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San Francisco Chronicle
Mar 26, 2004 - 01:00 AM

by TOM CHORNEAU, Associated Press Writer

Governor creates private corporation to oversee fund-raising

SACRAMENTO (AP) -- Gov. Arnold Schwarzenegger has quietly incorporated a private nonprofit group that can help advance his political goals without disclosing the source of its money.

Organizers insist the new corporation, which can raise money, lobby lawmakers and conduct polls, won't be used to hide special-interest donations to Schwarzenegger. But they acknowledged it could legally avoid disclosure under a variety of circumstances.

The new entity, which received tax exempt status from the Internal Revenue Service this week, comes forward as the Republican governor sets a near-record pace in fund-raising. After spending nearly $27 million to win the October recall election, Schwarzenegger has added $11 million since and appears poised to raise millions more before the November election.

Political watchdogs say that even if the governor fulfills his disclosure promises, the nonprofit corporation adds a powerful new weapon in his arsenal while also raising a variety of legal and ethical questions.

"He's building an infrastructure to have unprecedented leverage over the Legislature," said Jim Knox, executive director of California Common Cause. "No governor has ever had anything like this before; no one has even thought of this before. Like many other things about this administration, he's taking us into new ground."

Called the California Recovery Team, the new corporation has been organized as a "social welfare" entity exempted from paying taxes under section 501 (c)(4) of the tax code.

Its mission is to "educate the public about the need for government reform and efficiency," according to bylaws. The board of directors includes several members of the governor's staff, one of his campaign consultants and one of his attorneys.

The entity filed one, four-page report with the state showing it spent $135,000 last year but the source of its income was not required to be included.

Tom Hiltachk, the governor's attorney who created the corporation, said the new entity is identical to an existing Schwarzenegger political action committee known as "Gov. Schwarzenegger's California Recovery Team."

In what Hiltachk called a common practice, the governor was forced to incorporate the private nonprofit to allow the political committee to collect donations without paying taxes.

Still, many experts -- such as Knox -- said they were unfamiliar with the practice and noted the existence of a nonprofit component to a political committee is not easily identified on disclosure reports.

Already, Schwarzenegger's political web includes six active political committees. Two were created after the recall -- one to back the budget initiatives voters approved this month and a general purpose committee intended to support ballot measures Schwarzenegger has threatened to take to voters, including workers' compensation reform and revision of the state's tort system.

Because the general purpose committee, Gov. Schwarzenegger's California Recovery Team, could be holding large sums for more than one election cycle, interest income generated could be taxable. To save all the money for the political campaign, Hiltachk said, they needed to establish the committee also as a nonprofit.

While ballot campaign managers often create (c)(4) corporations to avoid taxes, such entities can also be used to hide the source of campaign contributors, said Larry Noble, executive director of the Center for Responsive Politics in Washington, D.C.

"That's the first thing I think of when I hear someone has established a (c)(4)," Noble said.

While Hiltachk said the governor's nonprofit won't do that, its sole official filing lists no specifics about the source of money or specifically how it was spent.

Other records show Schwarzenegger moved $100,000 from his Total Recall committee to the corporation in December and another $50,000 from the Gov. Schwarzenegger's California Recovery Team in January.

The money was used to pay for mail, research and consulting and public rallies to pressure the Legislature last December to put Propositions 57 and 58 on the ballot. There remains about $6,000 in its account, Hiltachk said.

The money was moved into the corporation's account so that if the campaign were audited it would be easier to distinguish the lobbying activities, he said.

But some experts were puzzled by the transfer. If the two are the same, there's no reason to move money between the parent committee and the nonprofit arm, said Lance Olson, a Sacramento attorney who has set up several (c)(4) ballot committees.

Instead, Olson said, Schwarzenegger's labyrinth of political accounts blurs the line between money spent supporting the governor's ballot measures and what gets spent for his re-election.

"Candidates are not supposed to have these slush funds and move money around to pay for any activity they want," Olson said.

At minimum, Knox said, the variety of accounts makes it difficult to follow what donors are paying for what political activity.

Schwarzenegger's (c)(4) corporation is also different than others because it's controlled by an officeholder -- the governor -- Olson said.

While Schwarzenegger's name isn't on the IRS application, the group's five-member board is run by Hiltachk, and includes Gary Hunt, a longtime Schwarzenegger supporter; and two aides to the governor, senior adviser Bonnie Reiss and Deputy Chief of Staff Donna Lucas.

Also, Olson said, a nonprofit such as the California Recovery Team doesn't have to report its finances until a ballot measure is ready to be circulated for voter signatures. All activity before that is not included in the disclosure requirement, he said.




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