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States vs. Plutocrats

A novel attack on hidden campaign donations.

Thanks to Citizens United and other recent rulings, the nation’s ultra-wealthy have a lot more latitude than they did a few years ago when it comes to pouring money into the political system. And, according to the latest campaign filings, they aren’t skimping. During February, Ken Griffin, founder of the hedge fund Citadel, and Henry Kravis, co-founder of private equity giant KKR, each gave $100,000 to the super PAC supporting Mitt Romney, while American Crossroads, the group co-founded by Karl Rove, received $500,000 from the financial services firm S.W. Childs Management Corp.

But these are just the contributions that get disclosed. Groups such as Crossroads do not need to reveal who donates to their 501(c)(4) arms, which are supposed to focus their advocacy on “issues,” not elections. (In practice, of course, they often blur that distinction to the point of meaninglessness. Crossroads’s 501(c)(4) arm, for instance, has spent hundreds of thousands of dollars on two ads attacking Barack Obama over the Solyndra fiasco.) Because the donations are anonymous, no one knows how much money is flowing from Wall Street billionaires to these entities. But everyone assumes—and it’s a pretty safe guess—that it’s a lot.

Now, under the radar, a fledgling effort to force these donors out into the open is underway. And it’s being led by a rather unlikely group of crusaders: a handful of the nation’s state treasurers.

IN MOST STATES, the duties of the treasurer include a role in the oversight of pension funds for state employees. These funds invest much of their money with the country’s biggest hedge funds and private equity firms. In fact, about 30 percent of the money invested with private equity is from public pensions. And so, it has occurred to some state treasurers that they might use these funds as leverage. The idea would be to say to firms: If you want to keep managing our billions, then we want you to be more transparent in your political giving. (While the stated intent is not to limit giving, presumably some money managers would be less inclined to write big checks if disclosure were required.) “They’re sending a message,” says Shelley Alpern of Trillium Asset Management, a “socially responsible” investment fund that pushes for transparency in political giving. “The pension funds have multiple billions of dollars to choose how they want to invest, and they can probably find hedge fund managers who aren’t involved in the political process the same way some of their current money managers are.”

So far, the loosely coordinated group of states considering this approach, according to several people familiar with the effort, includes California, Illinois, Massachusetts, North Carolina, and Rhode Island. Discussions appear to be most advanced in California, where the state’s two public pension funds have $53 billion invested with private equity and $5 billion with hedge funds. The tactic was a topic of discussion at a recent meeting of California pension officials in Los Angeles, and state staffers are now studying options for its implementation. “I support it,” California Treasurer Bill Lockyer, a Democrat, told me. “I’m among those concerned about the escalation of megabucks, private megabucks, in presidential and other campaigns. It’s alarming to see what’s happening.”

Officials in other states were hesitant to discuss the effort in detail, noting, for one thing, that any policy change would need to be approved by the boards overseeing their state’s pension funds (on which the treasurers typically sit). Said Massachusetts Treasurer Steven Grossman (also a Democrat), “I would be comfortable bringing it up [with other members of the state’s pension board] and believe it will have increasing visibility as time goes on.” A spokeswoman for North Carolina Treasurer Janet Cowell said she was not yet ready to discuss the effort. In Illinois, a spokesman for the treasurer, a Republican, said he’d heard nothing of the proposal; but the chairman of the board overseeing the state pension fund, Democratic appointee Devon Bruce, said it was “an idea percolating out there” that “may come up in the next several months.”

The effort is an outgrowth of a more developed campaign by state pension funds and activist groups, such as the Coalition for Accountability in Public Spending, to require greater transparency in political giving by publicly held corporations. “We own the companies. We are the shareholders. ... So they have a responsibility to fully disclose how they spend our shareholder money,” says Grossman of Massachusetts, which is in the midst of implementing a new policy requiring more disclosure of political spending by publicly held companies in which the pension fund invests. And, if states are going to require disclosure from corporations they invest in directly, why not make the same demand of the hedge funds and private equity firms that manage their other money?

But whether this effort proves to be legal is another question entirely. By federal law, pension fund managers’ “fiduciary responsibility” is simply to invest in ways that generate the best returns. One option for state treasurers would be to argue that big, undisclosed contributions from hedge fund and private equity partners are undermining U.S. democracy—and a weakened democracy is bad for the economy and all investment returns. Still, it is far from clear that legal experts would necessarily find this argument persuasive. And, even if the state treasurers’ initiative is upheld as a matter of law, the entire effort will undoubtedly spark a conservative backlash in the political arena.

WHEN I CONTACTED several large hedge funds and private equity firms to get their reactions, they noted it was not the firms that were cutting six- and seven-figure checks, but rather the partners who ran the firms—a distinction they will likely invoke should the state treasurers’ campaign gain steam. “We don’t typically comment on our individuals’ political giving—that’s their prerogative,” said Kristi Huller, a spokeswoman for KKR.

Lockyer acknowledges the challenges in making the case for this new approach. “We don’t know yet what the answers are ... legally and practically,” he says. “It’s not impossible, but it’s difficult.” Still, he is not dissuaded, in large part because of his deep concern about the rising dominance of big money. Recently, he wrote a letter to his former law school professor Anthony Kennedy, asking the Supreme Court justice whether he stood by his judgment in Citizens United that the sort of unlimited contributions the ruling would make possible “do not give rise to corruption or the appearance of corruption.” Kennedy “may be one of the country’s preeminent First Amendment jurists—one of the things I appreciated about him as a student is that I share this strong feeling about First Amendment freedoms, so I understand the logic of their analysis,” Lockyer told me. “But one of their tests was ‘avoiding the appearance and reality of political corruption.’ And, in my view, the practical consequences of the decision should enhance that concern about the appearance and reality of corruption.”

Alec MacGillis is a senior editor at The New Republic. This article appeared in the April 19, 2012 issue of the magazine.