On November 6, 2019, New York’s Office for People with Developmental Disabilities (OPWDD) amended its executive compensation regulations to conform to a decision by New York’s highest court. OPWDD’s executive compensation regulation was first implemented in July 2013 as a result of Governor Cuomo’s Executive Order 38 (EO 38), issued in January 2012.
The October 18, 2018 decision in the matter of LeadingAge N.Y., Inc. v. Shah[1] validated the “hard cap” for executive compensation included in EO 38, but held that the “soft cap” was invalid. While the Court’s decision considered Department of Health (DOH) regulations, OPWDD regulations contained similar provisions relating to both a “hard” and “soft” cap on executive compensation. As background, the hard cap limits the amount of state funds a covered provider can use to pay executive compensation to a maximum of $199,000 unless a waiver is requested from the funding agency. The soft cap imposed certain requirements on a covered provider if it used private funds to pay compensation in excess of $199,000. Specifically, the Court of Appeals determined that the hard cap was within the regulatory agency’s rule-making power. However, the soft cap exceeded the agency’s authority because it ventured beyond legislative directives relating to the efficient use of state funds and into the realm of broader public policy concerns.[2]
As a result, the OPWDD amended the regulations relating to executive compensation found in 14 NYCRR Part 645 to remove the soft cap provisions formally found at 14 NYCRR § 645.3(b). Under the amended regulations, an organization may pay executive compensation in excess of $199,000 if (i) it uses private funds to pay the amount over $199,000; or (ii) it requests a waiver from the regulatory agency to use state funds to pay any amount over $199,000.
The restrictions to executive compensation were implemented to help ensure that state funds are expended in the most efficient and effective manner to maximize the quality and availability of public care.[3] While EO 38 was originally put into effect on July 1, 2013, the Court’s decision brings EO 38 back to the forefront as state agencies revise relevant regulations to comply with the Court’s decision. It is unclear whether the amendment of these regulations will result in increased scrutiny by OPWDD and other regulatory agencies. However, a desire to balance budget shortfalls may be a driving factor when decisions are made on waiver requests. With the potential for increased focus on executive compensation, it is a good time for the OPWDD and other social service providers to review and evaluate their compliance under Part 645, including
- Confirm that your agency is a covered provider subject to the executive compensation limits.
- Review executive compensation with covered executives to determine whether the executive compensation limits are applicable.
- Consider whether individuals serve in a dual capacity (i.e., executive director and director of nursing). The executive compensation limit of $199,000 applies only to the compensation allocated to administrative duties.
- Review executive compensation in excess of $199,000 to determine how amounts over $199,000 are paid—with state funds or private funds.
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Submit waiver requests for executive compensation paid for with more than $199,000 of state funds or state-authorized funds.
Waivers will only be granted by OPWDD, where a covered provider demonstrates good cause supporting the waiver and provides documentation to support the request. Waiver requests must be filed with the EO 38 Disclosure Form at the same time the organization’s cost report is due. OPWDD will consider the following factors which should be addressed in the waiver request:
- Whether the compensation is comparable to compensation at other organizations of similar size, within the same program service sector, and in similar/comparable geographic area.
- Extent to which the organization would be unable to provide its program services paid with state funds or state-authorized payments at the same level (quality and availability) without obtaining reimbursement for the excess compensation above $199,000.
- Nature, size, and complexity of the organization’s operations and program services provided.
- Review and approval process used to set compensation, including whether it was approved by the governing body (with at least two independent members), whether comparable compensation information, including a compensation survey, was used, and whether such review/approval was contemporaneously documented.
- Qualifications and experiences possessed by or required for the covered executive or position.
- Organization’s efforts, if any, to secure individuals with the same levels of experience, expertise, and skills for the position at lower levels of compensation.
If granted, a waiver is in effect only for the reporting period for which the waiver was sought.[4]
For providers that are tax-exempt under Internal Revenue Code Section 501(c)(3), the information required to request a waiver is similar to that required to confirm compensation being paid is fair and reasonable as required by Code Section 4958.
Failure to request a waiver will result in OPWDD notifying the covered provider of its non-compliance, after which the covered provider may propose a corrective action plan to cure the non-compliance. OPWDD has broad authority to assess penalties, including the redirection of state funds or state-authorized payments and the suspension, modification, or revocation of the provider’s operating license if the cover provider fails to provide a corrective action plan or to fully implement such plan.[5]
- Matter of LeadingAge N.Y., Inc. v. Shah, 32 N.Y.3d 249 (2018).
[Back to reference] - Id. at 268.
[Back to reference] - Id. at 266.
[Back to reference] - 14 N.Y.C.R.R. § 645.4.
[Back to reference] - Id. § 645.6.
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