PDD-22-12-00020-RP Limits on Administrative Expenses and Executive Compensation

3/13/13 N.Y. St. Reg. PDD-22-12-00020-RP

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 11

March 13, 2013

RULE MAKING ACTIVITIES

OFFICE FOR PEOPLE WITH DEVELOPMENTAL DISABILITIES

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. PDD-22-12-00020-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 645 to Title 14 NYCRR.

Statutory authority:

Mental Hygiene Law, sections 13.09(b) and 43.02; and Not-for-Profit Corporation Law, section 508

Subject:

Limits on administrative expenses and executive compensation.

Purpose:

To curb abuses in executive compensation and administrative expenses and ensure that taxpayer dollars are used to help persons in need.

Substance of revised rule:

The proposed regulations add a new Part 645 to 14 NYCRR, titled Limits on Administrative Expenses and Executive Compensation.

Section 645.1 contains definitions for purposes of this Part, including definitions for administrative expenses, covered operating expenses, covered executive, covered provider, covered reporting period, executive compensation, program services, program services expenses, related organization, reporting period, State-authorized payments, and State funds.

Section 645.2. 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 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 645.3. 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 645.4. Waivers. Processes are established for covered providers to seek waivers of the limit on administrative expenses and the limits on executive compensation.

Section 645.5. Reporting. Covered providers are required to report information on an annual basis.

Section 645.6. 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 OPWDD website at www.opwdd.ny.gov.

Public hearing(s) will be held at:

10:30 a.m., April 29, 2013 at Office for People with Developmental Disabilities, Counsel's Office Conference Rm., 44 Holland Ave., Albany, NY; and 10:30 a.m., May 1, 2013 at Office for People with Developmental Disabilities, Counsel's Office Conference Rm., 44 Holland Ave., Albany, NY.

Interpreter Service:

Interpreter services will be made available to hearing impaired persons, at no charge, upon written request submitted within reasonable time prior to the scheduled public hearing. The written request must be addressed to the agency representative designated in the paragraph below.

Accessibility:

All public hearings have been scheduled at places reasonably accessible to persons with a mobility impairment.

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 Part 645.

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

Barbara Brundage, Director, Regulatory Affairs Unit, Office for People With Developmental Disabilities, 44 Holland Ave., 3rd floor, Albany, NY 12229, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

May 6, 2013.

Additional matter required by statute:

Pursuant to the requirements of the State Environmental Quality Review Act, OPWDD, as lead agency, has determined that the action described herein will have no effect on the environment, and an E.I.S. is not needed.

Revised Regulatory Impact Statement

1. Statutory Authority:

a. OPWDD has the statutory authority to adopt rules and regulations necessary and proper to implement any matter under its jurisdiction as stated in the New York State Mental Hygiene Law Section 13.09(b).

b. OPWDD has the statutory authority to adopt rules and regulations relating to reports concerning costs of providing services, as stated in section 43.02(c) of the Mental Hygiene Law.

c. Section 508 of the Not-for-Profit Corporation Law limits the use of incidental profits to the maintenance, expansion or operation of the lawful activities of the corporation, and states that in no case shall (the incident profits) be divided or distributed in any manner whatsoever among the members, directors, or officers of the corporation.

2. Legislative Objectives:

These proposed amendments further the legislative objectives embodied in sections 13.09(b) and 43.02 of the Mental Hygiene Law and Section 508 of the Not-for-Profit Corporation Law. The proposed amendments establish limits on administrative expenses and executive compensation.

3. Needs and Benefits:

In January of 2012, Governor Cuomo issued Executive Order 38, which directed each Executive State agency that provides State financial assistance or State-authorized payments to providers of services to promulgate regulations to address the extent and nature of a provider’s administrative expenses and executive compensation that are eligible to be reimbursed with State financial assistance or State-authorized payments for operating expenses.

State Government in New York directly or indirectly funds, or authorizes reimbursements with taxpayer dollars, to a large number of tax exempt organizations and for-profit entities that provide critical services to New Yorkers in need. State Government in New York also has an ongoing obligation to ensure that taxpayers’ dollars are used properly, efficiently and effectively to improve the lives of New Yorkers and our communities.

In certain instances, providers of services that receive State funds or State-authorized payments have used such funds to pay for excessive administrative expenses and outsized compensation for their senior executives, rather than devoting a greater proportion of such funds to providing direct care or services to individuals. 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 are being proposed to curb such abuses in executive compensation and administrative costs and ensure that taxpayer dollars are used first and foremost to help New Yorkers in need.

4. Costs:

a. Costs to the Agency and to the State and its local governments: The amendments do not make any changes in the overall amount of State funds and State-authorized payments which are provided to private agencies. Therefore, no changes are expected in costs to OPWDD, New York State or local governments.

b. Costs to private regulated parties: There will be no overall changes in the level of State funds or State-authorized payments received by agencies. In certain instances providers of services that receive State funds or State-authorized payments which currently use such funds to pay for excessive administrative expenses and outsized compensation for their senior executives will be required to redirect the expenditure of funds to the programs that serve individuals with developmental disabilities.

5. Local Government Mandates:

There are no new requirements imposed by the rule on any county, city, town, village; or school, fire, or other special district.

6. Paperwork:

The proposed amendments require covered providers to submit a new form to OPWDD on an annual basis in order to submit data necessary for OPWDD to monitor compliance with the requirements and for New York State to assess the impact of the requirements on the use of public funds to support excessive executive compensation and administrative costs among providers. Providers that pay executives over $199,000 will have to document that they meet the 75th percentile and governing body review criteria set forth in regulation. Paperwork will also be needed in the event that the provider seeks a waiver for the limit on executive compensation or the limit on administrative costs.

7. Duplication:

The proposed amendments do not duplicate any existing State or Federal requirements that are applicable to services for persons with developmental disabilities.

8. Alternatives:

OPWDD was required to propose these regulations pursuant to Executive Order 38 and did not consider any alternatives.

9. Federal Standards:

The proposed amendments do not exceed any minimum standards of the federal government for the same or similar subject areas.

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

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 Rule Making was published in the New York State Register on October 31, 2012. OPWDD received several sets of comments during the public comment period associated with the revised rulemaking. A summary of the issues and concerns raised in these comments are set forth below.

Some comments supported the goals of the proposed regulations, and others objected to the underlying concept of the proposed regulations. Those objecting stated the regulations are overly broad, and should exclude certain State funds and payments through local governments. Comments also stated the regulations are incompatible with IRS rules and burdensome. Other comments wanted the regulation broadened to cover for profit providers and State employees. OPWDD’s response is that for profit organizations are covered, and 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 executive, covered provider, covered reporting period, executive compensation, program services expenses, reporting period, State-authorized payments and State funds.

The definition of covered provider has been amended to address the individual or entity that has received State funds or State-authorized payments during the covered reporting period and the year prior to the covered reporting period. The definition of “covered provider” requires a contract or other agreement to render program services.

Comments asked for a list identifying employees considered “program service employees” and lists of “State funds” and “State-authorized payments”. OPWDD is not planning to create a list of program services employees, but will develop lists of government programs whose funds will be considered State-authorized payments or State funds.

Comments stated that the definition of “covered provider” should be based on total revenues, not in-State revenues, and that the provision regarding the 30% test should be revised to change “contributions by out-of-State individuals or entities” to “revenues from out-of-State individuals or entities”. OPWDD believes that the regulations appropriately focus on New York State and that “contributions” in meant to include any monies paid by individuals or entities.

Comments asked whether “reportable on a covered executive’s W-2 form” in the definition of “executive compensation” is applicable to non-salary benefits other than personal use of the organization’s property. OPWDD’s response is yes; “reportable on the covered executive’s W-2 or 1099 form” applies to all the listed examples of non cash compensation.

Comments asked that the regulations allow providers to allocate property rental, mortgage and maintenance expenses between “program services” and “administrative expenses” based on the actual use of the property. OPWDD’s response is that, other than housing to members of the public receiving program services, for purposes of Executive Order No. 38, property rental, mortgage and maintenance expenses are not program services expenses or administrative expenses.

Comments asked that “State-authorized payments” and “State funds” exclude funds provided by the State Education Department (SED) or authorized by SED. These payments are excluded.

One comment asked for a clearer definition of covered executive than the IRS instructions accompanying Form 990, Part VII. In response, OPWDD points out that the Form 990 instructions will only be used to determine if someone is a director, trustee, officer or key employee.

Some comments 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 through limitations incorporated into State reimbursement rates. Clarification was requested as to what will constitute administrative and program expenses. The proposed regulation has been further revised to clarify which administrative expenses are not included.

There was a comment that “or administrative” should be removed 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.” The comment stated that it is unclear whether a subcontractor or agent providing purely administrative services would be subject to the limitations. OPWDD does not believe that “or administrative” needs to be removed, because to be subject to the regulatory limitations, a subcontractor or agent would need to meet the definition of a “covered provider.”

Comments stated that the limits on administrative expenses should require Generally Accepted Accounting Principles as the allocation methodology for differentiating between administrative expenses and program expenses. OPWDD disagrees. The regulation’s distinction between administrative and program expenses are clear and sufficient to meet the purposes of the regulation.

Comments stated that the limits on administrative expenses do not allow for program expansion and will result in an underinvestment in organizational growth. OPWDD disagrees. The regulations do not limit program services or program services expenses, and administrative expenses are limited to a percentage.

Public comments tended to focus on executive compensation, stating the 75th percentile will drive salaries down as the outliers reduce salaries in order to comply with the regulation; implying this will depress the maximum salary permitted under the regulation. In addition, public comments stated that 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. The goal of the proposed regulation is to ensure that taxpayer dollars are used to provide critical services to New Yorkers in need.

The regulation was not revised to alter the 75th percentile threshold because these revisions would compromise the goal of the regulation. 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. 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.

Providers also commented that they may need to pay more than $199,000 per annum. OPWDD’s response is that the regulations allow for a waiver of this limit.

One provider wanted confirmation that if it is subject to a cap on executive compensation that is lower than $199,000 per annum, that if the lower cap is deemed “more stringent” than the Executive Order No. 38 cap; the lower cap supersedes the Executive Order No. 38 cap; and the provider is not subject to the provisions regarding executive compensation or the requirement to obtain a waiver. OPWDD’s response is that, to determine if another limit is more stringent, consideration would need to be given not only to the dollar amount of the annual limit, but also to what payments or benefits are defined as executive compensation.

Another comment was that the regulations should allow for the delegation of the approval of executive compensation by a committee of the Board of Directors. In response, OPWDD states that it is appropriate that the ultimate review and approval of executive compensation be at the level of the Board of Directors.

There were several comments on compensation surveys. Commenters asked how surveys will be “identified, provided or recognized” and asked that OPWDD approve compensation surveys as soon as possible in order to allow providers sufficient time to review the surveys. OPWDD’s response is that the implementation process will address these issues.

Another comment was that instead of utilizing currently available compensation surveys, providers should be allowed to develop and maintain a record of their own comparable salary information or use of surveys based on information about compensation that has been reported on the IRS Form 990. In response, OPWDD points out that the regulations allow for new surveys to be developed.

Another comment was that definitions of “executive compensation” under Form 990 and the regulations vary, and that this may cause comparability data necessary to assess compensation under the regulations to be unavailable. OPWDD recognizes the differences in the definitions and will give guidance in implementation.

In response to comments, the regulation has been revised to allow a waiver to be for a covered executive position rather than for a particular individual.

The effective date of the regulations has been changed to July 1, 2013. The effective dates of provisions in the proposed regulations have been revised to clarify: (a) covered reporting period; (b) submission of waiver applications regarding executive compensation; (c) submission of waiver applications regarding administrative expenses; and (d) reporting periods. The revised proposed regulations also exempt executive compensation contracts agreed to prior to July 1, 2012 until April 1, 2015.

Comments said that the regulation should state that waiver applications shall be deemed to be granted if OPWDD does not render a decision within 60 days. The regulations were not revised to make this change. OPWDD expects to make decisions within the 60 day timeframe.

Another comment was that OPWDD should respond to a waiver application within 30 days so a provider can hire an executive in a timely manner. Because waiver applications may be lengthy and complex, OPWDD may need 60 days to thoroughly and properly review the application and make a decision. The application deadlines in the regulation are the latest dates the provider can file an application; the provider has the option of filing an application earlier.

Comments asked what constitutes “other agreements” for executive compensation. The response is that “other agreements” acknowledges that not all employment conditions are finalized in a contract. For instance, “other agreement” could encompass a letter of employment setting forth a job offer and its general terms, if accepted.

One comment asked for clarification of the provision stating that submitting a request for reconsideration “shall stay any action to enter into a contract or other agreement.” OPWDD believes that the plain meaning of the word “stay” in the context of this regulation is sufficiently clear.

OPWDD received comments concerning implementation of the regulations. These comments requested coordination among the various State agencies implementing these regulations, use of a lead agency for reporting, waivers and appeals, and periodic re-evaluation of the regulation. These are not comments on the language of the regulation itself. OPWDD appreciates the comments and will take them into consideration when implementing the regulation.

The full Assessment of Public Comments is available on OPWDD’s website at www.opwdd.ny.gov.