Machado called to account

Senator’s GOP rival questions campaign spending

Senator Mike Machado and his challenger are gearing up for what likely will be the most expensive legislative race in state history.

Senator Mike Machado and his challenger are gearing up for what likely will be the most expensive legislative race in state history.

Photo By Larry Dalton

Although Republicans will do everything they can to take his seat in November, Senator Mike Machado, D-Linden, has had one key advantage in his re-election fight this year: an old campaign account that still could accept unlimited contributions because it was created before the limits on how much donors could give a candidate. Until the end of 2003, Machado used the old account to pay for campaign expenses.

But now, that advantage may turn out to be trouble. Machado’s GOP rival, Stockton Mayor Gary Podesto, is gearing up to challenge how the incumbent spent money from the old account. Namely, the Podesto campaign charges that Machado spent illegally because the money was used for an upcoming election.

“We are in the process of addressing this legally,” said Podesto campaign manager Carl Fogliani, who expected a lawsuit to be filed as early as this week. “We’re 99 percent sure Mike Machado is going to end up in court because he can’t keep his finances straight.”

Machado’s campaign officials said all spending is scrutinized by campaign-finance lawyers. “Everything is run through our attorney,” said campaign manager Jody Fujii.

The way Fogliani sees it, Machado essentially is taking unlimited donations into an old account and using the money to run a campaign operation. At the same time, Fogliani said, Machado also is raising money to put into his new account, which he can just keep in the bank without dipping into it to cover campaign operations. In other words, money raised from unlimited contributions offsets spending from the new account, which is subject to caps.

“We’re going to address this immediately,” Fogliani said, “because somebody’s trying to get an unfair advantage in a campaign.” He said the suit would seek, among other things, to block donors who gave the maximum to the old account from giving more money to the new account.

Proposition 34, which was passed by voters in 2000, updated the 1974 Political Reform Act by establishing a $3,200-per-election cap on donations to legislative candidates. But after it went into effect, the Fair Political Practices Commission (FPPC) carved out a loophole for old accounts, known as “pre-34 committees.” Lawmakers could keep taking contributions over the cap, but there were limits on what they could do with the money. The money could be used to pay for normal officeholder expenses such as traveling or sending non-campaign mail to constituents. Essentially, the rule says lawmakers can’t use a pre-34 committee to get elected. But FPPC regulations are murky.

Fogliani said Machado has been paying for campaign expenses from his old pre-34 account, not from his new one. Campaign-finance records show that Richie Ross, the big-name political strategist who’s overseeing Machado’s re-election campaign, is getting paid by the pre-34 committee. Machado’s reports classify Ross as a campaign consultant.

Podesto said he’s not that involved in preparing a suit. He said that he didn’t know for sure whether Machado’s committee violated the law and that he was trusting Fogliani and party lawyers on the issue.

As of Monday, the campaign said it had an attorney lined up, but it wasn’t ready to name the plaintiff. Fogliani said he had approached one of the architects of Proposition 34 earlier, Senator Ross Johnson, R-Irvine, but couldn’t get him to sign on. Johnson already is involved in another campaign lawsuit. Last year, he sued Lt. Governor Cruz Bustamante for taking unlimited donations in a pre-34 committee and then spending the money on his bid to replace former Governor Gray Davis. Johnson won the suit, which Bustamante has appealed.

Machado campaign manager Fujii said the pre-34 committee stopped spending money on election-related expenses at the beginning of this year. Before that, all of the expenditures by the old account were vetted by attorneys at Olson, Hagel & Fishburn. The Sacramento law firm, one of the state’s top campaign-finance firms, represents many Democratic candidates and officeholders, including Bustamante.

Although campaign strategist Ross was paid $30,500 last year out of the pre-34 committee, Fujii said he wasn’t advising Machado on the race. “The senator has used him just as a political consultant, with no campaign capacity. That’s according to the contract that the senator has with Mr. Ross as well as what was reviewed by the attorneys. It basically said he could be used as a consultant like he is for other people in a pre-campaign capacity.”

Fujii said Machado would pay Ross out of the new account as of January 1, under the terms of a new contract. She said the setup was blessed by the campaign’s attorneys, who were paid out of both of Machado’s campaign accounts.

Machado’s campaign-finance reports list a number of other expenses that appear to be campaign-related, including phone bills, staff time, mailings and the rental of a Stockton campaign office Machado has kept open since his election in 2000.

Asked about those expenses, Fujii said the campaign’s legal counsel advised that the pre-34 committee could cover those costs through the end of last year. “It was advised that between 2000 and 2003, it could be an officeholder account, but after that, it must be paid out of the re-election account.”

Asked about which part of the law would dictate when campaign-related expenditures may or may not be made from a pre-34 account, FPPC general counsel Scott Tocher said there wasn’t any regulation that would make that distinction.

“There’s nothing in the Political Reform Act that imposes any kind of date or deadline like that,” Tocher said. “The question is: What is the expense for, and what election is it related to? If it is tied to that election, you have to pay it out of that election committee.”

Machado opened his old committee when he ran successfully in the 5th Senate District four years ago. As required by state law, he created a new account when he filed to run for re-election. By keeping the old account open, Machado was able to take contributions that were several times larger than the cap. Machado has taken checks for $10,000, $15,000 and $25,000 from insurance, logging, tobacco, American Indian gaming, alcohol, development and water interests.

In 2003, Machado’s old committee collected $424,318 in contributions, most of which arrived in amounts higher than the cap. The committee spent $353,424 during the same time and ended the year with $193,844 in the bank. Machado’s new committee ended last year with $448,882 in cash. Podesto lagged behind that, raising $315,843 by year’s end, with less than half of that amount left in the bank.

Fujii said that Machado’s old committee would remain open through this election cycle and that none of the money in the account could be transferred to the new committee.

Meanwhile, the FPPC voted this month to close the 2-year-old loophole that allowed Machado and dozens of other lawmakers to deposit unlimited contributions into pre-34 committees. The new FPPC rule took effect January 24.

The Machado-Podesto contest likely will be the most-watched election in the state this year. Each party is gearing up to spend millions on the race. GOP operative Matt Rexroad, the political director for Assembly and Senate Republicans, predicted that the contest could be the country’s most expensive state legislative race ever.

Podesto has lagged way behind Machado in the race to build a war chest so far, though he’s expected to get all the help he needs from the party, which saw its fund-raising fortunes improve significantly with the election of Schwarzenegger.

Democrats control the Senate by a 25-15 margin, which shrank by one in 2002 after Republicans successfully grabbed a Central Valley seat. Machado’s seat is the only one in play this year. Both candidates are well-known in Stockton, which makes up nearly a third of the district’s population of about 850,000. But the district shifted north when it was redrawn during reapportionment in 2001. The new district includes Tracy at its southernmost tip and stretches north to include part of southern Sacramento County; much of Solano County, including Fairfield and Vacaville; and all of Yolo County.

Because the lines were reworked after he was elected, Machado’s name has never appeared on a ballot in the northern part of the district. Democrats outnumber Republicans in the district, but Machado is considered vulnerable, especially in a post-recall political climate that’s not incumbent-friendly.

Given the prevalence of anti-incumbent feelings, it’s no surprise that Fogliani is focusing on integrity issues, talking up how Machado “was rated tarnished by the California Journal.” If there’s a lawsuit that calls into question how Machado spends money—and calls attention to the large sums in which he raised it—it could be a potent weapon for the incumbent’s foes.

During the recall, the lawsuit that Johnson filed against Bustamante for violating campaign-finance rules only made it a slam dunk for Schwarzenegger to cast himself as a an outside reformer and paint Bustamante as a crooked career politician up to the same old sleazy tricks.

As far as the legality of what Machado’s doing, it’s hard to tell what’s going on just by looking at the campaign-finance reports. If there’s a question about whether a committee’s expense was related to officeholder or campaign purposes, the only way to tell would be to dig up supporting documents like receipts or contracts. But the only way anyone outside the campaign would ever see that information would be if the FPPC audited the committee accounts. Although the FPPC regularly audits candidates, those audits take a long time and don’t dig very deep. Sometimes they don’t conclude until after the election.

The other way to see exactly how a campaign spends money, or to do something about it faster than the FPPC can, is to file a lawsuit.

But even in a courtroom, the FPPC’s notoriously cluttered regulations can be hard to nail down. Law firms that specialize in campaign finance, like Olson, Hagel & Fishburn, regularly write formal letters seeking clarification on FPPC rules. The FPPC also has an 800 number that takes thousands of calls per year from political players who can’t figure out the law.

In this case, the relevant regulation spells out what expenses must be paid with the new account. They include political consultants, staff, fund-raising, mass mailings and polls.

If a lawsuit does hang over the race into the general-election season in late summer and early fall, the race would be more about the obscure provisions of campaign-finance law and less about other issues facing the district and the state.

One campaign-finance lawyer not involved in the case said it would continue an unfortunate shift in how races are won and lost: “The rules keep getting adopted and changed and adopted and interpreted, and now the outcome of races is turning on the rules, so the rules are becoming either perilous or advantageous in the campaign battle, rather than the issues. And I think that’s a negative.”