North Carolina governor’s race awash in out-of-state funds

Introduction

North Carolina’s race for governor is expected to be the most expensive in the state’s history thanks largely to two deep-pocketed, Washington, D.C.-based organizations whose underwriters may not even know how their funds are being spent.

The state is the latest field of battle for the Democratic Governors Association and the Republican Governors Association, organizations whose impact has increased thanks to court decisions that eliminated limits on campaign spending.

The two groups have spent roughly $3 million in North Carolina — nearly as much as candidates Pat McCrory and Lt. Gov. Walter Dalton combined — and have committed more to the race. Outside groups are poised to eclipse the $7.7 million record set during the 2008 governor’s race.

The state is experiencing “an advertising onslaught like we’ve never seen before” according to the Raleigh-based Free Enterprise Foundation.

North Carolina law caps donations to the candidates at $4,000 and prohibits donations from unions and corporations. But outside organizations — like the DGA and the RGA — can accept unlimited donations from virtually any source and spend the money on ads.

Those sources are tough to track. Even though the RGA is reporting the identities of corporate funders of ads, donors contacted by the Center for Public Integrity were unaware their money was being spent that way and denied having any stance on the North Carolina race.

The DGA, meanwhile, is funneling large sums through a state political committee, thus obscuring the identities of the original donors.

Things won’t quiet down any time soon. Not only is the state filling an open governor’s seat, it is also a presidential swing state — one of the reasons it is hosting the Democratic National Convention this week.

Possible GOP pickup

North Carolina’s current governor is Bev Perdue, elected in 2008. With sinking approval ratings, Perdue decided not to seek a second term. Despite the long history of dominance by Democrats, prognosticators see the state leaning right. In 2010, Republicans took control of the legislature for the first time in more than a century.

RGA spokesman Mike Schrimpf told The Charlotte Observer in May that North Carolina is a “prime pickup opportunity,” and that the RGA is “committed to provide the resources to win it.”

Thus far, the RGA has spent roughly $1.4 million and reserved another $3.5 million for ads this fall. The DGA has spent roughly $1.5 million on the race.

Lt. Gov. Dalton captured the Democratic nomination in May, though he had to survive an expensive primary that left him low on funds. Filings with the state show McCrory with six times more cash as of July.

Dalton, at least, will get some national exposure thanks to the convention. A spokesman said the lieutenant governor is scheduled to speak Thursday evening at Bank of America Stadium, the final night of the event.

McCrory, the Republican, is the former mayor of Charlotte. He was the Republican nominee in 2008 and lost to Perdue in a close race.

Soon after Dalton won the primary, the RGA launched its first attacks.

A DGA-funded group responded with its own ads in May, while Dalton’s cash-starved campaign got back on its feet.

“If Dalton hadn’t had the outside help,” said Jonathan Kappler, of the Free Enterprise Foundation, “he would have been sunk.”

McCrory has pledged to disavow negative ads run by independently funded groups, but he and Dalton have no control over the RGA and DGA. Outside spending groups may not give money directly to the candidates, nor are they permitted to coordinate their spending with the campaigns.

McCrory did not respond to a request for comment for this story.

Dalton’s spokesman Ford Porter called the independent advertising “an unfortunate reality” and said the Democrat’s campaign is trying to break through the “outside noise” the spending creates.

RGA spending

The RGA’s strategy has been to link Dalton to the unpopular governor, referring to him as Perdue’s “right-hand man” in advertising. It blames the lieutenant governor and Perdue for “higher taxes” and “job killing policies.” The Raleigh News and Observer said the ad distorts the truth.

Dalton was not Perdue’s “running mate” — the lieutenant governor in North Carolina is elected indpendently.

The RGA is paying for the ad directly and not “funneling its money through another entity,” which is what it says its Democratic counterpart is doing.

“This is a case where the RGA is truly being much more transparent than the DGA,” wrote Schrimpf in an email to the Center.

Instead, the RGA is reporting funders of its ads to the state board of elections. According to paperwork filed with North Carolina election authorities, the ad was paid for by 38 out-of-state corporations to the RGA — among them, a $75,000 contribution from insurance giant AFLAC.

The fact that AFLAC’s donations were used to pay for an ad attacking Dalton was news to the company, according to spokesman John Sullivan. Of the donation, $25,000 was meant to be used for “2012 convention sponsorship,” he said.

The RGA says it reserved the right to use the “sponsorship” money for any purpose it chose, including the ads in North Carolina.

The Metropolitan Milwaukee Association of Commerce was also unaware that its donation was going toward ads attacking a sitting lieutenant governor 900 miles away.

“This is the first I’ve heard of it,” said Steve Baas, director of governmental affairs at the Milwaukee business association, “but it’s not a shock to us.”

Baas said he trusts the RGA’s spending decisions with the association’s $150,000 contribution.

While Baas may be OK with it, the use of the donation raises legal questions.

“We appreciate and welcome disclosure whenever possible,” said Kim Strach, deputy director of campaign finance at the state’s Board of Elections, “as long as it’s accurate.”

No limits

Corporations and unions can give $4,000 to candidates from their PACs that draw on small donations from employees. But donations to the RGA and DGA are unlimited.

AT&T gave McCrory $2,000 from its PAC in April. The next month, it gave a $250,000 check to the RGA. General Electric gave $105,000 to the RGA in May, more than all of its PAC donations to all North Carolina candidates in the last decade combined.

None of the corporate funders of RGA’s ads contacted by the Center said their companies had declared a favorite in the race for governor.

General Electric pays a “membership fee” to both governors associations, according to spokeswoman Helaine Klasky, “to enable GE to participate in a wide range of activities sponsored by the DGA and RGA.”

Klasky adds that GE does not direct money toward specific campaigns.

The company’s Citizenship Report says GE has a “long-standing practice against using corporate resources for the direct funding of independent expenditures expressly advocating for or against candidates.”

AT&T did not respond to calls, but has supported both major parties and its candidates for governor in North Carolina for a decade. IRS filings show the company gave $100,000 to the DGA in 2012, less than half of what it gave to the RGA.

In fact, of the 38 corporations and organizations that have pitched into the RGA ad effort, 15 have also given to the DGA this year — including GE, AT&T, AFLAC, Altria, and the Milwaukee Chamber.

The RGA’s largest donor from North Carolina, Duke Energy, gave $175,000. The company, which is a major supporter of the Democratic convention, also gave $200,000 to the DGA.

Disclosure in the dark

The RGA, meanwhile, is criticizing its counterpart for not being as forthcoming with the state’s voters.

The DGA-funded entity is a Raleigh-based organization called North Carolina Citizens for Progress. The group has no formal affiliation with the DGA and has a separate board that makes spending decisions and solicits money.

The DGA is the main donor to North Carolina Citizens for Progress, giving 93 percent of the $2.1 million the group raised this year, according to IRS reports.

The cash infusion funded two controversial ads accusing McCrory of “questionable ethics” during his time as mayor of Charlotte.

The DGA and the RGA are 527 groups, named for the section in the IRS tax code that regulates them. The groups report donors and donations to the IRS as well as expenditures, including contributions to other organizations.

The DGA avoided listing specific funders of ads it financed by giving the money to the local PAC.

In addition to the DGA contribution, the National Education Association’s super PAC, funded by the nation’s largest public employee union, chipped in $144,000 toward the race.

“I have no idea where our money came from, beyond the fact that it comes from the DGA or the NEA,” said Michael Weisel, spokesman for North Carolina Citizens for Progress, the pro-Dalton group.

While it weathers criticism for its lack of transparency, the DGA-funded ads are attacking McCrory for refusing to release his tax returns. A spokesman for the DGA said it is “proud” to support the efforts to “expose Pat McCrory’s failure to release his tax returns and other financial interests.”

The DGA said it is “transparent about who our donors are and what they have given, and we regularly report that information.”

Courts change playing field

The RGA and DGA have played an increasingly significant role in the state thanks to a series of Supreme Court rulings beginning in 2007, which have eroded North Carolina’s ban on corporate and union money in the state.

The Wisconsin Right to Life decision in 2007 cracked open the door to corporate funding of ads that mention a candidate but stop short of telling viewers to vote for or against that candidate. So far in North Carolina, the DGA and RGA are funding ads of this type, which do not ask people for their vote.

If the 2007 decision opened the door, the Supreme Court’s 2010 Citizens United ruling blew it off its hinges.

The high court said corporate and labor donations to outside spending groups are legal — including organizations that ask voters to support or oppose a particular candidate. The decision led to the creation of super PACs which have played a major role in federal elections.

“We had entities spending millions in the state’s gubernatorial races before Citizens United, using various vehicles,” said Bob Hall, a longtime director of the state’s election watchdog group Democracy NC. “But now, more entities are stepping up to spend money as though the Supreme Court has blessed the whole enterprise.”

History of enforcement

North Carolina’s Board of Elections has investigated the previous two Democratic candidates for governor, and has also taken up long battles with outside spending groups.

“Groups from both sides have been complained about,” said Strach, the state agency’s veteran campaign finance director.

The RGA ran afoul of the elections board during its unsuccessful attempt to unseat Democrat Mike Easley in 2004. The board demanded that the RGA pay a penalty of $196,000 for violating state limits on corporate contributions.

But the RGA appealed and in 2005 an administrative law judge reversed the board’s ruling. The RGA acknowledged that its ads in the state were funded through an account that commingled corporate and individual contributions.

In a letter to the State Board in 2004, the RGA’s lawyer wrote that “determining which sources of funds were used … is an impossible task,” as contributions to the RGA were never earmarked for specific use.

Furthermore, the RGA argued that its “major purpose” was not as a North Carolina PAC, and therefore it was not subject to the state’s contribution caps.

In 2008, the board held a lengthy hearing about the fundraising and spending by several outside groups including the RGA and the Democratic Legislative Campaign Committee.

Election watchdog Democracy NC, which filed a complaint which prompted the hearing, claimed that the RGA was listing donors “who had no idea their money was going to a North Carolina PAC or was being used to impact a North Carolina election.”

The state-appointed board ultimately ruled 3-2 that the RGA and other outside spending groups had broken no rules.

Any ambivalence about what’s OK and what’s not is gone now.

Before the Supreme Court’s landmark ruling “there were lots of groups that were nervous about getting involved, who were being told by their lawyers, ‘that’s too messy,’” said Hall.

Today, he says, the environment is far more inviting. And the state’s disclosure laws fail to “give the public a chance to understand who is backing some engine of advocacy.”

Strach says both RGA and DGA “are finding ways to mask disclosure,” but the Citizens United decision makes the board’s decade of investigations largely moot.

“I don’t think those questions are relevant anymore,” she said. “If a group wants to make independent expenditures of any kind, the roadblocks are no longer there.”