Feb 26, 2008 -- CQ Politics: Six Questions About Public Financing Of Presidential Campaigns
By: Emily Cadei

When Arizona Sen. John McCain enjoyed a change of fortune in his presidential prospects after a string of primary victories, he also had a change of heart — about whether to accept federal matching money for his primary campaign.

McCain had started out as a well-financed frontrunner in 2007, but his campaign took a nosedive during the summer and found itself in a tight financial bind. So, in a turnaround, he became the first presidential candidate to apply for and be approved for public funds.

But back in the political and financial black in the weeks following his New Hampshire victory, McCain prompted the spotlight to shine again on public financing in the campaign when he wrote to the Federal Elections Commission saying he wanted to withdraw from the system.

So we take a look at six questions about public financing of presidential campaigns.

1. What's the history of public financing and how does it work?

The system to provide public financing for presidential candidates was established in 1971 as part of a massive overhaul of the campaign finance system. The goal of the system is to reduce candidates' needs to conduct massive fundraising efforts and thereby reduce the influence of money in the election. The funding comes from the federal government by way of donations made by taxpayers in the form of a $3 check-off on their federal income tax forms.

There are separate public financing schemes for the primary and general presidential elections. Both are optional, and a candidate is free to participate in one or the other, or both, depending on qualifications.

Primary public financing — the Primary Matching Payment Program — is the more complicated of the two schemes, both in determining who is eligible and how much money they qualify for. Candidates must apply and qualify for the system based on reaching a set of fundraising thresholds in 20 states. Once deemed eligible, the government will match the first $250 made by each individual donor to the candidate, per certification of the Federal Election Commission (FEC).

The first payments from the primary funding system are supposed to be made beginning in January of the election year, but in recent election cycles those payments have been delayed by administrative back-ups and have not been made until early spring. When this happens, many of the candidates have taken out loans at the beginning of the year on the promise of receiving those funds.

As a condition for receiving primary matching funds, candidates must observe a spending limit, which is equal to $10 million plus a cost of living adjustment. In 2008, that amounts to approximately $50 million. Primary candidates who take public financing must also abide by state-by-state spending limits.

The general election financing system is much more straightforward. The presidential nominee for each major party is automatically eligible for public funding. Minor party candidates may also qualify for partial funding, determined by the party's vote totals in the preceding presidential election. If he or she chooses to participate, the candidate receives a grant from the government in an amount that equals $20 million plus a cost of living adjustment. In 2008, that amount is approximately $84.1 million. The candidate may not raise or spend any additional funds, except to cover legal and accounting expenses.

2. Why does McCain want to withdraw from the system?

John McCain applied for the Primary Matching Payment Program last summer. The FEC determined in December that he was eligible for an initial pay-out of $5.8 million in public funding. He could thereafter make monthly applications for additional matching payments based on funds raised in the new year.

Since McCain's application for matching funds, his campaign has seen a reversal of fortunes, with wins McCain's wins in a string of January primaries and Super Tuesday propelling him towards the Republican nomination and prompting a flood of new donations.

Not only does McCain no longer need the help of public funding, but, more importantly, he does not want to be constrained by the $50 million spending limit that comes with it. The Arizona Senator has already spent $48.4 million total thus far in the primary. If he was forced to abide by this limit, he would only be able to spend $1.5 million more between now and the beginning of September, when he is officially named the Republican nominee at the party's convention.

"If he's in the system, he's effectively going to have to stop campaigning," said Larry Noble, an election law attorney and former FEC general counsel.

McCain's campaign thus wrote to the FEC and the Treasury Department, which disburses the public funds, earlier this month informing both offices that the campaign would be withdrawing itself from the system. "I will make no further requests for matching-fund payment certifications and will not accept any matching-fund payments," McCain wrote.

3. What does the law say about withdrawing from the system?

In previous rulings, the FEC determined that a candidate may withdraw from the Primary Matching Payment Program as long as he or she has not yet received any public funds from the system or received private financing based on the promise of accruing public funding.

The McCain campaign has not received matching funds payments, as pay-outs have been delayed until March. And it claims that it did not use its eligibility in the system to obtain private financing, though it did receive $4 million in private bank loans in November and December of 2007.

4. What has the Federal Election Commission's response been to McCain's attempts to withdraw from the system?

FEC Chairman David Mason, in a letter to the McCain campaign sent last week, asserted that the commission must approve a candidate's withdrawal with a majority vote of the six-person commission. But, Paul Ryan, FEC Program Director at the Campaign Legal Center , noted that this is Mason's opinion and "the statute isn't clear on this point. It doesn't expressly require a vote of four commissioners to withdraw from the program."

Mason also questioned McCain's assertion that his campaign has not "pledged the certification of Matching Payment funds as security for private financing." He pointed to the loan agreement McCain signed last fall as a potential stumbling block for withdrawing from the system, noting that the bank required McCain to accept matching funds if he were to lose the New Hampshire primary.

Mason concluded his letter by saying the FEC needed to explore the matter further, and invited the campaign to respond and explain their assertion that matching funds were not used as collateral in obtaining the loan.

While Mason's position provides some guidance about the FEC's stance on the issue it is not legally binding because all official FEC legal opinions require a four-person vote. "What one person thinks over there is not determinate," Noble said.

However, Mason's letter, which he copied to the Treasury Department, likely means that the McCain campaign will begin receiving payments of matching funds, said Democratic election law attorney Marc Elias. The Treasury will only halt public financing pay-outs on instructions from the FEC.

5. Why can't the Federal Election Commission issue an official ruling and resolve this issue?

The FEC is basically out of commission right now, with only two individuals occupying seats in what is normally a six-person commission. It requires a quorum of four votes for any official business to be conducted, including approving legal opinions, investigations and certification of participation in the Primary Matching Payment Program.

If the FEC had its entire slate of commissioners, it would have held a hearing and vote on McCain's withdrawal request this month and the issue would have likely been quickly resolved. But confirmation of four commissioners has been held up on Capitol Hill because of a political stand-off over one commissioner's controversial history when he worked at the Department of Justice, and that of three other commissioners who were set to be confirmed at the same time. The stand-off has been going on since December, and neither the Democrats or Republicans have shown signs of reconciling, meaning the agency charged with overseeing federal election law cannot take any enforcement action at this time.

6. What happens now?

McCain's campaign has dismissed Mason's letter, maintaining that it is within the candidate's right to withdraw from the Primary Matching Payment Program and does not require the FEC's approval. They also deny that the loan they received last fall used public funding as collateral. Thus, McCain has indicated that he will not accept any matching funds payments and his campaign will continue to raise and spend money, ignoring the limits instituted by public financing.

McCain's strategy could well succeed. The FEC has no enforcement powers until its confirmation battle is resolved, and even then its investigations are notoriously slow. The commission can levy civil penalties if it finds the campaign should have been bound by the public financing spending limits, but it likely would not occur until well after the presidential campaign has concluded. Moreover, the fines are unlikely to exceed $1 million, a small price to pay given the alternative.

Elias points out that public financing is "one of the few areas of the law where the candidate has individual liability." Thus, the FEC could also refer the case to the Department of Justice to pursue criminal charges of perjury against McCain. Most campaign finance experts view such a drastic move as unlikely.

Right now, this issue is likely to be more of a political annoyance than a legal impediment for the McCain campaign. The Democratic National Committee (DNC) has further stoked the controversy by filing a formal complaint alleging McCain is violating the provision of the primary matching funds system.

When the FEC eventually regains a full slate of commissioners, it will have to investigate the issue and it may well find that McCain violated the law in taking out the loan and then unilaterally withdrawing from the system. Either way, the resolution likely won't come until years from now and by then McCain's presidential fate will have already been sealed.