Proposed Regulations Limit Executive Compensation and Administrative Costs of New York State-funded Entities

by Proskauer - Not for Profit/Exempt Organizations
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[author: Lucia F. Deng]

On May 30, 2012, the public comment period began for proposed regulations issued by thirteen New York State agencies (including the Department of Health, the Office of Mental Health, and the Office of Children and Family Services) seeking to limit the executive compensation paid by, and administrative costs of, service providers that receive State funding. The proposed regulations were drafted to implement Executive Order 38, issued by Governor Cuomo on January 18, 2012. Public comment on the proposed regulations is available until July 14, 2012.

The proposed regulations apply to providers who (1) receive more than $500,000 of state support each year, and (2) receive at least 30% of their annual funding from the state. Each agency’s proposed regulations contain the following general requirements:

  • Limits on Administrative Expenses.
    • Commencing January 1, 2013, at least 75% of the State financial assistance or State-authorized payments received (directly or indirectly) by a covered provider for operating expenses must be used to provide direct care or services, rather than for administrative expenses.  This percentage increases by 5% annually until it reaches 85% by 2015.  The limit on allowable administrative expenses also applies to a subcontractor or agent that is a related entity of the covered provider if the subcontractor or agent received State funds or State-authorized payments from the covered provider.
  • Limits on Executive Compensation.
    • Commencing January 1, 2013, a covered provider (or related entity) may not use State funds or State-authorized payments to compensate any covered executive in excess of $199,000 per year.  The commissioner of an agency has some discretion to adjust this amount on a yearly basis within certain parameters.
    • A covered executive is “a director, trustee, managing partner, or officer whose salary and/or benefits, in whole or in part, are administrative expenses, and any employee whose salary and/or benefits, in whole or in part, are administrative expenses and whose executive compensation during the reporting period equaled or exceeded $199,000.”  If a covered provider contracts with a related entity for administrative or program services, the covered executives of the related entity are also considered covered executives of the covered provider.
    • Commencing January 1, 2013, a covered provider (or related entity) is subject to penalties where a covered provider’s (or related entity’s) compensation to a covered executive exceeds $199,000 per year (inclusive of State funds, State-authorized payments and any other sources of funding) and
    • exceeds the 75th percentile of compensation provided to comparable executives in other comparable providers as established by a compensation survey recognized  by the agency and the Director of the Division of the Budget; or
    • was not approved by the covered provider’s board of directors or equivalent governing body including at least two independent directors or voting members, or such review did not include an assessment of appropriate comparability data; and
    • the covered provider (or related entity) is unable to substantiate compliance with the requirements found in (i) and (ii) above with contemporaneous documentation acceptable to the agency.
  • The limit on executive compensation does not apply to compensation paid to covered executives for provision of specific program services outside his or her managerial duties.
  • The limit on executive compensation also applies to a subcontractor or agent that is a related entity of the covered provider if such subcontractor or agent has received State funds or State-authorized payments from the covered provider.
  • Waiver.  Agencies may grant a waiver from compliance with these regulations, in whole or in part, to a covered provider under certain circumstances and upon a showing of good cause.
  • Reporting.  Covered providers will be required to regularly report data to applicable agencies regarding the public funds they receive, the compensation of their executives and highest-paid employees and their administrative expenses.  It is anticipated that these reports may be submitted electronically using a state-wide form that will eliminate need to report to multiple agencies. The agencies are then required to monitor the providers for compliance with the regulations, and report the efficacy of the regulations to the Director of the Budget on an annual basis.
  • Penalties.  Non-compliance with these requirements may, at an agency commissioner’s discretion, result in termination or non-renewal of agency funding or a provider contract. However, the proposed regulations provide for an administrative review process, which grants providers the opportunity for a hearing and to correct any non-compliance over a period of at least six months prior to additional enforcement action or the assessment of penalties against them.

These proposed regulations, if adopted, will substantially influence the management and operations of many not-for-profit entities in New York, which make up a significant number of the covered providers that the regulations aim to regulate.  The language of each agency’s proposed regulations (which follow a substantially similar format) can be found at the links below:

Department of Health

Office for People with Developmental Disabilities

Office of Mental Health

Office of Alcoholism and Substance Abuse Services

Office of Children and Family Services

Office of Temporary and Disability Assistance

Office for the Aging

Department of State

Division of Criminal Justice Services

Office of Victim Services

Department of Agriculture and Markets

Department of Corrections and Community Supervision

Division of Housing and Community Renewal

In addition, not-for-profit entities should monitor the status of the Nonprofit Revitalization Act (the “Act”) proposed by Attorney General Eric Schneiderman earlier this year. The Act includes a requirement that not-for-profit boards must provide enhanced and independent oversight of executive compensation. These reform initiatives were summarized in our previous blog entry.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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