New York State Governor Andrew Cuomo settles the question of certain nonprofit executive compensation, and more; a new regime for New York nonprofits.
On Wednesday, January 18, Governor Andrew Cuomo took firm control of the issue of executive compensation for those providing services funded by the state. He promulgated an executive order directing state agencies to adopt rules limiting the use of state funding for executive compensation and administrative costs. Some action, with respect to the reimbursement of higher levels of executive compensation, was expected. The limits on other management costs reflect the governor’s deep concern with the price of caring for the people of the State of New York. The executive order applies to both nonprofit and for-profit entities alike.
Each executive state agency that provides state financial assistance or state-authorized payments to providers of services is subject to the executive order. That includes at a minimum: the Office for People with Developmental Disabilities; the Office of Mental Health; the Office of Alcoholism and Substance Abuse Services; the Office of Children and Family Services; the Office of Temporary and Disability Assistance; the Department of Health; the Office for the Aging; the Division of Criminal Justice Services, and the Office of Victim Services.
The executive order caps at $199,000, the amount of compensation reimbursable by state financial assistance or authorized payments. Amounts above that threshold will need to be paid for by other sources, such as income or charitable gifts. The definition of compensation (whether it includes deferred compensation and/or benefits) is yet unclear, as is the definition of the “executives” subject to this limitation. There was no attempt to tie these compensation issues to the existing reporting regime on IRS Form 990, or the well-regarded standard set forth in Internal Revenue Code Section 4958.
The executive order also imposes graduated limits on state support of “administrative costs.” No less than 75% of state funding may be directed towards the provision of direct care or services. This percentage will increase 5% annually, until reaching a minimum of 85% by April 1, 2015. This limitation is on all forms of state funding, not just those under a particular program such as Medicaid. This approach puts particular pressure on each executive state agency to define allowable costs, the provider institutions and their auditors to identify those costs, and private philanthropy to cover those costs the state will no longer fund.
The order directs each executive state agency to develop its own regulations and reporting systems to effectuate these limits. Agencies have the limited discretion to vary the compensation cap, but they are constrained by the approval of the director of the budget as well as a ceiling imposed by the federal government’s Rates of Basic Pay for the Executive Schedule promulgated by the Office of Personnel Management. Each agency is also directed to obtain “regularly” data from providers to assure compliance and report on the same to the director of the budget annually. It is yet unclear whether any attempt will be made to coordinate these efforts.
Failure to comply with these new regulations form the basis for termination or non-renewal of the provider’s contract or continued support of the provider, all subject to the commissioner’s sole discretion. The executive order goes so far as to direct the state to amend of existing provider contracts to bring them in line with these new standards.
The executive order was adopted immediately prior to a scheduled hearing by the Senate Standing Committee on Investigations and Government Operations, chaired by Senator Carl L. Marcellino, intended to examine executive compensation at nonprofits receiving state funding. That hearing is now scheduled for February 6. A report from Attorney General Eric T. Schneiderman—with respect to his recently commissioned Leadership Committee for Nonprofit Revitalization—is also expected shortly.
We shall be watching these developments closely, as a number of provider contracting, billing, and accounting practices will be affected. Governing boards of New York nonprofit providers should pay special attention to these developments.
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