Introduction

Who’s calling the shots in the states? A multi-year investigation into money in state politics.

Sandra Kennedy expected a tough race this fall for a seat on the Arizona Corporation Commission, but the Democrat didn’t expect to get socked with a $1.4 million onslaught of TV ads from a mysterious group that dredged up a past legal dispute.

The race for a seat on the commission to regulate utilities and other businesses rarely attracts campaign ads. Kennedy herself hadn’t purchased any. The group called Save Our Future Now, however, flooded the state’s airwaves with ads running nearly 1,400 times.

“Times are tough in Arizona, but Sandra Kennedy voted to hurt Arizona families. Kennedy voted for higher sales taxes, but she didn’t even pay her own bills,” one ad said. “Kennedy owned a restaurant chain and didn’t pay the rent.”

The ad referenced a royalty infringement suit involving Kennedy and restaurant chain Denny’s Inc. over a franchise that she and her husband owned. Both parties settled the case in 2010.

“It was devastating,” Kennedy said of the ads. “Unbelievable.”

State and federal law do not require the group to publicly disclose its funders because such politicking is not the group’s “primary purpose.” So it’s nearly impossible for Kennedy or other Arizonans to prove who funded the attack ads that helped lead to her loss in November. The group, based in Phoenix, did not respond to the Center for Public Integrity for comment.

Save Our Future Now is just one of 40 nonprofit groups that together spent an estimated $25 million to buy TV ads about 2014 state-level elections while keeping their donors secret, according to a Center for Public Integrity analysis of data from media tracking service Kantar Media/CMAG.

That’s a small piece of the more than $850 million spent on TV ads in all state elections overall in the 2014 cycle. However, the number of ads from such groups — and the proportion they made up in political advertising for state contests — nearly doubled from levels in 2010, the last year in which a comparable number of state-level offices were in play.

Such groups often appeared to have outsized influence on races from governor down to state senator this cycle. Most of them were successful, far more so than independent political groups overall: these secretive nonprofits either backed a winning candidate or, in the majority of cases, bashed the loser in 63 percent of the races in which they sponsored TV ads tracked by Kantar Media/CMAG. By comparison, all independent groups, including those that disclose their donors, were successful just under 50 percent of the time.

And overall 51 percent of election advertisers, including candidates and political parties, on the state level were successful, according to the Center for Public Integrity’s analysis.

Citizens United’s impact

In 24 states including Arizona — where nearly one out of every seven ads was sponsored by such entities — these mysterious groups were boosted by the 2010 U.S. Supreme Court’s Citizens United ruling. The high court’s 5-4 decision freed corporations and unions to spend limitlessly to directly advocate for the victory or defeat of candidates.

The ruling unleashed a wave of “social welfare” nonprofit corporations, which are supposed to spend the majority of the donations they receive to promote “social welfare,” not politics.

Attempts by the Internal Revenue Service to regulate tax-exempt groups — and allegations that the agency targeted conservative groups with its audits — resulted in the 2013 resignation of Lois Lerner, the director of that portion of the IRS.

To be sure, such “social welfare” nonprofits and other nonprofits that function as trade associations are not the only groups that sometimes can keep their donors secret. Lax disclosure rules in some states allow other types of groups to avoid registering with state election boards at all.

Or sometimes groups can hide their donors from voters with lags in filing deadlines. In Kansas, a state where a tight governor’s race attracted more ads from such mysterious groups than in any other state, a nonprofit called Alliance for a Free Society Inc., ran ads against Democratic nominee Paul Davis, who lost to incumbent Republican Gov. Sam Brownback.

The group incorporated in Delaware only in July, so detailed information about its leadership, lobbying and political activity will not be released by the IRS until 2015 — months after Kansas voters saw the anti-Davis ads and cast ballots. Michael K. Morgan, a top government affairs consultant to Koch Industries who runs the group, declined to be interviewed by the Center for Public Integrity on the record.

Some conservatives, including Supreme Court Justice Clarence Thomas, have argued that keeping donors secret is constitutionally protected anonymous political speech. And they have spent millions of dollars in recent years fighting the notion that social welfare groups and trade associations should disclose the source of money used for politics.

These groups lend a “comfort level” to individual and corporate donors who want to influence state politics without giving up their identity, according to David Vance, a spokesman for the Campaign Legal Center, which advocates for tighter campaign finance regulation.

“The 501(c)(4)s and the 501(c)(6)s represent a way for anyone, but particularly corporations, to kind of fly under the radar and make an impact,” said Vance, referencing the sections of the Internal Revenue Code that regulate politically active nonprofits. “They can have a lot more impact at the state level than on the federal level.”

“That’s what makes it hard for the general public. They don’t pay attention to who is saying it, they pay attention to the message.” – 2014 Wisconsin State Senate candidate Penny Bernard Schaber

Cease and desist

In Wisconsin, where a competitive gubernatorial race helped attract more than $4 million dollars in ads from such politically active nonprofits, two groups spent more than $350,000 combined attacking Penny Bernard Schaber, a 61-year-old physical therapist and longtime Democratic assemblywoman running for state Senate.

The ads started early, just after Labor Day, and painted her as a tax-and-spend liberal. They claimed that she took a pay raise while raising taxes for others.

Bernard Schaber sent a cease-and-desist letter to local TV stations demanding that they stop airing the ads because they were “factually untrue.” A legislative committee had voted to raise legislators’ pay to $49,943 before she was elected; her pay never rose while she was in office.

But the groups countered that the Wisconsin State Journal newspaper first published the statements in an editorial, noting that some legislators had declined to accept the increase. The ads continued.

The two organizations that paid for the ads, which ran nearly 750 times, were the Wisconsin Manufacturing and Commerce Issues Mobilization Council and the First Amendment Alliance Educational Fund.

Because the ads didn’t specifically advocate for Bernard Schaber’s defeat, the groups didn’t have to disclose what they had spent — or the source of their funding — to the state’s ethics board, which regulates campaign finance.

The Wisconsin Manufacturing and Commerce Issues Mobilization Council is a state-based group that is affiliated with the state chamber of commerce.

The First Amendment Alliance Educational Fund, though, is a Virginia-based group that ran ads within Wisconsin only on her race. It says on its website it is “dedicated to educating Americans on transparency, waste, fraud, hypocrisy and best practices at all levels of government.” Its donors, and its interest in Wisconsin state Senate District 19, are not transparent.

Representatives of both groups did not respond to the Center for Public Integrity’s request for comment.

Bernard Schaber lost, largely she believes due to the campaigns by those groups. And those behind the attacks remain largely unknown.

“That’s what makes it hard for the general public. They don’t pay attention to who is saying it,” she said. “They pay attention to the message.”

Leaving no footprints

Groups can drop in from afar, and then essentially disappear as they did in some state supreme court races.

At least four mysterious groups targeted candidates for state judicial races — contests historically removed from political blood sport. Such secretive spending is especially concerning within the judicial community because donors could come before a judge whom their dollars helped elect.

In Arkansas, a group called the Law Enforcement Alliance of America spent more than $160,000 to air three ads aimed at influencing the nonpartisan race for state Supreme Court. Such third-party spending was unprecedented in an Arkansas Supreme Court election.

One ad claimed that candidate Tim Cullen had called child pornography a “victimless crime.”

Cullen wrote that phrase in a 2006 brief while representing a sex offender who was appealing his sentence. However, Cullen said he was referring to his client’s conviction for enticing a minor — not the child pornography charge mentioned in the ad — and that he characterized that crime as “victimless” because his client engaged in sexually explicit Internet chat-room conversations with undercover police officers pretending to be young girls.

Cullen has repeatedly said the ad’s claims were false, and at the time, his campaign countered with an ad that aimed to exonerate him. But by the time of the election in May, Cullen was outspent, and he blamed his 4-percentage-point loss to Robin Wynne on the LEAA’s ads.

The LEAA, a Virginia-based nonprofit, does not have to publicly reveal its donors, nor is it required to file campaign finance reports with the Arkansas secretary of state. In the past, the group has been backed by the National Rifle Association and the U.S. Chamber of Commerce, though neither group has reported grants to the LEAA on recent years’ tax returns.

The LEAA has not made available its own tax returns from the past two years, keeping the public in the dark about the groups’ leadership and any of its recent donations to other organizations. Nor have representatives from the group responded to the Center for Public Integrity’s repeated requests for comment.

Cullen said he was troubled by the attack and pointed to the conflicts of interest such secretive support could create for elected judges in state courts.

“We don’t know where the money came from, so we don’t know when to ask Justice Robin Wynne who his benefactors are,” he said.

Following the disclosure trail of crumbs

Though the groups don’t have to report their donors, sometimes clues can be gleaned from other public records.

Very often the donors to a nonprofit are other nonprofits, which are required to reveal their contributions. Or publicly traded corporations may voluntarily disclose donations in their corporate filings.

Ohio’s Supreme Court race attracted nearly $600,000 in TV ads from the ambiguously named Washington, D.C.-based American Freedom Builders. In one of the few positive ads aired by political nonprofits, the group supported Republican Justice Judi French’s successful re-election to Ohio’s high court.

Like the LEAA, little is known about who funds American Freedom Builders. However a document released by Reynolds American earlier this year shows the tobacco giant donated $15,000 to the group in 2013, as the Center for Public Integrity has previously reported.

This debate has reached a fever pitch in Arizona, a breeding ground for some of the country’s most prolific political nonprofits. The secretary of state audited politically active nonprofits in July, including the group that attacked Kennedy in the corporation commission race, to make sure they met the state’s “social welfare” requirement as a nonprofit. Yet earlier this month, a federal judge threw out a provision in the state’s campaign finance law that required all other political committees to disclose their donors.

Kennedy believes the group that purchased the ads, Save Our Future Now, was financed by Arizona Public Service — the state’s largest electricity utility, which is regulated by the commission. She has advocated for solar energy tax incentives opposed by the utility.

The utility told the Center for Public Integrity it supports candidates and causes that are “pro-business and supportive of a sustainable energy future for Arizona,” but the utility declined to disclose specific political contributions or answer questions about alleged ties to Save Our Future Now.

Kennedy, devastated by the Save Our Future Now attack ads, said she’s hesitant to run for office again. She’s stopped reading newspapers or watching television and said her consulting business has been hurt by the bad press. Politics has strained her family life, too. A classmate of Kennedy’s 16-year-old daughter bullied her about the group’s accusations, she said.

“I think it’s a deterrent for other good people who want to serve,” she said. “Why would I put myself and my family through it again?”

Rachel Baye, Kytja Weir and Ben Wieder contributed to this story.