ASA-22-12-00014-RP Limits on Administrative Expenses and Executive Compensation

3/13/13 N.Y. St. Reg. ASA-22-12-00014-RP

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 11

March 13, 2013

RULE MAKING ACTIVITIES

OFFICE OF ALCOHOLISM AND SUBSTANCE ABUSE SERVICES

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. ASA-22-12-00014-RP

Limits on Administrative Expenses and Executive Compensation

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

Proposed Action:

Addition of Part 812 to Title 14 NYCRR.

Statutory authority:

Mental Hygiene Law, sections 19.07, 19.09, 19.21, 19.40, 32.01, 32.07 and Executive Order No. 38

Subject:

Limits on Administrative Expenses and Executive Compensation.

Purpose:

Ensure state funds paid by this agency to providers are not used for excessive compensation or unnecessary administrative costs.

Substance of revised rule:

The revised rule would add a new Part 812 to 14 NYCRR titled Limits on Administrative Expenses and Executive Compensation.

Section 812.1: Provides 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.

Section 812.2: Sets forth the statutory authority for the promulgation of the rule by the Office of Alcoholism and Substance Abuse Services (hereinafter the “Office”).

Section 812.3: Contains definitions for purposes of this Part, including definitions for administrative expenses, covered operating expenses, covered executive, covered provider, covered reporting period, executive compensation, Office, program services, program services expenses, related organization, reporting period, State-authorized payments, and State funds.

Section 812.4: 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 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.

Section 812.5: Limits on 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 812.6: Waivers. Processes are established for covered providers to seek waivers of the limit on administrative expenses and the limits on executive compensation.

Section 812.7: Reporting by Covered Providers. Covered providers are required to report information on an annual basis.

Section 812.8: 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.

Section 812.9: Severability.

A copy of the full text of the regulatory proposal is available on the OASAS website at: http://www.oasas.ny.gov/regs/index.cfm

Revised rule compared with proposed rule:

Substantial revisions were made in sections 812.2, 812.3, 812.4, 812.5 and 812.6.

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

Sara Osborne, Senior Attorney, NYS Office of Alcoholism and Substance Abuse Services, 1450 Western Ave., Albany, NY 12203, [phone], email: [e-mail]

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:

a) Section 19.07(c) of the Mental Hygiene Law (MHL) charges OASAS with the responsibility of seeing that persons who abuse or are dependent on alcohol and/or substances and their families are provided with care and treatment that is effective and of high quality.

b) Section 19.07(e) of the MHL authorizes the Commissioner of OASAS to adopt standards including necessary rules and regulations pertaining to chemical dependence treatment services.

c) Section 19.09(b) of the MHL authorizes the Commissioner to adopt regulations necessary and proper to implement any matter under his/her jurisdiction.

d) Section 19.21(b) of the MHL requires the Commissioner to establish and enforce regulations concerning the licensing, certification, and inspection of chemical dependence treatment services.

e) Section 19.21(d) of the MHL requires OASAS to establish reasonable performance standards for providers of services certified by OASAS.

f) Section 19.40 of the MHL authorizes the Commissioner to issue operating certificates for the provision of chemical dependence treatment services.

g) Section 32.01 of the MHL authorizes the Commissioner to adopt any regulation reasonably necessary to implement and effectively exercise the powers and perform the duties conferred by Article 32 of the MHL.

h) Section 32.07(a) of the MHL authorize the commissioner to adopt regulations to effectuate the provisions and purposes of article 32 of the MHL.

i) Executive Order No. 38 directs certain executive agencies to promulgate regulations addressing the extent and nature of a funded service provider’s administrative costs and executive compensation eligible for reimbursement with State financial assistance or State-authorized payments for operating expenses.

j) Section 508 of the Not for Profit Corporation Law requires any incidental profit from fees charged for services shall be applied to the maintenance, expansion or operation of the activities of the not for profit corporation and in no case be distributed among members, directors or officers of the corporation.

2. Legislative Objectives:

To comply with the requirements of Executive Order No. 38.

3. Needs and Benefits:

OASAS is proposing to adopt the following 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 taxpayers' 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 ensure that State funds or State-authorized payments paid by OASAS to providers are not used to support excessive compensation or unnecessary administrative costs.

4. Costs:

The costs of implementing this rule to affected providers is anticipated to be minimal; most, if not all, of the information that must be reported by such providers is already gathered or reported for other purposes. Current regulations require the submission of substantial financial information, some of which will be additional to current requirements, or collected in another form. The costs to OASAS and providers of such implementation are expected to be limited, and efforts to ensure efficient centralization of certain aspects of such implementation are underway. OASAS estimates that minimal compliance activities will be needed to satisfy any additional reporting requirements.

5. Paperwork:

The proposed regulatory amendments will require limited additional information to be reported to the agency by providers receiving State funds or State-authorized payments. To the extent feasible, such reporting shall be made electronically to avoid unnecessary paperwork costs.

6. Local Government Mandates:

As this regulation does not apply to state and local governments, there are no new local government mandates.

7. Duplications:

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:

Executive Order No. 38 requires the adoption of this proposed regulation.

9. Federal Standards:

These amendments do not conflict with 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 July 1, 2013.

Revised Regulatory Flexibility Analysis

A Revised Regulatory Flexibility Analysis for Small Businesses and Local Governments (RFASBLG) is not being submitted with this notice because the changes to the proposed rule will not impose any adverse economic impact on small businesses, nor will it impose new reporting, record keeping or other compliance requirements on small businesses or local governments.

Revised Rural Area Flexibility Analysis

A Revised Rural Area Flexibility Analysis (RAFA) is not being submitted with this notice because the changes to the proposed rule will not impose any adverse economic impact on rural areas.

Revised Job Impact Statement

A Revised Job Impact Statement (JIS) is not being submitted with this notice because it is evident from the subject matter of the regulation that it will have no impact on jobs and employment opportunities.

Assessment of Public Comment

A Notice of Revised Rule Making was published in the New York State Register on October 31, 2012. The Office of Alcoholism and Substance Abuse Services (OASAS) received four (4) sets of comments during the public comment period associated with the revised rulemaking from The Association of Fundraising Professionals (“AFP”), Coalition of Behavioral Health Agencies (“BHA”), Lawyers Alliance (“LA”), and Charity Defense Council (“CDC”).

The issues and concerns raised in these comments are set forth below, grouped according to the part of the revised rule they commented upon. Other participating state agencies received comments that applied to all agencies implementing Executive Order No. 38 and those comments and responses are incorporated by reference into these responses; however, only OASAS’s response is provided for issues addressed to OASAS.

Applicability

Issue/Concern: The Internal Revenue Service (IRS) rules and the Executive Order No. 38 regulations are not necessarily compatible concerning the issue of executive compensation. For instance, an organization that provides executive compensation which is reasonable pursuant to IRS rules may suddenly be subjected to penalties under the regulations.

Response: OASAS 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 penalties, the penalty provisions would not be applied “suddenly” ; rather Section 812.8 provides for notification of non-compliance, the submission of additional or clarifying information, a corrective action period, and the opportunity to appeal.

Issue/Concern: The regulations should cover only State-authorized payments, and not other State funds. When State funds are awarded through a State agency contract, that State agency has multiple opportunities to review the contractor’s use of the funds.

Response: The regulations cover those funds that are either State funds or State-authorized payments. The regulations would not adequately address the targeted problems of excessive administrative costs and inflated compensation and would create inequities if only State-authorized payments were covered.

Issue/Concern: Payments through municipal or county contracts should not be considered for purposes of determining whether a provider is covered. Funds awarded or granted by county or local governmental units should be excluded from the definitions of State-authorized payments and State funds.

Response: The regulations cover those funds that are awarded through a county or local government contract and are either State funds or State-authorized funds. The regulations would not adequately address the targeted problems of excessive administrative costs and inflated compensation if only providers that contracted directly with State agencies were covered. This would create inequities among providers depending upon whether their funding was received directly or indirectly from the State.

Issue/Concern: It is discriminatory that not-for-profit human service providers are subject to these regulations, but for profit corporations are not.

Response: For profit organizations that meet the definition of “covered provider” pursuant to Section 812.3(d) may be subject to these regulations.

Issue/Concern: It is wrong that the regulations do not apply to State agencies that pay their employees large salaries.

Response: The regulations have been developed to implement Executive Order No. 38, which addresses contracts to render program services.

Definitions

Issue/Concern: The definition of “covered provider” at 812.3 (d) (1) (ii) should be based on total revenues, and not in-State revenues. The explanation of “in-State revenues” does not resolve the inherent complications that arise from the receipt of contributed revenue from outside New York State.

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 “executive compensation” at 812.3 (e) should be revised to clarify that the qualifying phrase “reportable on a covered executive’s W-2 form” is applicable not only to the personal use of the organization’s property, but also to other non-salary benefits.

Response: This technical revision will be made to § 812.3 (f).

Issue/Concern: The definition of “program services expenses” at 812.3 (h) (2) (ii) should allow property rental, mortgage and maintenance expenses to be allocated between “program services” and “administrative expenses” based on the actual use of the property.

Response: With the noted exception of providing housing to members of the public receiving program services, participating State agencies maintain that for purposes of Executive Order No. 38, property rental, mortgage and maintenance expenses are not “program services expenses.”

Limits on administrative expenses

Issue/Concern: The regulations at 812.4 and 812.5 applying Executive Order No. 38 restrictions to subcontractors and agents of covered providers should be amended to remove “or administrative” from the following language: “…if and to the extent that such a subcontractor or agent has received State funds or State-authorized payments from the covered provider to provide program or administrative services during the reporting period and would otherwise meet the definition of a covered provider but for the fact that it has receive State funds or State-authorized payments from the covered provider rather than directly from a governmental agency.” This language makes it unclear whether a subcontractor or agent providing purely administrative services would be subject to the limitations.

Response: The language “or administrative” does not need to be removed. As stated in the quote above, to be subject to the regulatory limitations, a subcontractor or agent would need to meet the definition of a “covered provider.” The definition of “covered provider” requires a contract or other agreement to render program services.

Issue/Concern: The revised regulations create complicated new definitions and reporting requirements. Implementing the revised regulations will add significantly to the providers’ administrative costs.

Response: The participating State agencies will maintain on-line guidance to assist providers in complying with the new regulations.

Issue/Concern: The limits on administrative expenses, set forth in 812.4, should require the Generally Accepted Accounting Principles (GAAP) permitted by the Form 990 as the allocation methodology for differentiating between administrative expenses and program expenses.

Response: The allocation methodology is flexible to allow for agency specific applications.

Issue/Concern: The regulations may set a precedent for others to impose similar restrictions on the use of funds for administrative expenses. Covered providers may lose their ability to use their best judgment to determine how to operate effectively and efficiently.

Response: Executive Order No. 38 is encouraging the effective and efficient delivery of program services to New Yorkers by encouraging the redirection of funds from administrative expenses to service delivery.

Issue/Concern: Agencies should periodically re-evaluate the impact of the limitation on administrative expenses to ensure that organizations are not cutting back on key administrative functions in such a manner as to jeopardize their ability to deliver quality program services.

Response: The participating State agencies together with DOB plan to monitor the impact of the regulations and make periodic updates as needed.

Issue/Concern: A provision should be added to the regulations requiring agencies to reevaluate the limitations on administrative expenses every five years.

Response: Pursuant to State Administrative Procedure Act § 207, OASAS is required to complete a periodic review of existing regulations, which includes an analysis of the need for and the legal basis of the regulations and invites public comment on the continuation or modification of the regulations.

Issue/Concern: The limits on administrative expenses do not allow for program expansion and will result in an underinvestment in organizational growth.

Response: The definition of administrative expenses at § 812.3 addresses this concern. Expenses in excess of $10,000 that would otherwise be administrative expenses are excluded from consideration as either administrative expenses or program service expenses when they are either non-recurring (no more frequent than once every five years) or not anticipated by a covered provider.

Limits on Executive Compensation

Issue/Concern: Providers may need to pay more than $199,000 per annum to find the quality leaders needed to facilitate the growth of their organizations.

Response: The regulations take this concern into consideration in § § 812.6 and 812.6 by permitting consideration of such factors such as the compensation provided to comparable executives; the qualifications and experience possessed by or required of the covered executive; the provider’s efforts to secure other comparable executives; and/or the nature, size and complexity of the covered provider’s operations and program services.

Issue/Concern: The regulations should eliminate the 75th percentile cutoff on executive compensation.

Response: Eliminating the executive compensation requirements would remove one of the key objectives of Executive Order No. 38: 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. OASAS is proposing to adopt this regulation because New York State 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.

Issue/Concern: The 75th percentile will drive salaries down as the outliers reduce salaries in order to comply with the regulations. Eventually this will depress the maximum salary permitted under the regulations. In addition, the State agencies’ authority to deny all waivers related to executive compensation calls into question the integrity and the reasonableness of the entire process of reviewing executive compensation.

Response: The participating State agencies periodically will assess the impact of the revised regulations on executive salaries and will propose any necessary adjustments to the regulations accordingly.

Issue/Concern: The revised regulations relating to executive compensation at § § 812.5 and 812.6 should be revised to allow for the delegation of the approval of executive compensation by a committee of the Board of Directors, such as a compensation committee.

Response: The goal of EO No. 38 is to safeguard taxpayer dollars; it is appropriate that the required review and approval of executive compensation be at the level of the Board of Directors or an equivalent governing body (if such body exists); this has been addressed in the amended regulation.

Issue/Concern: The regulation at 812.5 should clarify by what mechanism compensation surveys will be “identified, provided or recognized.” Also the participating State agencies need to approve their compensation surveys as soon as possible in order to allow providers sufficient time to review the surveys.

Response: The implementation process will address these issues. It is anticipated that a website will provide organizations guidance regarding acceptable compensation surveys and additional information regarding how compensation surveys will be identified, provided or recognized.

Issue/Concern: Instead of compensation surveys, a better approach would be to permit covered providers to develop and maintain a record of their own comparable salary information or, at a minimum, to explicitly allow the use of surveys based on information about compensation that has been reported for comparable positions at comparable organizations on the IRS Form 990.

Response: The revised regulations allow for new surveys to be developed. Consistent with the regulations at § 812.5, the new surveys would need to be identified, provided, or recognized by OASAS and the Director of DOB.

Issue/Concern: The definitions of “executive compensation” under Form 990 and the regulations vary. Because the regulations use a definition of executive compensation that includes only a portion of the benefits generally reported on Form 990, the comparability data necessary to assess compensation under the regulations may not be available.

Response: The participating State agencies currently are developing with DOB a list of acceptable compensation surveys.

Issue/Concern: The “grandfathering” provision for executive contracts prior to the effective date of the regulation is good but too short; concerns that it may still interfere with existing contractual obligations.

Response: This has period has been extended to exempt contracts entered into prior to July 1, 2012 unless the term of the contract extends beyond April 1, 2015. (812.5(h)).

Waivers

Issue/Concern: The effective date of the revised regulations requires clarification. Providers should not be required to file waivers prior to April 1, 2013.

Response: The revised regulations have changed the effective date.

Issue/Concern: The revised regulations at § 812.6 provide that a decision on a timely and complete waiver application shall be provided no later than 60 calendar days after submission of the application. This section should further state that such waiver applications shall be deemed to be granted in the event that a decision is not rendered within the 60 day deadline.

Response: The regulations will not be revised to make this requested change. The implementation process will address waiver issues further.

Issue/Concern: It is unrealistic to ask large organizations that have historically compensated their executives at levels which would necessitate a waiver to spend time and resources in an effort to hire qualified executives at lower rates and to document those efforts, in order to qualify for a waiver.

Response: The goal of Executive Order No. 38 is to ensure that taxpayer dollars are used to provide critical services to New Yorkers in need.

Penalties

Issue/Concern: After the proposed denial of a waiver, the revised regulation at § 812.6 provides, “Submission of a request for reconsideration within thirty (30) calendar days shall stay any action to deny an applicant’s request for a waiver, pending a decision regarding such request for reconsideration, and shall stay any action to enter into a contract or other agreement.” The meaning of this latter statement concerning a “stay” is unclear.

Response: OASAS submits that the plain meaning of the word “stay” in the context of this regulation is sufficiently clear.