Sunday, February 12, 2012

Nonprofits Testify on Executive & Admin Comp Caps

The NY Nonprofit Press reported that nonprofits got their first chance on Monday to testify publicly in response to Governor Andrew Cuomo’s move to limit State reimbursement for executive compensation and administrative expenses. Three of the four individuals invited to testify before the NYS Senate Committee on Investigations and Government Operations agreed that the Governor’s Executive Order to cap state reimbursement to nonprofit CEOs and other employees at $199,000 would do little to address what they described as a relatively small number of abuses among the thousands of nonprofits that contract with the state. Conversely, they argued, the Executive Order would add significant bureaucratic and compliance burdens to a sector that is already struggling due to budget cuts and unfunded regulatory mandates.

The nonprofit representatives maintained that legal, regulatory and procurement mechanisms for monitoring and controlling executive compensation and administrative expense reimbursement already exist – even if frequently underutilized. They called for strengthening and coordinating use of these provisions to identify and address individual cases of abuse rather than imposing a new series of broad-brush compliance requirements on thousands of nonprofits where no problem exists.

A fourth witness, Jayne Cammisa of the NYS State Nursing Association, praised the Governor’s initiative, citing “exorbitant executive salaries in some hospitals and nursing homes” even as they are implementing significant reductions in the numbers of “bed-side” nursing staff.

“Cases of excessive executive compensation and abuse are few and far between and
what does exist, needs to be exposed and eliminated,” said Doug Sauer, CEO of the New York Council of Nonprofits (NYCON), noting that NYCON represents 3,100 small and mid-sized nonprofits. “Under-compensation is a much more prevalent and serious issue.” Sauer went on to note that “charities in New York State, and particularly those that contract with the State, are arguably the most regulated in the Country, and many of these regulations are outdated, piecemealed, and ineffective.”

“Not-for-profit organizations are already subject to federal and state oversight that includes regulation of excessive executive compensation and administrative expenses,” said Jim Lytle of the law firm Manatt, Phelps & Phillips who spoke on behalf of a group of 17 nonprofit associations and coalitions, including:

•Association For Community Living
•Black Agency Executives
•Catholic Charities of the Archdiocese of New York
•Catholic Charities Neighborhood Services, Diocese of Brooklyn and Queens
•Coalition of Behavioral Health Agencies
•Family Planning Advocates of New York State
•Federation of Protestant Welfare Agencies
•Hospice and Palliative Care Association of New York State
•Human Services Council of New York
•Long Island Coalition of Behavioral Health Providers
•Mental Health Association of New York City
•Mental Health Association of Westchester
•New York State Coalition for Children’s Mental Health Services
•New York State Council for Community Behavioral Healthcare
•Supportive Housing Network of New York
•UJA-Federation of New York
•United Neighborhood Houses of New York

Lytle noted that “the Attorney General’s Office exercises comprehensive regulatory authority to supervise the operation of the state’s not-for-profit corporations, including the reasonableness of compensation. The Attorney General can hold officers and directors of NFP Corporations fully accountable for their actions, including the right to remove directors who authorize or acquiesce in payments or practices that are deemed inappropriate or excessive.”

He went on to highlight that the IRS requires detailed disclosure of executive compensation and that substantial tax penalties can be levied on executives that receive excessive compensation. “In reviewing whether the compensation is reasonable, the IRS reviews what compensation is received for similar services by similar organizations (whether for- or not-for-profit) and under similar circumstances. To get the benefit of the doubt, entities must demonstrate that the board actually established and followed a reasonable compensation policy, and that the board actually reviewed comparable compensation data and comparability information to make a reasonable decision,” said Lytle.

Michael Cooney, an attorney with law firm of Nixon Peabody concurred. “I would urge the legislature to evaluate and incorporate existing processes and structures that are already in place. What is needed is a better understanding of this structure and enforcement mechanisms,” he said.

Give Me a Number!

Nonprofit sector representatives criticized the Governor’s proposal for blanket caps on reimbursement for executive compensation and administrative expense as a blunt instrument which is ill-suited to the complexity of the state’s nonprofit sector. “Taking a ‘one-size fits all’ approach to addressing the compensation and administrative spending practices of tens of thousands of not-for-profit organizations will not effectively curb excessive compensation by the handful of offending entities and will do harm to an already fragile New York State not-for-profit infrastructure,” said Lytle.

Despite these concerns, Committee Members pressed witnesses for their views regarding the proposed $199,000 salary cap or appropriate alternatives. “What is reasonable?” State Senator Daniel Squadron asked repeatedly.

Lytle and Cooney declined to give any number, citing the need for case-by-case assessments of the position, its responsibilities and complexity, issues of size and scope, and comparable pay levels in the competitive marketplace in which an agency must recruit leadership.

NYCON’s Doug Sauer, on the other hand, offered a “personal” opinion. “If somebody is making $1 million, I think you really need to look at it,” he said, and then added. “If someone is making $500,000, I think you should look at it.”

Costs of Compliance

Witnesses argued that the Governor’s Executive Order would establish an entirely new and unnecessary set of bureaucratic burdens on nonprofits. They noted that multiple State agencies -- DOH, OASAS, OMH, OCFS, etc. --- were being asked to develop their own separate regulations and procedures which would likely to lead to overlapping, conflicting and confusing reporting requirements.

“Every new regulation, every new reporting requirement, and every new unfunded mandate, comes with a cost,” said NYCON’s Doug Sauer. He noted that the Governor’s Task Force on Nonprofit Entities – appointed last year to explore the executive compensation issue – was already imposing unnecessary compliance costs on both nonprofit agencies and the state itself. The Task Force reportedly has demanded detailed staff salary and compensation data from hundreds of nonprofits with state contracts. “This information already is readily available,” said Sauer. “How much has the State spent to find out what is already out there? How much has it cost nonprofits to fill out these forms?”

Several witnesses – as well as State Senator Reuben Diaz – questioned why the Task Force had yet to offer any report on its findings -- even as an Executive Order was already establishing new State policy.

“No analysis of the collected data has been released nor have there been any recommendations or other reports from the Task Force,” said Lytle. “It may be appropriate, at a minimum, to review the results of that review before implementing such a sweeping across-the-board approach to a problem that we sincerely believe is much more limited and much better addressed by targeting the actual wrongdoers before impugning the practices of the whole charitable sector.”

Committee Chair Carl Marcellino, himself a member of the Task Force, may have unintentionally underlined the nonprofit sector’s concerns when he responded that “the Task Force is still receiving data. What slowed that down is the volume and the extent of the questionnaire. It was quite extensive.”


Nonprofit representatives offered some alternatives to the Governor’s Executive Order.

“Rather than rely on State-issued governmental guidelines or across the board caps that dictate salary and administrative expense caps for thousands of organizations, we recommend that the Legislature enact tough new requirements that will hold the contracting organizations themselves accountable for the discharge of their obligations in setting reasonable compensation and limiting administrative costs,” said Lytle on behalf of the 17 nonprofit associations and coalitions.

They proposed the following specific steps:

•Require that not-for-profit boards apply the Internal Revenue Code's reasonable compensation standards for tax-exempt organizations.
•Authorize the Attorney General to investigate compliance with, and enforce these requirements by directing the corporation to produce evidence of its compliance with these standards, upon request.
•Provide sufficient resources to the Attorney General’s Charities Bureau to investigate and to enforce these requirements, through reasonable fees if necessary.
•Require State agencies to adopt reimbursement and contracting practices that ensure that administrative expenses remain within appropriate levels, taking into account the specific services being rendered and other factors that may dictate the appropriate level of “overhead.”
•Establish a commission—perhaps building upon the existing Task Force on Not-for-Profit Entities, potentially supplemented with membership from reputable not-for-profit leadership—that could take a careful look at these issues and develop its own proposals.

“The State of New York needs to better coordinate efforts, focus resources, and streamline its attention to the business relationship with the nonprofit sector,” said NYCON’s Doug Sauer. “It is in that spirit that we point to solutions similar to those recently enacted by the State of Connecticut and their decision to hire a cabinet-level appointee whose sole purpose is to help manage the myriad issues related to the State-nonprofit relationship. We point to contracting solutions highlighted by our colleagues from the New York City area submitted testimony before this hearing. And, we point to solutions already proposed by the State Comptroller forthcoming from the Attorney General.”

What’s the Problem?

Throughout the hearing – as well as much of the public debate – a fundamental question remained. Which of two separate problems is the Governor’s proposal intended to address:

•Exorbitant executive salaries in any nonprofits that might represent a “sticker shock” to the public and a blow to their confidence in the sector; or,
•An inappropriate use of State resources when purchasing services.

While much of the moral outrage propelling the Governor’s initiative seems driven by the former, the provisions of the Executive Order seem entirely aimed at the latter.

“If for- and not-for-profit contracting entities that receive a substantial amount of their revenue from non-state sources may be able to supplement compensation over the established levels and exceed the administrative expense limitation with non-state resources, the proposal would unfairly target only contractors that are entirely dependent upon State support,” said James Lytle.

“The proposed system provides exemptions and waivers which we believe will result in exceptions for those organizations whose compensation levels are most likely to “shock the conscience,” said Doug Sauer.

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