[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
HEARING ON AARP'S ORGANIZATIONAL
STRUCTURE, MANAGEMENT, AND FINANCES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH
and the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
APRIL 1, 2011
__________
Serial No. HL-02
__________
Printed for the use of the Committee on Ways and Means
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70-865 WASHINGTON : 2011
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COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
SUBCOMMITTEE ON OVERSIGHT
WALLY HERGER, California, Chairman, &
CHARLES W. BOUSTANY, JR., Louisiana, Chairman
SAM JOHNSON, Texas PXAVIER BECERRA, California
PAUL RYAN, Wisconsin MIKE THOMPSON, California
DEVIN NUNES, California EARL BLUMENAUER, Oregon
DAVID G. REICHERT, Washington RON KIND, Wisconsin
DEAN HELLER, Nevada BILL PASCRELL, JR., New Jersey
PETER J. ROSKAM, Illinois
JIM GERLACH, Pennsylvania
TOM PRICE, Georgia
VERN BUCHANAN, Florida
AARON SCHOCK, Illinois
LYNN JENKINS, Kansas
KENNY MARCHANT, Texas
DIANE BLACK, Tennessee
FORTNEY PETE STARK, California
JOHN LEWIS, Georgia
JIM MCDERMOTT, Washington
Jon Traub, Staff Director
Janice Mays, Minority Staff Director
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C O N T E N T S
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Page
Advisory of April 1, 2011, announcing the hearing................ 2
WITNESSES
PANEL 1:
A. Barry Rand, Chief Executive Officer, AARP Accompanied by,
Lee Hammond, President, AARP Board of Directors.............. 9
PANEL 2:
William Josephson, J.D., Of Counsel, Fried, Frank, Harris,
Shriver & Jacobson LLP....................................... 79
Frances R. Hill, J.D.,Ph.D, Professor, University of Miami
School of Law................................................ 88
AARP'S ORGANIZATIONAL STRUCTURE, MANAGEMENT, AND FINANCES
----------
FRIDAY, APRIL 1, 2011
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The subcommittees on Health and Oversight met, pursuant to
call, at 9:00 a.m., in Room 1100, Longworth House Office
Building, the Honorable Wally Herger [chairman of the
subcommittee on Health] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
Chairmen Herger and Boustany Announce
Hearing on AARP's Organizational Structure and Finances
Friday, March 25, 2011
House Ways and Means Health Subcommittee Chairman Wally Herger (R-
CA) and Oversight Subcommittee Chairman Charles Boustany, Jr, MD (R-LA)
today announced that the Subcommittees on Health and Oversight will
hold a hearing on AARP's organizational structure, management, and
financial growth over the last decade. The hearing will take place on
Friday, April 1, 2011, in 1100 Longworth House Office Building,
beginning at 9:00 A.M.
In view of the limited time available to hear from witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
AARP has long held itself out as the preeminent non-profit
organization representing America's seniors. However, many do not
realize that AARP collects billions of dollars each year through the
sale and marketing of insurance products. Additionally, memberships on
AARP's corporate for-profit and tax-exempt non-profit boards overlap.
Given the Committee's responsibility to conduct rigorous oversight,
jurisdiction over Medicare and sale of Medicare insurance products and
sole jurisdiction over the Tax Code, the Committee will review AARP's
organizational structure and finances.
In announcing this hearing, Chairman Herger said, ``AARP is known
for being the largest and most well known seniors' organization in the
country. But what Americans don't know is that AARP was the 4th highest
spending lobbying organization between 1998 and 2010 or that the AARP
brand dominates the private Medicare insurance market. This hearing is
about getting to the bottom of how AARP's financial interests affect
their self-stated mission of enhancing senior's quality of life. It is
important to better understand how AARP's insurance business overlaps
with its advocacy efforts and whether such overlap is appropriate.''
In announcing the hearing, Chairman Boustany said, ``As one of the
country's most well-known non-profits, many of America's seniors trust
AARP to represent their interests. But in light of AARP's dependence on
its income from insurance products, there is good reason to question
whether AARP is primarily looking out for seniors or just its own
bottom line. Before seniors decide whether AARP is worthy of their
trust, or their hard-earned dollars, they deserve all of the facts. The
purpose of this hearing is to provide a public examination of the facts
so seniors can decide those questions for themselves.''
FOCUS OF THE HEARING:
The hearing will examine AARP and its affiliates, revenue,
charitable giving, Boards of Directors, and lobbying expenditures.
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Chairman HERGER. The subcommittee will come to order.
When Dr. Ethel Percy Andrus founded AARP in 1958, Medicare
did not exist. Dr. Andrus understood that seniors needed access
to health insurance and found a solution.
What began as an organization that filled a need not yet
met by society has grown and evolved over the last 50 years
into AARP, Inc. and its affiliated entities. With the
establishment of Medicare in 1965, health insurance became
widely accessible to seniors.
However, AARP kept on with its reported mission: to promote
independence, dignity and purpose for older persons; to enhance
the quality of life for older persons; to encourage older
people ``to serve, not to be served.''
These are unquestionably laudable goals. However, as we
will discuss today, Mr. Reichert, former Congresswoman Ginny
Brown-Waite, and I took a closer look into AARP over the last
18 months, reviewing nearly every publicly available document,
and the facts suggest that AARP has strayed from its core
mission.
The facts show that AARP no longer operates like a seniors'
advocacy organization. Instead, it is more closely resembles a
for-profit insurance company.
In 2009, AARP raised 46 percent of its revenue from royalty
payments versus just 17 percent from membership dues. While
questions have indeed been raised in the past about AARP's
reliance on royalties, the amount of these payments has nearly
tripled just over the past decade.
AARP asserts that their policy positions are made by its
all-volunteer board of directors, which is separate from its
business interests. The facts show otherwise.
In 2010, the entire board of AARP Insurance Plan, which
collected and processed $6.8 billion in insurance premiums in
2009, also served on the board of directors of AARP, which
makes policy decisions. The AARP Insurance Plan funneled
millions of dollars to AARP, Inc. in 2009.
The facts show that AARP is dependent on the hundreds of
millions of dollars it receives primarily from insurance
companies and could not continue to operate in its current
fashion without this revenue. AARP revenue from membership dues
totaled $246 million in 2009, just barely enough to cover its
employee compensation and legal and accounting fees.
AARP's decision to endorse more than one-half trillion
dollars in Medicare cuts to pay for a new entitlement program
seemed to directly contradict its mission. This became more
disconcerting when Medicare officials warned that the Medicare
cuts were so severe that seniors' access to care could be
jeopardized. Medicare officials also revealed that the health
care law will result in a migration from Medicare Advantage to
Medigap plans that could force as many as 7 million seniors to
give up a plan they know and like.
What does this have to do with AARP? Well, it turns out
that upon a close examination of AARP's Medicare insurance
business, the facts show that AARP had a unique financial
incentive that was not transparent to seniors, the public or
Members of Congress during the health care reform debate. As a
result of the unique contractual relationship between AARP and
United Health Group, AARP stands to earn $1 billion over the
next 10 years as a result of the Democrats' health care
overhaul on top of hundreds of millions of dollars in insurance
royalties that they currently collect.
This is just one of a number of shocking details contained
in a report issued earlier this week by Mr. Reichert and me,
many of which will be discussed today.
I would now like to recognize Mr. Reichert, who has been a
driving force in this investigation, to make a brief opening
statement.
Mr. REICHERT. Thank you, Mr. Chairman, for allowing me some
time to say a few words.
First, I want to take a moment just to thank all of the
volunteers that volunteer with AARP and the wonderful work that
you all do. I know there are some here in the hearing room
today, and some that may be listening across the Nation. Thank
you for volunteering and being engaged in helping our seniors
across this country.
I know that Mr. Rand and Mr. Hammond and others here
representing AARP, I know your hearts are in the right place,
but sometimes we can sort of find ourselves misguided and going
down the wrong path. We are here today just to make sure as
representatives of the people and our districts and across this
country that AARP is still on the right path. Your mission
statement is to make sure that you help seniors, and that is
what we want to do, too. We want to help seniors and make sure
that they can get the best health insurance coverage they can
get so they can have the best retirement that we know they all
deserve as they worked so hard during their lives.
But I sort of became very concerned back in 2007 when the
first cut was mentioned to Medicare Advantage. It was a $200
million cut associated with a SCHIP vote. I was very puzzled,
to be honest with you, sir, as to why AARP would support a $200
million cut to Medicare Advantage. Eventually what happened,
the Senate didn't support that cut and the cut wasn't made, and
SCHIP found other ways to support their financial needs.
And then along came the health care bill and a $523 billion
cut to Medicare was announced as one of the mechanisms to pay
for the health care bill. Close to $200 billion cuts again to
Medicare Advantage were mentioned as part of the solution to
finding finances to fund the health care bill.
So again I was puzzled. So myself and Mr. Herger and Ginny
Brown-Waite began to generate some letters and ask some
questions. Again to be honest with everyone in the room and
people watching today, we did not get forthright answers. We
were looking for some very simple answers to some very simple
questions as to where money is going, and why it is going and
why AARP supported that huge of a cut, a half a trillion
dollars to Medicare. We just wanted to know on behalf of the
seniors what the truth was. And we couldn't get it.
So now we find ourselves today, after 18 months of
interviews and exchanging letters, and here we are today at
this hearing. I wish we could have been more forthright, you
could have more forthright with your answers. Hopefully today
you will be, and we will be able to get to the bottom of this
and make sure together that our seniors are cared for properly
and that they enjoy the retirement that they deserve.
So I appreciate your presence here today and look forward
to asking you some questions and getting some straight answers.
Thank you.
Chairman HERGER. I thank Mr. Reichert and I thank you for
your dedication for being involved in this process.
Before recognizing our Ranking Member Stark for the
purposes of an opening statement, I ask unanimous consent that
all members' written statements be included in the record.
Without objection, so ordered.
I now recognize Ranking Member Stark for his opening
statement.
Mr. STARK. Chairmen Herger and Boustany, I want to thank
you both for holding this hearing. There are questions to ask
of AARP; of course, we could ask those same questions of the
Chamber of Commerce, which outranks AARP as the top spending on
lobbying over the last 12 years, spending three-quarters of a
trillion dollars lobbying over that period. We could ask the
questions of American Crossroads, which was founded by Karl
Rove and spent millions with its sister organization trying to
defeat Democratic candidates in the last election.
But the Republicans do not seem to want to ask those
questions today, and it is easy to understand why: those groups
opposed the Affordable Care Act and AARP supported it. So this
amounts to nothing more than a political witch hunt to punish
an organization that spoke out in favor of health care reform.
Any organization that would stand in the way of the goal to
privatize Social Security, end Medicare, and turn senior
citizens over to the mercy of private health insurance
companies would be suspect.
Now, I have to admit that in the past, and even today, I
have raised questions about AARP. It is true that in addition
to the work that they do advocating for us elderly, they make a
tremendous amount of money off businesses that they market to
us. And it is no surprise to American seniors that their
products make them probably the biggest player I think in
Medigap, Medicare Advantage, Part D drug plans, and it is
obvious to us, when you are shopping the market, that their
plans are well priced and have good features.
So it is not exactly that they are hiding under a veil, as
the Republicans would suggest. Many AARP members have looked
forward to joining for the discounts and other deals that they
get.
So they have investigated the AARP for a year. In that
time, all that the Republicans have found is publicly available
information. Here it is. This is all publicly available. You
don't have to research anything. It is all publicly available.
I must admit, I have not read through it, but it is large and
heavy. It is a complex organization, all of which is legal. In
fact, the information in here indicates there is nothing
illegal.
I must admit that when we had Holtz-Eakin here, the
President of the American Action Forum, he wouldn't answer any
of our questions. He said he didn't have to and he wasn't about
to, and he wouldn't explain who was funding his organization.
So while he refused to disclose the information, AARP at least
has been up front. It is transparent.
It seems to me and everyone sitting here today, rather than
American Action Network or 60 Plus or American Crossroads or
the Chamber of Commerce, we are here to discredit AARP in the
minds of seniors. They know, my colleagues across the aisle,
know that us seniors trust AARP and that is why the Republicans
lauded AARP's endorsement of the Republican Medicare
prescription drug bill in 2003, which I thought was wrong and I
thought it was a bad thing for AARP to do, but the Republicans
loved it.
Now, 8 years later, they are trying to break the trust that
American seniors have in AARP. Before they announce a budget
that will devastate Medicare, Social Security, Medicaid, the
Republican plan is to privatize Social Security, block grant
Medicaid, end Medicare, they would like to kind of silence
AARP, and that is why we are here today.
We should see this for what it is: a waste of government
time and abuse of government resources and a vindictive attempt
to settle a political score and silence a voice that represents
seniors.
I yield back the balance of my time, and I look forward to
hearing the testimony of witnesses.
Chairman HERGER. I thank the ranking member from
California, Mr. Stark.
I now recognize Dr. Boustany, chairman of the Committee on
Oversight, for an opening statement.
Chairman BOUSTANY. As Chairman Herger said in his opening
statement, AARP was created with the praiseworthy and noble
goal of promoting independence, dignity and enhancing the
quality of life for older Americans. As a physician before I
came to Congress, and now as a Member of Congress, I have
interacted with many volunteers in my home State of Louisiana
who have done excellent work. Founded with this goal, it was
incorporated under section 501(c)(4) of the Internal Revenue
Code. This meant that in return for promoting social welfare
and the common good, it would enjoy exemption from Federal
income taxes.
Today, more than 50 years after its founding as a small
nonprofit helping the retired, AARP has changed into what
appears to be an insurance and advertising powerhouse.
According to the most recent data we have, AARP, Incorporated
and its for-profit organizations annually process billions of
dollars in insurance premiums, and earned nearly $700 million
in insurance revenues and over $100 million in advertising
revenues.
Only a fifth of its revenue come from membership dues and
contributions. Since 2002, AARP's revenue from membership dues
has only increased modestly. Over that same period, however, by
partnering with other companies to sell insurance, AARP has
experienced gains in its royalty income that any private sector
business would envy. Its revenues have nearly tripled, growing
from $240 million to $657 million in 2009.
Yet as AARP, Incorporated has grown by leaps and bounds,
its funding for charitable work has nearly flat-lined.
Contributions to the AARP Foundation between 2002 and 2009 grew
by only 11 percent, or about $3.1 million. And funding of legal
counsel for the elderly actually decreased by about 9 percent.
The parts of AARP that fulfill its original purpose seem not to
be sharing in the bounty that has come to AARP from its
insurance-related business activities.
Another concern regarding AARP is whether they provide
excessive compensation to executives, which might suggest that
the organization exists more for the enrichment of its officers
and employees and less for the public good. In the case of
AARP, executive compensation and benefits often far exceed what
one might think appropriate for a tax-exempt organization. The
website Charity Navigator compares the compensation of CEOs at
charities and nonprofits with expenditures exceeding $500
million. And looking at these numbers, we see that compensation
for AARP's top executive is a consistent outlier, reaching as
high as $1.6 million in 2009.
In addition, AARP has maintained travel policies that
exceed what are considered ``best practice'' recommendations
developed by an independent oversight group which AARP's then-
CEO was involved in.
The differences in revenue generated and money spent
``promoting social welfare and the common good'' suggest that
AARP may have strayed from its original mission and brings into
question whether it is appropriate for it to continue to
operate as a 501(c)(4) tax-exempt organization. This is
primarily a question for the IRS, and we will be asking them to
conduct a review.
Let me end by saying that as chairman of the Ways and Means
Subcommittee on Oversight, I take this committee's
responsibilities on oversight very, very seriously and I intend
to take a closer look at the IRS's administration of the tax-
exempt sector and whether the IRS is adequately overseeing the
practices of tax-exempt organizations.
I yield back the balance of my time.
Chairman HERGER. Thank you, Mr. Boustany. I now recognize
Representative John Lewis, ranking member of the Subcommittee
on Oversight, for the purposes of making an opening statement.
Mr. LEWIS. Thank you, Mr. Chairman, for holding a hearing
on tax-exempt organizations. However, I do not think we should
single out just one organization. While I agree that
organizations that enjoy a special tax status should justify
the reasons for their exemption, I know there are about 140,000
other organizations that share the same tax status.
Mr. Chairman, while it is our duty to provide oversight of
the nonprofit sector, I am saddened that you have chosen to
fulfill your duty in the manner displayed today. You and I both
know that this hearing is politically motivated and driven by
AARP's support for the Affordable Care Act.
Your report admits that all of the information contained in
it came from publicly available documents, filed in accordance
with the law. There is nothing new here today, nothing that is
not already public, nothing that sets AARP apart, no unveiling
that I can see.
I am mindful that the majority wants to cut Social
Security. They want to cut Medicare. They want to cut programs
that help the poor. I can only surmise that the true intent of
this hearing is to harm the reputation of AARP or to silence
their voice as we move closer to this debate.
If there was a plan to provide real oversight today, we
will have before us other organizations who share the same tax
status as AARP, like 60 Plus. We would have more organizations
like Tea Party Patriots, American Crossroads GPS, and American
Action Network. They all share the same tax status as AARP and
played a major role in the elections.
If there was a real plan today, we would have before us a
$2.2 billion a year racetrack and casino operating in Iowa
under the same tax-exempt status as AARP. I find this unreal.
It is unbelievable. If oversight were the true goal, we would
look at the compensation paid by other tax-exempt
organizations, including those that opposed health care reform,
like the Chamber of Commerce, AHIP, AND NFIB. All pay their
executives well, and more than AARP.
Based on all of this, I believe that there is no plan for
oversight today. We have before us a single witness, a biased
report, and the use of committee resources to settle a score.
This is nothing other than a political witch hunt. The Ways and
Means Committee is better than this.
I ask my colleagues: Who is next? Who else is on your list?
My college? Your church? This is a dangerous game to play.
In closing, I am pleased to have before us today a
nationally recognized expert in the law of tax-exempt
organizations professor, Professor Frances Hill. She wrote one
of the leading treatises in this area, and I look forward to
her testimony.
I yield back the balance of my time.
Chairman HERGER. Thank you, Mr. Lewis.
I would now like to turn to the subcommittee's first panel.
Today we are joined by Barry Rand, Chief Executive Officer of
AARP, who is accompanied by Lee Hammond, President AARP Board
of Directors. Mr. Rand, thank you for agreeing to testify
today. You will have 5 minutes to present your testimony. Your
entire written statement will be made part of the record.
You are now recognized for 5 minutes.
STATEMENT OF A. BARRY RAND, CHIEF EXECUTIVE OFFICER, AARP,
WASHINGTON, D.C.; ACCOMPANIED BY LEE HAMMOND, PRESIDENT, AARP
BOARD OF TRUSTEES
Mr. RAND. Thank you, Mr. Chairman. Good morning. I am Barry
Rand, CEO of AARP. And joining me this morning is Lee Hammond,
President of AARP and a member of the AARP Board of Directors.
Lee, like all 22 members of our board, is an unpaid volunteer.
AARP is proud of our record. Throughout our more than 50
years of service, we have worked tirelessly to promote
nonpartisan policy solutions, to improve the marketplace, to
enhance the public good, especially for those 50 and older, and
we will continue to do so in the future.
We are a strictly nonpartisan organization. We do our work
in a very public way. Since its founding, AARP has made
information about its finances, mission, and governance
available to the public. We post on our Web site our annual
reports, financial statements, IRS Form 990 tax returns, and
detailed breakdowns of our revenues and expenditures.
This is why we are surprised and disappointed both by the
title and substance of the report a few members released this
week: ``Behind the Veil: The AARP America Doesn't Know.'' There
is no veil. Quite frankly, we disagree with each of the
conclusions drawn in this one-sided report.
First, we reject the allegation that our public policy
positions are influenced by our revenues. Our policy positions
are set by our all-volunteer board of directors based on the
needs of the 50-plus population. They are determined totally
independent from revenue considerations. We have long
maintained that we would forgo revenue in exchange for lifetime
health and financial security for all older Americans. The
revenues we earn from royalties allow us to keep membership
dues low, currently $16 a year, while providing outstanding
benefits to members and to all Americans age 50 and older.
We also reject the conclusion that we are not good stewards
of our nonprofit status. The revenue that AARP receives from
lending its name to products and services goes directly to
fulfilling our mission and serving people 50-plus.
Our mission includes three major areas. We work to make
sure that people have access to affordable, quality health
care. We work to make sure that people have the opportunity to
achieve lifelong financial security, and we help and empower
people 50-plus to live their best lives. These are the
principles AARP was founded upon.
Dr. Ethel Percy Andrus, a retired educator from California,
was appalled when she discovered a retired teacher living in an
old chicken coop, so she began a campaign to get affordable
group medical insurance for retired teachers, creating the
first group health insurance plan for people 65 and older in
the country, a decade before Medicare.
In 1958, she created AARP for seniors across the country
who needed health insurance for themselves. Through AARP, Dr.
Andrus also envisioned a better life for seniors that included
health and economic security and opportunities to remain active
and productive members of society. When we look at what Dr.
Andrus did, it is truly remarkable. She came up with a
creative, marketplace solution to what was then considered to
be an unsolvable problem: providing access to health care for
seniors. She changed the market by bringing seniors together
who shared those needs. We have followed Dr. Andrus' lead ever
since.
Lee, our other volunteer leaders, and our dedicated staff
are the guardians of that legacy today. We are leading efforts
to improve life for all generations by working to provide
access to quality, affordable health care, including lower
prescription drug costs; improve and protect financial
security, including Social Security; fighting age
discrimination; and we advocate for consumers. For example,
AARP has supported bipartisan legislation, including the
Lifetime Income Disclosure Act, which will provide consumers
with better information about their 401(k) plans.
We are also proud to endorse strengthening the Medicare
Anti-Fraud Act. This bill, sponsored by the chair and the
ranking member of the Health Subcommittee, empowers the
government to reduce Medicare fraud.
AARP also provides direct assistance to Americans. For
example, as we sit here today, more than 30,000 AARP tax aide
volunteers are helping 2.6 million taxpayers prepare their
taxes. In 2010, 193,000 people with low incomes received a
total of $233 million in earned income tax credits. Last year,
AARP volunteers helped more than 526,000 people stay safe on
the roads through our driver safety program. Also in 2010, our
advocacy efforts helped consumers save more than $3 billion in
lower utility costs.
Last year, more than half a million people visited our
``Create the Good'' Web site, connecting with more than 260,000
volunteer opportunities in their communities.
Today, AARP and the AARP Foundation, in partnership with
NASCAR's Jeff Gordon and Hendrick Motorsports, are leading the
``Drive to End Hunger,'' an effort to help 6 million American
seniors and another 6 million in their families who face the
horror of going hungry every day.
That is AARP, working to make sure that the American dream
lives on for all generations.
Thank you.
[The prepared statement of Mr. Rand follows:]
Chairman HERGER. Mr. Rand, I thank you for your testimony.
I would like to call to your attention to the monitors and
the chart detailing AARP's sources of revenue. According to
AARP's consolidated financial statement, AARP's royalty
revenue, which comes primarily from insurance companies, was
$240 million in 2002 and grew to $657 million in 2009, an
increase of nearly 200 percent. During this same period AARP's
revenue from membership dues, advertising and Federal and other
grants, have remained relatively flat. It is safe to say that
AARP could not operate or function as it does today without the
money it makes from its insurance business, which certainly
raises suspicion about where AARP's motives lie.
If AARP did not have the nearly one-quarter of a billion
dollars in royalty payments coming in, most of which are from
insurance companies, what sort of changes would AARP need to
make?
Mr. RAND. Quite frankly, AARP is very proud of the fact
that its membership dues are kept low. We work at keeping them
low. In fact, the directive from the board is we want to keep
membership dues low. We don't expect to extract incremental
dollars from our membership. We invest in it. So we are proud
of that particular fact.
Now, royalties, royalties from health insurance companies,
royalties from financial products, royalties from other
products, life-style products, we believe that part of the
solution to meet the unmet needs of the 50-plus population----
Chairman HERGER. Mr. Rand, if you could answer my question.
If you did not have these huge profits from the insurance
companies, what would you do? What would that do to you?
Mr. RAND. It would decrease our ability to serve 100,000
50-plus and 37 million members. All of our revenue, all of our
revenue, goes toward our mission.
Chairman HERGER. So in other words, this is very important,
the revenues you are bringing in from the profits that are
made, the royalties that are made from your insurance
companies; is that not correct?
Mr. RAND. It is very important to our members and it is
very important to the 100,000 50-plus.
Chairman HERGER. So, therefore, you have a great interest
in those revenues, those royalties being high, as we have seen
the huge increases that have taken place in a relatively short
period of time?
Mr. RAND. As you know, royalties are tax exempt. But let me
tell you what we do with the money.
Chairman HERGER. Just answer my question. You have a great
interest in that those royalties be high because your dues
would be higher if they weren't; is that correct?
Mr. RAND. Would you like me to tell you where our interests
lie?
Chairman HERGER. Just yes or no. Is that correct?
Mr. RAND. Obviously, it would----
Chairman HERGER. Answer the question, please.
Mr. RAND. The answer is we have an interest in meeting the
unmet wants and needs of our population. That is what our
interest is. This is not something that we devise. All of these
insurance products come from our members and the 50-plus
population who say we have these needs. They give us their
needs and wants, and if they are in the insurance area, we
convey those to potential providers of insurance. That is what
we do.
Chairman HERGER. I understand. Again, I would appreciate if
you keep to answering my question, if you would. I thank you
for that.
You stated in your testimony under the Democrat health care
overhaul, that the AARP's branded insurance plans for 50 to 64-
year-olds will become obsolete and AARP will no longer receive
revenues from those plans.
Can we take from that statement that AARP will not endorse
or sell insurance in the government-run exchanges and that AARP
will not accept any royalty or commission payments or licensing
fees from any insurance plan operating in the exchange? And
will you make that commitment today?
Mr. RAND. We don't sell insurance, Mr. Chairman.
Chairman HERGER. You do receive royalties which would rank
you as the sixth largest health insurance company in the United
States; is that not correct?
Mr. RAND. The answer is that we are not an insurance
company. We do not sell insurance. We don't underwrite any
insurance.
Chairman HERGER. Do you not receive the sixth highest
royalties of any insurance company in the United States?
Mr. RAND. Excuse me. Could you just repeat it?
Chairman HERGER. Do you not, AARP, does not AARP in
royalties receive the highest, the sixth highest profits of any
health insurance company in the United States? Is that not a
correct statement?
Mr. RAND. It is not correct. We don't receive profits, sir.
Chairman HERGER. Royalties.
Mr. RAND. I don't know what the----
Chairman HERGER. You receive royalties that would rank you,
and again this is public information, that would rank you as
the sixth largest for-profit, were you a for-profit, which the
IRS does not rank you as, and that is one of the purposes of
this hearing, would rank you as if you were an insurance
company. Well, anyway your public information would indicate
that.
Mr. RAND. Yes.
Chairman HERGER. Finally, I would like to highlight the
recent comment from an AARP spokesman that, quote, ``AARP is
committed to transparency, and the hearing will provide us yet
another opportunity to answer any questions.''
I found this quote somewhat refreshing given AARP's
repeated refusal for 18 months to provide members of this
committee financial documents relating to the AARP Insurance
Plan, AARP Services, and details about AARP's Medicare
insurance contracts. Given your new commitment to transparency,
I have a few questions I would like you to answer or to commit
to answering on the record.
In 2007, AARP retained 4 percent of every Medigap insurance
premium it received. In 2009, AARP retained 4.95 percent of
premiums paid for every AARP Medigap policy. Could you tell us
how you decided on 4.95 percent and what went into that
conclusion? What percentage of AARP's Medigap premiums will
AARP keep in each year from 2011 until the current contract
expires in 2017?
Mr. RAND. May I address your premise?
Chairman HERGER. I would like you to address my question.
Mr. RAND. That is what I think I am trying to do.
Chairman HERGER. Premise and question are two different
things. If you can address my question.
What went into your decision for AARP to increase its
royalties from 4 percent to 4.95 percent, first of all? And
what percentage do you anticipate that AARP will keep from each
year from 2011 to 2017? So if you could address my question,
please.
Mr. RAND. Number one, the royalties have nothing to do with
the premiums of the beneficiaries. Nothing to do with the
premiums.
The premiums----
Chairman HERGER. That is not my question. I asked you what
went into your decision that it would be 4 percent and what
went into your decision to increase it from 4 to 4.95? That is
my first question.
Mr. RAND. That was simply a renegotiation between United
and AARP.
Chairman HERGER. Could you tell us what percentage AARP
Medigap premiums, what you will keep in each of the years, the
year we are in, 2011 through 2017, which is what your contract
runs for? Will it go up again? Will it remain at 4.95?
Mr. RAND. I can't answer the future. We have not talked
about that.
Chairman HERGER. Okay. How much money did AARP earn on
investing seniors' insurance premium money before kicking a
portion of the premiums back to United in 2008, 2009, and 2010?
Mr. RAND. The premiums from the beneficiaries since 1958
have gone into a trust, a legal trust. It has been the
collecting portion of these checks and beneficiary----
Chairman HERGER. Again, if you can ask my question. That is
public information that you are stating. We all know that. What
we don't know and what you would not answer when we requested
from you and what my question is: What portion of the premiums
did you give back to United, money before kicking in a portion?
Mr. RAND. All of the money that we took----
Chairman HERGER. How much did you earn in investment before
giving it back? That is my question which is not public record.
Mr. RAND. Do you mind if I answer it in two parts, sir?
Chairman HERGER. If you answer it, yes.
Mr. RAND. The first part, any interest that we have goes
back to our mission which means it goes back to the 50-plus----
Chairman HERGER. That is not answering my question. You
have stated that already. Could you be precise in answering my
question which you are avoiding and which you would not answer
for 18 months?
Mr. BECERRA. Mr. Chairman, I am not certain what is going
on here, but to some degree the witness is entitled to an
opportunity to try to respond. If the chairman or any member
does not believe that is responsive, and certainly we are
entitled, as members, to try to extract as best an answer as we
can. But at this stage I think you are preventing the witness
from responding.
Chairman HERGER. The gentleman has not been recognized.
Let me just say that I will take that as you refuse to
answer my question.
Mr. RAND. No, I am. No.
Chairman HERGER. Either answer my question or we will move
on to the next one because you are not answering the questions
I am asking you.
Mr. RAND. All of the money that we have that comes out of
the trust in interest goes to our mission. None of the money is
taken out of any of the premiums----
Chairman HERGER. Mr. Rand, let me say for the third or
fourth time, that is not the question I asked. I asked what is
that amount. I will take that to be as you are refusing to
answer my question, and I will move on.
Mr. RAND. Now that I understand the specificity of your
question, over the years the interest earned from the trust,
which is AARP's trust, is--would vary anywhere from $60 million
to $90 million depending on the years.
Chairman HERGER. Thank you. I would like you to answer that
maybe in writing if you don't have that to our committee.
How much does AARP receive annually for the years of use of
AARP's brand for AARP Medicare Advantage insurance plans and
AARP Medicare prescription drug insurance plans each year over
the course of the current contract?
Mr. RAND. I can give you a cumulative answer, if that will
suffice, because I don't have it by the individual insurance
products. It is roughly $420 million, $430 million that we get
in royalties from United Health Care from their ability to use
our brand on their products.
Chairman HERGER. I believe that is already publicly known.
Could I request you to respond in writing to that?
Mr. RAND. We can respond in writing, yes.
Chairman HERGER. With the answer?
Mr. RAND. Yes.
Chairman HERGER. I thank you.
[The information follows: [The Honorable Mr. Herger, The
Honorable Mr. Boustany, and The Honorable Mr. Reichert-Letter
to AARP]
I now recognize the ranking member, Mr. Stark, for 5
minutes.
Mr. STARK. The report from my colleagues across the aisle
raises some objections to the AARP sponsoring NASCAR driver
Jeff Gordon. This raises questions, according to their report,
about whether scarce taxpayer dollars are being used to sponsor
a NASCAR team. You do sponsor a NASCAR team?
Mr. RAND. The answer is yes. We sponsor what we call the
Drive to End Hunger car.
Mr. STARK. I guess if it is bad for AARP to do that with
taxpayers dollars, it is okay for the Pentagon to do it?
I would like to insert in the record the rollcall vote of
February 18 of this year, an amendment offered by Ms. McCollum
of Minnesota that would eliminate $7 million in funding used by
the Department of Defense to sponsor a NASCAR vehicle. I would
also note that my colleagues, Mr. Herger, Mr. Boustany, and
most of the Republicans on this committee, voted against that
amendment. So if you did vote with us, the four who did in
eliminating this funding, Mr. Tiberi, Mr. Mr. Ryan, Mr.
Reichert, and Ms. Jenkins, thank you. But it seems to me there
is a difference here that it is okay to spend taxpayer funds on
NASCAR by the Department of Defense, maybe it helps them to
learn how to fly those airplanes, or whatever they are doing,
but then to insinuate that you all, AARP, was doing something
sinister, that just doesn't seem quite right to me. And I
wonder, Mr. Rand, can you explain why AARP makes this
investment in NASCAR and why you think it is valuable?
[The information follows The Honorable Mr. Stark,
Submission 1, Submission 2, Submission 3:]
Mr. RAND. Well, number one, we don't make the investment in
NASCAR, we are making the investment in a coalition of both
awareness and partners to end what is an insidious issue in
America, which is 51 million people who suffer from hunger, who
go to bed every night struggling to figure out how to get their
next meal.
Mr. STARK. So you make money?
Mr. RAND. We don't make any money on this.
Mr. STARK. There is revenue that comes out of this NASCAR
thing?
Mr. RAND. No, we take our revenue and invest in this issue.
Mr. STARK. Which is to help?
Mr. RAND. End hunger, bring attention to hunger, have
partners to help us with hunger, to figure out how we can have
a national network that helps with the infrastructure, access
to food, delivery of food, awareness of the issue.
We believe that we have over 6 million seniors who suffer.
We have another 6 million that includes their family, that is
12 million.
Mr. STARK. Thank you. Now, can you explain what the
Department of Defense does with the money they make on their
NASCAR involvement?
Mr. RAND. I can't, sir.
Mr. STARK. Do you suppose they bomb Yemen? Do you have any
ideas what they might do with it?
Mr. RAND. No, sir.
Mr. STARK. I don't either. It seems to me if it is all
right for our people in uniform, it ought to be all right for
us old folks who haven't worn the uniform for 40 years. Does
that make sense to you?
Mr. RAND. It makes sense to me.
Mr. STARK. All right.
Thank you. Thank you, Mr. Chairman. We have a new chairman.
Thank you. I yield back the balance of my time.
Chairman BOUSTANY. [Presiding.] Thank you, Mr. Stark.
Mr. Rand, I want to put a chart up, and it is chart number
7. If we can put the chart up on the screen for the viewing
audience. I would like to call your attention to chart 7
because to maintain tax-exempt status an organization must be
operated exclusively for the promotion of social welfare and be
primarily engaged in promoting the common good. This chart is
derived from your consolidated financial statements. The red
line shows royalty revenue. It shows royalty revenue, including
payments from insurance companies with remarkable growth of a
200 percent increase from the year 2002 to 2009. The last
figure in 2009 was $657 million. Down at the bottom are dollars
transferred from AARP, Incorporated, to AARP's legal counsel
which actually shows a decrease of $300,000 over that time
period. And dollars in the blue would be dollars transferred
from AARP, Incorporated, to the AARP Foundation, which was $3.1
million.
So in looking at this, the for-profit entities which
brought in these royalty revenues in your charitable mission,
the growth has not kept pace, and so this calls into question
in my mind are we really meeting that obligation as a 501(c)(4)
with your charitable contributions? How does that comport with
AARP's tax-exempt status, sir?
Mr. RAND. All of our money does go to our mission. There
may be a particular program that has not kept pace with
investment, but I will tell you that with----
Chairman BOUSTANY. When you say mission, are you referring
to----
Mr. RAND. Our social mission.
Chairman BOUSTANY. There are at least $414 million on the
table here if you just do some simple math. I am just wanting
an explanation of the discrepancy here. It seems to me that
those bottom lines would not be flat or showing a decrease over
the time period.
Mr. HAMMOND. Mr. Chairman, may I answer with some
information here?
Chairman BOUSTANY. Yes, sir.
Mr. HAMMOND. I think part of the problem comes in looking
at the difference between a 501(c)(4) and 501(c)(3).
Chairman BOUSTANY. I understand that.
Mr. HAMMOND. I know you understand it, but the definition
and requirements for a 501(c)(4) are considerably different
than for a 501(c)(3).
Chairman BOUSTANY. I understand, and am going to get to
that in a moment.
Let's move on to something else. I want to follow up on
part of the inquiries that Mr. Herger was working on. In
looking at the Medigap policies, I understand that you have
licensing agreements with insurance companies; is that correct,
sir?
Mr. RAND. We have an arrangement where we have our brand
that is lent to them.
Chairman BOUSTANY. This is a licensing agreement?
Mr. RAND. You can call it a licensing agreement. We call it
a royalty.
Chairman BOUSTANY. Okay. Well, I am going to get to the
definition of royalty in a moment.
Chairman BOUSTANY. Under the immediate cap arrangement only
dues-paying members, AARP dues-paying members, are allowed to
participate in these Medigap policies; is that correct, sir?
Mr. HAMMOND. Sir, again, if I could.
Chairman BOUSTANY. Mr. Rand runs the organization. Mr.
Rand, can you answer that question?
But is it only dues-paying members that are allowed to
participate in the AARP Medigap arrangement with the insurance
companies?
Mr. RAND. I believe we have some products that you don't
have to be a----
Chairman BOUSTANY. No, no. I am talking specifically about
Medigap.
Mr. RAND. When you start out, the answer is yes.
Chairman BOUSTANY. Okay.
Mr. RAND. Some leave the program, and they stay with the
insurance, and we are happy they stay with the insurance.
Chairman BOUSTANY. Okay, okay. Fair enough, fair enough.
And you receive in this arrangement--at least based on the
information we have gathered from public records and so forth
and your consolidated statement--you receive the premiums that
are collected from these beneficiaries in the Medigap policies;
is that correct, sir? You collect the premiums.
Mr. RAND. They are collected in the trust fund.
Chairman BOUSTANY. Right, the grantor trust.
Mr. RAND. That is correct.
Chairman BOUSTANY. Which is part of AARP?
Mr. RAND. That is correct.
Chairman BOUSTANY. Right.
Mr. RAND. Since 1958.
Chairman BOUSTANY. That is right. And you have retained
4.95 percent of those premiums as royalty?
Mr. RAND. No, sir, that is incorrect. We don't retain any
of the premiums. Those premium dollars are written to the
specific insurer, United or any of the other insurers.
Chairman BOUSTANY. No, I understand they are written to the
insurer, but you have an arrangement whereby you retain a
royalty.
Mr. RAND. No, sir.
Chairman BOUSTANY. What is this 4.95 percent?
Mr. RAND. It does not come out of the premiums. The
premiums go into the trust fund, sir.
Chairman BOUSTANY. Okay.
Mr. RAND. They are then matched.
Chairman BOUSTANY. So is this a separate royalty payment by
the insurance company?
Mr. RAND. No, sir.
Chairman BOUSTANY. Where does the money come from?
Mr. RAND. If I could just complete one statement----
Chairman BOUSTANY. Go ahead, sir.
Mr. RAND. Perhaps I could be clearer.
Chairman BOUSTANY. Go ahead, sir.
Mr. RAND. The trust fund is a collection that the
beneficiaries send their checks. There are 2- to 2.5 million
checks and wires that come in. They get collected, and they are
given to the appropriate insurer, whether it is United or Aetna
or Genworth. That is part of the administration that the trust
has.
Chairman BOUSTANY. Okay. So this is an administrative fee,
you are saying? Because I have a document here from Rhode
Island, the State of Rhode Island, that shows total member
contributions, lives covered, it breaks it all down. And it
says, royalty to AARP, percent of member contribution, 4.95
percent.
Mr. RAND. That is the royalty, sir.
Chairman BOUSTANY. Well, that is what I asked you in the
first place.
Mr. RAND. I know, but royalty has nothing to do--royalty
has nothing to do with the trust fund. The trust fund just
takes the beneficiary's payment to United or Genworth or any
other insurance provider, collects the dollars, and transfers
it to the appropriate insurers. That is all it does.
Chairman BOUSTANY. So the 4.95 percent is not going to----
Mr. RAND. The royalty fee associated with our contract or a
contract that talks about we are going to lend you our AARP
logo if you do certain things associated with improving
insurance products to our members and people 50-plus.
Chairman BOUSTANY. So does the 4.95 percent go to the
grantor trust, does it go to AARP, Inc.?
Mr. RAND. It goes to us in revenue.
Chairman BOUSTANY. I know, but what entity?
Mr. RAND. AARP.
Chairman BOUSTANY. AARP. Okay. Well, let us leave that for
the moment.
Royalty income, which is excluded from unrelated business
income under section 512(b) of the Tax Code, has often raised a
number of questions, and there has been litigation. And while
royalty income that is excluded under UBIT--under the code is
an issue that is difficult, you know, a lot of times it relates
to intangible property, it is my understanding that, putting
aside the 4.95 percent issue, which you classified as royalty
earlier, you also retain these premiums for an unspecified
period of time. I am not certain what that period of time is.
Can you tell us how long AARP or an entity of AARP holds on to
those collected premiums in Medigap?
Mr. RAND. There are two processes. The first process is the
collection process. There may be 2- to 2.5 million, either
electronic--6 percent is electronic; the rest is mail. Those
are sorted through for the various accounts, i.e., United;
i.e., Genworth. So that is an administrative process.
That administrative process can take anywhere from a week
to 2 weeks or 3 weeks depending on how these checks come in.
For that period of time, as we are amalgamating the checks for
payment, that trust, financial prudence, is also in an
interest-bearing account.
Chairman BOUSTANY. Are there other investments besides a
just simple interest-bearing account?
Mr. RAND. As the money comes in, it is in an interest-
bearing account. There is no other money in there. Interest-
bearing account.
Chairman BOUSTANY. Okay.
Mr. RAND. For that week or 2 weeks, or 3 weeks, we earn a
small interest, as any interest-bearing account, as your own
checking account that you may have which is interest bearing.
Chairman BOUSTANY. I understand.
Mr. RAND. That is one issue, and I think that is the one
that you are trying to get to. That interest has nothing to do
with the insurance companies. It does not affect any of the
payments associated with the beneficiaries.
Chairman BOUSTANY. And you pay tax on that interest?
Mr. RAND. I believe we do, but I don't know.
Chairman BOUSTANY. Okay.
Mr. RAND. I mean, I will find out for you.
Chairman BOUSTANY. Yes. If you would get us the answer on
that.
Mr. RAND. I will find out for you, and we will get you that
information.
Chairman BOUSTANY. Okay. And if you would get us some idea
of how much you earn with that, I mean, what kinds of interest
earnings do you get on that and the tax paid on it, that would
be helpful.
Mr. RAND. We will give you all that information, sir.
Chairman BOUSTANY. Thank you, sir.
Chairman BOUSTANY. Now, you mentioned there is another
aspect to this. Well, let me back up a moment. This is all set
by contractual arrangement?
Mr. RAND. The trust was set by a contractual arrangement in
1958.
Chairman BOUSTANY. No, no, no, but I understand that.
But you have a separate contract with United, for instance,
or Genworth for the handling of these premium dollars which
specifies how long you might hold on to it?
Mr. RAND. No.
Chairman BOUSTANY. There are no contracts?
Mr. RAND. Well, we have a contract to do the administration
for them.
Chairman BOUSTANY. Can you provide us with those contracts,
provide the committee?
Mr. RAND. Yes, we can.
Chairman BOUSTANY. Thank you, sir.
[The information follows: The Honorable Mr. Herger, The
Honorable Mr. Boustany, and The Honorable Mr. Reichert-Letter
to AARP]
Chairman BOUSTANY. You said earlier the interest goes back
to the mission. That was kind of a broad statement. I am just
following up on a quote you gave in questioning to Mr. Herger,
and that the royalties have nothing to do with the premiums.
Can you elaborate more on that?
Mr. RAND. Premiums are what the insurance companies charge
the beneficiaries.
Chairman BOUSTANY. Right.
Mr. RAND. Separate issue. We have nothing to do with that.
Royalties come from an agreement when we go through a
process that says who can meet the wants and needs of our
membership and 50-plus populations. We understand clearly what
the unmet needs are. We take those unmet needs, and during the
process we invite, in this case, insurance companies in and say
who can do the best job in changing the marketplace to meet the
unmet needs of our seniors. Who can have the quality that our
seniors expect?
Chairman BOUSTANY. Well, I understand that.
Mr. RAND. We then----
Chairman BOUSTANY. Okay, go ahead.
Mr. RAND. We then select. When we select, we then give them
permission to use our brand, the AARP brand. For that
permission to use our brand, we have royalties and payment for
that.
Chairman BOUSTANY. Okay. Now, does AARP Services have any
role whatsoever in setting the premium rates?
Mr. RAND. The answer is no.
Chairman BOUSTANY. Okay. Thank you. That is all I have.
Chairman HERGER. Thank you.
The ranking member of the Oversight Committee Mr. Lewis is
recognized for 5 minutes.
Mr. LEWIS. Mr. Rand and Mr. Hammond, I want to thank you
for being here. I want to thank you for your great service to
the Nation and for all of your great and good work.
The Republican report states that AARP charitable
contributions only increased by 11 percent from 2004 to 2008.
Now, AARP is a social welfare organization. American
Crossroads-GPS, is an American social welfare organization. The
Tea Party Patriots is a social welfare organization. Both want
to repeal health care reform. I am not aware of any charitable
activity or contribution by either of these organizations.
Mr. Hammond, are you aware of any requirement of a social
welfare organization engaged in charitable activities? Could
you please describe for the committee a few of the charitable
efforts of the AARP?
Mr. HAMMOND. Thank you for the opportunity, Mr. Lewis. That
is one of the things I was trying to talk with Chairman
Boustany about.
A (c)(4) social impact organization is simply that. We have
established a charitable arm to (c)(3) to deal with vulnerable
populations who are in need of assistance in the very essence
of their lives to try and stay together.
The (c)(4) is working on a broader basis on our social
mission. We are looking to help people in need, and certainly
we do, but we help them in different ways. We helped 53,000 job
seekers through our 2010 job fairs. We are helping with the
drive to end hunger, which we are financing. Folks say, well,
why don't you just throw that money at hunger? Why don't you
just help feed people with that money?
Well, that would be fine, and it would feed a lot of
people, but the focus isn't that. The focus is on defeating
hunger in this country, and putting the spotlight on hunger,
and making people understand just exactly what a big problem it
is.
We have been raising money for relief in Haiti. We are
raising money for relief in Japan. As Mr. Rand stated earlier,
we have, through our advocacy efforts, saved utility customers
about $3 billion in 2010 by opposing unjustified rate
increases.
We have represented tens the of thousands of people at no
fee in cases where age discrimination is involved.
We have supported efforts through our advocacy, which is
another perfectly legal part of the (c)(4), to do the kinds of
things that our people say need having done.
We are looking at 100 million Americans who are age 50-
plus, about 37 million, plus or minus, are members, but we are
not doing it just for our members, we are doing it for
everyone.
Mr. LEWIS. Thank you, Mr. Hammond.
Mr. Rand, do you want to respond?
Mr. RAND. Well, if I were to add some clarity, this is what
I was trying to explain when we were asking the questions about
where do our dollars go in terms of a social good organization.
Roughly 25 percent of our revenue--25 percent, excuse me,
of our expenditures go to community benefits such as tax aid
and driver safety, other programs of that ilk, 25 percent of
our expenditures; member services, 240 million, about 24
percent; advocacy and research, 10 percent; communications
operations, 8 percent, and that is really focused on education
with our great magazines. Those are some examples on a higher
percentage basis well beyond the two programs that there seems
to be a chart that says they went down, but this tells you in a
broad sense that the vast, vast majority, all of our money,
really goes to our social welfare mission.
Mr. LEWIS. Thank you.
Mr. Rand and Mr. Hammond, I find it sort of strange and out
of the ordinary that if our Republican colleagues of mine are
attacking AARP today as retribution for your organization's
support for health reform, they were more than happy, as Mr.
Stark suggested, to stand with you when they created the
Medicare drug benefit.
I want to ask unanimous consent to insert into the record a
list of the quotes from my Republican colleagues when MMA was
passed. Mr. Rand, I don't believe that you were at AARP at that
time, but, Mr. Hammond----
Chairman HERGER. Without objection, that would do.
Chairman HERGER. The gentleman's time has expired.
Mr. LEWIS. Well, Mr. Chairman, I think you took much more
than 5 minutes. I know you have leeway. You were asking
questions when I went over to vote, and when I came back, you
were still asking questions. You took at least 15 minutes.
Chairman HERGER. Well, the gentleman's time has expired.
The gentleman from Texas Mr. Johnson is recognized for 5
minutes.
Mr. JOHNSON. Thank you, Mr. Chairman.
Thank you all for being here.
The health care bill cuts Medicare Advantage by $206
billion, and those cuts are going to result in millions of
seniors no longer selecting Medicare Advantage coverage either
because those plans will no longer be available to some
seniors, or because they will become too expensive and offer
fewer benefits.
I want to know if you were aware of these cuts when AARP
endorsed that legislation?
Mr. HAMMOND. Mr. Johnson, if I might answer?
Mr. JOHNSON. Sure.
Mr. HAMMOND. Yes, we were certainly aware of those cuts.
That has been AARP's position since Medicare Advantage was
first instituted. We do not believe that excess payments should
go to programs that are paid for by the other 75 percent of the
taxpayers who are involved in regular Medicare. That has been
our position and our public policy for at least 10 years.
Mr. JOHNSON. So you don't believe that people ought to be
able to choose their own health care programs?
Mr. HAMMOND. We absolutely believe they ought to be able to
choose their own health care programs. We don't believe they
ought to be subsidized into programs.
Mr. JOHNSON. Okay. The for-profit AARP's insurance plan
collects Medigap premiums, invests seniors' premium money,
earns interest on it, and then keeps almost 5 percent of the
premium amount and the interest earned off the float. The rest
of the premium is then sent to UnitedHealth Group.
AARP, Inc., the 501(c)(4), receives royalty payments
directly from UnitedHealth Group for AARP's Medicare Advantage
and Medicare prescription drug plans.
Why does AARP handle insurance profits differently
depending on whether its Medicare Advantage or Medigap? Do you
want to answer that, too?
Mr. HAMMOND. I will give it a shot, and then Mr. Rand can
fill in with anything he has to say.
Number one, Medicare Advantage is a program that is
sponsored under Medicare, not through private insurance, and it
follows all the government regulations. Therefore, the way that
that royalty payment is done is under Federal regulation.
Mr. JOHNSON. Okay. So, you didn't really tell me about
Medigap, though.
Mr. HAMMOND. And Medigap, I think--first of all, I would
like to make a slight correction in what you indicated.
All of the premiums for those issues go into the insurance
trust, the grantor trust that Chairman Boustany was talking
about. That is a legal entity that was set up in 1958 to
receive those and to hold the group policy and to receive the
premiums, hold the premiums, invest that. And, yes, we do
receive interest income for that float, which is perfectly
legal. We do take royalty payments from that money that comes
in, and then, as requested by the insurance companies to cover
their products, we return the balance of that money to them.
Mr. JOHNSON. Does AARP receive more in royalty payments for
AARP-branded Medigap than Medicare Advantage plans?
Mr. HAMMOND. I am sorry, sir, would you repeat that?
Mr. JOHNSON. Do you get more from Medigap than you do
Medicare Advantage plans that you all have started?
Mr. HAMMOND. I am assuming you are talking about royalties,
sir?
Mr. JOHNSON. Yes.
Mr. HAMMOND. Yes, we do.
Mr. JOHNSON. You do.
Mr. HAMMOND. Yes.
Mr. JOHNSON. And according to Medicare's chief actuary and
United States--UnitedHealth Care executives, the Medicare
Advantage cuts will increase enrollment in Medigap plans as
seniors look to have supplemental coverage. And the more people
that enroll in AARP Medigap, the more money AARP receives,
according to what I am given. As a result, AARP could easily
see a windfall in excess of $1 billion as a result of the
health care law.
How do you explain that to the seniors you are supposedly
advocating for? And, you know, it looks like you are raking in
the cash while they are losing benefits and paying more for
coverage.
Mr. HAMMOND. May I make one comment, sir, before Mr. Rand
answers that question?
Mr. JOHNSON. Sure.
Mr. HAMMOND. One of the priorities that we set was that no
traditional benefits under Medicare would be lost. In fact,
Medicare would be strengthened. So I just want to make that
clear in terms of benefit cuts.
Chairman HERGER. The gentleman's time has expired.
Mr. JOHNSON. My time has expired, thank you, Mr. Chairman.
Chairman HERGER. The gentleman from Washington Mr.
McDermott, Dr. McDermott, is recognized for 5 minutes.
Mr. MCDERMOTT. I think you gentlemen understand what you
are being made part of today. It is a reenactment of a play by
Arthur Miller called ``The Crucible.'' It was a play about
witches in Salem, and the evidence had to be found that these
women were all controlled by the devil.
Your sin, as you may know, is that you backed the
Affordable Care Act. Now, I am sure that the chairman has a
long list of other groups that are going to be brought in here,
and I am sure that the pharmaceutical industry will be brought
in here because they got a deal that we can't negotiate
pharmaceutical prices or prohibited--Mrs. Sebelius is
prohibited, Secretary Sebelius is prohibited from negotiating
better prices for seniors.
The pharmaceutical industry, I think they must have caught,
you know, a pretty good deal on that. That was put in, you
remember, back when they put in the drug benefit a few years
ago, and they said that they couldn't negotiate better prices
for seniors. You could do it for veterans, save quite a bit for
them, maybe 40, 50, 60 percent, but you couldn't do it for
seniors. So the pharmaceutical industry caught quite a benefit
in there, and they supported it.
I am sure we are going to have them in here to go over
their finances, and how their money is spent, and where they
get it, and how they use it for lobbying up here, and how they
get tax deductions.
And then we will probably have the medical device people up
here. I keep getting those things The SCOOTER Store saying, are
you having any trouble moving around? Well, just come on in,
and we will get you a scooter, and it will be paid for by
Medicare. And, by goodness, and they got a little old deal in
this bill that went out of here, the Affordable Care Act, and
down the list we are going to go.
Now, the question really is are we going to go after every
organization that is a 501(c)(3) and a 501(c)(4)? And if we are
going to start that, well, then we are going to have churches
in here. There ought to be some churches we look carefully at.
I mean, this is an oversight committee, and we really ought to
be going after them.
And the question that comes to my mind in listening to all
this is how did you make the decision to back the Affordable
Care Act? I don't think you just got up one morning and said,
let us back this thing. Tell us about the process that you went
through, because I want to understand why you committed this
sin. I think if you would confess your sin, maybe we could end
this hearing and you could go home. But if you won't confess as
to how you came to this terrible decision, I would like to hear
you talk about it.
Mr. RAND. Thank you very much for the opportunity to talk
about it.
First of all, as many of you all know, this is a vital part
of our mission to have affordable, accessible health care for
all Americans. It is health security. This has been our mission
for over 50 years, over 50 years.
When we talked to our members, they asked us what it was
they needed the most. We took down a list of what they said
they needed. One was no preexisting condition, because they
couldn't get insurance, and yet they were still getting sick,
and it was their leading cause of bankruptcy and loss of homes.
And so we advocated for no preexisting conditions. And, in
fact, there were many portions of the insurance industry who
were pushing against it.
Age rating. They say, we are getting older, and we are
paying 10, sometimes more, depending on the State, than a young
person as we have less out-of-pocket to pay. We don't want age
discrimination to continue. And so we advocated for taking the
10X that they were paying, and the bill has the maximum of 3X.
Then the baby boomers said, we don't have enough money to
send our kids to college and at the same time try to figure out
how to pay for their separate insurance, so we would love to be
able to have them on our insurance policy so we can do both so
we can help give them the American dream.
Closing the donut hole.
Chairman HERGER. The gentleman's time has time. If you
could close up quickly, please.
Mr. RAND. The donut hole, because it was 30 percent of the
out-of-pocket cost for seniors. We closed the donut hole
completely.
Home and community care options for those people who don't
want to go to nursing homes, and preferred----
Chairman HERGER. The gentleman's time has expired.
Mr. RAND. Thank you, sir.
Chairman HERGER. I recognize the gentleman from Washington
Mr. Reichert for 5 minutes.
Mr. REICHERT. Thank you, Mr. Chairman.
Again, thank you, Mr. Hammond, Mr. Rand, for being here
this morning.
First of all, all of those conditions that you have just
listed, I think most members on this panel, Democrats and
Republicans, would agree with. I do. So I think we are on the
same page with a lot of these things.
And I do take issue with some of the comments made as far
as this being a political witch hunt. We can demonize this,
but, you know, really what it boiled down to is a
Representative in Florida who represents a lot of seniors, who
had some questions, Ginnie Brown-Waite; the chairman of the
health committee who had some questions, and it is his
responsibility to have those questions answered. And then as
far as my part in this, I am just an old cop.
And so I hope you can understand--do you really know and
understand why you are here today? I mean, we are just wanting
to find the answers. And so I just want to go through a couple
of things.
First of all, look, we exchanged some letters, and the
responses we got back were minimal in response to the questions
that we asked. And the fact this transparency issue was
referred to earlier by the chairman where one of the comments
made is no public or confidential propriety or information--
some information is nonpublic or confidential and proprietary
to only AARP and its member benefit providers.
There is a transparency issue. After the letters were sent,
and the responses were really not adequate, we then had a face-
to-face meeting with your CFO, then-CFO Tom Nelson. Tom Nelson
and others could not answer the questions that I posed to them.
They couldn't answer the question of what happens to the one
out of four seniors who will lose Medicare Advantage. What
happens to those?
You have actuarial scientists working in your organization,
I assume; is that correct? Just yes or no, because my time is
limited.
Mr. RAND. Yes.
Mr. REICHERT. I would assume.
Mr. RAND. Excuse me, I don't believe we have actuarial,
because we are not in the insurance business. So I don't----
Mr. REICHERT. You must have actuaries who can map out your
future for you, right? I mean, you are a large organization.
You have to have actuaries. I would think that your actuaries--
--
Mr. RAND. If we do, I will give you the answer.
Mr. REICHERT. Yes. Thank you.
The actuaries have to look out forward and say, you know,
we can predict what is going to happen to these one out of
every four seniors, how much insurance they may lose, what it
is going to cost, what its benefits are for AARP or not, what
United Way--you know, what the impact and effect will be.
But we finally had to end up calling in help from the IRS.
So this report, as people referred to it as a Republican
report, is a report that was formed with the help of an IRS
personnel who assisted our staff in going through this
information. This isn't made?up information; this is accurate,
statistical information gathered through a very serious
analysis of the monies that you are making in revenue versus
the monies that you are distributing in your 501(c)(3).
Now, look, one of the answers that Tom Nelson gave me is
that, you know, this whole thing is to protect the greater
good, which kind of goes to one of your mission statements,
enhance the public good. But what about protecting the American
seniors? You know, when you talk about Medicare Advantage, and
we don't want others shouldering the burden of paying these
additional premiums to allow others to have insurance, the
whole health care bill is built on that; am I not correct? Yes
or no, please. The whole health care bill is built on others
for helping to provide for others; is that not true? So why
would you be against Medicare----
Mr. RAND. The answer is yes. There are many elements that
are there.
Mr. REICHERT. Thank you.
So why would you be against another program that really is
helping seniors and others are shouldering the burden? That
doesn't make any sense to me.
The fact that you support these cuts, it is amazing to me.
Mr. RAND. Can I----
Mr. REICHERT. Protecting AARP's dues members, aren't you
concerned about that? AARP, you are not suggesting, I hope,
that the half trillion dollars in Medicare cuts that will
jeopardize seniors' access to health care is good for seniors,
are you?
Mr. RAND. No. And I am at your ready when you would like
for me to respond.
Mr. REICHERT. You keep records, I mean, meticulous records,
right?
I would just like to say, sir, if you could provide me with
the list of times that you visited the White House, I would be
interested in that.
[The information follows: The Honorable Mr. Herger, The
Honorable Mr. Boustany, and The Honorable Mr. Reichert-Letter
to AARP]
Mr. REICHERT. Thank you, Mr. Chairman.
Chairman HERGER. The gentleman's time has expired.
The gentleman from California Mr. Thompson is recognized
for 5 minutes.
Mr. THOMPSON. Thank you, Mr. Chairman.
I just want to state for the record that I believe it is
totally appropriate that we look at tax status. I think it is a
very, very important thing to do. And this committee certainly
has the jurisdiction and responsibility to review this issue. I
think our taking it on is very appropriate.
Also, however, I want to state that that review, I believe,
must be fair and impartial, and it should not be done to carry
out some sort of political vendetta.
After AARP supported the Medicare Part D measure, and that
was support that, I might add, was touted by then-President
Bush, Speaker Hastert, Chairman Thomas of this committee,
Chairman Tauzin of the other committee with jurisdiction,
AARP's financial interest, I think, was probably more clear
then than it is after their support of the health care measure.
And there was no question as to whether or not their tax status
should be looked at. There was no oversight of AARP at that
particular time. And I just find it curious that we are looking
at it at this particular time.
And I think we have to ask the question is this political
payback, or will this committee be reviewing the tax status of
other nonprofit organizations that get involved in the
political process, such as 60 Plus, the Republican-leaning
group that claims that it is the alternative, the conservative
alternative, to the AARP?
I am a little mystified as to why they are not here; or
American Crossroads or the Tea Party Patriots, for that matter;
or churches that may take political positions; or even
corporations, multibillion-dollar corporations who show
multibillion dollars of profits, and then we read in the papers
they don't pay one single dime of corporate taxes.
I think it is a very slippery slope where we are going down
today, and I just want to make sure that everybody recognizes
that. And I would like to see this committee get back on its
regular order, as a course of business.
I wanted to give Mr. Rand an opportunity to finish his
comments. Mr. McDermott had asked a question, and I don't think
he had a chance to finish his. Will he be coming back?
Mr. HAMMOND. He will be coming back. If you would like to
phrase the question, if it is appropriate with the chairman,
that I will be glad to try and give you an answer.
Mr. THOMPSON. Why don't you go ahead and finish up where he
had left off.
Mr. McDermott, do you want to rephrase?
Mr. MCDERMOTT. Yes. My question really was the process by
which you arrived at the decision to back the Affordable Care
Act. And he was describing the things that the members had
talked about and wanted, but never got to how that decision was
made.
Mr. HAMMOND. That decision was made by the board after what
seemed like torturous hours of discussion. And I think as Mr.
Rand stated, the decision was made based on the principles that
we wanted to see included in any health care reform act. These
are the principles, the things that our members told us they
wanted to see in the act, and, as Mr. Reichert indicated, they
are things that almost all Members of the Committee agreed
with.
We would love to have seen that done on a bipartisan basis,
because that is the way we try and operate, but we felt that we
had to support that act because of those principles and the
benefits that it would give to seniors.
Mr. THOMPSON. Mr. Lewis, you were kind of abruptly cut off
during your questioning. Would you like to take the remainder
of my time to finish asking your question?
Mr. LEWIS. I appreciate it. But I think you made the point
that I had planned to make.
Mr. THOMPSON. Thank you. I yield back.
Chairman HERGER. The gentleman yields back.
I request unanimous consent that the investigative report
``Behind the Veil: The AARP America Doesn't Know'' be entered
into the record. Without objection----
Mr. BECERRA. Reserving the right to object. Reserving the
right to object.
Chairman HERGER. The right to object has been recognized.
Mr. RANGEL. Reserving the right to object--I haven't
objected because there is just some question as to whether this
is an official document, who prepared it, is it a political
document, is it a Ways and Means document, is it a
congressional document?
I see your name on it and, of course, my colleague Mr.
Reichert, but I have been waiting to see where this came from.
And so if you put it in the record, how would you identify it
as to what we would look forward to in reading it? If you could
help me, I am certainly anxious to withdraw any objection at
all.
Who paid for it? Where did it come from? Is it a campaign
document? Did it come from the Republican Congressional
Campaign Committee, or is it a Ways and Means document without
a seal? God knows, I know what seals mean.
Chairman HERGER. The gentleman, I might mention that the
whole purpose, the object of this hearing is on this report.
The committees, on a regular basis, submit and are accepted by
unanimous consent documents that are not involved with this
hearing.
If the gentleman doesn't remove his objection, we will call
for a vote.
Mr. RANGEL. No--I am going to remove--there is one
question: Who paid for this report? Where did it come from? Why
is there no identification? Is it a Federal report? That is all
I am asking. I don't want a roll-call vote, I am ready to roll
over and accept it.
But I just want to know why there only two Members' names
on it, and why is the source of this information not put on the
cover, so when I do read it fully, I would know who paid to
have this done. If the government paid for it, I would think--
--
Chairman HERGER. Again, the gentleman--it has on the report
who has asked for it, so my name and Congressman Reichert's
name are on it. So it is indicated here.
Again, if the gentleman--would the gentleman like a vote?
Mr. RANGEL. I want to withdraw my objection. All I am
asking for is who paid for the report and where did it come
from. I don't want to make a big issue out of this. Did you and
your colleague pay for this?
Chairman HERGER. I appreciate. I think if the gentleman
looks at the report, I think it is obvious where----
Mr. RANGEL. It is not obvious, and you can direct my
attention to what I am missing.
Chairman BOUSTANY. Would the chairman yield to me for a
minute?
Chairman HERGER. I yield to the gentleman.
Chairman BOUSTANY. It is my recollection that Mr. Stark
issued a similar report in the context----
Mr. RANGEL. He may have been wrong in doing that. You know
Stark. You know him, and I know him, and I would never use
Stark----
Chairman BOUSTANY. But since you are admitting that----
Mr. RANGEL. I wouldn't want to use Stark as to what this
committee should be doing.
Chairman BOUSTANY. But to my friend from New York, the
report was prepared by two Members of the Committee.
Mr. RANGEL. You two did it. That is all I want to know. You
did it, you paid for it, and so that answers my question. I
remove any objection.
Mr. BECERRA. Reserving the right to object.
Chairman HERGER. The right to object has been reserved.
Mr. BECERRA. Mr. Chairman, I am not interested in rolling
over. I would like to know, are we saying this was a report
that was produced by just two particular members of this
committee? And if it was produced by just two particular
members, I am interested in understanding, is this a committee-
generated report, and, if so, at what point was it shared with
the other Members of the Committee?
Chairman HERGER. Again, it is on the report, as was
mentioned to the gentleman from New York. There were actually
three Members; former Congresswoman Ginnie Brown-Waite was also
involved. Again, I think it is very clear.
Mr. BECERRA. So were committee resources used to generate
this report, or was this done through Members' own member
account monies or through some private account monies?
Chairman HERGER. This has been done through the same
account, through committees, through our Member's account, as
would be done if you had asked, the gentleman from California
had asked for a report or anyone else.
Mr. BECERRA. Of the committee or of my staff? I am trying
to determine whether this is a committee----
Chairman HERGER. Would the gentleman like a vote, or would
the gentleman remove his----
Mr. BECERRA. I am reserving the right to object. I am
hoping to get responses to the question, because the report
doesn't identify, other than by saying investigative report
prepared by Reps Wally Herger and Dave Reichert.
Does that mean that this was prepared, Mr. Chairman, by you
as a Member and Mr. Reichert as a Member, or as you as chairman
using the resources of the Ways and Means Committee?
Chairman HERGER. Okay. We need to move on. Is the gentleman
objecting or not objecting? I think we have discussed it.
Mr. BECERRA. I do object.
Chairman HERGER. Would the gentleman like a vote?
Mr. PASCRELL. Reserve the right to object. Am I recognized?
Chairman HERGER. The gentleman is recognized.
Mr. PASCRELL. Thank you. Thank you.
There is no date on this report either. And if we were
supposed to consume it so that we could respond and ask
questions today, we certainly were not given much time.
Are you telling us, Mr. Chairman, and a very simple
question, this is like any other report that this committee
asks for, and the people who worked on it were paid their usual
salaries, nothing more, nothing less? There was no external
force used to put this together?
Chairman HERGER. The gentleman--we need to move on with
this hearing.
Mr. PASCRELL. No. We don't need to move on unless we get an
answer.
Chairman HERGER. Then why don't we have a vote.
Mr. PASCRELL. We are not moving on until we get an answer.
It is a fair question. What the heck is so complicated about--
--
Chairman HERGER. Okay. I remove my unanimous consent.
Mr. PASCRELL. Good.
Chairman HERGER. I remove my unanimous consent.
Mr. KIND. Mr. Chairman. Reserving the right to object, Mr.
Chairman.
Chairman HERGER. I have removed my unanimous consent
request, and we are going to move on.
Mr. KIND. Mr. Chairman, could I just ask a simple question?
We don't want to make a big deal out of this. Who prepared the
report?
Chairman HERGER. The gentleman is not recognized.
Mr. KIND. If your staff prepared the report, just say so,
so we have an understanding. But we are not clear who prepared
the report, and that is all we are asking today.
Chairman HERGER. Okay. The gentleman from Illinois Mr.
Roskam is recognized for 5 minutes.
Mr. ROSKAM. Well, Mr. Rand, back to you in the booth. A
couple of questions. Earlier in your testimony, in your written
testimony, on the first page down at the bottom, you said an
interesting thing. Let me just read two sentences of your
testimony, and let me just make a couple of inquiries in light
of some of your responses to Mr. McDermott and Mr. Lewis. You
said, we have long maintained that we would forego revenue in
exchange for lifetime health and financial security for all
older Americans. As an example of this, it is very unlikely
under the Affordable Care Act the AARP-branded insurance plans
for 50- to 64-year-olds will become obsolete and we will no
longer receive revenue from those plans.
Is it your intention to forego future revenues or royalties
or sources of income as the Affordable Care Act rolls in, and
are you committing today that you are not going to be earning
any of those revenues or royalties or sources of incomes from
areas that are in the exchange?
Mr. RAND. We really haven't had a conversation. We really
haven't had a conversation about the exchange and a strategy
about the exchange.
Mr. ROSKAM. But that is what you are implying in these two
sentences, aren't you?
Mr. RAND. No, I am not.
Mr. ROSKAM. Okay. But when you say that we would forego
revenues if this happened, and as an example of that, we are
foregoing revenues, that is a reasonable implication of those
two sentences together, isn't it?
Mr. RAND. If it is reasonable for you, I would not say no.
It is not the intent. You are putting two sentences together,
and perhaps it was my lack of clarity.
Mr. ROSKAM. No, you put two sentences together.
Mr. RAND. That is right.
Mr. ROSKAM. And I have read them together in context; isn't
that right?
Mr. RAND. Would you like me to clarify them for you?
Mr. ROSKAM. Yes, but let me put it in this context.
Mr. RAND. Yes, sir.
Mr. ROSKAM. You gave earlier a description of some of the
elements of the Affordable Care Act.
Mr. RAND. Yes, sir.
Mr. ROSKAM. And I understand those. I made a note, no
preexisting conditions. You referenced the age rating changing
from 10X to 3X, the baby boomers keeping children on their
coverage, closing the donut hole, home community care options,
and there were other things that you got cut off based on time
that were attractive to you.
Mr. RAND. Yes.
Mr. ROSKAM. What are the weaknesses of the Affordable Care
Act that compel you to keep an option open that would suggest
if the Affordable Care Act isn't successful, that you may have
to continue in the revenue royalty or income element of this in
order to preserve your mission? What are the weaknesses of the
Affordable Care Act that compel you to keep the option open?
Mr. RAND. Let me explain the intent of my statement. We
have long been accused by some elements of being in this for
money, for revenue.
Mr. ROSKAM. Hold that thought. I want to come back to it.
Let me just highlight some of the folks that have accused you
of that, because it is interesting. Our panel members really
don't disappoint, do we?
The gentleman from California Mr. Stark said that you -
``AARP members know that they are being sold out by an
organization'', i.e., you, ``from past conduct, not your action
in the Affordable Care Act.''
The gentleman from New York Mr. Rangel said that ``AARP has
forgotten where they come from, because once you get into the
business of making money with the devil, you forget your
mission.''
And the former Speaker Ms. Pelosi said--she complained that
``you were in the pocket of Republicans at that time and
suggested that you had a financial conflict of interest.''
So your point is you have received a lot of criticism from
a lot of circles. Now, go ahead.
Mr. RAND. That was not my point. That was your point.
The issue at stake here is that our mission started in the
1950s. I was 14 years old when the mission was stated, and that
mission is that every American should have access to affordable
health care and, therefore, health care security for life.
The question becomes, one of many, one is affordable. Right
now we are having conversations about Medicare as if Medicare
is the problem. Medicare is a recipient of the expenses of many
industries.
Mr. ROSKAM. Look, I understand that. So the question is----
Mr. RAND. Affordability, sir, I think is the answer.
Mr. ROSKAM. And the Affordable Care Act doesn't satisfy you
that it is going to maintain affordability, and, therefore, you
need to keep the option open to sell and be involved in these
products in the future. Is that really it?
Mr. HAMMOND. May I help with that?
Chairman HERGER. The gentleman's time has expired.
The gentleman from New Jersey Mr. Pascrell is recognized
for 5 minutes.
Mr. PASCRELL. Thank you, Mr. Chairman.
Mr. Rand, you are a tax-exempt, private corporation.
Mr. RAND. Private association, yes, sir.
Mr. PASCRELL. Mr. Chairman, I have a couple of questions
for you, Mr. Chairman.
I would like to know whether or not we think or you think
that there are specific laws that have been broken here with
regard to this tax-exempt organization? Is that one of the
reasons or the reason why we are having this hearing?
Chairman HERGER. That is an improper parliamentary inquiry.
Mr. PASCRELL. Oh, it is.
My second question to you is this: What laws do you think
have been broken, since we look at policy? We are not looking
at corporate policy here, we are looking at national policy.
That is our responsibility.
Chairman HERGER. I thank the gentleman. Again, that was
outlined in the report that we have. That is why we are
requesting the IRS to look into this and let them decide
whether or not they properly should be paying taxes on the
large amounts of money that they seem to be benefiting from,
legislation that was passed.
Chairman BOUSTANY. Mr. Chairman, if you would indulge me
for a moment.
Mr. PASCRELL. I will.
Chairman BOUSTANY. As chairman of the Oversight Committee,
I think there are legitimate questions that call into question
whether there is a violation of for-profit or nonprofit status,
and I think there are legitimate questions about what is
taxable income versus nontaxable income.
Mr. PASCRELL. May I have my time back, please?
Chairman BOUSTANY. Yes.
Mr. PASCRELL. May I have my time back?
Chairman BOUSTANY. Yes.
Mr. PASCRELL. Thank you.
Look, we are here to make national policy. We are certainly
not here--none of us are saying this, I hope--to make AARP
policy.
If the majority actually looked at the broader question
here that we are supposedly discussing today on taxes, and
section 501(c)(4), as a very specific part of the code, as you
know, I think they would find it interesting that the sixth
largest social welfare organization that has a 501(c)(4)
classification is a tax-exempt racetrack and casino which
operates in Iowa, and it pulls in $2.2 billion a year.
Can you blame us for asking questions about why now? It is
hard for me. It is really hard for me, and I am sure you will
help me understand why a racetrack and a casino is more
deserving of this classification than AARP--because that is
what you are getting at. You are questioning the classification
of AARP. You didn't do it 8 years ago, but you do it now.
This classification of the AARP, it is very clear here, the
majority believes the AARP is worth investigating more so than
this racetrack. I find that hard to accept.
I know for a fact that the AARP does great work. I have
disagreed with some of your philosophies. So what?
Mr. Rand, can you share with us how AARP directly helps
Americans in all the districts of the country?
Mr. RAND. Yes, I will. Let me just give you some snippets
in the job category. We have helped 53 million job seekers
through 2010 with career--53,000. Again, we talked about a
drive to end hunger. With tax aid we have helped 2.6 million
file free tax returns. Support of schools, provided more than
20,000 youths with supplies in 43 States. The Walgreens bus, we
have a tour that we completed, 2 million free health
screenings, 359,000 people participated. AARP litigation
represents tens of thousands of people at no fee in over 160
cases in 2010 alone. Again, we save utility costs in over 18
States, saved $3 billion for the consumers in those States. We
have defended and expanded services for home and community-
based care.
Mr. PASCRELL. Thank you, Mr. Rand, and you could go on and
on, and I am sure our great chairman would agree with all of
those activities in the field. He would not want to end any of
those activities----
Chairman HERGER. The gentleman's time has expired.
Mr. PASCRELL [continuing]. Because those are helpful to the
citizens which he represents and which I represent.
Thank you, Mr. Chairman, for your cooperation.
Chairman HERGER. I thank you.
At this time I request unanimous consent to enroll into the
record a letter from AARP from the chief operating officer Tom
Nelson, which states that less than $31 million out of the $650
million in AARP insurance revenue went to the AARP Foundation
in 2008.
Mr. BECERRA. Mr. Chairman, reserving the right to object.
Has that document been provided to the members of this
committee?
Chairman HERGER. This is a letter that is posted on the
AARP Website.
Mr. BECERRA. I understand that, and I certainly have no
reason to disbelieve the chairman in what he is saying the
letter depicts. None of us have seen this, and you are asking
for it to be part of the official record of this hearing. And
typically what happens is the chairman will make available to
every Member any document that is going to be made part of the
record. And like this report was never provided to Members
before it was given to the media. I just would want to make
sure that Members are provided with the information that will
be part of this record.
Chairman HERGER. I might mention that the minority has
entered already two letters for unanimous consent that have
been entered that have not been distributed.
Mr. BECERRA. That is fine, Mr. Chairman. We appreciate,
then, the indulgence of the Members who did not object. It is
just that this hearing is proceeding in irregular fashion when
it comes to this particular report, and so I am just interested
in making sure I know what is being put into the record as part
of this hearing.
I am responsible to my constituents and anyone in America
for what this committee does, and I don't want anyone to
believe that I was engaged in any form of witch hunt. And so I
am interested in knowing just what is going to be part of the
record in this particular hearing. I reserve the right to
object.
Chairman HERGER. We can distribute that. Is the gentleman
continuing to object?
Mr. BECERRA. Unless I can see that document that the
chairman is saying he wishes to submit into the record, I will
continue to reserve the right to object.
Chairman HERGER. The gentleman continues to reserve his
right to object.
Mr. BECERRA. Mr. Chairman, I have now been handed what I
think is--yes. If I could just take a moment to take a look at
the letter, Mr. Chairman, I would probably remove my
reservation.
Chairman HERGER. The gentleman removes his reservation.
Mr. BECERRA. If I could just take a moment to review the
document.
I will remove the reservation.
Chairman HERGER. The gentleman's objection has been
removed. So, without objection, the letter will be submitted
for the record.
Chairman HERGER. Now the gentleman from Georgia, Dr. Price,
will be recognized for 5 minutes.
Mr. PRICE. Thank you, Mr. Chairman, and I want to commend
the authors of this report, because I think it brings into
question what Mr. Pascrell talked about is a legitimate
question as to whether or not the tax-exempt status of AARP is
warranted, and I think that is a legitimate question.
I want to open by simply saying that there are a lot of
folks in my district who are members of AARP, and a lot of
folks who volunteer a lot of time and put their heart and soul
into efforts to try to help seniors in our community, and I
want to thank them for the work that they do. And I think that
they are interested in making certain that the organization
that they give so much volunteer time to is functioning and
appropriate in a legal manner.
I do want to follow up on--very briefly on the issue of the
support for the health care act, because I think that that is
part and parcel of the objection of the other side.
And there was such a huge disconnect between seniors in my
district about their lack of support for the health care act
and Medicare's--or AARP's support for it, and I think that is
what caused folks to say--scratch their head and say, well,
what is going on here? Is AARP really--do they really have my
seniors' best interests in heart, or do they have other reasons
to act the way they do?
And you mentioned, Mr. Rand, a number of things that you
felt were appropriate in the health care bill, and that is why
you supported it, because it ended preexisting allegedly and
the like there.
There are some things that we believe happened in that
health care bill that seniors adamantly oppose. So you don't
believe that seniors support the rationing of care, do you?
Mr. RAND. We don't support it, and I am sure seniors don't
support it.
Mr. PRICE. Exactly. And we believe that is in the bill, and
so there is that inconsistency.
You don't believe that seniors want it more difficult for
them to find a physician to care for them, do you?
Mr. RAND. They have been supportive of the doc fix. We have
been supportive of the doc fix.
Mr. PRICE. I get seniors all the time in my district who
say, I can't find a Medicare doctor; I can't find a Medicare
doctor because of the rules that have been put in place, and
believe that that is going to increase. And I know that you
don't support that.
You don't support a decrease in innovation of the health
care system, do you? Seniors don't, do they?
Mr. RAND. I don't think anyone supports----
Mr. PRICE. Exactly, the lack of innovation.
Mr. PRICE. Exactly.
Mr. RAND. I believe that there are some aspects of the
legislation that is there to help innovation.
Mr. PRICE. Absolutely, and there is a difference of
opinion, isn't there? So there is a difference of opinion among
seniors, just like there is a difference of opinion among the
regular population out there, which, again, is why so many of
us scratched our head and said, well, what is AARP doing? There
is a huge difference of opinion.
In fact, the majority of seniors right now believe that the
bill will, in fact, decrease their ability to get the kind of
care that they desire. So that is kind of why we say, what was
going on?
But I want to shift to this issue of tax-exempt status,
because I think it is incredibly important. It is an
appropriate question for this committee to ask, is it not,
whether or not an entity as large as AARP out there is--is
following the appropriate rules to maintain their tax-exempt
status? Is that an appropriate function of this committee?
Mr. RAND. I believe the committee has wide powers, and if
you want to do that, then it is appropriate.
Mr. PRICE. Great.
And I have here a number of questions that I understand
that members of the staff of the folks that put together this
report were unable to get from the AARP in spite of the
suggestion by AARP that they are open and transparent and they
want to share all information. So I wondered if I might be able
to ask you if you would be able to supply these things for the
committee's availability: How many millions of dollars does
AARP receive from its Medigap insurance business? That ought to
be something relatively simple, shouldn't it?
Mr. RAND. We will provide any of your asks that we can--
that we have sole control over. There are some confidential
contracts of which we can't make decisions about by ourselves.
Mr. PRICE. And I appreciate that, and I look forward to
seeing those. Things like the added benefits that AARP members
received after the AARP insurance revenues increased
significantly that members didn't receive in prior years, those
kinds of things we ought to be able to get that information on;
should we not?
Mr. RAND. Well, we would need some clarification on that
one. And if you can put that in writing so that we can clearly
understand that particular request.
Mr. PRICE. Well, and I appreciate that. What we will do is
submit these questions to you in an effort to try to be
transparent and open and to provide the public with the
greatest amount of information. Look forward to those responses
or why they can't be answered, and I thank you for coming
today.
Chairman HERGER. The gentleman's time has expired.
The gentleman from New York Mr. Rangel is recognized for 5
minutes.
Mr. RANGEL. Thank you. Thank you, Mr. Chairman.
I ask unanimous consent that this document called ``Behind
the Veil: The AARP America Doesn't Know'' be placed into the
record. I cherish the privileges that we have on----
Mr. THOMPSON. I reserve the right to object.
Chairman HERGER. The right to object has been recognized.
Mr. THOMPSON. Mr. Chairman, the report that my colleague
and friend Mr. Rangel is asking be put into the record, has
this been peer reviewed by anyone, any organizations?
Chairman HERGER. This is Mr. Rangel's request.
Mr. THOMPSON. I understand; but it is your report. Has this
been peer reviewed?
Chairman HERGER. This report has been--we requested it. It
has been prepared and it has been submitted.
Mr. THOMPSON. But has it been peer reviewed? That is my
only question.
Chairman HERGER. Well, it is before all of you right now.
Not any more than other reports are.
Chairman BOUSTANY. Mr. Chairman, might I add that the
report has 246 footnotes documenting thoroughly everything in
the report. Two hundred forty-three.
Mr. RANGEL. Mr. Chairman, there is a good reason why you
two don't want us to know who prepared it and who paid for it
and why it is not official. I just want to protect the
privileges of Members of Congress not to be challenged when
they want to put things into the record. I truly believe that
we have a responsibility to protect that record and to know
what we are, by unanimous consent, putting into the record.
And so I am asking unanimous consent, notwithstanding the
many unanswered questions, that it be placed into the record
and then we can proceed to make certain that my motion is not
abused by other people who just want to stop people from
expressing themselves. So I ask that it be placed in the record
by unanimous consent.
Mr. THOMPSON. Mr. Chairman, I withdraw my right to reserve
on Mr. Rangel's motion to place this unpeer-reviewed report
into the record.
Mr. BECERRA. Mr. Chairman, reserving the right to object.
Mr. RANGEL. This is not taken out of my 5 minutes, I hope.
Chairman HERGER. Your 5 minutes is ticking away, yes.
Mr. RANGEL. This is a procedural matter. It has nothing to
do with the time that I am allotted.
Mr. BECERRA. Reserving the right to object, Mr. Chairman.
Chairman HERGER. The gentleman reserves the right to
object.
Mr. BECERRA. Mr. Chairman, I will again raise the concern
that I have that this report, this document, indicates that it
is a report prepared by individual Representatives and----
Chairman HERGER. Okay, this report, we are not subjecting
it to the record now. There is objection. We want to move on
with this hearing.
Mr. BECERRA. Mr. Chairman, I am reserving the right to
object. I believe I have an opportunity to explain my
reservation to see if I can get the question I have answered,
to see if I will remove my reservation.
Chairman HERGER. The gentleman from Louisiana, Mr.
Boustany.
Mr. BECERRA. Mr. Chairman, I believe I have the floor. I
have made a reservation to the unanimous consent request. The
unanimous consent has not removed or withdrawn, and I have a
reservation on that unanimous consent request.
Chairman BOUSTANY. Would the gentleman yield? I will answer
his question.
Mr. BECERRA. I yield.
Chairman BOUSTANY. This report was prepared by the two
members listed on the cover.
Mr. BECERRA. Mr. Chairman, does that mean that two members
used their staff?
Chairman BOUSTANY. Hill staff.
Mr. BECERRA. Hill staff? No Ways and Means Committee staff?
Chairman BOUSTANY. Hill staff were used, and IRS
consultant.
Mr. BECERRA. Mr. Chairman, and was it Ways and Means
Committee staff that were used to prepare this report?
Chairman BOUSTANY. And Chairman Levin approved it. Chairman
Levin was in the loop, and he approved.
Mr. BECERRA. The use of committee staff?
Chairman BOUSTANY. Yes. And the IRS detailee.
Does the gentleman withdraw?
Mr. BECERRA. If the chairman is representing that Ways and
Means Committee staff helped prepare this report and that the
use of the committee staff was approved by then-Chairman Levin?
Chairman BOUSTANY. Yes. Yes, that is the case.
Mr. BECERRA. I am being told that that is not accurate.
Chairman HERGER. That is accurate.
Mr. BECERRA. My understanding is that Chairman Levin, when
Mr. Levin was chairman, approved the detailee from the IRS.
Chairman HERGER. The time of the gentleman from New York's
time has expired.
The gentlelady from Kansas is recognized.
Mr. RANGEL. Parliamentary inquiry, Mr. Chairman.
Ms. JENKINS. Thank you, Mr. Chairman.
Chairman HERGER. The gentlelady from Kansas is recognized.
Mr. RANGEL. I said parliamentary inquiry, Mr. Chairman.
Let's get a book or something.
Chairman HERGER. Parliamentary inquiry.
Mr. RANGEL. Now, under what provision is the chair denying
me an opportunity to question the witness? Now, I made a motion
here that had nothing to do with asking the witnesses any
questions. And if you are telling me now that because I made a
procedural motion, that I, as a member of the committee----
Chairman HERGER. If the gentleman will suspend. We will
start over again with 5 minutes for the gentleman from New
York.
Mr. RANGEL. Thank you so much for your consideration.
Now, Mr. Rand, since I don't know where this report came
from, could you tell me where you think it came from?
Mr. BECERRA. Mr. Chairman, parliamentary inquiry.
Chairman HERGER. The gentleman is recognized for a
parliamentary inquiry.
Mr. RANGEL. I hope this doesn't come out of my 5 minutes.
Chairman HERGER. The clock is stopped.
Mr. BECERRA. Mr. Chairman, there was a unanimous consent
request that was proffered by the gentleman from New York. As
far as I know, that request has not been disposed of.
Chairman HERGER. That is correct.
Mr. BECERRA. I don't see how we can proceed forward with
regular order until we dispose of this procedural request for
unanimous consent. Therefore, Mr. Chairman, I would ask for
regular order to be restored and observed, and let us dispose
of this unanimous consent request.
Chairman HERGER. Would the gentleman like a vote on that?
Is there objection?
Mr. BECERRA. My question had not been answered. Chairman
Boustany tried to answer the question, but the information I am
receiving on this side of the aisle is that Ranking Member
Levin, when he was chairman of this committee, did not approve
of committee staff being used to prepare this report, that he
approved the use of a detailee from the IRS. So I am just
trying to find out, Mr. Chairman, a very simple, get an answer
to a very simple question: Was committee staff used to prepare
this report?
Chairman HERGER. The answer is yes. Our committee staff did
work to prepare this report.
Mr. BECERRA. Okay. And given that this report was never
provided to members of this committee, or a report where
committee staff helped prepare it----
Chairman HERGER. It is not a committee report.
Mr. BECERRA. But committee staff resources were used.
Chairman HERGER. It is a member report.
Mr. BECERRA. Mr. Chairman, you may call it a member report,
but when committee resources are used, it is members of this
committee who have an opportunity and a right to review these
reports before they are submitted for broadcast and publication
and use by the media, I would hope. Otherwise how are we to be
prepared to question witnesses on a report that we are hearing
rumor and speculation on from all over the place. So if the
case is that this is a report that is being requested to be
included in the record, and it was prepared by committee staff,
unbeknownst to members of this committee, for it to be
considered and submitted into the record as any kind of
official document, I would object to that. If the chairman
wishes to portray this report as a report by two individual
members, who I believe may have misused committee resources,
to----
Chairman HERGER. That is what it is.
Mr. BECERRA. Okay. So if it was two members of this
committee who misused committee resources to prepare this
report, on that basis I will remove my reservation.
Chairman HERGER. Along with Ginny Brown-Waite.
Mr. BECERRA. So those individual members used, without
authorization, committee staff resources, with the approval I
assume of the ranking Republican at the time, resources of this
committee to prepare a report which members of this committee
did not have an opportunity to review. With that understanding,
I will remove my reservation and allow this report, which is
not an official report and prepared under the normal course
that this committee is accustomed to preparing reports, to be
allowed into the record.
Chairman HERGER. With the objection being removed, we again
recognize the gentleman from New York.
I have 4 minutes and 45 seconds.
Mr. RANGEL. You never did say permission is granted to put
it in the record.
Chairman HERGER. That permission is granted.
Mr. RANGEL. Okay. Now, Mr. Rand, did you have an
opportunity to see this report, The AARP America Doesn't Know?
Mr. RAND. I saw the report. Staff went through it, and that
is the reason why I objected to the conclusions.
Mr. RANGEL. Did anyone ask you questions in connection with
the preparation of this report?
Mr. RAND. From the committee?
Mr. RANGEL. No, from the authors of the--I have no idea why
the committee would be asking you questions. Did the author--do
you know who prepared this other than what you have heard this
morning? Do you know who prepared it?
Mr. RAND. That was my understanding as you were going
through the conversation and reiterated that there were two,
three people.
Mr. RANGEL. Did anyone represent the office of this
committee?
Mr. RAND. No.
Mr. RANGE. Or make any inquiries of you?
Mr. RAND. No. The answer is no.
Mr. RANGEL. So as far as you know, this could have been
prepared by a private, outside organization that would want to
discredit your organization as relates to your position on the
Affordable Care Act; is there anything that I am saying that is
inconsistent with that?
Mr. RAND. We really are not in a position to speculate on
that.
Mr. RANGEL. Well, let me try this. Is there anything in
this report that would indicate that the United States Congress
was involved in investigating this? Or, did anyone hold
themselves out to be staff of the United States Congress in
making this report?
Mr. RAND. No. It simply went through the names that you
have identified.
Mr. RANGEL. So you saw two members' names, but they were
not identified as being members of this committee? As a matter
of fact, with the exception of the word ``reps,'' they were not
identified as Members of the United States Congress; were they?
Mr. RAND. The answer is no, not in the report. So we
don't----
Mr. RANGEL. Not in the report, and not in the cover of the
report.
Do you have counsel that is hired normally when accusations
are being made against your organization? How could you
possibly defend it if you don't even know who made them?
Mr. RAND. We do have counsel in the normal procedure.
Mr. RANGEL. Well, I hope you make some inquiries as to why
would anyone put out a report and not identify who they are as
to where they come from because Rep. Wally Herger and Rep.
David Reichert could be a ``rep'' from the various States that
have, what, reps. But there is nothing on this report that
indicates that the Congress is involved in the inquiry that
certainly is not complimentary to the work that your
organization has been doing for half a century; is that
correct?
Mr. RAND. It certainly isn't complimentary; that is
absolutely correct.
Mr. RANGEL. Well, I hope your counsel will share with me,
since it is impossible for me to get any information, it will
be in the record, I hope that they would find out exactly what
was the motivation behind the report. Because if the motivation
is just to refer you to the IRS, anyone can do that without a
report. And I would hope that they would ask the questions that
I can't get answers for as to what were the resources that were
used in order to prepare the report, why there is no
identification with the United States Government, the United
States Congress, the Ways and Means Committee, the Subcommittee
on Oversight and the Subcommittee on Health, and the reason I
want it in the record is so that it doesn't disappear. I want
this in the record. I want you to be able to use this in the
record, and I want to make certain that the ability that we
have to put whatever we think is helpful to an inquiry, helpful
to a hearing, that no member be denied for partisan reasons the
opportunity to put it in.
So, Mr. Chairman, let me thank you for this opportunity. I
yield back the balance of my time, and I thank you for your
answers, and I look forward to working with you to see that
America continues to receive the best possible health care that
we can provide.
Mr. RAND. Thank you, sir.
Chairman HERGER. The gentleman yields back.
Again, this is the report. It says right on the report:
Investigative report prepared by Representative Wally Herger
(R) of California and David Reichert (R) of Washington. Inside
it mentions recognition of former Representative Ginny Brown-
Waite who represented the Fifth District of Florida, and
throughout it indicates congressional inquiries. So I think it
is very clear. I think it is important that we not have this as
diverting our attention from what the purpose, the very real
purpose of this hearing is.
Mr. RANGEL. What are you reading, Mr. Chairman? I have the
document that has been distributed.
Chairman HERGER. With that, the gentle lady from Kansas,
Ms. Jenkins, is recognized.
Ms. JENKINS. Thank you, Mr. Chair, and thank you for being
here to answer our questions.
As representative Roskam noted earlier, Representative
Nancy Pelosi, the Democrat minority leader, is on record as
having complained that AARP is in the pocket of Republicans,
and she suggested that ``because you sell insurance to your
members there is a conflict of interest.'' I am just curious if
you believe Leader Pelosi is wrong? And in the interest of time
with the bells ringing, just a simple yes or no, Mr. Rand?
Mr. RAND. Yes. We don't believe anybody who says that we
are in the pockets of anybody.
Ms. JENKINS. So Leader Pelosi is wrong. Representative Pete
Stark, a Democrat from California, is quoted as saying: ``AARP
members know they are being sold out by an organization that is
happily using member dues and Medigap premiums to promote a
Medicare bill that does more harm than good.''
Do you agree with Representative Stark?
Mr. RAND. We do not.
Ms. JENKINS. Representative Rangel from New York is quoted
as saying ``AARP has forgotten where they come from because
once you get into the business of making money with the devil,
you forget your mission.''
Is Representative Rangel wrong?
Mr. RAND. We have not forgotten our mission.
Ms. JENKINS. Representative John Larson, a Democrat from
Connecticut, is quoted as saying: ``Why does the national AARP
leadership support a bill that meets almost none of their
clearly stated needs and conditions?'' Is Representative Larson
right to question this logic?
Mr. RAND. We have said in testimony that there were a
number of items.
Ms. JENKINS. Just yes or no? Is he right in questioning
this?
Mr. RAND. I don't believe he is right in questioning this.
Ms. JENKINS. Former Representative Rahm Emanuel, a Democrat
from Illinois, is quoted as saying that ``AARP's latest step
forward into the insurance realm gives him some pause. When
there are principles about Medicare drug prices and
reimportation run into their business practices, which goes,
business practices or principles?''
I would just like you to answer Rahm's question, which
goes, business practices or principles?
Mr. RAND. We are first with principles and policy.
Ms. JENKINS. And finally, 85 Democrat Members of Congress
led by Representative Lynn Woolsey from California signed a
letter to AARP's CEO resigning their membership or stating that
they would not be joining the group in the future. The letter
stated that the AARP, this is a quote: ``AARP's misguided
decision to embrace this legislation and sacrifice the future
of Medicare must go unchallenged.''
I am curious if you know if any of those 85 Members were
true to their word and have continued to boycott AARP?
Mr. RAND. I do not know. We have always stood for our
policy.
Ms. JENKINS. Could you find out for us?
Mr. RAND. We will.
Ms. JENKINS. Thank you. The point I would like to make is
that I think we have run across something that Democrats and
Republicans in Washington can agree on, and perhaps that is
that the AARP leadership doesn't necessarily protect the best
interests of the American senior citizens that they pledge to
represent. So I simply beg of you as representing the
leadership of AARP, please don't mislead our seniors who sent
all of us, Democrats and Republicans alike, to this body to
represent them. Please don't use them as pawns to line your
pockets on their backs.
With that, I yield back.
Mr. RAND. Can I comment? Mr. Chairman, may I comment?
Chairman HERGER. The gentlelady yielded back.
I think it is very important, very important, that we not
allow the purpose of this hearing to be taken in a different
direction. The seniors of this Nation deserve the right to know
how money is being spent and whether it is being spent in their
best interests.
With that, I yield 5 minutes to the gentleman from Oregon,
Mr. Blumenauer.
Mr. BLUMENAUER. Thank you, Mr. Chairman. I actually agree
with that notion about the senior citizens. I would first of
all like to thank AARP because I have not always agreed on some
issues, but I respect the work that is done. The folks back
home provide lots of energy and activity. I for one am sorry
that you are subjected to something of this nature because I
truly think, reading through a 25 and a half page pamphlet with
243 footnotes, to try to dress it up to try to make it look
official and authoritative and scholarly misses the mark.
I find it fascinating on page 17, you are taken to task
because somehow you are undermining your long-term business
interests because you have underwriting standards that are more
flexible and speak to the needs of people who are 50 to 64 that
costs potentially some money, and you are taken to task for
that.
Well, you supported the Affordable Care Act, which now
requires every American to have these protections, which you
undertook at perhaps some financial disadvantage to your model,
because you thought it was the right thing.
I remember that when some Members of Congress who used to
support helping seniors with end-of-life care, when the big lie
about death panels, and they retreated, AARP was part of 400
individuals and groups that came forward to tell the truth. Now
just because somebody, like my friend from Georgia, thinks
something is in the bill, doesn't put it in the bill. And I
appreciate your zeroing in.
This report takes you to task because AARP had the
audacity, the audacity, to support the children's health
program expansion, assuming you did that only for some sort of
convoluted financial benefit, ignoring the fact that your
members have children and grandchildren and great
grandchildren, and we all want intergenerational cooperation.
Mr. Chairman, I have read it. I think it is a little bit
goofy. With all due respect, the notion somehow that they focus
on Medicare Advantage that is rocky and is a draconian cut,
Medicare Advantage means that 75 percent of your members who
are senior citizens in fee-for-service pay $90 a year more. So
maybe trying to reform Medicare Advantage speaks to the 75
percent of your members and 75 percent of America's seniors who
are paying more because a system got out of hand.
Mr. RAND. You have expressed our rationale.
Mr. BLUMENAUER. I just think that I am glad it is in the
record. I hope people look at it. ``Witch hunt'' is such a
nasty term. I look forward to bringing before us people who
have really crossed the line, people who have commingled funds
and pushed the limits or crossed over them in terms of IRS
regulations. But I think any fair reading is that your work on
preexisting conditions, children's health, end of life,
Medicare reform, speaks to what we need to be doing as a
country and as a Congress. Sadly, this morning's exercise moves
us no further along towards the implementation. But the things
that you came out for back in the day used to be bipartisan
supported. And some day they will again.
I appreciate your efforts. Again, I apologize for being a
part of this, but I do hope people analyze this and understand
that it is no indictment of AARP. It does say something about
this committee's operation.
Thank you, and I yield back the balance of my time.
Chairman HERGER. The gentleman yields back.
I think it is important to note that AARP, in its written
and oral testimony, did not refute any specific conclusions or
findings in this report. Neither ranking member refuted any
specific conclusions or findings in this report in their
opening statements. So all of this talk about which
congressional staffer was involved with the report or who the
committee will investigate next is simply a stunt to draw
attention away from the findings of the report; specifically,
that AARP stands to gain an additional $1 billion over the next
10 years as a result of the Democrats' health care law.
With that, I yield 5 minutes to----
Mr. LEWIS. Would the chairman yield?
Chairman HERGER. With that, I yield 5 minutes----
Mr. LEWIS. This is a stunt.
Chairman HERGER. With that, I yield 5 minutes to the
gentlelady from Tennessee, Mrs. Black, to inquire.
Mrs. BLACK. Thank you, Mr. Chairman.
I want to begin by saying how disappointed I am that this
has been turned into what people say is a witch hunt. It is the
role and responsibility of this subcommittee, when there are
things that seem to be outside of what should be happening,
that we should investigate. It is the role and responsibility.
I would hope that Members on the other side of the aisle that
have concerns about other organizations that may not be
operating or may have questions, that they bring that before
this committee.
And so my question I want to turn to you just comes from my
own personal experience prior to coming here to Congress. I was
an executive director of a 501(c)(3), a health care foundation.
We were very careful because we were providing funds for the
hospital for which we were the foundation about commingling our
members of our boards. One of the things that concerned me as I
read this report was the fact that your AARP, Inc., the
501(c)(4) tax exempt social welfare organization, is run by 22
board members. But you also have seven board members from your
for-profit, and all seven of those board members also serve on
your other board. So I am concerned about the commingling of
board members from your for-profit from your not-for-profit. If
you could speak a little bit about that, I would appreciate it.
Mr. HAMMOND. I would be glad to, Mrs. Black, if I could. I
am not sure what for-profits you are talking about with seven
members. Are you talking about the grantor trust, the insurance
trust?
Mrs. BLACK. Explain to me how many different boards you
have.
Mr. HAMMOND. Thank you. I appreciate that question because
it needs to be clarified.
There are basically three different boards that are
involved in the AARP organization. One is the parent board,
which is the AARP board.
Mrs. BLACK. And is that the 22 members?
Mr. HAMMOND. That is the 22-member board. It is 22 during
this body. There is another board which is the board for ASI,
our tax-paying affiliate, which has on it two AARP board
members.
Mrs. BLACK. Okay.
Mr. HAMMOND. There is a third board, which is the AARP
Foundation board, which has four board members on it. There are
seven total, but four AARP board members are on the Foundation
board.
The purpose of those interlocking boards, the purpose of
having the AARP board members on those interlocking boards, is
to make sure that the mission of AARP is the first priority of
each of the boards and that everything that goes through those
boards is in concert with our AARP policy and our mission.
Mrs. BLACK. So which of those boards sets your rates, the
premium rates?
Mr. HAMMOND. The premium rates are set by the State
insurance----
Mrs. BLACK. You have a contract with United. Who oversees
those contracts? Which one of those boards oversees the
contracts?
Mr. HAMMOND. The contracts are not overseen by the board,
they are overseen by ASI, which is our for-profit. They manage
and oversee the contracts.
Mrs. BLACK. You do have members from your for-profit on
your not-for-profit; correct?
Mr. HAMMOND. We have two board members from AARP who are
members.
Mrs. BLACK. Which is the non-profit arm?
Mr. HAMMOND. On the seven-member board of the ASI.
Mrs. BLACK. And so with these three different boards, are
they all in the same office?
Mr. HAMMOND. No.
Mrs. BLACK. So they have three different offices?
Mr. HAMMOND. They have three different offices. They meet
at three different spots.
Mrs. BLACK. With three different managers.
Mr. HAMMOND. There is the president of the Foundation and
there is the president of ASI.
Mrs. BLACK. But as far as your managers go, your
administrative staff, so they are all three separate
administrative staff?
Mr. HAMMOND. They are separate. If there are a few
occasions where they may be commingled, their time is set. But
there are only a few of those occasions. Most of the work is
done by the staff of those individual entities.
Mrs. BLACK. Mr. Rand, are you the CEO over all three of
these entities?
Mr. RAND. No. The board--they report to their separate
boards. I am the CEO of AARP, the (c)(4).
Mrs. BLACK. The (c)(4)?
Mr. RAND. Yes.
Mrs. BLACK. The nonprofit (c)(4)?
Mr. RAND. Yes, that is correct.
Mrs. BLACK. Do you sit as an ex officio on any of these
other boards?
Mr. RAND. I sit on the board of ASI as a nonvoting member.
Mrs. BLACK. Okay. I am concerned about the intermingling of
these board members and veto power and the decisions that are
being made by each one of these groups and these members being
commingled. I am concerned about that, and I will be interested
to see, once IRS looks at the way in which you manage your
organization by the commingling of these, what they have to say
because I know how sensitive of a situation that was as I
served as the executive director of a non-profit and the for-
profits.
Thank you.
Chairman HERGER. The gentlelady's time has expired.
With that, we have a series of votes, so we will recess and
reconvene immediately after the votes and we will continue with
this panel. I apologize. It will probably be about an hour, but
I appreciate your indulgence.
With that, we are recessed.
[Recess.]
Chairman HERGER. The committee reconvenes.
I would like to first recognize the chairman of the
subcommittee, Mr. Boustany, for a quick comment.
Chairman BOUSTANY. I thank Chairman Herger.
I want to make clear a previous comment I made about Mr.
Levin's approval of the IRS detailee that I spoke of earlier in
our discussion. I want to be really clear so there is no
confusion here. When Mr. Levin requested from IRS Commissioner
Shulman an IRS detailee be assigned to the Republican staff of
the committee, the detailee would be looking into, and I quote
from Mr. Levin's letter, ``in areas related to tax-exempt
organizations and other matters of interest to the Ways and
Means Committee.''
Mr. Levin was not aware that the detailee would be working
on the investigation specifically of AARP. I just wanted to
offer that clarification.
I yield back.
Chairman HERGER. The gentleman yields back.
The gentleman from California, Mr. Becerra, is recognized
for 5 minutes.
Mr. BECERRA. Mr. Chairman, thank you very much for yielding
the time, and I thank Chairman Boustany for the clarification
which I think simply leads to more confusion because the
reality is here that we are looking at a document that was
prepared without I think the knowledge of most every member on
this committee. It appears to be a document that was prepared
without the committee staff's full participation. Certainly
nowhere in the document does it indicate that this is an
official report, certainly not an official investigative report
by the Ways and Means Committee. And in my 12-plus years of
being on this committee, this is the first time I have seen us
conduct business this particular way.
We are a week away from a government shutdown where this
House has been unable to reconcile its differences with the
President, and there are Members on the other side of the aisle
who are talking about the need to shut the government in order
to make the case. We are watching as this discussion about a
budget has become more an issue about a social agenda that some
Members believe should be attached to a fiscal bill, and I
would think that most people watching with us just a week away
from seeing this government shut down and the services that
would be provided to all of the seniors that might be
interested in this hearing in jeopardy as a result of a
government shutdown, that they would probably look at this and
wonder: Is this the way that those who took control of the
House of Representatives intend to govern?
I don't believe this is any way to run the largest economy
in the world or the smallest business on Main Street. So I hope
that we get down to the real business, which I thought and I
remember on both sides of the aisle, people campaigning back in
November talking about job creation; jobs, jobs, jobs.
I don't know how having this hearing today where we have
requested Mr. Rand and Mr. Hammond to come testify does
anything to help create jobs. To some degree maybe it is better
that if this is the way that the House of Representatives is
going to operate that this is all we do because fortunately,
with the work that was done in the last 2 years with the
President, this Congress was able to get this economy back on
track. We just heard this morning that the economy was able to
generate another quarter of a million new jobs in the last 2
months, 450,000 jobs created in the private sector. But then
again when you recognize that in January of 2009 when new
President Barack Obama was handed the keys by outgoing
President George Bush, we hemorrhaged 780,000 jobs, and you see
the type of work that we have in front of us.
So this committee, which is perhaps the most important
committee in the House to help the private sector stimulate
that job growth that we need to see, we find ourselves
essentially engaged in a discrete, aggressive attack on an
organization that represents, and has for many decades, perhaps
the population in America which deserves the most respect,
those who made it possible for us to be here.
I guess this is the business of the day, and so we will
conduct the business of today.
I do hope, and Chairman Boustany has said this and so I
applaud him for having said this, that we will continue to do
oversight because whether Mr. Rand or Mr. Hammond or AARP, or
any other organization wishes to get favorable treatment from
the taxpayers of this country, we have an obligation to do
oversight to make sure that no one abuses the opportunity to be
treated differently in the Tax Code than any other American who
is paying his or her full share of taxes.
I think it would have been wholly appropriate to have AARP
or any other non-profit come before this committee and explain
itself if we legitimately thought there was something going on.
Mr. Chairman, I hope we will conduct true oversight because I
can tell you about any number of organizations that have
swindled the American public out of precious contributions and
done very few things that are good for this country.
Perhaps the biggest concern I have, and it is actually kind
of funny, today I realized as I was walking back, today is
April 1, April Fool's Day. And if it weren't for the fact that
we have been at this for over 4 hours, it would be a joke. But
this is not a joke. And my sense is it is not a joke because I
suspect what we are trying to do here, what some are trying to
do here through these hearings is perhaps to silence voices,
instead of having full participation in this process.
So, I hope, Mr. Chairman, this is not an effort to try to
silence voices of people who represent seniors in America. My
understanding is that with regard to Medicare and Medicaid and
Social Security, there are efforts underway to cut the benefits
for seniors in America, and I hope that this House is willing
to do the hearings that it takes to show the American people
that we are working for them and not against them.
I yield back the balance of my time.
Chairman HERGER. Mr. Kind is recognized for 5 minutes.
Mr. KIND. Thank you, Mr. Chairman. I want to thank the
gentlemen for your presence here today. It has been a long time
and your patience is appreciated. To echo what my colleague
from California said, you might think this is some type of
cruel April Fool's Joke, hauling you before a congressional
committee, but it really isn't. I mean, whenever you are
subjected to a prosecutorial inquiry before a United States
Congress committee, it is a serious matter. And I think it is
unfortunate. I don't want to ascribe any motives on the other
side, but on the surface at least, this appears to be a form of
selective retribution or political retribution here.
There are many other organizations and individuals who
could be sitting out there right now answering the same types
of questions and inquiries that you have been subjected to over
the last few hours, but they are not. I think that is
unfortunate because if there is anything that ultimately works
for the Tax Code, it is the feeling that it is being applied
and addressed fairly to everyone in this country and not being
used as some type of a political weapon.
We can go through a litany of organizations that are
collecting royalties and licensing fees that are tax exempt
under the Code, from television stations to universities, to
the Chamber of Commerce to NFIB to the Association of Health
Insurance Plans, and on and on and on, that the same questions
could be directed to here. On the surface, this just smacks of
political retribution.
Everyone on this committee, I am sure, has not been in
complete agreement with AARP and where they come down on policy
issues. I wasn't with you in 2004 when you were supporting the
Medicare Modernization Act, which also created the new
prescription drug benefit plan for seniors, and the main reason
I wasn't was because it was largest expansion of entitlement
spending since Medicare was created in 1965, and not a nickel
of it was paid for. It all went to deficit financing. And there
was language in it that prohibited the price negotiation with
drug companies in that bill. Significant policy differences.
And yet Republicans, when they were in control of the
Congress then, that was a bill that they offered. You had
supported it. They were not coming back the next week or the
next month subjecting you to these type of questions. It was
only after you had the audacity to support the Affordable Care
Act that they want to haul you before them and start
questioning you about your royalty payments, when again a list
of organizations could very well be subjected to the same line
of inquiry.
In fact today, Mr. Chairman, former Representative, a
colleague, Billy Tauzin, wrote an article for the Politico, a
Capitol Hill publication here entitled, ``Don't Play Politics
With AARP.'' In that Article I would just like to quote one
paragraph that he wrote: ``The fact is that the organization,
AARP, gets significant revenue from licensing its name to
others and selling products. But that isn't unusual. Many non-
profit health insurers, like Care First, member organizations
like NRA, trade associations like the American Bankers
Association, and human service activities like the Red Cross,
get significant revenue from product sales or name licensing.''
That is the point I was just making.
Mr. Rand, maybe you could inform the committee, how many
dues-paying members does AARP have today?
Mr. RAND. 37 million, sir.
Mr. KIND. About 37 million, just shy of 40 million. Yet it
is my understanding that AARP does not spend a nickel directly
advocating the election or the defeat of any candidate running
for office in the United States; is that correct?
Mr. RAND. That is correct. And we don't have a PAC.
Mr. KIND. And you don't have a PAC. So you are not
contributing any campaign funds to any person, Republican,
Democrat or otherwise, running for office?
Mr. RAND. That is correct. We are nonpartisan and
bipartisan.
Mr. KIND. And I don't want to put you on the spot, but the
Sixty Plus organization that views themselves as the
conservative alternative to AARP, do you know how many dues-
paying members the Sixty Plus organization has?
Mr. RAND. I don't know. Not many.
Mr. KIND. Well, let me answer that for you: None. Zero.
They take all their contributions from wealthy interests out
there that don't have to be disclosed. They turn around and run
negative attack political ads against candidates throughout the
country, and they are a tax-exempt organization. It is not
surprising that we don't find them sitting next to you here
today either, because they basically went on the attack against
Democratic candidates in the last election cycle.
Let me also ask you, getting to the crucial question here,
I think AARP supported the Affordable Care Act and we want to
know why today. Was it because there was a direct financial
benefit for you of what was in this legislation that was
passed? Or was it based on substantive or policy reasons on why
you supported the Affordable Care Act?
Mr. RAND. It had nothing to do with revenues. It was 100
percent focused on our mission and what our seniors and 50-plus
populations were saying that they needed for the American
dream.
Mr. KIND. And what more specifically that you found in the
Affordable Care Act that made sense for your members to come
out in support of that?
Mr. RAND. We talked about no preexisting conditions, which
is what they wanted, what we advocated for. The stopping of age
discrimination through age rating which they said as we get
older we have less money.
Chairman HERGER. The time of the gentleman has expired.
I want to thank our witnesses, you, Mr. Rand and Mr.
Hammond, for participating in today's hearing. With that, that
will conclude our first panel, and I would like to call up our
second panel, please.
Mr. LEWIS. Mr. Chairman?
Chairman HERGER. The gentleman from Georgia.
Mr. LEWIS. Mr. Chairman, I would like to raise a question
of committee procedure.
Mr. Chairman, according to the hearing advisory released
March 25, any organization has until April 15, 2011, to submit
written comments as long as they follow the process set forth
in the advisory; is that correct?
Chairman HERGER. Yes, that is correct.
Mr. LEWIS. And that applies to any organization; is that
correct?
Chairman HERGER. That is correct.
Mr. LEWIS. So, Mr. Chairman, would that also apply to our
witnesses before us today, AARP?
Chairman HERGER. Our witnesses today have had an
opportunity to submit their testimony for this committee, so
they have already had that opportunity.
Mr. LEWIS. It is my understanding----
Mr. RAND. May I respond to that, Mr. Chairman?
Chairman HERGER. Again, AARP has had their opportunity to
submit their testimony and submit for the record, so that has
already been extended to them.
Mr. LEWIS. Well, Mr. Chairman, it is my understanding that
the report is 26 pages long with 243 footnotes and was only
released on Wednesday. This was not sufficient time for AARP to
review and develop written comments. We should have the benefit
of a full record. That is the point, to get your questions and
all of our questions answered.
Chairman HERGER. I would mention to the gentleman that we
met with AARP 2 weeks ago and went over this report with them,
so they have had 2 weeks to be able to submit to us their
report.
Again, I would like to move on to our second panel.
Mr. RAND. Can I just correct that? We went over four pages,
Mr. Chairman.
Mr. RANGEL. I ask unanimous consent that the witnesses be
allowed to submit additional information for the record.
Chairman BOUSTANY. I reserve the right to object. I object.
Mr. RANGEL. With this witness?
Mr. KIND. Not us, the witnesses before us.
Chairman BOUSTANY. The witnesses have provided testimony.
Mr. LEWIS. Mr. Chairman, could I refer to the advisory, a
direct quote from the advisory? A person or any organization
wishing to submit for the hearing record must follow the
appropriate link of the hearing page of the committee Website
and complete the information or form from the committee home
page.
Chairman HERGER. Just a quote from our advisory. In view of
the limited time available to hear from witnesses, oral
testimony at this hearing will be from the invited witnesses
only. However, any individual, organization not scheduled for
an oral appearance may submit a written statement for
consideration by the committee and for inclusion in the printed
record of hearing. A list of invited witnesses will follow.
The chairman, again, would like to thank our witnesses. We
would like to move on to our next panel. I want to thank you
for your patience and waiting over for the hour plus that you
did.
And I would like to call up our next panel, please.
Mr. RAND. Thank you, Mr. Chairman.
Chairman HERGER. Thank you.
Mr. RANGEL. Thank you.
Chairman HERGER. I would like to introduce the second
panel's witnesses. Mr. William Josephson is a nationally
recognized expert on tax-exempt and nonprofit organizations. He
is currently of counsel at Fried, Frank, Harris, Shriver and
Jacobson LLP, New York. He joined the firm in 1996, became a
partner in 1967, and retired in 1999.
He was appointed assistant attorney general in charge of
the New York State Law Department's Charities Bureau in 1999.
He served in this capacity for 5 years under then-attorney
general Eliot Spitzer.
Mr. Josephson's opinions on nonprofit issues are frequently
reported in The New York Times, Washington Post, The Chronicle
of Philanthropy and other newspapers.
I would also like to recognize Ms. Frances Hill, professor
of law, University of Miami School of Law, Coral Gables,
Florida. Ms. Hill has a Ph.D. in government from Harvard
University, where she majored in political theory and
comparative politics, and a J.D. from the Yale Law School.
Professor Hill teaches courses in taxation, including
corporate tax, bankruptcy tax and the taxation of exempt
organizations, constitutional law and election law. Her current
scholarship focuses on bankruptcy tax, and constitutional
issues and election law.
You will have 5 minutes to present your testimony. Your
entire written statement will be made a part of the record.
Mr. Josephson, you are now recognized for 5 minutes.
STATEMENT OF WILLIAM JOSEPHSON, J.D., OF COUNSEL, FRIED, FRANK,
HARRIS, SHRIVER & JACOBSON LLP, NEW YORK, NEW YORK
Mr. JOSEPHSON. Thank you, Mr. Chairman. I am very happy to
be here today. I want to make it very clear that I am not a
health care person.
What I have done is looked at the report in question, the
investigative report in question, as if it had been a complaint
that had been filed with my office, whether at a time when I
was counsel to the Peace Corps or other government agencies, or
when I was the head of the Charities Bureau, from the point of
view of whether or not the contents of the report would, in my
judgment, warrant further inquiry or further investigation, and
my answer to that question is yes.
What I would have done if this had been a complaint filed
with me is I would have solicited the cooperation of the
organization; ask it to make available information, much of
which would be similar to the information the committee staff
has already asked for, but I would go much deeper, actually,
than the committee staff has asked. And if I did not receive
that kind of cooperation, I would regrettably use my subpoena
power to acquire it. Why? Because the totality of information
contained in the report raises the question into my mind as to
whether or not this organization is truly a nonprofit or, in
fact, is a business.
In that connection, there are many areas that I would
particularly examine. I would try to understand the complexity
of the organizational structure. I would examine the extent to
which its board and officers, in fact, exercised their
fiduciary responsibilities of due diligence, of prudence, of
candor. The same would be true for the fiduciaries of each of
the eight affiliates of AARP.
I would look at AARP's expenditures, especially those for
its exempt purposes, as a percentage of its total expenditures.
I would ask how much AARP actually spends not just at the
Federal level, but also at the State and local levels on
lobbying.
I would try to find out the adequacy of AARP's internal
controls, its documentation retention policies, its
whistleblower protection policies, the scope of its external
audit function, and any management letters AARP has received
from its auditors.
AARP classifies much of its income, as the committee knows,
as royalties. When the Congress exempted royalty income from
the unrelated business income tax, it did not define royalty. I
think that was a grievous error. Consequently, the IRS and the
courts have struggled to apply the concept of royalty to
various kinds of nonprofit income to determine whether or not,
in fact, it was a royalty, which I understand traditionally to
be a percentage of gross income that goes up or down depending
on how successful the product to which it attached is, or
whether or not, in fact, as the report may suggest--I emphasize
``may suggest''--the amounts characterized by AARP as royalty
really are closer to insurance commissions, which I believe
would be subject to unrelated business income tax. This is a
factual inquiry that is not necessarily resolved by questions
of law.
This is an issue, actually, on which I agree 100 percent
with Professor Hill's statement, and she is, in fact, a highly
respected colleague of mine in the not-for-profit tax area,
where she, too, talks in her statement about the uncertainties
that involve the application of royalty to various situations.
AARP's compensation and benefits are issues, including to
what extent all of its fiduciaries, officers, managers receive
compensation from multiple sources.
Unfortunately, in conclusion, I would like to say that the
resources that the IRS has available to itself with respect to
the oversight of tax-exempt organizations are completely
inadequate. I can cite two examples that the committee should
be familiar with.
The Pension Protection Act of 2006 asks the IRS to produce
within a year a study of supporting organizations.
Chairman HERGER. If you could conclude your testimony, and
the rest of it will be submitted for the record.
Mr. JOSEPHSON. Thank you.
Chairman HERGER. Thank you. Thank you very much, Mr.
Josephson.
[The prepared statement of Mr. Josephson follows:]
Chairman HERGER. Ms. Hill, you are now recognized for 5
minutes.
STATEMENT OF FRANCES R. HILL, J.D., Ph.D., PROFESSOR,
UNIVERSITY OF MIAMI SCHOOL OF LAW, CORAL GABLES, FLORIDA
Ms. HILL. Thank you, Mr. Chairman, Mr. Chairman, and
Ranking Member Lewis.
I am a tax lawyer, and as a tax lawyer, we live in a world
of uncertainty at every turn. Corporate tax consolidated
returns. Tax turns on the facts and circumstances of each
particular case. And that phrase resonates through all the
regulations and all the guidance we have.
What I was asked to do today is talk about 501(c)(4)
organizations from the perspective of a student of exempt
organizations, and that is what I propose to do. I want to note
a couple of developments.
The exempt sector as a whole, all types of exempt
organizations, 501(c)(3) public charities, 501(c)(6) business
leagues, all have grown enormously over time since the 1950s.
They have grown in size, they have grown in scale, they have
grown in scope. They all conduct now a broad range of
activities that perhaps was not contemplated fully when the law
was written. On the other hand, this is part of the dynamic and
dynamic vibrancy of the sector.
Certainly exempt organizations have become complex
structures of multiple types of exempt entities, taxable
entities, joint ventures, 527 political organizations of at
least two types. But no one has thought that that was a
necessarily alarming thing.
Schedule R of the new form 990 is going to teach us all a
very great deal about complex structures because it is going to
allow for the orderly reporting of information that has never
been available before to scholars like me or, indeed, to many
policymakers.
The central issue in complex structures is not whether they
are big or not. Some of them are really, really big. I come
from the world of universities, and we are very big. Most
universities are, in fact, bigger than mine. Harvard University
or Yale University are enormous. They have many resources, and
certainly Harvard has some 100 affiliated entities in the
larger Harvard structure. Hospitals tend to be very large and
also to have multiple structures. Schedule R recognizes this
modern development and the need for information about them.
I just want to say a few things about the complex
structures. Overlapping boards are not, themselves, a problem.
They don't lead to the attribution of one entity's activities
to other entities.
Sharing of staff, if it is properly documented and paid
for, is not a problem. The problem is if one organization
controls the daily operation of another.
I want to talk a bit about royalty income. Yes, there is
uncertainty about what is a royalty, but generally we know what
a royalty is. It is a payment pursuant to the licensing of a
right in generally intangible property for a defined use, and
the IRS and the courts have, for UBIT purposes, the unrelated
business income tax, focused on the issue.
Is it this kind of payment for the use of this right in
intangible property, or is it for the provision of services? If
it is for the provision of services, it is taxable. And there
have been a variety of cases, but not a dividing line or two
lines of cases, cases that reached different results about the
facts and circumstances.
501(c)(4) organizations also engage in a great deal of
lobbying, and this is--has become so pervasive. But the IRS
over time decided lobbying was, in fact, an exempt purpose of
501(c)(4) organizations.
This is, I regret to note, I think an unfortunate but long-
term development. We have now seen organizations that are
heavily engaged in pursuing their rights under Citizens United
under the First Amendment as interpreted by our Supreme Court
to make independent expenditures from their general treasury
funds. They can show that they satisfied 501(c)(4) solely by
showing that their lobbying activities exceed their independent
expenditures.
It is possible that this new form that is emerging may
simply be a tax-exempt lobby shop with this defined First
Amendment right, and I am not referring to specific
organizations, I am referring to the possibility of the new
legal form.
I have written in my testimony a discussion brief, but a
longer one in the book that I have done on tax-exempt
organizations, on Section 4958, which the IRS has spent a great
deal of time and resources learning to administer.
Chairman HERGER. Your time has expired. Could you maybe
conclude quickly and submit for the record your testimony?
Ms. HILL. Thank you, Mr. Chairman. I will wrap this up.
Chairman HERGER. Okay. Thank you very much.
[The prepared statement of Ms. Hill follows:]
Chairman HERGER. Mr. Josephson, I want to thank you for
your testimony and for sharing your expertise with us.
One of the many facts I find troubling in the report
released by the committee is the overlap between the boards of
AARP's for-profit and not-for-profit affiliates.
Do you think that it is appropriate for seven members of
AARP, Inc.'s, board of directors, a 501(c)(4) that establishes
AARP's advocacy positions, to also comprise the entire board of
AARP's for-profit side, the AARP insurance plan, a grantor
trust that processed $6.8 billion in insurance premiums in
2009?
Mr. JOSEPHSON. Interlocking directors always raise concerns
about the duties of loyalty, diligence, because there are
inherent conflicts of interest.
As I said in my statement, were I in charge of an
investigation of this organization, I would look very carefully
at the composition of each of its board and officers. I would
look at the minutes of their meetings. I would try to determine
how frequently they are attended.
Chairman HERGER. Mr. Josephson, could you move microphone a
little closer, please?
Thank you.
Mr. JOSEPHSON. Thank you. Is that better?
Chairman HERGER. Yes.
Mr. JOSEPHSON. I would try to determine how frequently the
committee meets, who sets the agenda, is there independent
leadership to the board and committee meetings? There are a
whole host of good governance issues that are equally
applicable to for-profit and nonprofit organizations that cry
out for inquiry into this complex situation.
Chairman HERGER. Do you think it is appropriate for an
additional two AARP, Inc.'s, board of director members to serve
on the for-profit AARP Services, which negotiates the lucrative
contract with insurance companies?
Mr. JOSEPHSON. I can't speak directly to that issue, Mr.
Chairman. I can say, for example, if my former colleague Tom
Conway, the head of the Bureau of Consumer Protection, were
sitting here with me, we would both be looking very carefully
at the procedures that the for-profit board followed in
ensuring competition, and ensuring consumer protection, and
ensuring value for money.
I do not understand on the present record the basis for the
choice of the insurers of each product that AARP makes.
Chairman HERGER. I share your concerns.
In your testimony you stated that the royalty payments AARP
receives might be more properly characterized as commissions.
As you know, AARP's royalty payments are not subject to tax.
However, if these payments were, instead, considered to be
commissions, would they be subject to taxation?
Mr. JOSEPHSON. Yes, sir, but that is a factual inquiry that
needs to be made. And if I may say so, sir, the Congress, when
it enacted 512(b)(2), I think did practitioners and itself a
disservice in not trying clearly to define royalty. As a
result, both the courts and the IRS have struggled with trying
to make sense out of that concept.
Chairman HERGER. If the $657 million in royalty payments
AARP received in 2009, largely from insurance companies, were
then taxed as unrelated business income, what sort of tax
liability would AARP be subject to?
Mr. JOSEPHSON. I can't speak to that because I don't know
what the state of the proper deductions would be. That it would
be subject to unrelated business income tax is quite clear, but
what the ultimate tax burden would be, one would have to know a
great deal more about the organization's finances and
expenditures.
Chairman HERGER. Thank you.
With that, I recognize the gentleman from Georgia Mr. Lewis
for 5 minutes.
Mr. LEWIS. Thank you very much, Mr. Chairman.
I want to thank the two of you for being here today and for
being so patient.
Dr. Hill, the Republican report points out that there is an
overlap of the board for AARP and the subsidiary. Have you seen
this in large nonprofit organizations, in other nonprofits?
Ms. HILL. I have, and so has the IRS. And so in my written
testimony I went to some effort to talk about board overlap.
When there is an overlap of less than a majority, the IRS
has never been interested in it and doesn't think this leads
for the purposes of determining whether the activities of one
organization should be attributed to another. And that is
important to tax lawyers, which is the role I am testifying in
today, because that can jeopardize the exempt status of the
organization to which the activities are attributed.
The question of a total overlap of boards, of course,
raises questions for inquiry, and the IRS has looked at
situations of overlap or potential 100 percent overlap and
found in the facts and circumstances of the case that is
available to us, in the form of a private letter ruling, that
in that one case, it did not lead to attribution.
And so the idea of the overlap of boards can, in fact, be
the way that the whole core mission of an organization is built
into all the other entities. But these inquiries are always
factual inquiries.
If the question is is it such a red flag that whenever we
see any overlap, we must immediately investigate, the IRS has
not taken that position, and I personally do not see that
unless we find something very strange and very unexpected
through our Schedule R information, that that would be the best
use of the IRS' scarce resources.
Mr. LEWIS. Well, Professor Hill, I know you are very
familiar with the great and distinguished law firm Caplin &
Drysdale.
Ms. HILL. I am.
Mr. LEWIS. One of its lawyers publicly stated that there is
not anything in this report that really adds up to the loss of
tax-exempt status.
Do you agree with this?
Ms. HILL. Of the six pages of the report, pages 21 to 26
that touch in some way on tax issues, I saw nothing in that
section of the report that would cause me to think that
revocation of exemption is likely, probable or warranted, not
from what I saw in those six pages of the report.
Mr. LEWIS. Now, the AARP sponsors NASCAR drivers, sponsors
a NASCAR driver, to promote a campaign to fight hunger. Does
that sound like a reason that an organization should have its
tax-exempt status revoked?
Ms. HILL. It doesn't to me.
If I had been their lawyer, I would have asked, you know--
and I am sure their lawyer did--for a thorough examination of
why they are doing it and how it relates to their mission.
But I have always thought that there is some latitude to
organizations to promoting their mission, and making people
aware of a mission, and trying to generate donations.
I am not a follower of NASCAR. I am sure I am not fully
aware of the implications of supporting a NASCAR driver in any
particular----
Mr. LEWIS. You are not alone. You are not alone.
Ms. HILL. So I am perhaps not the best person to ask about
the NASCAR driver, but they, I am certain, would have some
reason in their minutes and in their deliberations. Any
organization would.
Mr. LEWIS. Thank you very much for your testimony and for
your response.
Ms. HILL. Thank you.
Mr. LEWIS. I yield back.
Chairman HERGER. The gentleman yields back.
The gentleman from Louisiana Dr. Boustany is recognized for
5 minutes.
Chairman BOUSTANY. Thank you, Mr. Chairman.
Let me start, Mr. Josephson, with you. You stated in your
written testimony that I read that AARP's organizational
structure is unprecedented in your years of experience, and you
specifically mentioned how uncommon it is for a tax-exempt
organization to have such a large number of affiliates, some
for-profit and some nonprofit.
What sort of red flags would be raised by such a structure?
Mr. JOSEPHSON. I have never seen anything in the nonprofit
area as complex as AARP's structure. And as I said in my
testimony, I would have to examine its justification for each
of these separate organizations were I in charge of any
investigation. And I would also have to examine the nature of
the control that AARP exercises over the organizations that are
its affiliates. I agree with my colleague that the existence of
an interlocking situation is not necessarily a bad thing, but
it is also necessarily something that needs to be looked at.
The Internal Revenue Service, IRS, Code is not only replete
with references not only to direct control, but to indirect
control, and indirect control may well be an issue that goes
beyond the actual numerical composition of each governing body.
Chairman BOUSTANY. Thank you, sir.
I asked questions to the first panel about the royalty
income, and is it royalty versus unrelated business income that
should be taxable.
What kind of information--and clearly the report that we
have issued leaves a lot of questions unanswered in this
regard, but what type of information would you be interested in
reviewing to understand how the royalty income is controlled
and allocated and whether----
Mr. JOSEPHSON. I would want to review each contract in
detail with respect to any royalty payments.
Chairman BOUSTANY. Thank you, sir. Ms. Hill, is that your
opinion as well?
Ms. HILL. Well, every lawyer would be quiet and refuse to
give an opinion without reading the documents. That is what we
do.
Chairman BOUSTANY. Yes.
Ms. HILL. We read things, and we are careful. And so we
would read the documents, but we would also want to know if the
documents were being implemented consistent with the--
Chairman BOUSTANY. So we need the documents.
Ms. HILL. And so I just want to reiterate that the core
issue for UBIT is whether or not this is a payment for the use
of these intangibles. I understand it.
Well, take the university context. We have mascots, we have
all that sort of stuff. And we put it on T-shirts and
everything that we can possibly sell, and we receive royalties
for selling it.
And so the question then is are we promoting those sales
through services that are improper? And my written testimony
addresses how the courts have said there can be services to
protect our good name, our universities' good names when we put
a mascot on a T-shirt so that nothing disgusting appears with
our mascot.
Chairman BOUSTANY. Sure.
Ms. HILL. So that is the state of the law. It is an
administrable standard----
Chairman BOUSTANY. Right. Let me understand that. Yes. Let
me go to a slightly different line of questioning for you,
Professor Hill.
In your testimony you indicate that a 501(c)(4) should work
for the common good and promote social welfare for a community,
and you state that a 501(c)(4) organization, and I quote,
``could not expect to satisfy the requirements for tax-exempt
status if they deliberately excluded nonmembers or free
riders.''
So if a 501(c)(4) limited access to a program to only
members, which is what we see with the Medigap plan that AARP
has, because in order to enroll you have to be a member, could
that lead to the loss of status, a tax-exempt status?
Ms. HILL. Well, it is going to depend. Here, in the cases I
cite about the community television antenna and the community
bus service----
Chairman BOUSTANY. Right.
Ms. HILL [continuing]. Those were small communities and
fairly small programs. We get to the Tax Court with the Eden
Hall case, one corporation, the recreational facility for the
female members, and there were apparent several thousand or at
least 1,000 female employees of this one corporation. The IRS
said, too few. The Tax Court said, enough. And, therefore, Eden
Hall kept its exempt status.
And so the question of number and expanse enters into this.
This is what I mean by facts and circumstances. It is what
makes tax law so interesting to do and so challenging to do.
But those are the precedents that are out there.
And so it is a totality of facts and circumstances. So a
very large organization with a very large program might be,
under the Eden Hall precedent, thought to qualify; whereas if
it were much, much smaller, like the television antenna,
different outcomes.
Chairman BOUSTANY. So what you are suggesting to me is we
really need more information.
Ms. HILL. What I am suggesting is the tax base, some facts
and circumstances.
Chairman HERGER. The gentleman's time is expired.
The gentleman from New York Mr. Rangel is recognized for 5
minutes.
Mr. RANGEL. Thank you.
Let me thank our witnesses. You really have impressive
backgrounds. Professor Hill, Denver, Fulbright, Harvard,
University of Texas. Thank you for taking time to share your
views with us.
And, of course, my fellow New Yorker. It is always good to
have someone from New York testify, and you have been in charge
of charity bureau with the attorney general's office in New
York, Peace Corps. Bard College is one of my favorites. I am
glad to see you are associated with that, small but essential;
and George Washington University. And you went out of your way,
counselor, to explain that you had no particular knowledge of
health care-providing institutions. I assume that you didn't
think that was necessary in order to testify about AARP?
Mr. JOSEPHSON. I did not think it was necessary in order to
express the opinions I was asked to express with respect to the
report.
Were, hypothetically, I in charge of any further
investigation, this is a subject I would have to become an
expert in and I would become an expert in.
Mr. RANGEL. But you are not familiar with what AARP really
does. You were given a hypothetical, and you gave your
professional opinion?
Mr. JOSEPHSON. I take the report as if it were a
hypothetical.
Mr. RANGEL. Okay. You know, it is the practice down here
that the Republicans and the Democrats select different
witnesses, support their case, and, Professor, you are the
Democratic selection. Did you know, counselor, that you are the
so-called Republican witness?
Mr. JOSEPHSON. Well, I do know that I was contacted by the
current majority staff, but I am sure the current majority
staff also knows that I am the Democrat, a member of no
organized political party.
Mr. RANGEL. Okay. So based on the fact that you had no
knowledge of AARP--and you are retired now, right?
Mr. JOSEPHSON. Well, you might say so. I seem to be busier
than ever.
Mr. RANGEL. Well, good for you. That is encouragement for
me.
Mr. JOSEPHSON. We are virtually the same age, Mr. Rangel.
Mr. RANGEL. Oh, well, anyway, that is good for me to know
people can be as active and intellectual as you.
So let me ask you this. You referred to the majority party
when you talked about the report.
Mr. JOSEPHSON. I believe it is the majority party in this
body.
Mr. RANGEL. Do you have a copy of the report anywhere near
you?
Mr. JOSEPHSON. I do.
Mr. RANGEL. Is there anything on that report that would
allow you to believe that there is a party affiliation,
Republican or Democrat, or majority or minority?
Mr. JOSEPHSON. Yes, there is, sir.
Mr. RANGEL. What is that?
Mr. JOSEPHSON. It identifies Representative Herger and
Representative Reichert as Republicans.
Mr. RANGEL. But that doesn't mean that the report is
Republican.
Mr. JOSEPHSON. That is correct.
Mr. RANGEL. So you don't know whether--do you see any
congressional seal on that?
Mr. JOSEPHSON. I did not.
Mr. RANGEL. Did you see anything that this report was
prepared by the Ways and Means Committee?
Mr. JOSEPHSON. I did not, nor do I see a committee document
number.
Mr. RANGEL. So everything that you have testified to is
based on the hypothetical?
Mr. JOSEPHSON. That is correct.
Mr. RANGEL. And two Members of Congress who happened to be
Republican gave it to you?
Mr. JOSEPHSON. Well actually the staff gave it to me.
Mr. RANGEL. And you would assume they did it on behalf of
the two Republican members?
Mr. JOSEPHSON. I do assume that.
Mr. RANGEL. So, if, indeed, the information, by some
strange chance, is not accurate, and you based your testimony
on this hypothetical, you would have to revisit everything that
you testified to?
Mr. JOSEPHSON. I would revisit each issue with respect to
which the information might turn out to be inaccurate.
Mr. RANGEL. I am sorry?
Mr. JOSEPHSON. I would revisit each issue with respect to
which the information turned out to be inaccurate.
Mr. RANGEL. But as you testified today, the only evidence
that it is accurate is your confidence in the staffs of these
two Members. In other words, there is nothing to indicate that
it is official, that it is congressional; that if, indeed, you
found that the hypothetical had problems, then your testimony
based on the hypothetical would have to be different?
Mr. JOSEPHSON. Correct.
Mr. RANGEL. I have no further questions.
Chairman HERGER. The gentleman yields back his time.
I might mention there are 243 footnotes which are
documented, which anyone can look and verify or at least see
where the information has come from.
With that, I recognize for 5 minutes the gentleman from
Washington Mr. Reichert.
Mr. REICHERT. Thank you, Mr. Chairman.
Well, I really appreciate the way you answer your
questions, Mr. Josephson.
Mr. JOSEPHSON. I have been around for a long time.
Mr. REICHERT. Well, it is--as you probably heard while you
were sitting here earlier today, I spent 33 years in law
enforcement, so I am one of those that have been on the witness
stand before and raised my right hand. And I have given
straight answers to the questions that have been asked, and
also, of course, have had the opportunity to interview and in
some cases interrogate suspects who sometimes are not quite so
forthcoming in their answers. But I appreciate your
straightforwardness and your answers to the question. I think
it makes the process much easier and much more credible when we
have witnesses that are cooperative and ready to supply those
answers to us.
Mr. JOSEPHSON. Thank you, sir.
Mr. REICHERT. So I think you and I do have maybe a little
bit of something in common. We are both, I am guessing,
investigators at heart, and so I would just ask this question
first.
So you stated in the--stated that AARP's organizational
structure merits further investigation, and that an extensive
document production from AARP maybe could be provided to us.
I am interested in what types of documents should this
committee request from AARP so that we can better understand
the relationship between AARP's numerous for-profit and tax-
exempt affiliates?
Mr. JOSEPHSON. That is a long list. I would start with the
composition of the governing bodies of each of the affiliates.
I would want to know to what extent they also operated through
subcommittees, just as I would want to know whether AARP itself
operates through subcommittees. I would want to see, let us
say, 5 years' worth of minutes of each of the governing bodies
and its subcommittees. I would be very interested in flows of
cash among the affiliates. I would be very interested in the
internal controls that AARP applies and its auditor's opinion
as to the adequacy of those internal controls. I would be very
interested in looking at not AARP's consolidated 990, but in
the audit process. Each auditor, of course, audits separately
the books of each affiliate and then combines them for purposes
of consolidated reporting. I would be very interested in
looking at the elements of each consolidated financial
statement, consolidated 990. That is a brief summary.
Mr. REICHERT. And, hopefully, if I have made a request
today, could you give me the rest of the list that we might be
interested in?
Mr. JOSEPHSON. I could try.
Mr. REICHERT. I would appreciate that very much, thank you.
Mr. REICHERT. So have you had time at all to look through
the report that you have before you? I am sure you have had
some time to look at it.
Mr. JOSEPHSON. Not much.
Mr. REICHERT. Not much.
Mr. JOSEPHSON. The committee called on Monday. I read it
Tuesday. I prepared my statement Tuesday night and Wednesday.
Mr. REICHERT. So from what you have heard today and maybe
the report that you have had some time to look at, even though
briefly, would you say, would you agree, that there is some
interest there that should be followed up?
Mr. JOSEPHSON. I do agree with that.
Mr. REICHERT. There is something that we should at least
have some answers to some questions that should be answered?
Mr. JOSEPHSON. I do agree with that.
Mr. REICHERT. Thank you, sir.
I am particularly interested in another aspect of AARP in
their insurance plan, a massive grantor trust that processed
more than $6.8 billion in insurance premiums in 2009 before
kicking some of that money up to the tax-exempt AARP, Inc. Is
this an area where we should seek more information?
Mr. JOSEPHSON. It is interesting that you ask that
question. That was exactly the first question I asked the staff
member who contacted me, and she was unable to provide me with
any more information about that grantor trust. I am fascinated
to know more about that grantor trust, why it was created, how
it actually functions.
Mr. REICHERT. What do you think that might tell us?
Mr. JOSEPHSON. I don't know, but I am curious.
Mr. REICHERT. And why are you so curious, just from your--
--
Mr. JOSEPHSON. It is an unusual element. I have never seen
in the context of profit or nonprofit affiliates a grantor
trust playing such a key role.
Mr. REICHERT. Mr. Chairman, I yield back.
Chairman HERGER. The gentleman yields back.
The gentleman from Oregon Mr. Blumenauer is recognized for
5 minutes.
Mr. BLUMENAUER. Thank you, Mr. Chairman.
I guess I would just posit for a moment that AARP does a
whole range of activities that aren't a part of their
foundation. I mean, this is the revenue stream that deals with
people that I am working with on the Healthy Communities
programs, with health policy; that this is part and parcel of
what they do that is part of the revenue structure, which Mr.
Josephson seemed to feel was so complex.
If I understood Professor Hill correctly, you mentioned
Harvard University has over 100 affiliated entities. I wonder
if either of you are familiar with the AAA program?
Mr. JOSEPHSON. I am not.
Ms. HILL. No, not specifically.
Mr. BLUMENAUER. Here we have a program that operates in
about a dozen countries. It has an affiliate in, I think, every
single State, and some large States are divided. There is an
AAA of northern California and southern California. They are
involved with roadside service. They are involved--they have
programs that are involved with accommodations. They have a
travel service. They sell insurance for cars, boats. And I
think it is a fair assertion that to have all of those entities
involved in all those lines of business, that it would not look
substantially different than what is being waved around here
for AAA.
Ms. Hill, would you agree?
Ms. HILL. I would just--yes, I would agree as a
hypothetical matter. I would just like to reiterate how
important it is for all of us, and possibly the committee might
choose to do this, to look at the Schedule Rs going forward.
These are the information returns filed, signed by the
organization under penalty of perjury. This new Schedule R
really is important in understanding complex structures. It
would help provide baselines----
Mr. BLUMENAUER. Yes.
Ms. HILL [continuing]. To see what is unusual and what is
not unusual better than any of us could with our own
observations drawn from practice or scholarship.
But I have to say that just, even in teaching my exempt
organizations class, I have drawn on the board structures that
are more complex than what we saw in the report, because young
lawyers have to know about those structures.
But the Schedule R is so helpful to an inquiry like this.
Mr. BLUMENAUER. Thank you, Professor Hill. I don't want to
prolong this, but I think it would be useful for people who are
raising some what I think are rather bizarre notions and having
a conspiracy theory and so forth, just look at some other
complex organizations.
I do a lot of work with AAA. They have advocacy programs
for public safety. They are part of a group that we are working
with to try and deal with how we actually finance
infrastructure in this country. They have played an integral
role in public policy in my State and nationally. They lobby,
they get involved with politics, but, as I mentioned, well,
they are involved with banking and loans. They offer insurance
on autos, boats, homes, life, health, long-term care, RV, trip
cancellation and trip delay.
With all due respect to wherever the majority is going with
this, I do think, as I mentioned earlier, that there are some
legitimate areas where there are people that crossed the line
and need to be looked at. There are real questions about what
happens in some universities, where you talk about skewing
priorities, where the top 10 salaries are one football coach,
thank you very much, and how much tax-exempt and business
activities intermix.
These are all legitimate areas for inquiry, but to single
out AARP for legitimate policy differences--and on balance I
think the evidence suggests that they were better attuned, and
that it wasn't anything wrong with being concerned about health
care for children or for people with preexisting conditions and
advocating their position--I think that is unfortunate.
I would suggest take a look at AAA and compare that to see
if this is somehow bizarre, unwarranted or worthy of
investigation.
Chairman HERGER. The gentleman's time has expired.
The gentlelady from Kansas Ms. Jenkins is recognized for 5
minutes.
Ms. JENKINS. Thank you, Mr. Chairman, and thank you two for
joining us today.
Mr. Josephson, you referenced IRS enforcement and audit
capabilities in the tax-exempt arena in your testimony. You
also note that there is a lack of guidance in several areas
related to tax-exempt organizations, especially involving
501(c)(4) organizations.
I have a series of questions for you. Do you think the lack
of IRS oversight in this area is related to the lack of
guidance? What type of changes at the IRS would improve this
situation? And, finally, what additional guidance do they need
to issue health--to ensure that tax-exempt organizations
properly serve their missions?
Mr. JOSEPHSON. As my statement says, the IRS, in its work
plan for the next year that it released in December, announced
that it has decided to take a careful look at the whole
question of 501(c)(4) organizations. This, in my some 50 years
experience in the law, is the first time the IRS has ever
announced that this area of exemption would be the subject of
administrative scrutiny.
I can't say, frankly, that I am too hopeful of an immediate
product. As I was saying at the end of my original 5 minutes,
the Pension Protection Act asks the IRS to produce in a year a
report on supporting organizations, which it hasn't produced.
The Pension Protection Act asked it to produce a report on
donor-advised funds. I haven't seen hide nor hair of that
report.
And I am sympathetic to the IRS, because, as I say in my
statement, it really--in the exempt organization area it has
been starved of resources because the 4940 excise taxes,
originally conceived as supporting oversight in that area,
never was actually appropriated for that purpose. So I have to
be skeptical.
Ms. JENKINS. Okay. I can appreciate that.
You also stated that the compensation and benefits paid by
AARP and its affiliates are worthy of further legislative and
regulatory attention. Do you think it is appropriate for AARP's
CEO to have received $1.6 million in compensation in a single
year? And additionally, is it appropriate for AARP's volunteer
board to be holding multiday conferences at a resort described
as a beacon of grandeur and refinement among vacation
destinations in southern California and the world, a definitive
example of what a luxury resort should be, and is also named as
one of the top 10 resorts in the world today?
Mr. JOSEPHSON. During the 1972 political campaign, I was
Sargent Shriver's campaign manager. We stayed at the Coronado
one night in the course of the campaign. I can attest to the
quality of the resources in the Coronado. I have never thought
of spending the kind of money that would be required to return.
Ms. JENKINS. Thank you. I would yield back.
Chairman HERGER. The gentlelady yields back.
The gentleman Mr. Kind is recognized for 5 minutes.
Mr. KIND. Thank you, Mr. Chairman.
I want to thank our witnesses for being here and for your
testimony today.
Professor Hill, let me first start with you. More and more
organizations, it seems, are registering as (c)4s--we were just
talking about that a moment ago--and they are doing primarily,
if not exclusively, political activities now.
Do you think this is an area that is rife for more IRS and
congressional inquiry in regards to the (c)4 status and what is
going on there?
Ms. HILL. Yes, and I want to be clear about why. I do not
at all question the First Amendment right to express themselves
by making independent expenditures from organizational general
treasury. This is what the Supreme Court decided. This is now a
First Amendment right. The question is, is that a tax-exempt
activity?
My problem is not with the advocacy. I think it is
important to keep nonprofit, tax-exempt organizations in the
advocacy mix and not to get it--it is so expensive to be an
advocate that nonprofits of ordinary size cannot even afford to
play in that arena. I do think it is important.
My technical problem, if I could just talk about the
technical tax of this, is the following. You can do a lot of
independent expenditures. Fine. But what is the (c)4 activity
that is the primary activity?
Now, my taste runs to taking vacant lots and turning them
into playgrounds. I would love to see political operatives of
both political parties both devote themselves to that. But let
us not fantasize. Because of the way the IRS has, in fact,
interpreted the law, then lobbying can be the sole exempt
function of these kind of organizations that are springing up
like mushrooms in both parties. And I have always had trouble
with the IRS treating lobbying as an exempt activity, because I
think the original point was you would be converting vacant
lots to playgrounds, and you had to lobby the zoning board or
the city council to get it done. The lobbying was related to
that kind of purpose.
Ms. HILL. But now it is clear that you can use your
lobbying as your exempt purpose. That is a powerful, powerful
money-raising machine that has all sorts of implications for
advocacy and public policy, for the dollar amounts involved,
for the expectation of supportive, independent expenditures.
And I think that we need to look at not what the Supreme Court
has decided because they have decided that, we have to look at
whether lobbying is an exempt purpose or only a permissible
purpose in furtherance of and related to some other 501(c)(3)
exempt activity. And that I think is really important for the
use of 501(c)(4) structures.
Mr. KIND. Thank you for that comment.
Mr. Chairman, I might propose that this could be ripe for a
future congressional hearing for us to get into in a little
more detailed fashion. I think this is an area that does
deserve some greater scrutiny.
Mr. Josephson, let me turn to you.
Mr. JOSEPHSON. May I comment on your first question, sir?
Mr. KIND. Yes. I am limited on time though.
Mr. JOSEPHSON. I understand, and I will be very brief.
I also teach exempt organizations at NYU, and I asked my
class the other night, in light of the Citizens Union case, how
long they think it would take before a 501(c)(3) brings an
action similar to Citizens Union to exercise its right to
intervene in a political campaign and whether or not the
tradeoff between the exemption and the First Amendment right,
which would trump which?
Mr. KIND. That is an interesting inquiry. I don't think it
is going to take long at all.
Mr. Josephson, I was a little surprised when I heard you
testify that you only had a couple of days really to look at
the prepared investigative report that was submitted to you for
testimony this week, but in your testimony you stated that you
thought it was unprecedented in your experience for a tax
exempt organization to have eight affiliates; is that right?
Mr. JOSEPHSON. It is unprecedented in my experience, that
is correct.
Mr. KIND. Have you heard of any type of eight-affiliate
limit for tax exempt organizations though?
Mr. JOSEPHSON. No, I have not.
Mr. KIND. Would it surprise you if I told you that the
British Broadcasting Network, the largest social welfare
organization here in the United States, listed nearly 100
related entities on its Form 990 Schedule R?
Mr. JOSEPHSON. I would be flabbergasted as well.
Mr. KIND. Yes. I was just looking at that myself; I was a
bit flabbergasted as well. Or the fact that a Harvard
University entity has over 145 related entities listed on its
Form 990. And there are other organizations too that are larger
than AARP that have a lot more affiliated entities that they
are listing on their Schedule Rs, as Professor Hill just
indicated. That, I think, is going to deserve more attention as
we move forward.
Mr. JOSEPHSON. I agree.
Mr. KIND. Which brings me back to the original point. Why
AARP? Why today? Why under these circumstances when there could
be a whole host of organizations sitting up there right along
with them subject to the same inquiry and the same line of
questioning. And again, on the surface, it does smack of
political retribution. I mean, the same questions could have
been asked to AARP after the prescription drug bill was passed
in 2004 when you guys were in charge, but you didn't haul them
in front of us then because they were supportive 4 years ago.
Chairman HERGER. The gentleman's 5 minutes has expired.
The gentlewoman from Tennessee, Mrs. Black, will inquire
for 5 minutes.
Mrs. BLACK. Thank you, Mr. Chairman.
And before I begin my remarks and the questions for the
witnesses I want to once again say thank you to this committee
for doing what it is to be doing, and that is oversight.
Regardless of where we started, this committee is doing what
its role and responsibility are, and that is oversight. And I
hope we will have more of this. And I encourage those that are
trying to characterize this as a witch hunt will bring about
those concerns that they have that they are mentioning right
here today.
But let me go to my question. As a condition of the tax
exempt status of 501(c)(4), entities are expected to operate
for the benefit of the community. And though evidence suggests
that AARP may have strayed a bit from that mission, the size
and the extent of AARP's insurance-related business activities
compared to their social welfare programs and their executive
compensation suggests that maybe AARP may not be operating
primarily for the benefit of the community.
Indeed, AARP's royalty revenues--primarily from insurance
companies--nearly tripled from 2002, with $218 million, to
2009, at $656 million. They also report to have $2.2 billion
worth of assets and $1.4 billion worth of revenues for 2009.
Yet, at the same time, AARP's cash and in-kind contributions to
their foundation only increased by 11 percent, $3.1 million,
and their cash contributions to the Legal Counsel for the
Elderly actually decreased by 9 percent.
And in the last session I noted that, as Mr. Rand spoke
about when questioned where their dollars are going for their
advocacy, he started out by making a statement about percentage
of their revenues spent on their advocacy, and he very quickly
changed that to say the percentage of their expenditures. And
so as I look at the amount of revenue and how rapidly it has
grown by the various ways that they have allowed their label to
be used and been able to receive a royalty on that, it doesn't
appear that what they are getting in the royalty also matches
what they are doing in their advocacy.
Would that be something that the IRS would be looking at?
And it is either one of you, Ms. Hill or Mr. Josephson,
whichever of you would like to answer that.
Ms. HILL. I will start. Here is the way I look at the chart
and the discussion this morning. The measure of whether the
(c)(4) entity--and remember, I know nothing about this
particular case and I didn't come here claiming to know about
this particular case, but a (c)(4) that has an affiliated
501(c)(3) public charity is not obligated to contribute a dime
to that affiliated public charity. That affiliated public
charity could raise all its money from outside. So anything
they contribute to the (c)(3) is voluntary and is not a measure
of their own exempt activities. One has to look at whether they
are pursuing their own 501(c)(4) purposes and exempt activity
as a measure, and then one can discuss whether that has become
larger commensurately. But there is no requirement in fact that
the (c)(4)'s income from something like a royalty actually
match, then, a commensurate increase in its (c)(4) activities
because 501(c) organizations, tax exempt organizations,
heretofore have had broad latitude in defining programs, saving
money for later times, are making these decisions. Now Congress
is free to legislate otherwise, but they have not done so, or
States would be free to do that, but States have not done so.
So I think the looking at how many contributions, the scope
of the contribution to the (c)(3) is not the measure, and one
has to look at the (c)(4), but there is no benchmark and no
requirement under current law.
Mr. JOSEPHSON. I agree with Professor Hill, but I would
make a further comment if I may, and that is, listening to the
testimony this morning, AARP certainly made a point about the
section 501(c)(3) activities of its (c)(3) organizations. Yet,
assuming the chart in the investigative report is correct,
while it is not required to fund its (c)(4) monies with those
organizations, it certainly appears not to have done so
commensurate with the increase in its revenues. And if I may
also say so, its return on equity, if the report is correct, is
astonishing.
Mrs. BLACK. I am curious, and I know my time is up, but I
am curious, Mr. Chairman, even looking at the legality of this,
but it is the morality of it, too, in which the organization is
selling itself one way to those that are seniors that are
getting the services and actually how they are using their
money.
Thank you.
Chairman HERGER. The gentlewoman's time has expired.
Again I want to thank our witnesses for your testimony
today.
As a reminder, any member wishing to submit a question for
the record will have 14 days to do so. To all of today's
witnesses, if any questions are submitted, I ask that you
respond in a timely manner.
With that, the subcommittees are adjourned.
[Whereupon, at 2:20 p.m., the subcommittees were
adjourned.]