The Working Families Party, representing just 40,878 registered voters in a state of 19 million residents, is becoming the most influential power broker in New York politics. Its mission is to drive the Democratic Party further to the left, strengthen the grip that public-sector unions have on local elected officials, and institutionalize the power of taxpayer-subsidized special interests in the Empire State. The expansion of the party—founded in 1998, in an attempt to replace the Clinton-era Democratic Party’s centrism with an agenda that the WFP’s executive director, Dan Cantor, forthrightly calls “Social Democracy 101”—has potentially national implications.

Curiously, the WFP’s chief influence isn’t in New York’s general election; rather, it’s in the low-turnout, closed Democratic primaries that determine the vast majority of officeholders in New York City. Taking advantage of the fact that in New York, political parties may endorse other parties’ candidates, the WFP offers its endorsement to labor-friendly Democratic candidates. The endorsement acts as a signifier for liberal and labor-union Democrats, helping the endorsed candidate stand out in the often crowded primary field. So to win the WFP’s backing is to have an inside track on winning the primary and then the general election. In what the WFP calls the “progressive landslide” of 2009, an astounding 30 of the 34 candidates whom it backed in New York City’s Democratic primary won—including successful challengers to four incumbent city council members. The party has made inroads into the state legislature and congressional delegation, too, helping flip seats from Republican to Democrat.

Securing the WFP nomination comes with important perks. Perhaps chief among them is a formidable ground game, courtesy of the party’s political-consulting arm, Data and Field Services (DFS), created in 2007. DFS works only for candidates whom the WFP endorses. The two entities are supposed to be legally separate to comply with election and campaign-finance laws, but they share office space on the third floor of the building at 2-4 Nevins Street in Brooklyn. (The building also served as Acorn’s headquarters before that organization was rebranded, amid national scandal, as “New York Communities for Change.”) This cozy arrangement has come without the apparent obligation to pay rent consistently over the last decade, as investigative reporter Edward-Isaac Dovere, who has done authoritative work on the WFP for City Hall, has uncovered.

Labor unions’ influence in determining WFP endorsements is established by a formula based on how much money they donate to the party and its affiliated organizations, according to the former chair of the Suffolk County WFP, Chuck Pohanka, who split with the party after lawsuits seeking to strip his county committee of the option to cross-endorse Republicans. “This is your classic pay to play,” he tells me. “You pay X amount of dollars for how many members are in the union . . . and it determines how much weighted vote you would have.” A lobbying arm known as the Working Families Organization—which racked up the state’s eighth-largest lobbying expenditures in 2008, behind Goldman Sachs—and a think tank called the Progressive America Fund round out the entities that enable the WFP to do an end run around New York campaign-finance laws. Under state law, political parties are allowed to accept a maximum of $94,200 from any donor—but the existence of all these organizations (many with overlapping board members) allowed the WFP to raise $1 million from the United Federation of Teachers in 2008 and $150,000 from George Soros, much of the money tax-exempt.

The WFP’s campaign financing amounts to “an audacious scheme to violate the law by using corporate subterfuge to hijack our local election process,” according to a lawsuit filed last year by former deputy mayor Randy Mastro, now a partner at Gibson, Dunn & Crutcher. Mastro’s suit tore the lid off WFP efforts on behalf of city council member Debi Rose, who won her Staten Island seat over incumbent Ken Mitchell in November 2009. The case, which was settled, documented that the Rose campaign had benefited from serial undercharging by DFS and from assistance by unions. For example, DFS charged the campaign just $375 for access to its digital Voter Activation Network, which contains data allowing candidates to micro-target voters in a district, saving time and money during get-out-the-vote efforts. (By comparison, city council candidate Kevin Kim paid over $9,000 for a similar voter-targeting product.)

Despite a Rose campaign affidavit attesting that “the campaign is aware of no activity by the WFP on its behalf,” extensive e-mail records showed that the WFP and DFS worked for free on the Rose campaign for months before billing for their services. Taking more than a $1,000 loss, DFS supplied Rose with a campaign manager (whose online nom de guerre was “Laborista”), as well as several campaign staffers who worked for free for more than a month. The overlap between the WFP and DFS was so wide that the WFP’s New York State campaign coordinator, Rachel Goodman, signed DFS’s contract with the campaign.

In short, distinctions between DFS and the WFP have been essentially a legal fiction. The New York City Campaign Finance Board has commenced an audit, issuing an initial opinion that “DFS exists as an arm of the Working Families Party. Both organizations are located in the same space and share employees. . . . There are no apparent firewalls between them.”

Shortly after the 2009 campaign, amid widespread allegations of the kind of improprieties found in the Rose case and the abrupt resignation of the party’s treasurer, the U.S. attorney’s office issued subpoenas to the WFP, but it declined to prosecute in the summer of 2010. In the wake of the decision, Democratic gubernatorial nominee Andrew Cuomo agreed to run on the Working Families Party line, provided that it endorse his Reform Albany pledge, which contains policy proposals, such as pension reform, unpopular with unions. But the WFP had little choice; it needed Cuomo to run on its line so that it could receive the requisite 50,000 votes for future ballot access.

Gibson, Dunn & Crutcher has filed court papers accusing DFS of contempt of court in the Rose case, arguing that it has failed to live up to the terms of the settlement, which included reconstituting its board and taking other steps necessary to ensure that it is wholly independent of the WFP. And despite the WFP’s decision to turn DFS into a nonprofit entity, some of the old games apparently continue: this past July, the New York Post reported that onetime WFP employee Patrick Crooks left the organization after higher-ups instructed him to falsify names and addresses on a petition to move rent regulation from the city to the state legislature. Crooks’s paychecks came from DFS, indicating an enduring institutional overlap.

The fact that three of the five New York City borough district attorneys ran on the Working Families Party line creates a political hurdle for further investigations. Staten Island’s Dan Donovan—who, along with Manhattan’s Cyrus Vance, Jr., is free of the WFP association—is now locked in a general-election battle for state attorney general with Democratic nominee Eric Schneiderman, a longtime labor-ally assemblyman running on the WFP line. As for New York City’s next mayoral election in 2013, the three most likely Democratic candidates—Public Advocate Bill de Blasio, Comptroller John Liu, and Congressman Anthony Weiner—have all campaigned under the WFP banner, promising a potentially expensive new era of labor influence in post-Bloomberg city hall.

But the stakes reach far beyond New York. Fledgling Working Families Parties have been established in seven other states—California, Connecticut, Delaware, Massachusetts, Oregon, South Carolina, and Vermont. With public-sector unions increasing their domination of statewide Democratic Parties, there is talk of forming a nationwide WFP coalition in time for the 2012 presidential election. Given that state budgets are stretched past the breaking point because of out-of-control pension benefits and labor costs, the WFP’s growth has serious implications for the country’s fiscal future.

John P. Avlon is senior political columnist for The Daily Beast.