Curbing Excessive Executive Compensation

On July 18, NPCC hosted a webinar with the Governor’s special counsel, Jeremy Creelan to discuss draft regulations and answer members’ questions about Governor Cuomo’s Executive Order 38, issued in January 2012. EO 38 is designed to limit executive compensation and administrative expenses at nonprofit as well as for-profit entities that receive State funds or State-authorized payments.

The Governor previously established an interagency working group comprised of 13 State agencies that, along with the State Division of Budget (DOB), will implement the Order. The interagency group will also clarify statewide policy issues and questions that arise with service providers.

Creelan noted that the Governor’s office recognizes that the majority of nonprofits are law abiding groups and that these regulations are designed to address abuses by a relatively small number of entities that rely largely on State funds and either pay excessive executive compensation or spend a disproportionate amount on administrative costs rather than on program services.

Fran Barrett, recently appointed Interagency Coordinator for Nonprofit Issues in the Governor’s Office, noted that the Governor’s office made great use of data gathered from surveys undertaken earlier this year that many nonprofit organizations completed.

Creelan said that until now, there have been no clear State standards to identify abusers and no clear rules for conscientious providers to follow. It is their hope that these regulations will provide such guidance.

Who’s Covered?

The new regulations will apply to both for-profit and nonprofit organizations that meet three criteria: (1) they receive 30 percent of their annual revenues from State funds or State-authorized payments; (2) they receive at least $500,000 in State funds or State-authorized payments each year; and, (3) they have received such funding for at least two years prior to the reporting period. Subcontractors or agents of covered providers and related entities will be covered to a limited extent, and the details of such coverage are being considered now as the Administration reviews comments on proposed regulations issued in May. In addition, covered providers must provide services directly to members of the public; certain types of services such as policy development and research are not considered program services. Most for-profit entities are not covered providers, unless they provide program services that are supported by State funds or State-authorized payments and otherwise meet the threshold criteria. The regulations address only limits on the use of State-funded operating expenses, not capital expenses. (There are additional exemptions for certain organizations such as certain child care providers, all units of government, and providers of products rather than services.)

The office is hoping to create a simple, electronic form that providers will complete requiring only information that is germane. It will be accessible to all participating State agencies, as well as the State DOB. Creelan notes that an additional benefit of capturing this information is that it will provide a snapshot of all providers receiving these funds (which doesn’t currently exist), which should be of value in creating policy and better understanding the provider community.

There are a number of open questions that will be clarified in the near future, such as timing issues regarding effective dates, reporting periods, and waiver applications. Creelan emphasized that the final regulations will not become effective until all of the unanswered questions regarding both implementation and the standards themselves have been answered.

What’s Required?

EO 38 stipulates: —At least 75 percent of State funds or State-authorized payments must go to direct care or services (by April 2015 that percentage will increase to 85%); —State funds or State-authorized payments used for executive compensation will be capped at $199,000 for each covered executive. —Covered executives will include directors, officers, trustees, partners, and certain of the highest paid key employees.

Covered providers can use other funds to pay executive compensation, but if their executive salaries exceed the 75th percentile of such salaries according to salary surveys that will be identified or recognized by the State agency, the organization may be subject to review or penalties. Creelan noted that they are working on determining which salary surveys will be acceptable and made available to providers.

In cases of providers that have contracts with multiple agencies, an appropriate lead State agency will be designated so that reporting and waiver requests can be streamlined. Providers wishing to seek waivers will contact their lead agency.

Thirteen State agencies are involved with implementing EO 38 along with the Department of Budget. Proposed regulations for implementing the Executive Order have been released by the State agencies. Each of the applicable agencies has posted its draft proposed regulations on its website: Office for the Aging: www.aging.ny.gov/News/2012/2012PR2.cfm. Office of Victim Services: www.ovs.ny.gov/news/NewsArticle/12-05-16/executive_order_no_38.aspx. Division of Criminal Justice Services: www.criminaljustice.ny.gov. Office of Mental Health: www.omh.ny.gov/omhweb/policy_and_regulations. Office for People with Developmental Disabilities: www.opwdd.ny.gov/regulations_guidance/opwdd_regulations/limits_on_administrative_expenses_and_exec_compensation. Office of Alcoholism and Substance Abuse Services: www.oasas.ny.gov/regs/documents/Part812.pdf. Office of Children and Family Services: www.ocfs.state.ny.us/main/legal/Regulatory/pc. Office of Temporary and Disability Assistance: http://otda.ny.gov. Department of Health: www.health.ny.gov.

More about EO 38 is at www.governor.ny.gov/executiveorder/38 and at www.governor.ny.gov/press/05162012State-Funded-Providers.

Creelan noted that this is a complex undertaking and that much remains to be determined. The administration is working very hard to ensure that final regulations and the implementation process are clear and that they do not impose a substantial burden on providers.

Questions and comments can be sent to Jeremy Creelan at [email protected].

NPCC members can listen to a recording of the webinar at www.npccny.org/info/EO38webinar.

This article originally appeared in the August 2012 issue of New York Nonprofits, the monthly publication of the Nonprofit Coordinating Committee of New York, Inc. www.npccny.org