Loans Loophole Under Fire

Nearly half the $9.5 million Arnold Schwarzenegger has poured into the recall race has been in the form of loans that his campaign staff says can be repaid by fund-raising after the election.

Most of the loans came late last week, as polls began to show Schwarzenegger’s prospects for winning the governor’s office strengthening. In announcing his run for governor Aug. 6, Schwarzenegger had said that he did not need money from others.

The Republican candidate has lent $4.5 million to his recall efforts, starting with $1.5 million to his gubernatorial committee, Californians for Schwarzenegger, on Sept. 19. Last week, he gave the same campaign another $2.5 million and deposited $500,000 in his Total Recall fund.

Schwarzenegger obtained the loans, which carry a 4% interest rate, by tapping a line of credit with City National Bank, based in Beverly Hills.

Robert Stern, president of the Center for Governmental Studies, a Los Angeles organization that promotes campaign reform, criticized the candidate’s arrangement.

If Schwarzenegger becomes governor, Stern said, he should not be allowed to solicit money to repay the loans. “It would be a sure thing for contributors that they are giving money to the governor,” Stern said. “It is basically money directly into his pocket.”

And Californians would not know before the election who is funding Schwarzenegger’s candidacy, Stern added.

Campaign spokesman Sean Walsh said Tuesday the loans were needed because Schwarzenegger’s fund-raising slowed markedly after a three-judge panel of the 9th Circuit Court of Appeals issued an order last month postponing the Oct. 7 recall election. That decision was overturned eight days later by a larger panel of the same court, and the election date was reinstated.

Walsh said Schwarzenegger’s loans comply with the letter and spirit of Proposition 34, which governs fund-raising in California elections. The measure’s $100,000 limit on personal campaign loans does not “apply to loans made to a candidate by a commercial lending institution in the lender’s regular course of business on terms available to members of the general public,” he said.

“We’re playing by the rules,” Walsh said. “This to us is a nonissue.”

And campaigns are allowed to accept sufficient contributions after an election to pay off the debt, said Colleen McAndrews, treasurer and legal counsel for Schwarzenegger’s campaign.

The $100,000 limit “was just a quirk in the law when Proposition 34 was drafted,” McAndrews said.

Others called it a major flaw in campaign finance law.

“This is another one of the loopholes that you can drive a Hummer through,” said attorney Karen Getman, former chairwoman of the Fair Political Practices Commission.

Her firm, Remcho, Johansen & Purcell, represents Gov. Gray Davis.

Professor Daniel Lowenstein of UCLA law school said he saw no problem with Schwarzenegger’s borrowing as long as it “is a genuine commercial loan.”

Lance Olson, who helped write Proposition 34 and represents Lt. Gov. Cruz Bustamante in the recall race, called the loans suspect.

“Clearly, a loan of [$4.5] million at 4% interest is not on terms available to the general public, and is illegal,” Olson said.

Sen. Martha Escutia (D-Whittier) said Tuesday she intends to sue the Schwarzenegger campaign in Superior Court in Sacramento to force the actor to cease using the loans to pay for his television ads.

Escutia, chairwoman of the Senate Judiciary Committee, said she is convinced that the loans violate Proposition 34, because most other people could not obtain loans at such favorable interest rates.

“It has everything to do with preserving the integrity of Proposition 34,” said Escutia, a supporter of Bustamante’s candidacy.

McAndrews said Schwarzenegger’s 4% line of credit is due to his credit-worthiness.

“Any lawsuit regarding this matter is frivolous,” added Walsh, “and a last-gasp attempt to slow down Arnold’s momentum going into election day.”

Schwarzenegger’s ability to obtain such sums left John Feliz, campaign manager for state Sen. Tom McClintock (R-Thousand Oaks), Schwarzenegger’s closest Republican rival, shaking his head. The $4.5 million is more than twice the $2 million that McClintock has raised in his campaign to replace Davis.

“I sit here in absolute amazement at the supposed campaign reform we did,” Feliz said. “These people who have their own money assume the law does not apply to them.”

Early in the campaign, Schwarzenegger said he was not beholden to anyone because he could fund his campaign from his own resources. Throughout the race, he has denied that he takes special interest money, despite large contributions from real estate developers, vineyard owners, car dealers and others with a stake in what happens in Sacramento.

City National Bank has been a modest donor to Davis and other candidates in the past.

Like many banks, it also has lobbyists in the Capitol, where it is represented by one of Sacramento’s top political law and lobby firms, Nielsen, Merksamer. In the past, Nielsen, Merksamer represented the California Republican Party and was counsel to Gov. Pete Wilson.

In the legislative session just ended, City National Bank pressed lawmakers for changes related to how real estate investment trusts are taxed, according to its filings with the secretary of state. It also sought favorable rulings from the Franchise Tax Board, a three-member panel that includes the governor’s director of the state Department of Finance.

Last week, Schwarzenegger reported the $2.5 million and $500,000 as contributions to his campaign funds. Monday night, the campaign filed amendments stating that the money was actually a loan.

McAndrews said each of the two checks reported last week was marked “loan” and that the Monday amendments corrected a clerical error. “We realized our mistake,” she said. “We filed our amended reports.”

She said the candidate is drawing on the money “as we need it.”