October 01,2009

Grassley Statement on Two Charity-related Amendments Filed to Health Care Reform Bill

Mr. Chairman, while we are on the topic of compensation, I wanted to take theopportunity to discuss my amendments regarding executive compensation andgovernance of nonprofit organizations. They are Grassley amendments F7 and F8. I willnot ask for a vote on these at this time. These should be nonpartisan, good governanceproposals so if any of my colleagues here are interested in incorporating some version ofthese amendments I welcome your thoughts.

As many of you know, I have been engaged in oversight of the nonprofit sector for overeight years now. During this time, I have reviewed groups of nonprofit hospitals,university endowments, college athletic programs, and media-based ministries. I havealso reviewed individual organizations such as the American Red Cross, The NatureConservancy, American University, and the Smithsonian Institution. The Chairman hasjoined me in some of these reviews.

I think my amendment F7 speaks for itself. It simplify clarifies that the IRS has theauthority to ask what it is asking about governance and management practices revisedForm 990. I hope that we could agree that this makes without too much controversy. Iexpect that this amendment would have a negligible revenue effect.

My other amendment relates to eliminating a safe harbor related to nonprofit executivecompensation.

Section 4958 of the tax code imposes taxes on organization managers who essentiallyapprove or who engage in excess benefit transactions, including the payment ofunreasonable compensation.

The problem is that the intent of that statute was undermined by Treasury Regulationsimplementing this statute. The regulations create a rebuttable presumption, or a safeharbor, so that compensation will automatically be deemed reasonable if the charity doesthree things.

First, the compensation has to be approved in advance by an authorized body, such as aboard of directors, and at arms-length so there are no conflicts of interest. Second, theauthorized body must obtain and rely on data regarding comparability before making itsdecision.

And finally, it must document its decision-making process. While these are good steps totake, this safe harbor makes it impossible for the IRS to challenge compensation.The IRS stated as much in two recent studies it did. One study was focused on executivecompensation among a variety of charities and the other was part of a larger study ofnonprofit hospitals.

I personally found organizations hiding behind this safe harbor in my investigations. Forexample, the boards of both American University and the Smithsonian Institution usedthis safe harbor to rubber-stamp the compensation packages of Benjamin Ladner andLarry Small.

My amendment, as filed, would adopt the Joint Committee on Taxation’s proposal from2005. This proposal was also considered by the Panel on the Nonprofit Sector – anindependent coalition of charitable organizations that came to together at the request ofthe Chairman and me to respond to our staff’s proposals for charitable reform.Mr. Chairman, I ask unanimous consent that the Panel’s recommendation on thisproposal be posted in the record.

While there are three prongs to the 2005 JCT proposal, my primary focus is to eliminatethe safe harbor and hold the organization’s managers accountable when they have rubberstampedcompensation packages which they know to be unreasonable.

In addition, I propose that charities and nonprofits subject to the excess benefitstransactions tax disclose what type of comparable data they used to determinecompensation for their executives.

For example, my investigations have shown that for-profit comparisons are verycommon. One charity under investigation has a compensation study from a reputablecompensation consulting firm using comparisons to Britney Spears and Oprah Winfreyto justify a charity CEO’s salary. While I am not yet proposing we prohibit charitiesfrom using for-profit comparisons, I do think the public should have some informationabout how compensation was determined, including the industry and title of those usedfor comparisons.

I do have a request into JCT but I do not have a current score. But I understand thiswould raise revenue or would have a negligible revenue effect. Mr. Barthold, can you forconfirm that?

I understand that some believe that my two amendments are beyond the scope of thisbill. As you may suspect, I believe otherwise. A significant majority of the total assets inthe charitable sector sit within hospitals and their related foundations. In addition, theChairman’s Mark supports the creation of tax-exempt insurance companies through theco-op proposal and also creates at least two other tax-exempt organizations – acomparative research institute and a reinsurance entity.

More importantly, although I have not asked CBO or JCT for this analysis, I believe thateliminating the safe harbor for executive compensation would bend the health care costcurve. As evidence of that, I would like to highlight to two recent press stories.Mr. Chairman, I ask unanimous consent that these be posted in the record.

The Boston Herald just ran a story on the CEO of Boston Medical Center. In addition toher almost $1.5 million dollar salary from the Center, she also received over a $1 millionin cash and stock for serving on the boards of other organizations, some of whichengaged in business with the Center. This, however, is not the most egregious part.According to the article, in 2008, the Center paid her a $3.5 million retirement bonus –even though she doesn’t retire until January 2010. I strongly believe that individualsshould be compensated for their performance. But when the Boston Medical Centerexecutive was moonlighting for outside organizations to the tune of $1 million, I questionwhether she provided $1.5 million worth of services to the hospital.

I also question the appropriateness of a $3.5 million bonus when the hospital, which issupposed to be a charity, is so cash-strapped that it decided to sue the state ofMassachusetts for inadequate reimbursements for providing health care to the poor.The other article I would like to highlight is from The Chronicle of Philanthropy, whichjust released its annual survey of nonprofit executive salaries. The Chronicle reports that,despite the steep economic downturn, executive salaries at nonprofit institutionscontinued to grow. More importantly, the survey’s biggest earner was the CEO ofPartners HealthCare System in Boston. He received over $2.7 million in compensation,of which nearly $1.3 million was deferred compensation.

Let me be clear that I am not saying these amounts are per se unreasonable. I just don’tthink the IRS should be hamstrung with the presumption that compensation is reasonablejust because the organizations took advantage of the safe harbor. Keep in mind that forprofitorganizations have no such safe harbor under section 162(m).

There was much discussion Tuesday about the motives of non-profit organizations versusfor-profit organizations. Let me close by saying that all nonprofits are not tax-exempt, asmy staff’s recently released analysis of ACORN highlights. More importantly, taxexemptentities can be just as profit-driven as investor-owned entities. Sometimes theonly difference is that investor-owned entities return profits to shareholders while taxexemptsreturn profits to executives.

In the bill before us, there is nothing that would prevent the nonprofit co-ops from payingtheir executives what AIG executives made.

My amendment doesn’t set limits on compensation – it would just hold tax-exemptorganizations more accountable for what they pay their executives.As I stated earlier, I am not seeking a vote on these amendments but am happy to workwith those who may be interested.

Thank you, Mr. Chairman.