Comments of Lawyers Alliance for New York on Executive Compensation Regulations

Transcription

1 Comments of Lawyers Alliance for New York on Executive Compensation Regulations July 16, 2012 Lawyers Alliance for New York ( Lawyers Alliance ) respectfully submits these comments on the proposed executive compensation regulations (the Regulations ) to each of the New York State agencies that have promulgated proposed regulations. We urge the State to clarify and modify the Regulations in order to achieve appropriate oversight of providers contracting with New York State without unduly burdening nonprofit organizations. Lawyers Alliance is the leading provider of business and transactional legal services to nonprofit organizations that are improving the quality of life in New York City neighborhoods, and annually represents more than 600 nonprofit organizations on more than 1000 legal matters. Our client base consists in large part of human service providers with budgets under $20 million and high dependence on government contracts to help them provide vital programs to communities and residents in need. Lawyers Alliance works with nonprofit boards of directors to develop strong oversight and governance practices and educates the sector on board responsibilities and executive compensation, and we will work to inform and educate our clients on the new Regulations once finalized. Lawyers Alliance supports the State s efforts to raise the accountability level for agencies receiving state dollars. As recipients of public dollars, nonprofit organizations have an obligation to ensure that those dollars are spent in furtherance of the public good and not to enrich their highest executives. Nonetheless, human capital is an essential resource for nonprofit organizations to be successful. These organizations should have the ability to make appropriate investments in their administrative infrastructure, hire and retain those employees who are best qualified to provide high quality services to New York State s residents, and reasonably compensate the employees who will ensure proper legal, fiscal and programmatic oversight. The Regulations should not limit their ability to do so. We note that nonprofit organizations are already subject to New York Attorney General oversight as well as Internal Revenue Service ( IRS ) regulations. The Attorney General has the authority to bring an action against one or more board members for the neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets 1, including excessive compensation of employees of the organization. In addition, under its intermediate sanction rules 2, the IRS can impose penalties on both board members and 1 NPCL Section 720(b). 2 I.R.C

2 individuals who benefit from compensation that is excessive and/or not properly reviewed and approved by board members. Annual reports to the IRS (Form 990 Part VI) are required to contain not only salary data for top staff but also provide a description of how executive compensation is established, including whether the organizations collect and use compensation data for similarly qualified persons in comparable positions at similarly situated organizations. State contracting agencies have access to this compensation information through both these public reports and their own communications with nonprofit organizations. In our role as counsel to smaller nonprofit organizations likely to be subject to the Regulations, we have identified a number of concerns with the Regulations as currently drafted, with the hope these comments will be useful in facilitating clarity and compliance by the nonprofit sector, as well as ensuring that the Regulations are not unnecessarily burdensome on the organizations with limited infrastructure that form the backbone of human services in New York State. For purposes of these comments, we have referenced the version of the Regulations promulgated by the New York State Department of Health. Unless otherwise noted, section references were made to that version of the Regulations, but intended to address the corresponding sections of each version promulgated by the applicable State agencies. 1. Narrow the Scope of Covered Providers One of the first challenges service providers will face is making the initial determination of whether or not they are covered providers and therefore subject to the Regulations. Ensuring that the definition of Covered Provider is as clear as possible will facilitate compliance by those subject to the Regulations while preventing unnecessary burden on those not covered by the Regulations. A. Payments through municipal or county contracts should not be considered for purposes of determining whether provider is covered. As currently drafted, whether the thresholds for inclusion as a Covered Provider (as defined in Section1002.2(d)) are met is dependent not only on funds received through direct payment or contracts with State agencies, but also through indirect receipt of State funds through payment or contracts with other governmental agencies, including county or local government units. Inclusion of funds administered through municipal and county governmental units is problematic because it would intrude on the contracting authority and unnecessarily burden such governmental units. Municipal and county governmental units have their own oversight processes for municipal and county contracts. Requiring such contracts to be subject to the Regulations would be duplicative and confusing. Furthermore, such a requirement would place an unnecessary administrative burden on municipal and county governments, because they would be obligated to report to each contractor the amount funding attributable under each contract to State-Authorized Payments or State Funds. 2

3 An additional difficulty of this broad definition (as it appears in the definitions of covered provider, State-Authorized Payments, and State Funds in Sections (d), (k), and (l), respectively) is that contracts between service providers and municipal or county governmental units rarely specify how much of the contract is funded by the State. As a consequence, a service provider will have no way of calculating how much of its municipal or county contract should be included for purposes of the definitions of Covered Provider, State-Authorized Payments or State Funds. This inability to obtain information critical to determining compliance with Regulations will result in confusion and in the possibility of lower compliance levels. We recommend that funds awarded or granted by county or local governmental units be excluded from the definitions of Covered Provider, State-Authorized Payments and State Funds. B. The Regulations Should Cover Only State-Authorized Payments Our understanding of the intended operation of the definitions of State- Authorized Payments and State Funds is that the difference between the two sources of funding centers around whether the funds in question are allocated through a reimbursement connected to a provider s license (State-Authorized Payments, consisting largely of Medicaid payments) or through service contracts or grants awarded through a State agency (State Funds). Excessive compensation paid to nonprofit executives at any organization can stain the reputation of the sector and should not be tolerated, and nonprofit organizations that pay excessively should be targeted with enforcement action, However, the remainder who pay appropriately should not be burdened. Inasmuch as the impetus for this extraordinary regulatory overhaul was reportedly excessive compensation at one contracting entity that is heavily dependent on Medicaid reimbursement funding, these regulations should not be extended to entities that receive only State Funds through contract awards. In the case of State Funds awarded by a State agency, such State agency has multiple opportunities to review, and if appropriate reject, a provider s proposed compensation of all staff under the contract and the administrative expenses. This happens both when the provider responds to a request for proposals from the State agency, and again when the State agency awards a contract to the provider. In each instance, the State agency may make a determination of whether the proposed expenses are appropriate under the circumstances, and may disallow an award to a provider that it deems to be excessively compensating its executives or whose administrative expenses are too high. 3

4 Because of the checks and balances already in place with New York State contracts, we propose that only State-Authorized Funds be covered by the Regulations. C. In-state Revenues The definition of Covered Provider in Section (d) of the Regulations describes the need to determine whether thirty (30) percent of in-state revenues are from State Funds or State-Authorized payments. However, instate revenue is not defined. Because the threshold calculation is so critical for determining whether a provider is subject to the compensation requirements, we urge the inclusion of a clear and simple definition of what should count as in-state revenues. We propose the reference to in-state revenue be removed, and Section (d)(2) altered to read as follows: (2) at least thirty (30) percent of whose total support and revenue for the most recent reporting period were derived from State funds or State-authorized funds... This change would eliminate the need to make the determination of which funds are considered in-state and which are not. Such a determination would be complicated because nonprofit organizations do not segregate contributed income by whether it originated in New York or out of state. Internet solicitations, for example, may be intended to reach a New York audience, but may in fact result in contributions from people located outside of New York. Furthermore, a contributing private foundation may have multiple offices through the United States, with an office in New York but headquarters elsewhere. Using total support and revenue instead of in-state revenue both (a) eliminates the confusion described above and (b) tracks the revenue thresholds used to determine whether nonprofit organizations are required to include audited financial statements with their CHAR 500 filings with the New York Attorney General. 2. Clarify Reporting Period and Waiver Application Due Date As currently drafted, the Reporting Period is defined in Section (j) as the calendar or fiscal year of the Covered Provider. Waivers are due sixty (60) days prior to the Reporting Period, or at least sixty (60) days prior to the date of the contract or its renewal or extension (Section (a)). However, due to the prescribed process for providing services under State (as well as county or local) contracts, it will be almost impossible for providers to calculate at the beginning of a Reporting Period the amount of their funding that will come from State Funds or State- Authorized Payments. Additional complications include the fact that the fiscal years of New York City and New York State are not aligned, and the fact that Covered Providers have 4

5 (especially in recent years) been forced to accept mid-contract funding cuts for the services they provide. Similarly, determining when a waiver application must be submitted is complicated by State contracting procedures. The deadline of at least sixty (60) days prior to the date of the contract or of its renewal or extension is not a clear concept, because the date of contract does not have a clear meaning. This is because the dates on which contracts are awarded, contracts are approved or filed, contracted services must begin, and Covered Providers are actually reimbursed under their contracts are all likely to be very different. For these reasons, in order to allow Covered Providers to make an accurate calculation of their receipt of State-Authorized Payments and State Funds, we recommend that the report due under the Regulations contain financial information concerning a completed Reporting Period, instead of the pending or forthcoming one, and that such report be due on a similar schedule as the IRS Form 990 or NYS CHAR 500 (i.e., the 15th day of the fifth month following the end of the fiscal year) 3. The decision to apply for a waiver for the pending or forthcoming Reporting Period should be triggered by the outcome of the most recently completed Reporting Period, as the determination of whether a waiver is needed cannot accurately be made in advance based on anticipated status as a Covered Provider. Under this proposal, the waiver would apply to contracts for State Funds or State-Authorized Funds for the current year based on the previous year s Reporting Period. While not a perfect solution, as it will require the Covered Provider to project its anticipated status based on past reporting period(s), it will allow for a clearer application of the Regulations and the waiver process. 3. Limits on Executive Compensation and Covered Executives A. Eliminate the 75th Percentile Cut-off The 75th percentile stipulation for waiver exemptions is troubling because it will discourage Covered Providers from attracting, assigning to statesupported projects and appropriately compensating those employees who are able to provide the best and highest quality services to New York citizens under their State contracts. While we acknowledge the need to support efficiency and value in State contracting efforts, in our view this 75th percentile cut-off does not achieve that goal. Instead, organizations that obtain and use relevant comparables should be allowed to rely on those comparables unless they are paying above the comparables, and only if they are paying in excess of the comparables should they be required to seek the waiver anticipated. 3 See Instructions for Form 990 Return of Organization Exempt From Income Tax, 6, Instructions for Form CHAR 500, 5, 5

6 First, the 75th percentile band creates, in effect, an artificial and arbitrary line that will result in unintended consequences. Like the $199,000 cap itself, this bright line will encourage organizations that should pay compensation at lower levels to pay up to the 75th percentile of comparable compensation with the expectation that they will not be required to seek a waiver even though that level of compensation may not be appropriate. In contrast, organizations that would otherwise pay employees in the upper 25th percentile after reviewing appropriate and available comparables may need to hire less qualified staff, or lose desired and needed staff, because they will not be assured of a waiver and could face penalties if they unsuccessfully undertake the waiver process. Therefore, we believe that the specific operation of requirement that a Covered Provider seeking to take advantage of this provision pay its Covered Executives less than the 75th percentile of average of comparable providers is unworkable and will be unfair to those organizations that may pay their Covered Executive(s) something very close to but above the 75th percentile level. We appreciate the effort, outlined in Section (b), to establish circumstances under which a Covered Provider paying over $199,000 will not be required to apply for a waiver. Our recommendation is that nonprofit organizations that follow a prescribed process, including the collection and use of comparable compensation data, should not be required to file the waiver. B. Clarify When Penalties for Excess Compensation will be Assessed As currently drafted, Section (b) is framed in the negative and is therefore somewhat difficult to interpret and follow. The structure and content of the regulation may lead to confusion as to whether a covered provider paying a Covered Executive above $199,000 is subject to penalties. We assume that the Regulation s intention is to prescribe that, in order for the provider to avoid paying penalties, a covered provider paying a Covered Executive more than $199,000 should (i) pay such Covered Executive compensation that is comparable to similarly situated executives, (ii) ensure the salary was reviewed and approved by the appropriate governing body, and (iii) upon request, substantiate the requirements (i) and (ii) above. We propose the following changes to Section (b) for clarification: (b) For the period commencing January 1, 2013, except if a covered provider has obtained a waiver pursuant to section of this Part, if a covered provider or a related entity s executive compensation given to a covered executive is greater than $199,000 per annum (including not only State funds and State-authorized payments but also any other sources of 6

7 funding), such covered provider may be subject to the penalties set forth in section of this Part unless: (i) the compensation paid to such covered executive is comparable to the compensation paid to other providers of the same size and within the same program service sector and the same or comparable geographic area as established by a compensation survey identified or recognized by the department and the Director of the Division of Budget; and (ii) the compensation paid to such covered executive is reviewed and approved by the covered provider s board of directors or equivalent governing body including at least two independent directors or voting members, and such review includes an assessment of appropriate comparability data; and (iii) the covered provider or related entity is able to, upon request by the department or its designee, to substantiate the requirements in (i) and (ii) above with contemporaneous documentation in a form and level of detail sufficient to allow a determination of whether such requirements have been satisfied. C. Definition of Appropriate Comparability Data Both sections (b)(b) (Limits on Executive Compensation) and (a)(2)(iv) (Waiver) refer to appropriate comparability data. We are pleased that the requirements for comparability data do not exclude the possibility of using data collected and promulgated by membership organizations, sector-wide surveys or other sources of publicly available information. Allowable comparability data should be broad enough to accommodate smaller nonprofit organizations who may not have the resources to pay for an independent and customized compensation survey. These organizations should be allowed to rely on free and publically available information, especially given the Regulation s focus on minimizing administrative expenses. Due to the higher cost of living in New York City metropolitan area, salary comparisons for covered providers located in and around New York City should take in to account such higher costs. In order to do so, comparisons may need to be limited geographically in a manner national or New York State-wide surveys are not. As with IRS guidelines, 4 comparisons should be made for organizations providing like services by like enterprises (whether taxable or tax-exempt) under like circumstances. 4 Treas. Reg (b)(1)(ii)(A). 7

8 Finally, we recommend that the Regulations explicitly state that covered providers who choose to commission an independent salary consultant are permitted to use the resulting study for their determinations of the limits on executive compensation in Section (b)(b) and, if applicable, for the waiver application process described in Section (a)(2)(iv). 4. Ensure Uniform Reports In order to avoid undue burden on covered providers, we recommend that all State agencies that require compliance with the Regulations adopt the same reporting form, and the same deadlines for such reports. In addition, we propose the following addition to Section (f) (Other Limits on Executive Compensation) in order to ensure that any applicable, more stringent regulations do not result in additional reporting burdens in accordance with the Regulations: 5. Definitional Recommendations If the contract, grant or other agreement is subject to more stringent limits on executive compensation, whether through law or contract, such limits shall control and shall not be affected by the less stringent limits imposed by these regulations, and such additional limits shall not affect the reporting required by these regulations. A. Administrative Expenses We propose the following change to the definition of Administrative Expenses in Section : Except as provided in (c), the salaries of staff performing administrative and coordination functions that cannot be attributed in any part to a particular program services... We note that for smaller organizations in particular, it is very common for employees performing administrative functions to also be engaged in the provisions of program services. B. Related Entity vs. Parent/Subsidiary The definition of covered provider in Section (d)(2) currently includes a reference to parent and subsidiary corporations. There is no definition of parent and subsidiary relationship. For purposes of clarity, we recommend that this reference be changed to related entity. C. Specify Calendar Days or Business Days 8

9 In the interest of clarity, we recommend that any reference to days (see, e.g., Sections or ) specify either business or calendar days. Thank you for the opportunity to comment. We appreciate your willingness to take in to consideration the impact the Regulations will have on the nonprofit organizations we represent, and would be happy to provide any additional assistance or information. Please contact Executive Director Sean Delany, Deputy Director Elizabeth Guggenheimer or Staff Attorney Elizabeth Perez for further information at (212)