Testimony on Improving Campaign Finance Disclosure in West Virginia

On October 20, 2014, the Brennan Center submitted testimony to the West Virginia Legislature recommending improvements to the state’s campaign finance disclosure laws.  Specifically, the Brennan Center recommended a new law that provides for better underlying donor disclosure, disclaimers in ads listing an organization’s top donors, an expanded window during which sham issue ads are disclosed as political ads, and improved disclosures to reveal the original source of political donations.  The testimony also explained that robust disclosure requirements are constitutional.

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Testimony of
David Earley,
Counsel, Democracy Program,
Brennan Center for Justice at NYU School of Law[1]

On Improving Campaign Finance Disclosure in West Virginia and H.B. 4463

Submitted to

Subcommittee C of the Joint Committee on the Judiciary, West Virginia Legislature

October 20, 2014

On behalf of the Brennan Center, I would like to thank the members of the Committee for giving me the opportunity to testify today.  As a native of Parkersburg and as a person who is truly proud to call West Virginia his homeland, disclosure of political spending in West Virginia is of particular importance to me.

West Virginia has been a leader on disclosure of political spending.  When the state was met with the events that led to the famous Caperton v. Massey case, the West Virginia Legislature responded by enacting new disclosure requirements.  Furthermore, in recent years, the Legislature has twice responded to court rulings in order to ensure that robust disclosure exists in this state.

But more can be done.  Political spenders are finding new ways to evade disclosure provisions and the Legislature must act if these challenges are to be met.  Existing provisions can be improved to ensure that all political spending is disclosed.

In this testimony, I first discuss how political spending has increased in recent years, both at the federal level and in West Virginia.  Much of this spending has been made with inadequate disclosure.  Second, I explain why disclosure of political spending is valuable.  Third, I discuss the U.S. Supreme Court’s strong support for robust disclosure requirements.  Finally, I examine specific provisions of H.B. 4463, a disclosure bill proposed during the last legislative session.  As a whole, the Brennan Center believes H.B. 4463 is a strong bill that includes many important improvements, such as requiring top donor disclaimers, expanding the electioneering communications window, and ensuring that the original sources of political donations are ultimately revealed.  The Brennan Center believes the bill could be strengthened by requiring all underlying donors to be disclosed, requiring all artificial entities to be subject to full disclosure, and increasing the amount of time disclosing entities have to file their reports.

1. Money in Politics Trends

1. Outside Spending Has Exploded

In 2010, the U.S. Supreme Court held in Citizens United that independent political spending cannot corrupt and therefore cannot be limited, regardless of the identity of the spender.[2]  Outside spending has skyrocketed in the wake of the decision.  The 2010 federal elections included $300 million in non-party outside spending while the 2012 federal elections had over $1 billion.[3]  These amounts are far greater than the $69 million and $338 million in non-party outside spending that occurred in 2006 and 2008, respectively.[4]  So far in the 2014 cycle, $395 million in non-party outside spending has occurred.[5]

In West Virginia state races, over $33 million was contributed to candidates and committees in both 2010 and 2012—amounts far greater than the $15 million contributed in 2008, which included a gubernatorial race.[6]  Non-party outside spending has increased in recent cycles, going from over $2.2 million in 2008 and $300,000 in 2010 to $6.0 million in 2011 and $4.1 million in 2012.[7]  Notably, electioneering communications dwarfed independent expenditures, making up over 74% of outside spending in every completed election cycle since 2008.[8]  As of October 17, $417,000 in outside spending had occurred during this election cycle.[9]

2. Inadequate Disclosure

Beyond this, further sums likely went completely unreported, both at the federal level and in West Virginia, due to inadequate statutory definitions of political spending.  As will be explained below, sham issue statements that are intended to influence elections, but are published outside the so-called “electioneering communications window,” are entirely unregulated and unreported.

Additionally, spending by entities that reported the amounts they spent but not their underlying donors has increased in recent election cycles.  Nondisclosing entities spent over $135 million and $ 308 million at the federal level in 2010 and 2012, respectively.[10]  The current election cycle has already seen more than $100 million in spending by nondisclosing groups—an amount “well ahead of what was spent on congressional races at this point in any other cycle,” according to the Center for Responsive Politics.[11]

Inadequate disclosure leaves the public in the dark about who is trying to influence their votes and the votes of their elected officials (which, in West Virginia, might include the justices of the Supreme Court) after the election is over.

2. The Benefits of Disclosure

Full disclosure furthers at least four distinct democratic interests: the voter informational interest, the anti-corruption interest, the anti-circumvention interest, and the due process interest.  The U.S. Supreme Court has recognized the importance of all of these interests.

1. Voter Informational Interest

Disclosure informs the public about who is trying to influence their votes before the election, allowing them to vote with complete knowledge of the electoral debate.[12]  Many advertisements not run by candidates are sponsored by organizations which are unknown to the public or that have misleading names that belie their true financial sponsors. Robust disclosure ensures that donors cannot hide behind these organizations’ anodyne names; voters will know who is trying to influence them, and to whom their elected officials are likely to be responsive, before they go to the polls.  Note that the voter informational interest, by itself, was sufficient to justify the federal disclosure and disclaimer requirements at issue in Citizens United.[13]

2. Anti-Corruption Interest

Disclosure helps prevent corruption and the appearance of corruption by allowing the public and regulators to monitor for improper arrangements between elected officials and political donors and spenders.  The U.S. Supreme Court explained in its famous 1976 Buckley v. Valeo decision that disclosure “expos[es] large contributions and expenditures to the light of publicity [which] may discourage those who would use money for improper purposes either before or after the election.”[14]  The Court added that “A public armed with information about a candidate’s most generous supporters is better able to detect any post-election special favors that may be given in return.”[15]

3. Anti-Circumvention Interest

Disclosure is necessary to ensure the enforcement of other campaign finance laws, such as contribution limits and contribution source bans (such as the ban on foreign contributions).  The Buckley Court explained that “[R]ecordkeeping, reporting, and disclosure requirements are an essential means of gathering the data necessary to detect violations of the contribution limitations.”[16]  Without this information, it would be extremely difficult to discover violations of other campaign finance laws.[17]

4. Due Process Interest

Disclosure is needed to protect the due process rights of litigants before elected judges.  In Caperton, the U.S. Supreme Court recognized that in exceptional circumstances, a judge must recuse himself or herself where there is a “serious risk of actual bias—based on objective and reasonable perceptions—when a person with a personal stake in a particular case had a significant and disproportionate influence in placing the judge on the case by raising funds or directing the judge’s election campaign when the case was pending or imminent.”[18]  Without full disclosure, it would be difficult or impossible for a litigant to successfully seek a judge’s recusal on this ground.[19]

Full disclosure protects our elections, the legislative process afterward, and the impartiality of our courts.[20]

          III. Robust Disclosure Provisions are Constitutional

As a general matter, requiring the disclosure of political contributions and spending is indisputably constitutional under U.S. Supreme Court precedent.  In Citizens United, an 8–1 majority of the Court held that disclosure is constitutional, saying that “disclosure requirements may burden the ability to speak, but they impose no ceiling on campaign-related activities and do not prevent anyone from speaking.”[21]  In its recent McCutcheon decision, the Court reaffirmed the constitutionality of disclosure requirements, explaining that “disclosure of contributions minimizes the potential for abuse of the campaign finance system.”[22]  Disclosure of political spending “enables the electorate to make informed decisions and give proper weight to different speakers and messages.”[23]

Additionally, the U.S. Court of Appeals for the Fourth Circuit, the jurisdiction of which includes West Virginia, has upheld as constitutional state disclosure provisions that extend beyond their federal counterparts.[24]  In other words, the federal provisions are not the outer constitutional limit of permissible disclosure requirements.

In the following section, I discuss specific provisions of H.B. 4463.  As part of that discussion, I include relevant precedents and authorities discussing the constitutionality of each provision.

4. Specific Provisions of H.B. 4463

1. Top Donors Disclaimer

H.B. 4463 would require that political television and radio ads include the names of the sponsor’s top donors in the ads.[25]  Television ads would include the top five donors while radio ads would include the top two donors.[26]  Many other states have implemented similar provisions.[27]  Because only donors of at least $10,000 in the past twelve months are eligible to be listed as a top donor on an ad,[28] there is no danger that an individual who gives $20 to the National Rifle Association or Planned Parenthood will inadvertently have his or her name included on political ads as a top donor.

Transparency can be greatly improved by requiring outside spender political ads to include a list of top donors.  Rather than being told that an ad is sponsored by a group with an anodyne name like “Mountaineers for Country Roads,” West Virginians would be able to immediately know who is really behind the money.  Under current West Virginia disclosure laws, outside spenders are only required to include the name of the sponsoring organization in the ad—not the organization’s funders.[29]

Examples abound of groups using misleading names to shield their funders’ identities.  The U.S. Supreme Court has explained that entities run “[A]dvertisements while hiding behind dubious and misleading names like: ‘The Coalition-Americans Working for Real Change’ (funded by business organizations opposed to organized labor) [and] ‘Citizens for Better Medicare’ (funded by the pharmaceutical industry) . . . .”[30]  In one particularly egregious example, during a 2010 Colorado ballot measure election, a group called “Littleton Neighbors Voting No,” spent $170,000 to defeat the ballot measure, which would have imposed a restriction that would have prevented Wal-Mart from coming to town. Disclosure reports later revealed that the group was exclusively funded by Wal-Mart.[31]

Finally, West Virginia has experienced this phenomenon first hand.  In 2004, as part of the events leading up to Caperton, Don Blankenship spent about $3 million supporting a candidate for justice of the West Virginia Supreme Court of Appeals.[32]  Just under $2.5 million of this funded “And for the Sake of the Kids,” an organization created by Blankenship.[33]  Due to inadequate disclosure at the time, not all West Virginians knew of Blankenship’s involvement until after voting had occurred.  Though West Virginia’s disclosure laws have since improved, they still would not provide for Blankenship’s name being on the face of the organization’s ads if they were run in the same manner today.

The Brennan Center documented other examples of groups with misleading names in its testimony on the federal DISCLOSE Act of 2012.[34]

Importantly, full underlying donor disclosure is necessary to ensure that this top donor disclaimer provision works effectively.  As West Virginia law stands now, an organization’s underlying donors are disclosed only if those donors gave money “for the purpose of furthering” independent expenditures or if the donors’ money was “used to pay for” electioneering communications.[35]  This language potentially leaves open the so-called earmarking loophole where if a donor doesn’t specifically state that he or she wants his or her donation to be used for a political purpose, it won’t have to be disclosed.[36]  This loophole is how organizations have spent hundreds of millions of dollars on political ads at the federal level without having to disclose their underlying donors.[37]

The best way to address this problem is to require politically active organizations to disclose all of their donors who give amounts over a certain threshold.  However, many politically active organizations engage in activities other than political spending, making it unreasonable to require the disclosure of all donors.  There are two ways to address this problem.  First, organizations can set up segregated accounts for their political expenditures.  Only donors to the political account can be disclosed and only funds in the political account can be used for political spending.  Second, the law can exempt donors from disclosure if they specify that their funds can’t be used for political spending and the recipient organization agrees to abide by that restriction. 

Looking at H.B. 4463, full underlying donor disclosure is provided for with respect to donors of at least $10,000, but not for donors of smaller amounts.[38] To address this problem, W. Va. Code § 3–8–2(b)(1)(E) and § 3–8–2b should be amended to require the disclosure of all underlying donors who give over statutorily specified amounts and are not exempt in one of the manners described above.

Both the U.S. Supreme Court and the Fourth Circuit have upheld the disclosure of underlying donors in reports that are ultimately made available to the public.[39]  Additionally, the U.S. Supreme Court and the Southern District of West Virginia federal court have upheld the constitutionality of the requirement that political ads identify their organizational sponsors.[40]  While the Brennan Center is not aware of any court that has weighed in on the specific question of the constitutionality of requiring top donor names in ads,[41] taking disclosure to the next step by simply combining two clearly constitutional practices does not seem like it should raise significant issues.  Professor Richard Briffault of Columbia Law School has explained that top donor disclaimers are likely constitutional so long as the resulting disclaimer is not “so long or time-consuming as to unduly eat into the campaign message.”[42]  Additionally, as noted above, many states have had top donor disclaimer requirements for years and no successful challenge has been made against those laws.[43]

2. Expansion of the Electioneering Communication Window

Under H.B. 4463, the electioneering communications window would be expanded from its current size of 30 days before a primary election and 60 days before a general election to 90 days before a primary election and 120 days before a general election.[44]  The electioneering communication window should be expanded to ensure disclosure applies to all political ads. 

An electioneering communication is a political ad run close to an election that mentions a candidate but does not explicitly encourage the viewer to vote for or against a candidate by using words such as “vote for,” “support,” or “defeat.”  The regulation of electioneering communications is necessary to ensure that a large percentage of political spending does not evade disclosure.  If electioneering communications are not regulated, an entire swatch of political advertising could potentially be completely outside the campaign finance system, meaning that not only are the amounts spent undisclosed, but also the sponsoring organization’s name and that organization’s donors.

While the 30 and 60 day thresholds may have been adequate at the time they were enacted at the federal level, the reality of today is that modern campaigns extend far beyond these periods.  Indeed, many organizations have spent money on purported “issue ads” right up until the day before the 30– or 60-day window would have opened (and full disclosure would have been required), only to suddenly change strategies to avoid donor disclosure.[45]  Estimates of how much is spent outside the windows are difficult to make precisely because there is no required disclosure of this spending, but the Center for Responsive Politics estimated that $100 million was spent on sham issue ads outside the electioneering communications window before the federal 2012 primary elections.[46]

The Fourth Circuit has held that West Virginia may constitutionally regulate electioneering communications in a way that goes further than the federal government.[47]  The Fourth Circuit has also explained that legislatures have a fair amount of latitude in deciding how to implement disclosure compared to other campaign finance regulations.[48]  In discussing how high or low contribution limits should be, the Buckley Court explained that so long as the court is satisfied that the limit is necessary, “a court has no scalpel to probe whether [one] ceiling might not serve as well as [another].  Such distinctions in degree become significant only when they can be said to amount to differences in kind.”[49]  Similarly here, the courts have no scalpel to determine whether a 30 day threshold is proper while a 90 day threshold is not.  Given recent history and the ever-expanding length of the campaign season, the legislature is well within its constitutional powers to require the disclosure of advertisements that mention candidates further out from the election than 30 or 60 days.

3. Covered Transfers

H.B. 4463 would require the disclosure of what are referred to as “covered transfers”—the transfer between two entities of large amounts of funds that are intended or expected to be used for a political purpose.[50]  As disclosure provisions have become more robust, new methods of avoiding disclosure have developed. One of these methods has created the so-called “Russian doll problem,” where the imposition of multiple artificial entities between the original donor and the ultimate spender of political money prevents the donor from ever being disclosed.[51]  Regulating covered transfers is the best available solution to this problem.

For example, suppose that big donor A gives $25,000 to shell corporation B, which in turn passes the money on to super PAC C, which then spends the money on a political ad.  Under most disclosure regimes, including West Virginia’s, even if super PAC C must report its donors, only the immediately underlying donor—shell corporation B—will appear on super PAC C’s reports; big donor A’s identity is never revealed.  In many cases, the pattern is reiterated as money is passed through a succession of artificial entities, further reducing the likelihood of discovering the original source of the money to essentially the point of impossibility.[52]

Indeed, many media investigations have sought to uncover the individuals behind some of these groups and gone far beyond public reports, yet have come up empty.  In 2010, a group named “Coalition to Protect Seniors” spent over $425,000 on independent expenditures at the federal level.[53]  A New York Times reporter tracked the organization to an address at a Mail Boxes Etc. store in Wilmington, Delaware, but couldn’t learn anything more.[54]  In 2011, a group named “Citizens for a Strong America” ran ads against a Wisconsin Supreme Court candidate, but provided no public information about its organization, leadership, or funders.  The address listed for the group led to a mailbox at a local UPS store and its phone number led to a full voicemail box.  The Center for Media and Democracy eventually discovered that the organization was controlled by a leader of Americans for Prosperity, a 501(c)(4) that spent over $36 million on independent expenditures and electioneering communications in 2012.[55]  The Brennan Center documented more examples in its testimony on the federal DISCLOSE Act.[56]

The current version of H.B. 4463 limits those who potentially have to report covered transfers to “covered organizations”—a list that includes corporations, section 501(c) nonprofit entities (except for 501(c)(3) entities), section 527 political organizations, and political committees.[57]  The list of covered entities should be expanded to include all artificial entities.  Recent history has shown, especially at the federal level, that when particular types of entities are not subject to disclosure, political spenders who wish to avoid disclosure will funnel their money through those entities.[58]  Notably, there has been concern that limited liability companies may become the new vehicle for anonymous political spending if 501(c) entities can no longer be used to circumvent disclosure requirements in the future.[59]  The current version of H.B. 4463 does not include limited liability companies within the ambit of the term “covered organization.” Section 501(c)(3) entities should also be included for similar reasons.  Beyond this, the Fourth Circuit held that statutorily exempting 501(c)(3) entities from disclosure requirements is unconstitutional,[60] so including an exemption for 501(c)(3) might open the door to a constitutional challenge.

The proposal in H.B. 4463 closely resembles the covered transfer provisions in the federal DISCLOSE Act of 2014.[61]  According to the Brennan Center’s research, Connecticut is the only state to have enacted a law regulating covered transfers and enacted its law in June 2013.[62]  Because the regulation of covered transfers is relatively new, the constitutionality of doing so has not yet been tested.  However, as explained above, the Supreme Court has strongly endorsed thorough disclosure and the disclosure of underlying donors.  Covered transfers are likely to be upheld as constitutional for this reason.

Additionally, the proposal has a number of safeguards to ensure that it does not extend too far or become too burdensome to pass First Amendment muster.  First, if an organization chooses to exclusively use a segregated bank account for its political spending, only donors to that account will be disclosed.[63] Second, only underlying donors of at least $10,000 since the first day of the preceding calendar year will be subject to disclosure.[64]  Through these safeguards, only the biggest of spenders and donors will be subject to the covered transfer disclosure requirements.

4. Accelerated Disclosure

H.B. 4663 provides for the accelerated disclosure of political activity.  Under the proposal, each time a covered organization engages in $10,000 worth of “campaign-related disbursements”—independent expenditures, electioneering communications, and covered transfers—that organization must disclose that activity within 24 hours to the Secretary of State.[65]

Prompt disclosure is important.  If disclosure takes too long or, worse, occurs after an election is over, it can leave voters uninformed and make it more difficult to monitor for improper relationships between political spenders and their beneficiaries.[66]

However, requiring disclosure too quickly can cause courts to find disclosure requirements unduly burdensome.[67]  While the interest in disclosure is great in the closing weeks before an election, there is not as much urgency when the election is still many months away.  For this reason, the Brennan Center recommends that the state allow for a longer period of time—perhaps 48 hours—for the reporting of campaign-related expenditures which aggregate to $10,000 and are made more than 60 days before an election.[68]  The Southern District of West Virginia federal court upheld the constitutionality of 48-hour disclosure in 2011.[69]

5. Disclosure to Shareholders and Members

H.B. 4463 would require that covered organizations include its campaign finance filings in their regular reports to their shareholders and members.  As the Brennan Center explained in a 2012 report, while states can require that entities incorporated within the state disclose political spending to their shareholders and members, states generally cannot do the same for entities incorporated in other states because of the internal affairs doctrine.[70]  While such a requirement is constitutional and within the powers of the West Virginia Legislature,[71] the provision is unlikely to have a significant impact because it is easily circumvented.  The better method of achieving full disclosure is to ensure that all political contributions and expenditures are disclosed, regardless of which entity is engaging in the spending.

* * * * * *

Transparency of political spending is essential to a healthy democracy.  In the absence of disclosure, vast sums will be spent to seek influence with public officials and potentially mislead the public, which is left with no means of discovering who is behind the money.  In an era when the Supreme Court has said that the “ingratiation and access” big spenders can buy are “not corruption” and “embody a central feature of democracy,”[72] complete and prompt disclosure is more important than ever before.  The Brennan Center strongly urges the West Virginia Legislature to enact a law strengthening the state’s campaign finance disclosure provisions.

I would be glad to take any questions that you might have.  Thank you for the opportunity to testify today.