On July 11, 1986, with the Aug. 6 Michigan GOP precinct delegate elections fast becoming a battleground for the 1988 presidential nomination, Vice President Bush announced formation of a "testing the waters committee" that would begin spending money directly on behalf of his candidacy.

This was an important decision, because it formally triggered the provision of federal election law that limits how much a candidate can spend and remain eligible for federal matching funds. Outlays by Bush's new committee would have to be counted against the Federal Election Commission's overall limit of $27 million that a candidate is permitted to spend in seeking his party's nomination.

The decision by Bush's shrewd and experienced campaign staff to kick off his campaign so early surprised some political operatives for its candor; Bush aides boasted that they were declaring their intentions openly months before their rivals would.

But what happened next -- only revealed in financial reports filed much later -- suggests that the Bush campaign's candor was limited. Like almost all the other presidential candidates of both parties, Bush launched forth on a variation on the theme of getting around campaign spending limits.

In the first month after that announcement, Bush's presidential committee reported expenditures of only about $1,000 in Michigan. In that same month, Bush's political action committee (PAC), The Fund for America's Future Inc., spent more than $150,000 in Michigan. But under the law, the PAC's expenditures did not count against the $27 million limit, because legally at least, they are not considered spending in support of Bush's presidential candidacy.

Overall, Bush's PAC reported spending $1.1 million that July, double the amount it paid out across the country just one month earlier. The pickup in activity also took place in Iowa and New Hampshire, the two other states that pick their convention delegates early.

In Michigan in July 1986, the Bush PAC paid salaries to seven Michigan residents already on its payroll, and to seven others listed as consultants working in Michigan, including the son of former governor William Milliken and the wife of Rep. Guy Vander Jagt (R-Mich.). The PAC paid the rent for at least two offices in the state; $10,000 to Michigan Bell for telephone services; $27,000 to the Lansing postmaster for one direct mailing and $36,655 to a printer in that city. Three months earlier, the PAC had used $66,000 to set up an affiliate fund in Michigan to contribute to local candidates and organizations.

The Bush PAC, by law, is not supposed to promote the nomination of George Bush. According to a January 1986 presentation to the FEC, its role is "to seek to build a stronger Republican Party at all levels, including local party organizations" by contributing to both.

But the sophisticated Bush organization, running its third national campaign in eight years, knew that the rules are ambiguous and could be stretched. Its handling of money since 1985 provides a case study in creative use of the 1974 federal campaign law that has reshaped modern presidential politics.

In 1985-86, when the Bush PAC raised $9.3 million, it gave only $815,845 to 276 GOP Senate and House candidates across the country. Another 200 smaller contributions totaling less than $250,000 went to local candidates in Iowa and New Hampshire. In no other state but Michigan were more than about a dozen local candidates given money by the Bush PAC.

In 1987, when the PAC raised and spent $1.2 million, less than $100,000 was contributed to local or federal candidates. Among those contributions were $2,000 in October to the Republican candidate for mayor in Manchester, N.H., and $200 apiece to nine Republicans running for alderman there.

The Bush campaign's legal counsel, Jan W. Baran, who doubles as counsel for the PAC, said in an interview that the PAC contributions "help the party, help the candidates, and help George Bush."

Instead of giving most of what is raised to candidates, which most PACs do, the bulk of the Bush PAC's spending over the past three years went to personnel and organizations, most of which have since become involved in Bush's presidential campaign. More than half the current senior staff of the Bush campaign organization earlier worked on the staff of the PAC.

The PAC also spent large amounts of money on key campaign service organizations such as Market Opinion Research Corp., the Detroit firm run by pollster Robert Teeter, who also is a senior Bush campaign adviser. Roger Ailes' TV production firm, Ailes Communications, also provided services first to the PAC, and now to it and the campaign organization.

When Ailes was working for the PAC, a Bush official said, he would help the vice president and "his advice worked to the benefit of those candidates" for whom Bush was appearing. When he was paid by the campaign, Ailes' advice was to benefit Bush alone.

Lee Atwater, who directed the Bush PAC in 1986, in 1987 became director of the campaign. Atwater's $10,000-a-month consulting fee was initially paid by the PAC, but once the "testing the waters" committee was formed, the fee in October 1986 and thereafter was divided between the two organizations, $9,000 from the PAC and $1,000 from the campaign.

Another PAC consultant in 1987 was speechwriter Landon Parvin, who received more than $45,000 that year. A Bush official said Parvin's speeches were to help the party, "but that was a murky gray line where an incumbent was both an official and a politician." One former Bush employee, however, said Parvin's speeches included commencement addresses that were essentially nonpolitical, and supportive primarily of Bush's image.

A review of the thousands of pages of campaign spending reports filed by the Bush PAC with the FEC over the past three years -- which show higher spending but are otherwise similar to the PACs of other candidates -- leaves little doubt that its primary goal has been to support the vice president's candidacy, in part by assisting Republican candidates and organizations that could in turn help Bush.

The situation was described in March 1986 by then-Federal Election Commissioner Thomas E. Harris, who wrote a blunt dissent from an FEC advisory opinion that allowed Bush's PAC to contribute to Michigan Republicans running for positions that would eventually determine the state's 1988 GOP convention delegation.

"Vice President Bush is running for president and is financing his campaign through The Fund for America's Future, which he organized and controls. Vice President Bush did not invent this scheme," Harris added, "he is merely doing what others have done and are doing, with the commission's sanction."

Other presidential candidates who have stretched the rules by using similar PACs or tax-exempt "foundations" include Sen. Robert J. Dole (R-Kan.), whose Campaign America is a PAC similar to Bush's; Rep. Jack Kemp (R-N.Y.), Campaign for Prosperity; Alexander M. Haig Jr., Committee for America; Gary Hart, Volunteer Committee; Rep. Richard A. Gephardt (D-Mo.), Effective Government Committee; Pat Robertson, Committee for Freedom, and Sen. Paul Simon (D-Ill.), The Democracy Fund.

Bush's counsel Baran described the situation as "ambiguous" and said that is why the Bush organization sought the advisory opinion in early 1986 to guide its activities in Michigan.

The use of PACs has reached a point where the FEC is considering changes that could limit a PAC's advantage to presidential contenders.

One proposed change would require that "substantial" amounts of the money raised be distributed to other candidates, limiting use of the PAC to hire and train the presidential campaign staff. Another proposed change would permit donations only to federal candidates, so these PACs could not support local political figures who could help the presidential candidate in primaries and caucuses.

The current rules benefit a presidential campaign in raising funds as well as spending. FEC rules restrict individual contributions to Bush's prenomination campaign to $1,000, but donors to the PAC can give $5,000 a year. These rules, for example, allowed Ambassador Fred M. Zeder, an old friend of Bush who until January 1987 was the U.S. negotiator in the Micronesian independence talks, and his wife each to give $5,000 to the Bush PAC in 1985, 1986 and 1987 -- a total of $30,000.

On July 11, 1986, the day Bush announced his exploratory committee, Zeder delivered two checks for $750 to the Bush campaign, making him one of the first donors, according to FEC reports. Last February, the Zeders each gave another $250, thereby "maxing out" as contributors to the campaign. Each can still give another $5,000 to the PAC in 1988.

The director of fund-raising for both groups is Frederick M. Bush, no relative, but a veteran of many GOP campaigns. He is paid by both the PAC and the campaign organization.

Fred Bush said he arranged for the Zeders, and many other $1,000 donors, to hold back $250 of their 1986 donation because the federal government would match contributions up to $250, but only if they were made in 1987. The major soliciting now is for the campaign, Bush said, which has just passed the $20 million mark.

In the lore of today's PAC-campaign organization practices, the Bush PAC must know nothing about the operations of the Bush campaign committee for fear they are actually "affiliated" and thus both spending accountable funds.

Last October, with the campaign in full swing, Rich Bond, deputy director of Bush's presidential campaign and his full-time, principal political field operative, was paid $12,000 in consulting fees -- $9,000 from the campaign committee and $3,000 from The Fund for America's Future, according to FEC records.

Bond said he was paid for consulting with the new director of the PAC, "casting an experienced eye over planning . . . . The Bush people know I have other clients," he said.

Baran, and the campaign's director of operations and administration, Edith Holiday, said that they did not know of the PAC's report of recent payments to Bond.

George Bush Jr. made appearances for his father's PAC in 1986 and early 1987 and was reimbursed for his expenses. He also began receiving $5,000 consulting fees in consecutive months from the campaign last year.