CFS-22-12-00010-RP Establishing Limitations on Administrative Expenses and Executive Compensation of Service Providers Supported by State Funds

10/31/12 N.Y. St. Reg. CFS-22-12-00010-RP

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 44

October 31, 2012

RULE MAKING ACTIVITIES

OFFICE OF CHILDREN AND FAMILY SERVICES

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. CFS-22-12-00010-RP

Establishing Limitations on Administrative Expenses and Executive Compensation of Service Providers Supported by State Funds

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:

Proposed Action:

Addition of Part 409 to Title 18 NYCRR; and addition of Subpart 166-5 to Title 9 NYCRR.

Statutory authority:

Social Services Law, sections 20(3)(d) and 34(3)(f); and Executive Law, section 501(5)

Subject:

Establishing limitations on administrative expenses and executive compensation of service providers supported by State funds.

Purpose:

To comply with Executive Order numbers 38 and 43.

Substance of revised rule:

The revised rule would add a new Part 409 to 18 NYCRR and a new Subpart 166-5 to 9 NYCRR entitled "Limits on Administrative Expenses and Executive Compensation".

Sections 409.1 and 166-5.1 provide the background and intent of the revised rule, which is to implement Executive Order No. 38, issued by Governor Andrew Cuomo on January 18, 2012.

Sections 409.2 and 166-5.2 set forth the statutory authority for the promulgation of the rule by the New York State Office of Children and Family Services (OCFS).

Sections 409.3 and 166-5.3 contain definitions for purposes of the relevant Parts, including definitions for administrative expenses, covered operating expenses, covered executive, covered provider, executive compensation, OCFS, program services, program services expenses, related organization, reporting period, State-authorized payments, and State funds.

Sections 409.4 and 166-5.4 are entitled "Limits on Administrative Expenses". These sections contain limits on the use of State funds or State-authorized payments for administrative expenses.

The restriction will apply to subcontractors and agents of covered providers which meet the specified criteria.

The restriction will apply to covered providers receiving State funds or State-authorized payments from county or local governments, rather than directly from a State agency, pursuant to specified criteria.

The revised regulation addresses how the restriction will apply in the event that a covered provider has multiple sources of State funds or State-authorized payments.

Sections 409.5 and 166-5.5 are entitled "Limits on Executive Compensation". These sections contain restrictions on executive compensation provided to covered executives.

The restriction will apply to subcontractors and agents of covered providers which meet the specified criteria.

The restriction will apply to covered providers receiving State funds or State-authorized payments from county or local governments, rather than directly from a State agency, pursuant to specified criteria.

The revised rule addresses the application of this limit if the covered provider has multiple sources of State funds or State-authorized payments.

Sections 409.6 and 166-5.6 address waivers. These sections establish processes for covered providers to seek waivers of the limits on administrative expenses and the limits on executive compensation.

Sections 409.7 and 166-5.7 are entitled "Reporting by Covered Providers". These sections require covered providers to report information on an annual basis.

Sections 409.8 and 166-5.8 address penalties. In these sections, a process is established for the imposition of penalties in the event of non-compliance with the limits on administrative expenses or the limits on executive compensation.

A copy of the full text of the regulatory proposal is available on the OCFS website at http://ocfs.ny.gov

Revised rule compared with proposed rule:

Substantial revisions were made in Part 409 and Subpart 166-5.

Text of revised proposed rule and any required statements and analyses may be obtained from

Public Information Office, NYS Office of Children and Family Services, 52 Washington Street, Rensselaer, NY 12144, [phone]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

30 days after publication of this notice.

Revised Regulatory Impact Statement

1. Statutory authority:

Section 20(3)(d) of the Social Services Law (SSL) authorizes the Office of Children and Family Services (OCFS) to establish rules and regulations to carry out its powers and duties pursuant to the provisions of the SSL.

Section 34(3)(f) of the SSL requires the Commissioner of OCFS to establish regulations for the administration of public assistance and care within the State.

Section 501(5) of the Executive Law authorizes the Commissioner of OCFS to promulgate regulations necessary to establish, operate and maintain programs operated and oversee by OCFS under the Executive Law.

2. Legislative objectives:

The proposed regulations are necessary in order for New York State to maintain appropriate controls on administrative expenses and the amount of State funds going toward the purpose of executive compensation. This will support the legislative goal that State funds be expended in a manner consistent with the best fiscal interests of the State, as provided for throughout the State Finance Law.

3. Needs and benefits:

OCFS is proposing to adopt the regulation because the State of New York directly or indirectly funds with taxpayer dollars a large number of tax exempt not-for-profit organizations and for-profit entities that provide critical services to New Yorkers in need. The goal of the regulation is to establish appropriate controls so that taxpayer dollars are used properly, efficiently, and effectively to improve the lives of New Yorkers. In certain instances, providers of services that receive State funds or State-authorized payments have used such funds to pay for excessive administrative costs or inflated compensation for their senior executives, rather than devoting a greater proportion of such funds to providing direct care or services to their clients. Such abuses involving public funds harm both the people of New York who are paying for such services, and those persons who must depend upon such services to be available and well-funded. These regulations, which are required by Executive Order No. 38, will establish standards to prevent the use of State funds or State-authorized payments that come through OCFS for support of excessive executive compensation or unnecessary administrative costs.

4. Costs:

The compliance cost to providers of services is expected to be minimal because most, if not all, of the information that will be required to be reported by providers of services is already gathered and reported by such providers for other purposes.

It is estimated that the cost to OCFS of implementing this rule will be minimal, as the State will be making efforts to centralize as many of the functions associated with the rule as possible in order to efficiently implement the rule.

5. Local government mandates:

The proposed regulations will impose very minimal additional mandates on social services districts. The social services districts may be asked to provide some information to OCFS concerning service providers with which the local districts have contractual relationships, or to provide a reporting form or reporting information to their prospective contractors for the contractors to send to OCFS, but the administrative functions required by the proposed regulations will be carried out by OCFS.

6. Paperwork:

The proposed regulations will require some additional reporting of information to the State by service providers receiving State funds or State-authorized payments. The State will, to the extent feasible, provide that such reporting be done electronically to avoid unnecessary paperwork costs.

7. Duplication:

The proposed regulations do not duplicate, overlap, or conflict with any other State of federal requirements. However, the proposed regulations seek to minimize the reporting requirements faced by service providers by building upon existing requirements in the federal Internal Revenue Code that require certain tax-exempt organizations to report information concerning their executive compensation and administrative costs.

8. Alternatives:

Since Executive Order No. 38 requires the adoption of the proposed regulations, there is no viable alternative to implementing the proposed regulations.

9. Federal standards:

The regulatory amendments do not conflict with any federal standards.

10. Compliance schedule:

This rule will become effective upon adoption. The implementation date establishing the limits on administrative expenses and executive compensation will be April 1, 2013.

Revised Regulatory Flexibility Analysis

Although substantive changes were made to the proposed regulations, those changes do not require changes to the Regulatory Flexibility Analysis as originally published.

Revised Rural Area Flexibility Analysis

Although substantive changes were made to the proposed regulations, those changes do not require changes to the Rural Area Flexibility Analysis as originally published.

Revised Job Impact Statement

Although substantive changes were made to the proposed regulations, those changes do not require changes to the Job Impact Statement as originally published.

Assessment of Public Comment

A Notice of Proposed Rule Making was published in the State Register on May 30, 2012.

All comments received were reviewed and evaluated. Many of the concerns expressed in the comments have been addressed by revisions to the various sections of the proposed regulation. Suggestions from others were determined to be contrary to the goals of the proposed rulemaking.

A number of comments objected generally to the underlying concept of the regulations, stating that the proposed regulation is overly broad in its authority and burdensome in its requirements. The New York State Office of Children and Family Services (OCFS) believes that the proposed limitations in the regulation further the legitimate goal of ensuring that public funds are properly expended and the use of such funds is properly monitored.

Clarification was requested concerning certain defined terms in the proposed regulation, in particular with respect to their intended scope. In response, and taking into account suggestions submitted, changes were made to the definitions of the following terms: administrative expenses, covered provider, covered executive, executive compensation, program services expenses, related entity, State-authorized payments and State funds.

Some commenters stated that the proposed limits on administrative expenses were burdensome and unnecessary, because they would interfere with existing contracts, because they were possibly duplicative of existing state and federal rules, or they will not enhance the protections already provided by restrictions from State reimbursement rates. Clarification was requested as to what will constitute administrative and program expenses. The proposed regulation has been revised to incorporate an allocation methodology for these two expenses.

There were a wide range of comments and suggestions on the definition of "executive compensation." They covered such topics as: (a) general concerns about application of the definition, (b) exclusions, (c) limitations and application of the definition, and (d) suggestions about surveys and their use. A summary of the comments and suggestions follows:

(a) General concerns regarding the regulation include that it: is too broad since it regulates use of funding sources not emanating from the state; is unrealistic, problematic and intrusive to operations; will adversely affect candidate pools, incumbents, service delivery and the ability of providers to meet the challenges and changes in the health care system; is intrusive to the for-profit sector where executive compensation is a private matter; is faulty in that it will institutionalize abuses through comparability data; and is duplicative as executive compensation is already controlled at the State and federal levels through rate setting, IRS rules and reporting, and the Not-For-Profit Corporation Law. Other comments stated that the regulation would encroached on the State Attorney General's regulation and enforcement; is arbitrary in its establishment of the thresholds of $500,000 and 30%; was exclusive of larger corporations; and inappropriately used a percentile standard that will gradually diminish compensation levels and lead to the existence of two levels of compensation. Commenters also suggested that covered providers subject to penalty should be allowed to submit documentation in advance of penalty review.

(b) Other comments focused on exclusions for not-for-profits and for not-for-profit long term care and senior services providers and an elimination of the 75th percentile threshold.

(c) Still other letters related to limitations and application of the definition of "executive compensation." They suggested that executive compensation rules should only be applied to non-State funds or to State and State-authorized funds. The applicability of the rules with regard to contributions of other non-covered entities should be clarified. Also, letters received argued that the period covered by the limits on executive compensation should not begin on January 1, 2013, the executive compensation limits should be revisited periodically to adjust for changes, and the role of executives in the assurance of program services should be recognized.

(d) Commenters recommended several approaches to determining reasonable compensation, such as the use of recognized surveys or independent commissioned surveys or identification and recognition of specific compensation surveys to establish comparisons. It was suggested that surveys should allow for regional and geographic variations. Further, commenters suggested that the regulation also should address instances where a board or governing body does not exist.

The regulation was revised to address the comments on: the period to be covered by the limits on executive compensation, an annual review of the $199,000 cap and the adjustment thereof, the consideration of the availability of a governing body as alternate to the covered provider's board of directors, the submission of contemporaneous (but not prospective) documentation for penalty review, the recognition of supervisory services of executives as program services, the allocation methodology for reporting administrative and program service costs, the recognition of specific clinical and program personnel as providers of program services, and a method for subcontractors to be advised of the receipt of State or State-authorized funds from a covered provider.

The regulation was not revised to limit the rule to non-State funds, to exclude for-profits from being covered by the regulations, or to alter the 75th percentile threshold because these revisions would compromise the goal of the regulation. Eliminating the executive compensation requirements would eviscerate one of the key objectives of the executive order: limiting the extent of such compensation paid by covered providers that rely to a significant degree upon public funds for their program and administrative services funding. OCFS is proposing to adopt this regulation because the State of New York directly or indirectly funds with taxpayer dollars a large number of tax exempt organizations and for-profit entities that provide critical services to New Yorkers in need, and the goal is to ensure that taxpayer dollars are used properly, efficiently and effectively to improve the lives of New Yorkers. In certain instances, service providers that receive State funds or State-authorized payments have used such funds to pay for excessive administrative costs or inflated compensation for their senior executives, rather than devoting a greater proportion of such funds to providing direct care or services to their clients. Such abuses involving public funds harm both the people of New York who are paying for such services and those persons who must depend upon such services to be available and well-funded. These regulations provide a benchmark to ensure that State funds or State-authorized payments paid by this agency to providers are not used to support excessive compensation or unnecessary administrative costs. In part because of the funding of resources, their restriction is necessary to accomplish these objectives.

Some comments stated that the proposed waiver process is overly complex and lacking objective criteria. The revised regulation provides greater flexibility in the filing of a waiver application and also has pushed back the implementation date.

Comments received also criticized the proposed reporting requirements suggesting that they require providing information related to administrative and program expenses in a manner inconsistent with other current reporting obligations. The regulation has been amended to conform some of the requirements to those with which many covered providers must already comply, including provisions incorporating the definitions applicable with non-profits under the IRS Code.

Other submissions asked when penalties for excess compensation would be assessed, what the type of penalties would be imposed, and about the level of severity. Commenters also requested details on the criteria for making penalty determination. Changes have been made to the Penalties section in the revised text, including extending the time for submissions, a corrective action plan (CAP) and a request for an administrative appeal to 30 calendar days.

The full Assessment of Comments is available on the OCFS website at: http://ocfs.ny.gov