Hearing on AARP’S Organizational Structure, Management, and Finances

April 1, 2011 — Transcripts   
Health    Oversight   



HEARING ON AARP’S ORGANIZATIONAL
STRUCTURE, MANAGEMENT, AND FINANCES

________________________

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION
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April 1, 2011
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SERIAL HL-02
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Printed for the use of the Committee on Ways and Means

 

 

 

COMMITTEE ON WAYS AND MEANS
WALLY HERGER, California, Chairman, &
CHARLES W. BOUSTANY, JR., Louisiana, Chairman

SAM JOHNSON, Texas                       
PAUL RYAN, Wisconsin
DEVIN NUNES, California
DAVID G. REICHERT, Washington
DEAN HELLER, Nevada
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
XAVIER BECERRA, California
MIKE THOMPSON, California
EARL BLUMENAUER, Oregon
RON KIND, Wisconsin
BILL PASCRELL, JR., New Jersey

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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WITNESSES
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PANEL 1:

A. Barry Rand, Chief Executive Officer, AARP
Accompanied by, Lee Hammond, President, AARP Board of Directors

PANEL 2:
William Josephson, J.D., Of Counsel, Fried, Frank, Harris, Shriver & Jacobson LLP
Frances R. Hill, J.D.,Ph.D, Professor, University of Miami School of Law

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HEARING ON AARP’S ORGANIZATIONAL
STRUCTURE, MANAGEMENT, AND FINANCES
Friday, April 1, 2011
  U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.

____________________________

The subcommittees on Health and Oversight met, pursuant to call, at 9:00 a.m., in Room 1100, Longworth House Office Building, Hon. Wally Herger [chairman of the subcommittee on Health] presiding.

[The advisory of the hearing follows:]

______________________

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 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.  ‑‑ 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. Rangel.  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 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 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.  ‑‑ 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.  ‑‑ 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.]

MEMBER SUBMISSIONS FOR THE RECORD


The Honorable Mr. Stark
Submission 1
Submission 2
Submission 3

QUESTIONS FOR THE RECORD

The Honorable Mr. Herger, The Honorable Mr. Boustany, and The Honorable Mr. Reichert
Letter to AARP

Response to Letter
AARP
Attachment


SUBMISSIONS FOR THE RECORD

David C Stanley
The 60 Plus Association -The Honorable Mr, Zion
The 60 Plus Association – Mr. Martin