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

3/13/13 N.Y. St. Reg. CFS-22-12-00010-RP

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 11

March 13, 2013

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 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 proposed regulations would add a new Part 409 to Title 18 of NYCRR and a new Subpart 166-5 to Title 9 of NYCRR. The language of the two sets of regulations would be substantively the same.

Each set of regulations would have the following:

The first section would set forth the background and intent underlying the regulations. Both Part 409 and Subpart 166-5 are being added to comply with the requirements of Executive Order #38, which requires that the executive agencies promulgate regulations establishing limits on administrative costs and executive compensation of service providers where such costs and compensation are supported by State funds.

There would be a section setting forth the statutory basis for promulgating the regulations.

There would be a definitions section, which would include definitions of what service providers are covered, what administrative expenses are covered, what constitutes executive compensation, and what constitutes State funds for purposes of the regulations, as well as other useful definitions. The covered service providers would basically be entities or individuals having contracts or other agreements with the Office of Children and Family Services (Office) or another government entity for the year prior to and during the covered reporting period during which time the provider received an average amount greater than $500,000 each year where at least 30 percent of the provider’s total annual in-state revenues were derived from State funds, directly or indirectly. Governmental units and individual professionals providing program services under agreement with the State would not be covered. Also, Part 409 would provide that individuals or entities providing child day care services who are in receipt of child care subsidies under the Social Services Law would not be covered based on the receipt of such subsidies. However, such providers could be subject to the regulations if they receive State funds or State-authorized payments other than child day care subsidies.

There would be a section discussing the limitations on use of State funds to support administrative expenses. The limitation would basically be that no more than 25 percent of the State funds could be used for administrative expenses, with the percentage decreasing five percent each year until the limit would be 15 percent for calendar year 2015 and thereafter.

There would be a section discussing the limitations on use of State funds to support executive compensation. The limitation would basically be that no more than $199,000 per year in executive compensation could be supported by State funds. This section also addresses certain variances from the standard limitation.

There would next be a section under which service providers who exceed the limitations on use of State funds to support administrative expenses and executive compensation could seek waivers from those limitations. The section would establish standards for granting waivers and a process for determining whether to grant waivers.

There would be a section on reporting requirements for service providers subject to the new regulations, and provision for the consequences of failing to comply with the reporting requirements.

The final section would set forth the penalties to which a service provider would be subject if the service provider fails to comply with the limitations on use of State funds to support administrative expenses or executive compensation and fails to obtain a waiver of those limitations. This section would also set forth the procedure to be followed in assessing such penalties.

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 409.2 - 409.7 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, N.Y. 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.

Section 508 of the Not-for-Profit Corporation Law provides that a not-for-profit corporation may make incidental profits, but any such incidental profits must be applied to the maintenance, expansion or operation of the corporation and cannot be divided or distributed to the members, directors or officers of the corporation.

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 #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 July 1, 2013.

Revised Regulatory Flexibility Analysis

A Regulatory Flexibility Analysis for Small Businesses and Local Governments is not being submitted with this notice because 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 Rural Area Flexibility Analysis is not being submitted with this notice because the proposed rule will not impose any adverse economic impact on rural areas.

Revised Job Impact Statement

A Job Impact Statement 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 Proposed Rule Making was published in the State Register on October 31, 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 regulations. Suggestions from others were determined to be contrary to the goals of the proposed rulemaking.

Some comments objected generally to the underlying concept of the regulations, stating that the proposed regulations are unnecessary and counter-productive. A comment was also received alleging that the proposed regulations discriminate against not-for-profit entities. The New York State Office of Children and Family Services (OCFS) 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. The proposed regulations were not revised to exclude not-for-profits from being covered by the regulations.

Clarification and changes were requested concerning certain defined terms in the proposed regulation, in particular with respect to their intended scope and meaning. 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, reporting period, State-authorized payments and State funds. A definition was also added for the term “covered reporting period”.

Clarification was requested as to what will constitute administrative and program expenses. The proposed regulations have been revised to clarify provisions related to those two expenses.

Comments were received seeking clarification of what is included within executive compensation. The proposed regulations have been revised to further clarify what is included within the term.

Comments were received concerning the treatment of subcontractors and agents for purposes of the regulations. The proposed regulations have been revised to clarify that covered providers will not be held responsible for the failure of an agent or subcontractor to comply with the requirements of the regulations.

A number of comments were concerned about the limits on executive compensation, including concerns that the proposed regulation should not intrude into the not-for-profit sector and inappropriately uses a percentile standard that will gradually diminish executive compensation levels. Other comments criticized the methodology governing the use of the 75th percentile threshold. Also, commenters questioned the meaning of the exemption for executive compensation contracts entered into before April 1, 2012 that extend beyond April 1, 2014. There were also several comments concerning the use of recognized surveys or independent commissioned surveys or identification and recognition of specific compensation surveys to establish comparisons. And there were comments concerning the requirement that where executive compensation is subject to more stringent limits than those set forth in the regulations, the more stringent limits apply.

In response, the proposed regulations were revised to: clarify the standards for determining what activities by a covered executive would be subject to the compensation limits; extend the April 1, 2014 date to April 1, 2015; and further clarify the provision concerning the situation where executive compensation is subject to more stringent limits than those set forth in the regulations. The regulations were not revised to alter the 75th percentile threshold because such revisions would compromise the goal of the regulations.

Comments were received concerning the waiver process, the time for submitting waiver requests and the effect of a lack of timeliness in the process. Questions were also raised about the effect of a stay where a waiver denial is being appealed. In response to those comments, the proposed regulations have been revised to permit waivers to be granted to positions, not just to the individuals holding those positions. Changes were also made to the date when the limits on administrative expenses and executive compensation will take effect, which will also help address concerns about the timeliness of initial waiver requests. Changes were not made to the proposed regulations concerning the effect of a stay.

Comments were received concerning the ramifications of the April 1, 2013 effective date. The proposed regulations have been revised to provide that the limits on administrative expenses and executive compensation will take effect at the beginning of the first covered reporting period that begins after July 1, 2013.

Comments were receive requesting that the regulations set forth the process for selection of a lead State agency for covered providers who are subject to oversight by more than one State agency. This will be handled administratively by the State agencies involved, and no change was made to the proposed regulations to address this issue.

Comments were received criticizing the need for the proposed regulations. OCFS believes the regulations are necessary to establish appropriate controls so that public funds are used properly, efficiently and effectively.

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