wilson
Washington Post Staff Writer
Friday, April 24, 1998; Page A01

A financially strapped Democratic National Committee has enlisted at least a dozen state parties -- including Maryland's -- in an effort to avoid limits on the use of large contributions for federal campaigns, a Washington Post computerized analysis of campaign finance reports shows.

In recent months, the DNC has collected more than $1 million from labor unions, corporations and wealthy individuals that cannot be used directly for congressional and presidential races and handed that restricted money over to the state parties. In return, the state parties have sent back to the national committee unrestricted funds that can be spent on those contests, keeping a 10 to 15 percent commission for their assistance.

The DNC-engineered swap is one of the most aggressive to date and comes as the party, facing a multimillion-dollar debt, is eagerly seeking funds to finance congressional election campaigns less than seven months away. But campaign-finance reform advocates say the tactic, while legal, renders meaningless the federal distinction between "soft money" campaign funds whose use is sharply restricted and unrestricted "hard money," providing the latest evidence yet of the need to tighten federal campaign finance laws.

"It shows the porousness of the system and exposes the myth that there is some separation between hard and soft money," said Don Simon, executive vice president of the watchdog group Common Cause.

DNC general counsel Joe Sandler, however, described the transfers as a way to ensure that "each party has more of the kind of money it needs," adding, "In our view, it's not only absolutely legal, but it's absolutely appropriate and ethical in every respect."

House Republican leaders this week agreed to schedule votes on stalled legislation that would effectively curb the money-swap practice and fund-raising abuses, by banning outright "soft money" donations to political parties.

Both political parties have previously avoided limitations on the use of soft money by funneling it through their state party affiliates to pay for advertising that indirectly promotes congressional and presidential candidates. In past election cycles, the DNC has orchestrated money swaps from one state party to another, and both parties have conducted limited swaps between their national committees and state affiliates. But the recent money exchanges between Democratic national and state party committees has never been conducted on such a large scale.

Hard money tends to be more valuable to national parties. It can be used for any purpose, including direct help for congressional and presidential candidates. But they can raise hard money only in limited amounts -- $20,000 a year from any individual and $15,000 a year from any political action committee. Unions and corporations are prohibited from giving to federal races.

By contrast, soft money can be collected in unlimited sums from any entity, including unions and corporations. But it cannot be spent directly on behalf of candidates for federal office. Instead, soft money can only be used to cover a party's administrative costs, get-out-the-vote efforts, and other general activities. State parties often find they can make better use of soft money under the separate state rules they must abide by, providing national parties with an outlet for the money they raise.

Last year, national Democratic committees raised $27 million in soft money, while Republican national committees collected $40.4 million -- record totals for off-election years. Among the largest soft-money donors were tobacco companies Philip Morris and R.J. Reynolds, MCI Communications Corp., Walt Disney Co., and the oil concern Atlantic Richfield Co.

With a multimillion-dollar debt and a donor base far smaller than the GOP's, the DNC finds itself especially short of the hard money it will need to help finance the 1998 campaign. Its most recent report to the Federal Election Commission shows the party has a $6.7 million debt, which will require mostly hard money to pay off.

To help alleviate the crunch, the DNC has approached its state affiliates to, in effect, buy state hard money with national soft money reserves. To each transaction, the DNC tacks on a 10 to 15 percent commission paid in soft money. The state parties can use the soft money for general costs or, in some cases, on behalf of state candidates.

Since January 1997, the DNC has shipped state committees soft money in amounts ranging from $11,000 to $172,500 and received equivalent sums of hard money -- less the commissions -- in return, sometimes within days.

Fred Wertheimer, of Democracy 21, a nonprofit advocating campaign-finance reform, said the tactic "just reveals that the whole thing is a game and that the principal goal involved here is a coordinated effort to get soft money into federal elections."

"The notion of purchasing campaign contributions is par for the course in terms of new ideas used to try to evade the campaign finance laws," Wertheimer said.

The Republican National Committee engaged in similar exchanges with state parties during the 1996 election but on a far smaller scale. Campaign finance reports show no direct exchanges this time, although the RNC has received one-way hard money transfers totaling $105,000 from two state parties.

In the past, national parties have used state affiliates in a variety of ways. In 1996, for example, the DNC sent state parties at least $32 million in soft money to pay for ads that indirectly promoted President Clinton. The system has, in fact, become a cash cow for some state parties.

For example, the Maryland Democratic Party has turned a $16,400 profit during the last three years through the exchanges. It sent at least $122,000 to the DNC in hard money raised from Maryland individuals and political action committees, and in return received $138,400 in soft money from the national committee. Campaign records do not show Democratic Party committees in the District of Columbia or Virginia exchanging money with the DNC.

More than half the money exchanged by Maryland Democrats came in the last year and was used by the state party to pay staff salaries, office rent and other administrative costs that consume the bulk of a party's budget in off-election years, according to finance reports.

"We're all part of the same party," said Peter B. Krauser, the state party chairman. "It's important to help Democrats get elected throughout the country."

Connecticut and Alaska have banned soft money transfers between national and state party committees, primarily to curb the influence of federal money on state campaigns. Before a ban in its state was approved last month, the Connecticut Democratic Party turned a $6,300 profit last year by selling $63,000 in hard money to the national committee.

"We've got to scratch for every nickel and dime," said Robert Ives, executive director of the Connecticut Democratic Party.

A computerized analysis of state and federal campaign finance reports shows that the exchanges occurred to the greatest degree in Texas, Michigan, Minnesota and Ohio, reports show.

Take the case of Texas. On June 17, 1997, the Texas Democratic Party received a check for $115,000 from a DNC soft money account. Two days later, $100,000 in hard money arrived at the DNC from the Texas party.

"We've both called each other. One time, they [the DNC] called and needed to make payroll, so we helped them out there," said Steve McDonald, comptroller of the Texas Democratic Party, which last year made $37,500 by shipping the DNC $250,000 in hard money. "We plan on doing this as much and as often as we can."

Staff writer Ruth Marcus and staff researcher Alice Crites contributed to this report.

© Copyright 1998 The Washington Post Company

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