McCain and Public Financing

The full question isn’t stated correctly: Our reader is actually referring to circumstances surrounding Sen. John McCain’s participation in public financing for the primary campaign. Candidates that use public financing in campaigns must abide by various Federal Election Commission rules, which we explained in a previous Ask FactCheck, while those using private funds can raise and spend as much as they want.

In August 2007, McCain became the first presidential candidate of the 2007-2008 presidential campaign to be declared eligible for public financing by the FEC, although it wasn’t clear at the time whether his financially troubled campaign would actually use the money.

Then, late last year McCain’s campaign took out loans totaling $4 million (an initial $3 million loan and then another for $1 million) from the Maryland-based Fidelity & Trust Bank. The Washington Post reported that in order to secure the additional loan, McCain pledged "incoming but unprocessed contributions as collateral." According to the Post, when the bank asked what would happen if the campaign didn’t go well, Trevor Potter, McCain’s attorney, said McCain could "reapply in the future for federal matching funds, and would agree to use the FEC certifications for those funds as collateral." And the Associated Press reported that the loan agreement "did not include McCain’s right to the public funds," but that it did require him to reapply for public financing if he withdrew and lost in early primary contests.

Matthew S. Bergman and Scott E. Thomas, outside counsel for Fidelity & Trust, wrote a letter to Potter in late February, saying that public financing hadn’t been considered as collateral:

Counsel for Fidelity & Trust: After the bank determined that adequate assurances of loan repayment existed without obtaining a pledge of any certification for matching funds, the loan terms were carefully drafted to exclude from the bank’s collateral any matching funds certification (so as to assure that the Committee (McCain campaign) retained the flexibility to withdraw from the program in accordance with the principles of Advisory Opinion 2003-35). The fact that there was no pledge of any certification for matching funds is further evidenced by the fact that the covenants were included within the loan documents that expressly required the Committee to pledge, in the future, and if (and only if) certain specified events occurred after the Committee were to withdraw from the program (such as the Committee’s re-entry into the program), future certifications of matching funds as collateral for the loan. It is our understanding that, to date, none of these events have occurred.

All of this had become an issue because earlier that month, on Feb. 6, McCain had written to the FEC, notifying it of his intent to withdraw from the matching funds program. McCain, who had done well in the early primaries and experienced a financial turnaround, said that no funds had been paid by the Department of the Treasury and the certification of funds technically had not been pledged as security for private financing, two important factors necessary for withdrawal. FEC rules say that if a candidate uses federal funds as collateral for a personal loan, then they are required to remain in the federal funding program. In response, FEC Chairman David Mason said that the commission would consider withdrawing the certification provided that McCain explained in further detail the conditions of the loan he received. Mason also notified McCain that the commission could not vote on the matter since it lacked a quorum at the time and that a formal decision would have to wait. But the McCain campaign said that it didn’t need the FEC’s approval to withdraw from public financing.

Further complicating matters for McCain, the Democratic National Committee has decided to file a lawsuit with the U.S. District Court to require the FEC to launch an investigation into whether McCain violated the conditions of the public funds program. The DNC says it believes he did. It filed a complaint back in February, but the FEC wasn’t able to act on the matter since, with only two members, the commission lacked a quorum (it usually has six members). The DNC argued that McCain could not "unilaterally withdraw" from the matching funds program because he had signed a binding agreement with the FEC and had to abide by the conditions of it, which included the approval of the FEC to withdraw. The DNC further argued that McCain "already violated a key condition for being let out of the program – pledging matching funds as collateral for a private loan." An additional concern is that McCain may have violated the conditions by spending more than the $54 million he was limited to under the program.

Will there be a ruling by the commission any time soon? On June 24, the Senate confirmed five commissioners to the FEC. This will allow the commission to return to operating status for the first time since the beginning of the year and make rulings on this and other campaign finance matters.

-D’Angelo Gore

Update, March 3: The FEC announced in a Feb. 27 press release that McCain didn’t violate the terms of the public financing program. According to the FEC: "The Commission found no reason to believe that John McCain 2008, Inc. violated the law because McCain permissibly withdrew from the Matching Payment Program and thus was released from his obligations. It also found no reason to believe that a violation occurred as a result of the Committee’s reporting of McCain’s loan. The Commission closed the files."