The Super-PAC Economy

Who’s getting rich, and how they’re pulling it off. Part one of a series on the new world of campaign finance. By John Avlon and Michael Keller.

09.18.12 8:45 AM ET

This is the first installment in a series by The Daily Beast, in partnership with the Center for Responsive Politics, on the influx of money into the 2012 campaign.

Beneath the still struggling American economy, there is a gold rush going on. An unprecedented $5.8 billion will be spent in this election cycle, $2.5 billion in the presidential election alone. Much of this money will be spent not by campaigns, but by two kinds of outside organizations: super PACs and social-welfare groups, also known as 501(c)(4)s.

This isn’t just democracy. It’s big business. “This is the greatest windfall that ever happened for political operatives in American history,” says Democratic consultant Hank Sheinkopf. “It allows them to make extraordinary amounts of money for work whose effectiveness is hard to determine.”

Thanks to Citizens United and other court decisions, super PACs and 501(c)(4)s now enjoy the ability to accept and spend unlimited contributions. With the final stretch of the campaign about to start in earnest, The Daily Beast—in partnership with the Center for Responsive Politics—has taken a detailed look at just how profoundly this influx of money is reshaping our politics. Today we’ll provide an overview of the new world of campaign spending and look specifically at how it’s allowing some consultants to get very rich. Wednesday, we’ll take a closer look at 501(c)(4)s. And Thursday, we’ll examine how government regulations are failing to help. (Click here to see an interactive timeline of the rise in 501(c)(4) spending.)

To start, consider just one measure of the growing influence of money in our political system: Back in the presidential election cycle of 2008, express advocacy in the campaign as of mid-September totaled about $65 million. This time around, with two months to go in the election, that figure has already been eclipsed by a single super PAC—the pro-Romney Restore Our Future, which has outraised the pro-Obama Priorities USA Action by a 5–1 margin.

Some 844 super PACs are currently in existence—and only 100 distinct donors account for nearly 59 percent of the $350 million donated to these entities to date. Perhaps the most noteworthy of these groups is the Karl Rove-founded Crossroads empire. Its influence spreads across the conservative community with multiple entities—a super PAC as well as other organizations. Already they have spent $85 million on television ads.

One upshot of the enormous spending by super PACs is that 70 percent of television ads early this cycle were negative, compared with just 9 percent in 2008, according to the Wesleyan Media Project. After all, if you’re spending super PAC money on positive ads, you’re doing it wrong. The whole point is plausible deniability. “One of the reasons that candidates love the super-PAC model is that it keeps their wife from saying, ‘Oh honey, please don’t run that negative ad, my friends at the country club hate it,’” laughs longtime Republican consultant Rick Wilson, who currently counts a half dozen super PACs as clients. “I’ve had that conversation literally dozens of times.”

In 2007 an influential Supreme Court case, Federal Election Commission v. Wisconsin Right to Life, gave 501(c)s the ability to spend money on issue ads naming candidates within 30 days of a primary election or 60 days of a general election. This type of spending, known as electioneering communication, had been out of bounds for all but a few 501(c)(4)s under the 2002 McCain-Feingold Act.

Super PACs are supposed to function separately from campaigns, and, as far we know they technically do. But if the letter of the law isn’t being broken, the spirit of the law has certainly been violated. Obama, for instance, has encouraged people to give to his super PAC, while Romney has appeared as a “featured guest” at fundraisers for his super PAC (although there are limits on what he can say there).

While this system hasn’t necessarily succeeded in creating meaningful distinctions between the world of political campaigns and the world of super PACs, it has certainly been a boon to political operatives. For the presidential candidates’ actual campaigns, individual donations are capped. This means that campaign expenses tend to be tightly controlled, with contracts scrutinized to maximize impact and minimize profit. For example, FEC filing data shows that Obama campaign manager Jim Messina gets paid a yearly salary of about $90,000 while Romney campaign manager Matthew Rhoades takes home about $120,000.

We've just entered the 60-day window for general-election spending this cycle–but spending on electioneering communication might remain low thanks to a decision handed down earlier this year by a federal district court in Van Hollen v. FEC. The court affirmed that 501(c)s must disclose their otherwise anonymous donors if money is spent on electioneering communication. (The rule isn't airtight, however: paying for electioneering communication from a special fund may be one way around full disclosure.)

But super PACs and their associated groups rely on big-dollar donors like Republican Sheldon Adelson or Democrat Jeffrey Katzenberg—who end up forking over millions at a time. As a result, political operative salaries and commissions aren’t subject to the normal laws of campaign gravity. According to last year’s disclosure forms, the president of Crossroads, Steven Law—a longtime Rove ally and GOP operative—took home about $600,000. Paul Begala, a senior advisor to the pro-Obama super PAC Priorities USA Action (and a Newsweek/The Daily Beast columnist), is currently the highest compensated individual Democrat on the super PAC rolls, taking in more than $335,000 to date this election cycle, according to public filings. (It’s certainly possible that others are being paid more but are using techniques to hide their compensation—for instance by taking percentages of ad buys rather than regular salaries.)

But, from the point of view of 501(c)s, all that spending on electioneering communications–issue ads naming a candidate close to an election–may no longer be desirable anyway. That's because the Supreme Court's 2010 decision in Citizens United gave these groups the right to do something that's arguably even better: spend anonymously donated dollars advocating directly for candidates. Not surprisingly, this kind of spending, known as independent expenditures, has ballooned during the current election cycle.

Those not working directly for super PACs have done well too. Statistics compiled by the Center for Responsive Politics illustrate this phenomenon. Mentzer Media, a consulting firm, has received at least $70 million from Restore Our Future and more than $38 million from conservative 501(c)(4)s like Americans for Prosperity and Crossroads GPS. Infocision Management, a conservative telemarketing firm, was paid more than $10 million during the heated primary season alone. On the other side of the aisle, Waterfront Strategies has been paid about $20 million for communications consulting by liberal super PACs, nonprofits, and unions, while Mundy Katowitz Media has been paid $24 million by liberal super PACs. (For comparison’s sake, consider that, just four years ago, Mentzer Media had taken in $2.8 million and Mundy Katowitz Media had been paid just $900,000 at this point in the cycle.)

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Overall, consultants are estimated to have pocketed more than $465 million this election cycle (as of early June) from a combination of campaigns and super PACs, according to analysis by The Huffington Post. “It’s a full employment operation,” says Trevor Potter, president of the Campaign Legal Center, who served as chairman of the Federal Election Commission and general counsel of the McCain campaign. “And the really senior ones can do very well ... because there’s no one who’s going to call them to account or ask how they spent the money.”

Indeed, one of the mysteries of this election cycle is the essential lack of accountability for the millions of dollars that are being funneled into the super-PAC economy. “It’s a huge problem because there’s no way for the donor to have any clue how much the guy’s racking in,” Santorum super-PAC donor Foster Friess told The Daily Beast at the Republican convention in Tampa. “How much is he getting from the media buys? He might say, ‘Well, I don’t take any salary,’ but when he places media he’s maybe getting a 10 percent kickback ... It’s a huge, big sinkhole.” (“Media buys” are where many political consultants make big money on campaigns. After a political ad is made, the media buyer places the advertisement in strategically selected local media markets—essentially buying specific airtime on television stations. Their pay is pegged at a percentage of the television airtime purchased—usually between 10 and 15 percent of the total amount spent.)

If some donors seem to have suspended their business acumen when it comes to donations, it may be because the extraordinary amounts of money they are giving don’t strike them as all that much. For example, Sheldon Adelson’s league-leading $36 million in donations this cycle is the equivalent of a modest $168 donation for the average American family.

Another mystery is why conservatives have made so much better use of super PACS than liberals have. Republican-leaning super PACs this cycle outnumber Democratic-leaning super PACs by a more than 2–1 margin, and eight of the top 10 super-PAC donors are conservative. And the disparity between the overall money raised by pro-Republican and pro-Democratic organizations is equally stark: conservative super PACS and outside groups have spent $238 million—nearly three times the $85 million spent by their liberal counterparts. George Soros is essentially sitting out this cycle, spending just over $1 million—in contrast to the $23 million he spent in 2004. Meanwhile, the AFL-CIO effectively shuttered its super PAC in April of this year. Direct spending by unions at this point in 2008 was above $17 million, compared to less than $4 million this cycle.

What impact all of this will have on the presidential election is unclear. As Republican strategist Rick Wilson says, “In the past, there was limited money and unlimited airtime. Now there is unlimited money and limited airtime.” Nationally there may be a limit to what super-PAC dollars can buy—but if targeted to relatively small swing states where the presidential contest is within a few points in the fall, outside money could be decisive. One thing is clear: candidates might win or lose, but many consultants will get very rich.

Tomorrow: 501(c)(4)s and the rise of secret money.

Disclosure: John Avlon’s wife, Margaret Hoover, is treasurer of American Unity PAC, which supports Republican candidates in favor of LGBT rights.