AAM-22-12-00013-RP Compliance with Executive Order No. 38 of 2012
3/13/13 N.Y. St. Reg. AAM-22-12-00013-RP
NEW YORK STATE REGISTER
VOLUME XXXV, ISSUE 11
March 13, 2013
RULE MAKING ACTIVITIES
DEPARTMENT OF AGRICULTURE AND MARKETS
REVISED RULE MAKING
NO HEARING(S) SCHEDULED
I.D No. AAM-22-12-00013-RP
Compliance with Executive Order No. 38 of 2012
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:
Proposed Action:
Addition of Part 400 to Title 1 NYCRR.
Statutory authority:
Agriculture and Markets Law, section 18; and Not-For-Profit Corporation Law, section 508
Subject:
Compliance with Executive Order No. 38 of 2012.
Purpose:
To limit administrative costs and executive compensation to ensure that services to New Yorkers are available and well-funded.
Substance of revised rule:
The revised rule would add a new Part 400 to 1 NYCRR titled Limits on Administrative Expenses and Executive Compensation.
Section 400.1 contains definitions for purposes of this Part, including definitions for administrative expenses, covered operating expenses, covered executive, covered operating expenses, covered provider, covered reporting period, Department, executive compensation, program services, program services expenses, related organization, reporting period, State-authorized payments and State funds.
Section 400.2 Limits on Administrative Expenses. Contains 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 regulation addresses how the restriction will apply in the event that a covered provider has multiple sources of State funds or State-authorized payments.
Section 400.3 Limits Executive Compensation. Contains 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.
Section 400.4 Waivers. Processes are established for covered providers to seek waivers of the limit on administrative expenses and the limits on executive compensation.
Section 400.5 Reporting by Covered Providers. Covered providers are required to report information on an annual basis.
Section 400.6 Penalties. A process is established for the imposition of penalties in the event of non-compliance with the limit on administrative expenses or the limits on executive compensation.
A copy of the full text of the regulatory proposal is available on the New York State Department of Agriculture website, http://www.agriculture.ny.gov/.
Revised rule making(s) were previously published in the State Register on
October 31, 2012.
Revised rule compared with proposed rule:
Substantial revisions were made in sections 400.1, 400.2, 400.3, 400.4, 400.5 and 400.6.
Text of revised proposed rule and any required statements and analyses may be obtained from:
Frederick B. Arnold, Esq., NYS Department of Agriculture and Markets, 10B Airline Drive, Albany, NY 12235, (518) 457-2449, email: rick.arnold@agriculture.ny.gov
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 18 of the Agriculture and Markets Law provides, in part, that the Commissioner may enact, amend and repeal necessary rules which shall regulate and control the transaction of business by the Department and provide generally for the exercise of the powers and performance of the duties of the Department as prescribed in the Agriculture and Markets Law and the laws of the State and for the enforcement of their provisions and the provisions of the rules that have been enacted.
Section 508 of the Not-For-Profit Corporation Law provides, in part, that a corporation whose lawful activities involve among other things, the charging of fees or prices for its services or products shall have the right to receive such income and, in so doing, may make an incidental profit.
2. Legislative objectives:
The statutory provision pursuant to which these regulations are proposed is intended to authorize the Department to promulgate rules necessary to properly exercise its powers and duties.
3. Needs and benefits:
The proposed amendments implement the requirements set forth in Executive Order #38, which states that New York State directly or indirectly funds or authorizes reimbursements with other taxpayer dollars to contractors that provide critical services to New Yorkers in need; and expresses concern that such monies are being used for excessive administrative costs and executive compensation. The Executive Order directs that State agencies, including the Department, promulgate regulations to prevent excessive payment of taxpayer dollars for administrative expenses and executive compensation for these contractors.
The proposed regulations restrict administrative expenses for contractors to 25 percent and eventually 15 percent of the State’s financial assistance or State-authorized payments. The proposed regulations also limit the annual compensation paid from State financial assistance or State-authorized payments to executives of contractors to $199,000. The regulations provide that contractors may make an application to the Department for a waiver of these requirements. Recordkeeping requirements are also included in the proposal to ensure compliance with these requirements. Finally, the proposed regulations set forth measures in response to failure to comply with these requirements.
The proposed amendments benefit the State by ensuring that the most State and taxpayer monies possible are allocated to delivery of services to the people of the State rather than to excessive funding for administrative costs and executive compensation. The proposed amendments also benefit the people of the State by not only ensuring the proper, efficient and effective use of taxpayer dollars, but also ensuring that those taxpayer dollars are used, to the extent possible, to help New Yorkers in need.
4. Costs:
(a) Costs to private regulated parties: Contractors would incur minimal costs in complying with the reporting requirements in the rule since most, if not all, of the information to be reported is likely already collected or reported by the contractor for other purposes. Contractors would be limited in the dollar amounts they could allocate from State contracts for their administrative costs and executive compensation. However, the overall State funding award amounts would not decrease.
(b) Costs to the Department, State and local governments: The cost to the Department is expected to be minimal and consist, in part, of developing a reporting form. The State and local governments will not incur any expenses.
(c) The cost analysis is based upon the requirements for agencies in the proposal.
5. Local government mandate:
None.
6. Paperwork:
Contractors would need to complete and file a reporting form, and a waiver application as needed. To the extent feasible, such reporting will be made electronically to avoid unnecessary paperwork costs.
7. Duplication:
This proposed rule does not duplicate, overlap, or conflict with any State or federal statute or rule. However, the proposed rule seeks to minimize the reporting requirements faced by providers by building upon those 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 #38 of 2012 directs State agencies to promulgate this regulation, there is no alternative to proposing this rule.
9. Federal standards:
These amendments do not conflict with federal standards.
10. Compliance schedule:
The rule will become effective upon adoption. The implementation date establishing the limits on administrative expenses and executive compensation will be July 1, 2013.
Revised Regulatory Flexibility Analysis
Revisions to the proposed regulations do not necessitate any changes to the Regulatory Flexibility Analysis for Small Businesses and Local Governments previously published.
Revised Rural Area Flexibility Analysis
Revisions to the proposed regulations do not necessitate any changes to the Rural Area Flexibility Analysis previously published.
Revised Job Impact Statement
Revisions to the proposed regulations do not necessitate any changes to the Statement in Lieu of Job Impact Statement previously published.
Assessment of Public Comment
A Notice of Revised Rule Making was published in the State Register on October 31, 2012. The Department received several sets of comments during the public comment period associated with the revised rule making. The issues and concerns raised in these comments are set forth below. Because many commenters addressed concerns that applied to all of the participating State agencies that are implementing Executive Order No. 38, the responses to comments provided by each of those agencies are incorporated by reference into these responses. The Department’s response is provided for each issue.
Issue/Concern: The revised regulations are discriminatory in that they only apply to nonprofit organizations, to which only $3.2-billion in contracts were awarded. By contrast, the revised regulations do not apply to for profit organizations to whom the State awarded 32.6-billion in contracts, or 91-percent of the money allocated for contracts. Additionally, the revised regulations do not apply to state, local and public authorities, for which approximately 117,000 employees earn at least $100,000 per year.
Response: For profit organizations that meet the definition of “covered provider” may be subject to these regulations.
Issue/Concern: The revised regulations set forth strict limitations on executive compensation, which are burdensome and unnecessary to accomplish the goals of limiting the compensation of nonprofit executives to reasonable levels. The Internal Revenue Service (IRS) rules already provide guidance to nonprofit organizations in determining reasonable compensation, provides for penalties for payment of unreasonable compensation and already limits executive pay to $199,000 per year.
Response: The participating State agencies and the Division of the Budget (DOB) are aware that there are differences between the IRS rules and the revised regulations. The goal of these regulations is to implement Executive Order No. 38. Regarding the issue of penalties, the penalties section provides for notification of non-compliance, the submission of additional or clarifying information, a corrective action period, and the opportunity to appeal.
Issue/Concern: Strict limitations on executive compensation will unduly burden organizations that obtain all or substantially all of their compensation from State funds. This may lead to organizations cutting back on quality management, accounting, fundraising or compliance functions, which would potentially generate new administrative expenses in order to meet the requirements under the revised regulations.
Response: The Department believes that the proposed limitations in the regulation furthers the legitimate goal of ensuring that public funds are properly expended and the use of such funds is properly monitored.
Issue/Concern: The definition of “covered provider” includes an individual or entity that receives an average annual amount greater than $500,000 to render program services and receives at least 30-percent of their/its total in-state revenue from State-funds or State-authorized funds. The revised regulations do not address the possible need to change these thresholds in the future.
Response: The regulations focus on New York State with the goal of identifying contractors providing program services in New York State who receive a significant portion of their funds to provide such services from State funds or State-authorized payments.
Issue/Concern: The definition of “program services” does not include property rental, mortgage or maintenance expenses, except where such expenses are made in connection with providing housing to members of the public receiving program services from a covered provider. However, the IRS already requires nonprofit organizations to report on their program and administrative expenses and further, allows the organization to allocate expenses related to real property between program services and administration. In not allowing such allocation, the revised regulations eliminate a category of expenses which directly support charitable services.
Response: The revised regulations 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.
Issue/Concern: Regarding administrative expenses, a commenter approves of the provision that a covered provider may allocate a portion of an expense to program services and administration, if the allocation is supported by the nature of the expense. However, the commenter believes that the regulations should use the allocation methodology employed by the IRS which is based on generally accepted accounting principles (GAAP).
Response: The revised regulations have not added this requirement. However, the participating agencies will issue guidance to assist providers in complying with the new regulations.
Issue/Concern: Regarding administrative expenses, by requiring that State-funded nonprofit organizations allocate 75-percent (eventually 85-percent) of their State funds to program services, the revised regulations may prompt private funding sources to impose the same requirements on their funding. High administrative costs do not necessarily mean that the nonprofit organization is ineffective.
Response: Executive Order No. 38 is encouraging the effective and efficient delivery of program services to New Yorkers and preventing taxpayers from finding excessive administrative expenses.
Issue/Concern: Regarding executive compensation, the revised regulations subject the covered provider to penalties if the compensation is greater than $199,000, is greater than the 75th percentile of that compensation provided to comparable executives and was not reviewed and approved by the covered provider’s board of directors or governing body. Tying reasonable compensation to a specific percentile will lead to uncertainty among the larger nonprofit organizations which must pay higher compensation to retain quality employees capable of managing such large organizations.
Response: The participating State agencies periodically will assess the impact of the regulations on executive salaries and will propose any necessary adjustments to the regulations accordingly. The goal of the participating State agencies is not to control executive compensation, but to ensure that taxpayer dollars are used to provide critical services to New Yorkers in need.
Issue/Concern: The revised regulations define executive compensation to include all forms of cash and noncash payments or benefits, but exclude mandated benefits which are consistent with those received by the covered provider’s other employees. This is inconsistent with IRS requirements, which provide that base compensation and all benefits for an executive of a nonprofit organization are to be disclosed. Data sufficient to satisfy IRS requirements would not address the more specific requirements under the revised regulations, making it difficult for covered providers to know whether the compensation for their executive is near or beyond the 75 percentile.
Response: The goal of the regulation is to ensure that public funds are properly expended and that taxpayer dollars are used to provide critical services to New Yorkers in need.
Issue/Concern: Limits on executive compensation may have a chilling effect on the growth of smaller nonprofits, since these entities may shy away from the complexity of compliance with the requirements in the revised regulations.
Response: The limitations in the regulations are designed to ensure that the most taxpayer dollars possible are being used to provide critical services to New Yorkers in need.
Issue/Concern: Regarding waivers, the waiver process is unnecessarily burdensome with uncertain outcomes. Nonprofit organizations would have to spend time and resources to qualify for a waiver, which may be required to pay higher salaries to qualified executives or allow administrative expenses to exceed the 75-percent threshold.
Response: The Department believes that the waiver process in the regulations furthers the legitimate goal of ensuring that public funds are properly expended to provide services to New Yorkers in need.
Issue/Concern: Payments through municipal or county contracts should not be considered State-authorized payments. Otherwise, the revised regulations would intrude upon the local contracting authority, and unnecessarily burden county and municipal governmental units. Additionally, service providers would be unable to discern how much of a municipal or county contract should be included for purposes of defining State-authorized payments or State funds. Under the revised regulations, guidance on these issues will be provided to the affected counties and local governments, but not to the service providers.
Response: The regulations remain unchanged in this regard.
Issue/Concern: The revised regulations should only cover State-authorized funds, not State funds, since State agencies have multiple opportunities to review allocation of State funds.
Response: The regulations would not adequately address the targeted problems of inflated executive compensation and excessive administrative expenses if only State-authorized funds were covered.
Issue/Concern: The minimum State funding should be based on total revenues, not just in-state revenues. It remains unclear whether funding from out of state that is not designated for a particular program would constitute in-state funding if the nonprofit entity also has program activity outside the State.
Response: Under the regulations, minimum State funding is based on total revenues.
Issue/Concern: The 75th percentile cut-off should be eliminated since it could result in unintended circumstances, such as nonprofit organizations paying their executives up to the 75 percentile when they might otherwise pay at a lower level and requiring the organizations to hire less qualified staff in order to meet the threshold due to the uncertainties of the waiver process.
Response: The Department believes that the proposed limitations in the regulations further the legitimate goal of ensuring that public funds are properly expended and the use of such funds is properly monitored.
Issue/Concern: The definition of executive compensation should not include the provision “ … use of the organization’s property, reportable on a covered executive’s W-2 form,” since it could be construed that the definition only applies to the executive’s use of the organization’s property and not to other non-salary benefits.
Response: The regulations remain unchanged in this regard.
Issue/Concern: Use of compensation surveys to determine executive compensation and that are identified, provided or recognized by the Department and Director of the Budget, may be burdensome if the survey isn’t provided by the Department. This would require the nonprofit organization to absorb the cost of the survey which could be burdensome on the smaller entities. Further, it is unlikely that there are surveys which are appropriate for all positions in all covered providers. Finally, to the extent such surveys exist, they are based on IRS requirements which have a definition of executive compensation that differs from that which is in the revised regulations. The better approach would be to allow nonprofit organizations to use their own comparable salary data or use surveys which use IRS data.
Response: It is anticipated that sample compensation surveys will be provided upon request.
Issue/Concern: The revised regulations require that executive compensation in excess of $199,000 per year and waivers of such compensation limitation must be approved by the covered provider’s board of directors or equivalent governing body, including two independent directors or voting members. It appears that this requirement does not allow the delegation of review and approval to a committee of the board of directors, which is the practice in many nonprofit organizations. The revised regulations should be changed to allow for such delegation.
Response: The revised rule remains unchanged.
Issue/Concern: The revised regulations require that limits on executive compensation and administrative expenses be imposed upon subcontractors or agents of covered providers. “Administrative expenses” should not be included, since this would extend the limitation to agents and subcontractors who/which provide a purely administrative service (e.g. janitorial services), rather than program services.
Response: The Department believes that the proposed limitations in the regulations further the legitimate goal of ensuring that public funds are properly expended and the use of such funds is properly monitored.
Issue/Concern: The deadline for waiver applications for the reporting period beginning April 1, 2013 should be pushed back from January 1, 2013 to March 1, 2013, given that it may take time to obtain compensation surveys and that in any event, with the comment period extended to mid-December 2012, the revised regulations would not become effective until, at the earliest, less than one month after the regulations are issued.
Response: The implementation process will address waiver issues further.
Issue/Concern: The revised regulations provide that a decision on a waiver application must be made by the Department or Director of the Budget no later than 60 calendar days after submission of the application. However, the regulations do not indicate the consequences if the decision is not rendered within that timeframe.
Response: The implementation process will address waiver issues further.
Issue/Concern: The revised regulations provide that a request for reconsideration of a denial of a waiver shall stay any action to deny the request for the waiver and stay any action to enter a contract or other agreement. The stay regarding a contract or other agreement is unclear. Does the stay mean that the contract or agreement cannot be withdrawn during the stay? What effect does the stay have on the commencement date and service obligations under the contract or agreement? These questions should be clarified in the revised regulations.
Response: The implementation process will address waiver issues further.
