Money in politics and the implications of a new campaign finance law

Last year, the California legislature approved – and Governor Newsom signed – SB 1439, a new law that significantly alters the campaign finance rules for local agencies throughout California:

Starting Jan. 1, any member of an elected agency – including most school boards, water districts, city councils and county boards of supervisors – can’t vote on any issue that could affect anybody who donated $250 or more to the elected official’s campaign. The voting ban lasts for 12 months after a donation is received, and a donation can range from cash to in-kind assistance (like accounting or legal advice) to catering a lunch at a campaign event. A violation would be a misdemeanor under California law.

Prior to the implementation of SB 1439, candidates for local office were able to accept contributions from any individual who was a US citizen. In some jurisdictions, they were allowed to accept money directly from corporations and political action committees as well. Monetary limits were almost universally applied though, ranging anywhere from a couple hundred dollars per donor to a few thousand per donor.

With SB 1439 in effect, they can still theoretically accept these contributions – but it just means they can't vote on defined issues that might lead to a benefit for that donor, assuming the contribution is more than $250.

(The  issues that the law applies to are "business, professional, trade, and land use licenses and permits and all other entitlements for use, including all entitlements for land use, all contracts (other than competitively bid, labor, or personal employment contracts), and all franchises.”)

On the surface, this sounds like a reasonable, "good government" reform that would reduce influence peddling at the local level. Here's a quote from the bill's author, Sen. Glazer:

“Local public officials should not be soliciting or accepting campaign contributions from anyone seeking their approval for a license, contract or permit. These government officials are currently exempt from most laws which prohibit this improper conduct. This bill would close that loophole.”

However, there are several likely unintended consequences that shift how money is raised and spent in local races.

Below, I'll examine the dynamics that allowed this proposal to become law, and I'll also examine what the unintended consequences reveal about money in politics.

What does California's SB 1439 do?

Beyond the summary provided above, there are a number of actual implications I – and others – believe this law will have.

As I've written previously, a large portion of funds donated to local campaigns come from donors who have an economic interest in the outcomes of agency decisions:

This last pool is the most significant, yet also typically the last to show up. They are the donors who have an economic interest in the outcome of the election, and thus want to best position themselves to back the winner.

In the context of a City Council election, this would include local developers, trash companies, labor unions with employees at the city, local construction contractors, and others. Basically anyone who receives a check from the city, either as an employee organization or contractor, or anyone who would financially benefit from a city decision (like a developer).

This group is not ideological, and they probably don't have much of a personal relationship with the candidate. They sit on the sidelines until it's clear which candidate(s) are the strongest and have the best chance of winning (while also supporting the donor's economic interests).

In that piece, I estimated that these donors generally made up at least 70% of a candidate's funds. What happens if those funds dry up as a result of this law?

Here are some general practical implications:

• Candidates and elected officials at the local level will have greater difficulty raising money for local office, for their re-election, or for a higher office.
• Challengers to sitting incumbents will also face greater difficulty raising money; in general, it will be harder for them to defeat sitting incumbents with fewer funds, due to the built in advantages that incumbency has.
• Even more money will flow into outside political committees, which are generally funded and run by outside special interests. Independent expenditures originating from these committees in support of candidates are not subject to this law, giving a safe-haven to those who want to influence the political process.
• Similarly, political parties will also now play an even greater role in elections, as party endorsements and party spending will now make a relatively larger impact.
• Individual donors generally – even those who don't believe they will fall under this law – may be more hesitant to donate more than $250 for fear of falling under this law.
• Elected officials – fearing criminal punishment and acting cautiously – will likely overapply the law and frequency recuse themselves from votes – especially when doing so allows them to dodge a controversial vote.

The political calculus of the Legislature

If this is such a potentially problematic law, why did it essentially sail through the California legislature without any opposition?

These legislators are almost certainly sophisticated enough to understand the practical impacts of this law – yet they still voted for it.

There are three major reasons:

First, the bill only applies to local agencies; in other words, the legislators exempted themselves from this law. As individuals, they will still be able to raise money and cast votes as they had in the past, unlike their local government colleagues.

Sen. Steve Glazer, the author of the bill, stated that there was "no political appetite" to apply the rule to Sacramento politicians. No kidding!

Second is the fact that this bill was successfully marketed as "campaign finance reform" and a "good government" policy. Voting against these types of laws is highly problematic in the eyes of voters. As you can imagine, it's a pretty effective hit for an opponent to send out a mailer talking about how a politician was bad because they voted against reducing corruption.

Third is that this bill is basically an incumbent protection plan for State Legislators. Many prospective candidates for the legislature currently sit on City Councils, school boards, and other agencies. Even though they'd be raising money into a committee for the legislature (as opposed to City Council or whatever agency they currently sit on), they are still subject to the law. This makes it harder for them to raise money to challenge an incumbent Assemblymember or Senator.

You can imagine why a sitting legislator would find this compelling.

Leaving aside the actual impact of the legislation, it was far riskier to vote "No" than it was to vote "Yes", creating a very easy calculus for most of these legislators.

"Money in politics is like water on concrete: it finds all the cracks"

I would argue that despite many attempts to do so, you never really remove or reduce the impact of money on politics. You just create a new set of incentives to move it around, typically into little nooks and crannies that are less transparent and accountable.

What might the new landscape look like, and what behaviors might emerge as candidates attempt to maneuver around this law?

The proliferation of shadow campaigns

Let's pretend you are a candidate running for re-election. During your prior election, you raised a substantial sum of money, and you have a broad set of donors. Some of them you know personally (friends and family) and they won't have any business at your agency, so you'll be able to simply raise money from them directly like you did on your prior campaign.

Many others – the vast majority – are donors because they do business with your agency.

If you are an enterprising candidate who wants to be re-elected, you will want to do what you can to raise that money. It's basically a pile of money sitting on the table – a candidate isn't going to simply leave it sitting there if they can help it.

So what would not surprise me would be the emergence of shadow campaigns and committees. Essentially, a trusted member of the candidate's inner circle would simply open an independent committee: "Concerned Citizens supporting John Smith for City Council."

Now, that campaign and that insider could not legally coordinate any activities or expenditures with John Smith or his candidate committee. But that committee would presumably know all of John Smith's donors, and the donors would know that the money in that committee would be used to help John Smith get re-elected (because it's in the name of the committee!).

More importantly, under California's campaign finance rules, that committee does not have contribution limits, whereas most candidate committees do.

It would not surprise me to see candidates over the long-term start to essentially keep two informal campaign organizations. One that is prepared to run the candidate's actual campaign, and one that is prepared to run the outside campaign.

Since these two entities cannot coordinate, the money won't be as efficiently spent. But who cares? It's money the candidate committee wouldn't be able to raise anyway due to the new law, and it's likely way more money (unlimited!) than they'd be able to raise into their candidate committee.

This approach does create some greater legal risk – if someone behaves improperly and coordinates with the campaign, there could be severe fines or worse. But if everything is executed in accordance with the law, it's a completely feasible approach to running an augmented campaign.

To be clear, this isn't a completely new idea. Campaigns for offices of significance often already employ a strategy like this. I just think it's more likely than not to become more common in smaller, local races.

A shift toward more ideologically extreme candidates

Generally, the vast majority of money donated in local campaigns comes from stakeholders: people who will likely have business at the city. These people typically donate to candidates who are more moderate and practical. They generally don't have a strong ideological agenda beyond getting their projects and contracts approved. Accordingly, they tend to value more pragmatic candidates.

By removing this pot of money from the equation, there will essentially be two sources of direct funding for many local campaigns: personal contacts of the candidate and ideological donors, meaning those who are motivated to donate because they share a strong ideological position with the candidate.

With a greater importance on ideological money, candidates will have a greater incentive to gravitate toward the ideological extremes.

Furthermore, with less money available for candidates to spend on traditional campaign messaging tactics such as mail and media, they will be incentivized to take a different approach: generating free attention based on more ideologically extreme positions.

This tactic is one we've seen grow over the years, primarily as social media has become more and more widespread. The ideologically extreme ideas are typically those that go the most viral and those that generate the most eyeballs, raising the notoriety and name ID of the candidate.

These two factors tilt the scales toward ideological extreme positions: because that's where the money and attention will be.

Am I saying that all local campaigns will become more ideologically extreme? No – but on the margins, I see this as a potential shift over the long-term and across a large sample size.

The increased influence of political parties and special interests

While I briefly mentioned this earlier, it deserves additional explanation.

With greater difficulty raising money into their own campaigns, candidates will look around for where they can find big piles of money. And two of those places are endorsements from special interests that have large independent expenditure budgets – like labor unions and business groups – and political parties.

The special interest incentive is fairly straightforward: if it's hard for you to raise the $50,000 you need to win your race, you're going to bend over backwards to try to win support from organizations that can provide you with that $50,000 – even if it's spending you're not allowed to know about or coordinate with.

Meanwhile, with less money in the race entirely, the ability of a given special interest group to control the outcome of that election. Pretend an interest group's expenditures historically made up 20% of all spending for the entirety of a campaign. Now, with candidates raising less money, the share of that special interest money increases to 30%. That group now has more leverage over the ability to impact the outcomes of campaigns.

This is another marginal increase in the context of one campaign, but over the course of multiple campaigns over multiple cycles, the aggregate buildup in influence starts to become more significant.

Meanwhile, by receiving the endorsement of their local Democrat or Republican Party, candidates will raise money (that they're prohibited from raising into their own campaign) into the party. Unsurprisingly, the amount of money that a candidate raises for the party is strongly correlated with the amount of money the party spends promoting that candidate.

Typically, the money spent by the party will tell voters that the candidate is the party's choice in that election. This has a strong impact on partisan voters, and is often enough on its own to secure their vote – especially when there isn't as much money out there informing voters about other facets of the candidates.

Keep in mind, under California rules, party expenditures are deemed "member communications" – since the voters registered to that party are technically members – and the candidate can coordinate those expenditures with the party. This is a benefit that the party has that special interests don't. It only further strengthens the allure of a party endorsement.

As a result of all of this, it's likely that the party endorsement will grow even further in importance. It's critical to note that party Central Committees (those who vote on endorsements) generally favor more ideologically pure candidates as opposed to more practical ones, potentially exacerbating the problem I described in the preceding section.

The annoying impacts of the new law

While all of the consequences I listed above are probably bad, I do not expect some sort of fundamental reshaping of campaign finance at the local level overnight. As I indicated, a lot of these impacts won't necessarily be easy to spot on a campaign-by-campaign or candidate-by-candidate basis, but could gradually play out over time across a large sample size.

The more immediate impact of the law is generally how annoying it will be:

1) Candidates and elected officials will need to meticulously review every donor they have, every pending agenda item they have, and be exceedingly cautious about whether or not that person will have a financial benefit from a given vote, assuming that vote falls under the new law. This will generally be a problem that only candidates and elected officials care about and have to deal with, but it's still a problem.

2) There will likely be unending lawsuits, conflict-of-interest complaints, and other paperwork challenges regarding any agency vote of significance that might potentially fall under this law. There is already one major lawsuit challenging the law itself, but I anticipate we will see many more moving forward on a vote-by-vote basis.

Ultimately, this law is another legal tool that's been handed to individuals or organizations who oppose certain decisions being made by elected officials. City Attorneys, local Ethics Commissions, the Fair Political Practices Commission, and prosecuting agencies will probably see an uptick in complaints as a result of this law. Some of these complaints will arise from legitimate conflicts; others will arise from those who just want to obstruct agency decisions or intimidate elected officials.

3) Prosecutors will have to debate how aggressively they want to enforce this law, especially when you factor in the number of ways it can be interpreted that create legal ambiguity. If there's ultimately no enforcement due to the ambiguity, then it's not really a law anymore. But if prosecutors push charges that fall apart in court, that doesn't look good either. (Note: I am not a lawyer.)

4) There may be a number of instances where a majority of representatives on an agency board have to recuse themselves from a vote on an issue due to a conflict. In some cases, this may make it impossible to conduct business as an agency; in others, it may dampen confidence in the decision if a significant portion of the governing body was unable to vote on an important decision due to a lack of a quorum.

Keep in mind, the law applies to contributions made 12 months before a vote, even if neither the elected official nor donor anticipated that the vote would occur within the next 12 months.

Additionally, it also applies to "agents" of a party – even if that person may not have been an "agent" at the time (so Jane Smith may have donated as a citizen, but 6 months later she was hired at a local contracting company with pending business before the city). You can imagine that even if candidates were careful in how they accepted donations and tried to plan ahead, it may still complicate agency business.

In light of all these annoyances and headaches (most prominent among them the fear of criminal prosecution), I wouldn't be entirely shocked to see certain jurisdictions simply impose a contribution limit of $250 across the board. In doing so, all of these annoyances are eliminated.

Whether or not that happens depends on the answer to whether or not the politicians value the extra money they could squeeze out without the limit (from those they presume wouldn't be subject to the new law), or are the headaches and legal liabilities simply not worth the extra campaign cash?

If local jurisdictions were to impose this type of universal contribution limit, doing so would only exacerbate the problems I described earlier in the article. Even more money would flow to outside groups and allow their influence to grow.

But based on how easily SB 1439 sailed through the legislature, I would argue that politicians ultimately aren't too concerned with that problem.