Public Policy Analysis & Opinion
Insincerity: The enemy of clear language
NAIC shirks standard annual financial filings
By Kevin P. Hennosy
I know some people seem to thrive on forwarding e-mail-based jokes and/or smut to long lists of “friends.” I suppose this is a form of life in the spotlight for these as yet uncelebrated arbiters of humor and questionable taste. I hope it works out for them. For the most part, I rely on spam filters and the delete key to deal with their unrecognized artistry.
However, once in a great while one of these “have you seen this” missives provides something interesting to look at. In mid-December, several friends in the insurance sector forwarded the same group e-mail to me. Since the subject of the communication concerned the budget of the National Association of Insurance Commissioners (NAIC), I will let individual readers decide whether to classify the e-mail as humor or obscenity.
The e-mail contained an A.M. Best Company wire service story on the NAIC budget. A.M. Best dutifully reported the happy-talk baby-food regularly dished out to the trade press by the NAIC staff leadership, which this column tends to ignore. The wire service submissively reported an observation by NAIC Executive Vice President Catherine J. Weatherford: “The NAIC is just like lots of other nonprofits.”
I have been reading insurance regulatory treatises for a long time now, so I admit that my sense of humor is somewhat skewed. Yet, Mrs. Weatherford’s observation struck me as particularly funny. It would be like Edward John Smith, the captain of the Titanic, observing that his vessel “is just like lots of other boats.” Even a cursory observation of either overgrown behemoth presents some obvious distinguishing features—beginning with questionable leadership at the helm.
Weatherford’s farcical statement begs for some clarification, in case anyone should be confused. Cathy Weatherford is not Dorothy Day. The NAIC is not the Catholic Worker Movement or even an urban homeless shelter. The NAIC does not subsist on charitable donations. The NAIC does not feed, clothe, shelter or educate the needy. The NAIC senior staff has not taken a vow of poverty. In other words, nonprofits generally serve the public good on shoestring budgets, and that is not an accurate description of the NAIC.
After reading and re-reading Weatherford’s statement, I felt compelled to do something that I usually try to avoid. I went to the NAIC Web site and perused the association’s “news” releases. I really hate to read NAIC news releases.
The NAIC issues press statements that communicate with all the magnetism (and credibility) of PRAVDA at the height of the Soviet Empire. THE FIVE YEAR PLAN FOR PIG IRON EXCEEDED AGAIN! (Counter-revolutionary rumors of breadlines debunked on page two.)
Sure enough, the NAIC Web site carried a statement trumpeting the glorious passage of another annual budget designed to foster regulatory modernization. No, I am really not making this up. Then the message of the day came forward in a particularly heavy-handed fashion. Contrary to accusations made by agitators in the insurance lobby, the NAIC’s books are open and transparent.
The release contains the usual selection of canned quotes conjured up for attribution to one insurance commissioner or another using phrasing that no one would ever mouth. For example: “ ‘I am proud of the level of transparency and disclosure in the NAIC’s budget process,’ said Sandy Praeger, NAIC vice president and Kansas insurance commissioner. ‘We continue to believe that the NAIC budget and financial reporting processes are as transparent as any nonprofit you will find.’” One could insert the term “comrade” at the end of either sentence and not miss a beat.
In case the reader missed the deftly hidden message about “transparency” and “disclosure” the NAIC spin-doctors included a second statement attributed to Weatherford herself. “ ‘The NAIC budget serves as a very effective tool to steer the membership’s initiatives into 2006 and beyond,’ said Catherine J. Weatherford, NAIC executive vice president and CEO. ‘Clear and full disclosure is what the process is all about.’”
Sure thing, Cathy, the books are wide open, just like a lot of other nonprofits.
With this double-shot of Newspeak from the NAIC truth-tenders, the reading audience receives a warm and fuzzy feeling about the association leadership’s commitment to financial disclosure and transparency. Yet, forming an opinion after reading an NAIC news release is akin to driving a car after drinking a pitcher of martinis—not a good idea.
With regard to the NAIC’s finances, actions could speak louder than statements concocted for news releases. The NAIC could behave like other nonprofit associations that are tax-exempt under section 501 (c) (3) of the Internal Revenue Code. The NAIC could simply file a routine financial statement with the Internal Revenue Service (IRS). The financial statement is known as a Form 990.
Filing a Form 990 is a standard practice for most nonprofit organizations. If an organization “normally” receives more than $25,000 a year, the management files with the IRS. This “normal” status includes organizations with gross receipts for the immediately preceding three tax years that average $25,000 per year or more. Organizations with gross receipts of less than $100,000 and total assets less than $25,000 at the end of the year may file a short-form Form 990 called Form 990-EZ. Organizations that are classified as private foundations (generally organizations that receive funding from a very few sources) are required to file a Form 990-PF. Generally, churches are not required to file a Form 990 (but interestingly some churches file voluntarily).
The NAIC, the Gray Lady of Insurance Regulation, received approval from its dangerously detached membership for a reported $60 million-dollar budget in December 2006. Nevertheless, the NAIC’s senior management has no plans to file a Form 990. Which begs the simple question: Why?
To understand what the NAIC management might be hiding, it is useful to understand what we could learn from a Form 990. Where does the association’s money come from, and where is the money spent? What is the total compensation of the top association staff members? Does the tax-exempt entity lobby and, if it does, how is the lobbying accomplished? These are basic questions that deserve definitive and honest answers.
Lobbying by tax exempt organiza-tions like the NAIC is generally frowned upon but not completely prohibited by the Internal Revenue Code. That is why a Form 990 filing requires strict disclosure of all lobbying activity on the part of the organization.
The NAIC adopts a cagey attitude about its lobbying activity. In recent years, the NAIC’s federal lobbying spending has grown exponentially. According to the Center for Responsive Politics, Weatherford, a former Oklahoma insurance commissioner, funneled $420,000 to the lobbying firm of former Oklahoma Congressman J.C. Watts during the 2003-2005 reporting period. (See the article, “From KC to K Street,” in the March 2006 issue of Rough Notes.) At press time the 2006 report was not yet available.
By any fair-minded assessment, a $420,000 expenditure is material in understanding the NAIC’s finances and business practices. The NAIC staff should notify the IRS of this material expenditure, and the proper way to make that disclosure is through a Form 990 filing.
The NAIC’s reluctance to file a sworn public statement of its financial and business activities is very troubling to those who follow insurance regulation. Most important, all the information contained on a Form 990 is sworn to be accurate by an officer of the association. This is not true of NAIC “budget proposals” or press releases. Officers of nonprofit associations who knowingly file inaccurate or misleading information on a Form 990 are subject to criminal prosecution, jail time and fines.
In the absence of a filed Form 990, there is no sworn and official public statement of the NAIC’s finances and business operations. No one can really be sure how much money the NAIC realizes in revenues and what the senior staff does with it. The NAIC’s corporate structure and business operations remain shielded from serious review.
From time to time, insurance trade associations have gently pressured the NAIC to file a Form 990. The trade associations’ requests were most recently rejected by the NAIC staff because the NAIC claims to have an exemption from filing in the form of a letter from the IRS. The NAIC has not made this letter available for public review.
The NAIC appears to be relying on an IRS opinion letter from the early 1980s. The association asked for the letter in order to avoid paying certain state taxes in New York in connection with sales income generated by the NAIC’s Securities Valuation Office.
But the NAIC is not the same legal entity that it was when the IRS issued that opinion letter. At that time the NAIC was an unincorporated association of state officials with an annual budget of $5 million. I believe it is safe to say that in the early 1980s, the bar bill at the NAIC’s quarterly conventions exceeded the executive vice president’s annual salary.
Today, the NAIC is a Delaware-chartered corporation with affiliate entities. The NAIC’s executive vice president, who insists on brandishing the title CEO, is now paid at least $350,000 per year, a princely sum in the Midwest. The NAIC that the IRS opined on in the early 1980s does not legally or functionally exist anymore. The IRS should take a good close look at today’s NAIC.
Even if the IRS granted a filing exemption letter to the NAIC under its current corporate status, there is really no reason why the association should use it. There is simply no good reason why the NAIC should not file a Form 990.
The NAIC management’s continuing refusal to file the standard Form 990 raises suspicions concerning the association’s finances and business practices. I believe that the Burka of Secrecy which covers the NAIC’s pecuniary charms hides something more than corporate modesty—but without police or subpoena power we cannot know.
As an association of state officials, the NAIC should err on the side of openness and public accountability—not just talk about it. The Newspeak phrases coming out of the NAIC do nothing to improve its faltering standing in public policy circles. In the words of George Orwell: “The great enemy of clear language is insincerity.” *
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States and is an adjunct professor of political science at Avila University. Hennosy publishes a quarterly briefing paper on the activities of the NAIC, which is available at www.spreadtherisk.org.